E-commerce Shakes up the Taiwan Retail Sector

As more and more Taiwanese shift to online shopping, traditional merchants are losing business.

 Not long ago, I visited Taipei’s camera district in search of a Fuji X100T, a compact digital camera capable of producing professional-quality images. The X100T is one of only a few cameras Fuji still manufactures in Japan, and is considered superior to similar products made in China or Thailand.

Oddly, every shop I visited gave me the same answer: “We are out of stock. We don’t know when we will have it in stock again.” Several shopkeepers said the camera had a limited production run, so supply was tight. But scanning the websites of the biggest photographic equipment suppliers in the United States, U.K, and Hong Kong, I found they all had the X100T in stock.

I decided to try my luck with Taiwan’s local e-commerce platforms. PChome didn’t have the X100T, but I quickly found a Taichung-based seller on Yahoo who said he would be able to get the camera for me in about a week’s time. His feedback rating on Yahoo was almost 100% positive, he accepted credit cards, and he charged the market price for the camera. True to his word, I received the camera eight days after our phone conversation. I use the camera regularly, and have had no problems with it.

With that kind of shopping experience prevalent, it’s easy to see why e-commerce is surging in Taiwan. Consumers can save time and money buying online. Taiwan’s homegrown e-commerce platforms are mature, encouraging transparency that’s beneficial for both buyers and sellers. The comprehensive logistics infrastructure ensures delivery of items being shipped domestically within a few business days (my camera came from Japan, so it took slightly longer). Overnight deliveries are common. And getting online is a breeze thanks to widespread network coverage, notably 4G LTE for mobile devices.

The Taiwan e-commerce market has averaged 10-15% annual growth over the past five years, and the value of sales reached US$34 billion in 2015 (the most recent data available), according to government sources. The average expenditure rose to NT$7,200 in 2015 from NT$6,300 a year earlier, according to research firm AC Nielsen. Impressively, despite its small market size, Taiwan has the world’s third-highest rate of e-commerce penetration (62%) after the United States (66%) and the U.K. (77%).

Driving the growth of e-commerce in Taiwan is the nation’s youth, says Jamie Lin, co-founder of the Taipei-based accelerator AppWorks and an expert on e-commerce. “Young people [under 30] do most of their shopping online, so physical retail is suffering,” he says. “If you go to a major department store in Taipei today, you’ll see there aren’t many young Taiwanese shopping there.”

“Shopping online gives you more free time to do the things you like. You don’t have to spend your time walking around a department store,” says Jamie Liu, PChome’s marketing manager.

Surprisingly, the best-selling product in PChome’s 5-million item inventory is toilet paper. “If you want to buy more than a few rolls, you have to drive to a physical store, load it into your car, and bring it home,” she says. “Online you can buy as much as you want, and it will be delivered right to your door.”

A sluggish market

Chelsea Fu, a 29-year-old sales representative at French energy-management and automation company Schneider Electric in Taipei, does more than half of her shopping online. For fashion, Fu likes China’s Taobao marketplace and online fashion specialist Zalora. She buys her groceries from Concierce and delivery service Honestbee and high-speed rail tickets via a dedicated smartphone app. She rarely visits department stores – once a month at most.

“In the past six months, I’ve bought 90% of my clothes online,” Fu says. “You can easily compare different brands online. If I want to do that in a physical store, it’ll take much so much more time.”

As consumers shop for a narrowing range of items in physical stores, growth in the overall Taiwan retail market is slowing. In a January report on internet retailing, research firm EuroMonitor predicts that “store-based retailing is likely to post sluggish growth” this year compared to the “robust growth” of e-commerce.

“Most retailers have adopted a conservative approach towards expansion as consumers are cautious on their spending,” says Ping Lee, associate director of property consultancy CBRE in Taipei. “Salaries are stagnant and the economic outlook is uncertain.”

