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Falling costs drive bricks-and-mortar renaissance in China

Narrowing online-offline price gap brings new lease of life to physical stores

| China
  • Falling rental costs and surging online customer acquisition costs are renewing the business case for bricks-and-mortar stores in China, as the cost premium for offline purchases slides to a level FT Confidential Research data suggest many consumers are willing to pay.
  • This is particularly so in third-tier and smaller Chinese cities, where customers are particularly keen on a hands-on shopping experience. In conjunction with rising incomes, this is driving rapid lower-tier expansion by established and new brands.
  • The physical store model will remain under pressure, however, particularly in first-tier cities where costs have not fallen as much as in smaller cities. Yet the distinction between online and offline retail will continue to blur as companies exploit new technologies to drive sales.

Bricks-and-mortar is making a comeback in many parts of China. Even as online captures an ever-larger slice of retail sales (see chart), changing shopping habits are breathing new life into the physical store model.

The shift is being driven by narrowing price differentials between goods sold offline and online, as logistics and rental costs fall and online customer acquisition costs rise. In lower-tier cities, where consumers remain predisposed to offline shopping, these trends are helping revive the business case for expanding physical store networks.

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