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Is the future of shopping still in malls?

COMMENTARY
By Peter Ndiangui | September 5th 2016

NAIROBI: The retail sector in Kenya is growing rapidly. The amount of money spent on retail outlets has tripled since 2007. In 2015, Kenyans consumed goods and services worth over Sh3 trillion. Out of this amount, Sh1.2 trillion was spent in retail outlets.

To quench this shopping appetite, retail shopping malls are coming up rapidly as the retail sector formalises. In Africa, Kenya ranks second to South Africa when it comes to formalised retail.

At least 20 per cent of retail happens in formalised settings contrary to Nigeria or Ghana where this number sits at less than five per cent. Picture this, Lagos, a city of over 10 million people, only has four major malls compared to Nairobi, whose population is three times less and has over 10 major malls.

In Kenya, locally grown retail outlets dominate the trade over foreign entrants. Yields of retail real estate are some of the best in the real estate sector, hovering at between 12 and 14 per cent compared to less than 5 per cent in typical Nairobi upmarket suburb apartments.

While this happens, the other side of the divide in the developed markets, an opposite development seems to be taking shape. Physical stores seem to be closing down. In the USA, whose retail sector is worth over $3.8 trillion dominated by 800,000 strong retail outlets, physical stores are shutting down while some operators are shrinking their space.

In 2014, over 125 major retail stores announced that they would close more than 6,400 stores. One of the leading retailers in the US shut down 339 stores. Foot traffic in many malls is waning yet online sales constitute only 7 per cent of total retail sales in North America.

So what does it mean for retail mall developers and stores in developing markets like Kenya? To peer into what the future might hold, it’s good to first look at retail development in China and how digital technologies are re-shaping retail in China.

First, the infrastructure is not as great as the developed world, though it’s far much more developed than Kenya's. The available retailing space per capita in Kenya is 20 times less that of the US and four times less that of China.

From China’s experience, the largest retailer in China is Alibaba with a Gross Merchandise value of Sh48 trillion. Alibaba’s retail marketplaces include Taobao, Tmall and Juhuasuan, which list over one billion products from more than 10 million retailers.

To put that into perspective, Sh48 trillion is nearly 42 per cent more than the Sh34 trillion that all US online retailers sold in 2015. While at it, the percentage of total sales that happened online is far much greater in China than in the USA or other markets with more mature retail infrastructure.

Unlike Amazon and other US e-commerce companies, China e-commerce companies have relatively weak offline competition. There are no 100-year strong legacy retailers with very strong nationwide networks and powerful local brands that command loyalty.

This absence of strong nationwide offline retailers also plays a significant role in the rapid growth of the entire Chinese e-commerce sector overall. Everything in modern retailing literally came up during the past 20-30 years in China.

Retail off-line development is actually lagging online growth, and it’s interesting to watch how offline retail development will evolve in a nation where modern online retail took off first.

This phenomenon is alive in Kenya and most of sub-Saharan Africa where retail infrastructure is still relatively weak. To Nairobians, it appears like there are established National retail brands but the data suggests otherwise. In a country whose population is relatively young, the adoption of digital marketplaces like OLX will have a strong bearing not only on the demand for mall space but also the purpose shopping malls will serve in the whole Omni-channel retail experience.

Shopping mall investors and developers can think ahead of the leapfrogging effect being driven by e-commerce similar to the one witnessed in mobile telephony and mobile money by designing malls or retail centers that will complement e-commerce platforms.

This means accepting to design smaller stores to even accommodate the Kirinyaga road traders who run “boutiques” in areas commonly known as exhibitions but with better facilities such as storage and warehousing.The utility of these centres might not be to browse products but for pick-up purposes having already browsed and even purchased their products in online marketplaces where these small traders will be trading from.

For mall developers in Kenya, thinking of ways to accommodate the “boutique” operators with smaller stores while designing with a forward looking mindset of an era where e-commerce might just leapfrog the development of bricks and mortar might just help avoid building ghost malls.

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