From left to right: Carrie Liu, managing director, China Life Capital; Teresa Zhuge, vice chairman, GLP China; Leo Ye, Partner and vice president of SCPG; and Todd Pilgreen, managing director of Gensler in Shanghai, speaking at a ULI event in Shanghai.

This article is also available in Mandarin.

When e-commerce first became entrenched in China, it seemed to sound the death knell for traditional retail. How could brick-and-mortar properties, with their high fixed costs, compete with companies that had much lower overheads for their digital systems and that could serve the entire nation simply and efficiently?

However, the subsequent development of both retail and the logistics behind it has shown that physical property still has an important place in China, said panelists at a ULI event in Shanghai. Developers must, though, go about developing it in new, smart ways.

Shopping malls “have become another very important space for people to go apart from their working and residential spaces,” Leo Ye, a partner at China Vanke’s commercial-property-developing arm SCPG Commercial Real Estate, said, speaking at a ULI event in Shanghai. “We once thought that online retail would grow so rapidly that offline retail would be weeded out. However, that’s not the entire story. We do in fact see some offline shopping malls do quite well by introducing more experience services.”

The shopping mall is becoming far more than simply retail space, a bunch of stockholding boxes designed to sell products out the door. Nowadays, stores are often showrooms where consumers can test out new technologies or sample clothing, perhaps an experience augmented with a “smart mirror” that can explore the full range of styles and color combinations. Then the product can be ordered for home delivery.

An offline mall must also offer more than shopping. Even if they shop online, Asian consumers still like going to the mall for the social experience. Malls that can also offer experiential spaces can set themselves apart and gain a competitive edge.

This type of property requires early input at the design stage. Incorporating elements such as aquariums, which might even include the opportunity to go scuba diving, requires intensive effort when planning and building the structure, to make sure the floor plate is designed to incorporate such a large space and heavy load. This same strategy is being used in new retail developments in the United States such as the American Dream mall near Manhattan.

Museums, cultural centers, cinemas, and theaters are venues that draw recurring footfall for specific events. But they require a much higher floor height, typically around 16 meters (20 ft), as well as tighter specifications for issues such as fire safety. Likewise, sporting facilities such as indoor basketball courts or ice rinks require pre-planning of the internal area. SCPG has even designed a botanical garden inside one Shanghai shopping mall, with exacting standards not only for floor plate but also climate control.

“We are focusing on several kinds of emerging business formats featuring strong experience and engagement,” Ye explains. “If the latest business formats are unavailable, the property will be less competitive in the future.”

The shifting blend of offline versus online sales is also forcing the back end of retail to advance. Even e-commerce has a very physical component for warehousing and logistics, which must expedite the purchases. Logistics space is having to adapt fast as a result.

In China, there were total retail sales of C¥38 trillion (US$5.5 trillion) in 2018, and 24 percent, or C¥9 trillion (US$1.3 trillion), occurred online. The e-commerce total has risen more than 10-fold since 2011. This has resulted in a massive surge in the number of deliveries.

The logistics operators were not prepared for the change, even if they saw it coming. Single’s Day on November 11 caused such a sudden rise in the number of orders that parcels were arriving faster at distribution centers than the centers were able to process them and ship them out.

This caused warehouses to, in popular parlance, “explode.” The package logjam meant that a delivery that was supposed to take two to three days ended up taking one to two weeks—as long as one month in the worst-case scenario.

“The capacity of the logistics industry limited the development of e-commerce in the early years,” Teresa Zhuge, the vice chairperson of warehouse developer GLP China, admits. “However, it was also an opportunity for the logistics industry to keep innovating and make progress.”

Warehouse operators have built out their networks so they can serve all of China. They have also adopted a much-greater technological component in an industry that once was derided as “building big sheds.” Modern logistics space incorporates intelligent sorting equipment, rapid automation, and artificial intelligence to speed the processing of goods. Unmanned vehicles patrol the warehouse floor, reducing headcount and payroll.

“Today, the logistics and express-delivery industry offers a powerful support to e-commerce; at the same time, it has obtained a lot from the growth of e-commerce,” Zhuge says. “The logistics industry has become one of the major foundations supporting the development of e-commerce.”

The amount of warehousing devoted to e-commerce has risen from just 80,000 square meters (861,000 sq ft) in 2010, when e-commerce made up 4 percent of the logistics market, to 6 million square meters (6.5 million sq ft) now, when online retail accounts for 36 percent of the industry. The space total is rising by an average annualized rate of 60 percent.

Behind this all, whether online or offline sales, is “big data.” Both the warehousing and offline retail industries have found it highly advantageous to incorporate tech-industry advances to track and predict demand.

The ability to collect real-time data on orders and predict where demand is going to come from next allows warehouse developers such as GLP to plan shipments so the distribution centers and vehicles are nearest to the consumers that demand them the most.

Vanke’s SCPG also relies heavily on big data to serve consumers, landlords, office employers, and retailers. Installing facial-recognition software and body-heat sensors in buildings can allow employees to access their workplaces swiftly, using their face rather than a keycard for entry. Meanwhile the data can be aggregated and provided to office tenants and retailers so they can predict when their properties will see the heaviest footfall. Landlords can also use the information to perform maintenance and repair tasks before, rather than after, problems with a property develop.

Developers and mall landlords can also compare the performance, in real time, of malls in various markets and locations. That way, they can deploy what is working in one mall in another location, while highlighting what does not work in another site.

Even when dealing with physical property, digital information is key. Harnessing that flow of data is the key to success in creating the right blend of physical and virtual property to serve not only the market of today but also the needs of consumers tomorrow.

This article is also available in Mandarin.