In the Taipei market, with rents already high, retailers are reluctant to pay more, she observes. Yet landlords of what the British call “high-street shops” in prime locations are generally cash-rich and are not under pressure to offer substantial discounts to attract tenants. Therefore, vacancy rates are increasing while rents in Taipei stay high.

Meanwhile, luxury retail sales growth has slowed due to the decline in the number of Chinese visitors; arrivals have fallen 33% since May. In recent years, wealthy Chinese tourists have been the key driver of growth in the local luxury market, where they can buy products at lower prices than in China. In a March 2015 report, Taiwan Business TOPICS noted that Chinese tourists comprise up to one-third of customers at the Taipei 101 mall, home to many tier-1 luxury brands.

Market observers say sub-par service is hurting some retail segments, such as consumer electronics, which has been hit hard by the e-commerce boom. “Some of the 3C retailers don’t have knowledgeable staff,” says PChome’s Liu.

In some cases, the problems run deeper than that. For instance, several shops in Taipei’s camera district illegally pass on the fee their bank charges them for a credit-card transaction to the customer. When confronted, they usually urge the customer to pay in cash, as it will be “cheaper.”

In an IBM survey of the quality of service in the retail market in 23 countries conducted in December 2015, Taiwanese retailers ranked second to last and two places behind No. 20, China. The survey found many Taiwanese retailers did not accept mobile payments or offer online shopping services. The survey noted that Taiwanese retailers often rely on “popular marketing strategies” and have difficulty meeting the expectations of consumers for tailored shopping experiences.

A human touch

Market observers are divided on the prospects for Taiwan’s traditional retailers. AppWorks’ Lin, a staunch believer in the transformative power of internet technology, sees limited opportunity for them. Given the convenience of e-commerce, he doubts that physical retailers can boost sales simply by offering a better buying experience. “It’s hard to convince someone to buy something from you in a physical store just because the experience is good,” he says.

Eslite’s DunHua South Road store positions itself as a destination unto itself, not
merely a bookstore. Photo: Matthew Fulco

Noting that e-commerce accounts for about 10% of Taiwan’s retail sales, Lin says that figure will climb to 40-50% within two decades. “E-commerce is replacing physical stores,” he says.

Eslite Spectrum Corp., the bookstore, shopping mall, and restaurant operator, is one traditional retailer that has continued to grow during the e-commerce boom. In 2015, Eslite posted sales of NT$3.82 billion, up 9% year-on-year, and a net profit of NT$412 million, an increase of 11.6% from a year earlier. The company has expanded to Hong Kong and mainland China in recent years and plans to foray farther afield to Japan and the United States.

Eslite does offer online shopping, and sends out regular e-mail blasts to its members, but the focus of its business remains physical retail. It has been able to do that by turning its stores into destinations and making its brand a lifestyle. In particular, Eslite’s iconic 24-hour store on Taipei’s DunHua South Road is a magnet for locals and tourists alike. People go there to eat, drink, socialize, and attend film screenings, musical performances, and lectures – and sometimes shop for books.

In a 2015 report, AC Nielsen Taiwan director Terri Kang forecast a convergence of the online and offline sectors. Rather than shopping exclusively online or offline, consumers are “using whatever channel best suits their needs,” she wrote. “The most successful retailers and manufacturers will be at the intersection of the physical and virtual worlds, leveraging technology to satisfy shoppers however, wherever and whenever they want to shop.”

Taipei’s Lomography (Lomo) Embassy store is following that model. Lomography is a Vienna-based organization that focuses on quirky analog photography.  Its outlets primarily sell retro-looking film cameras (many based on the designs of Soviet-era cameras), film, and other photo accessories.

Lomo stores also offer film-processing and photo-printing services. After developing and scanning a customer’s film, the store sends the scans to customers via the file-sharing and storage platform DropBox so that they can be uploaded to photo-sharing sites or other social networks. “We want customers to be able to share the photos online as soon as possible,” says store manager Karen Yu. “They can come pick up the negatives at their leisure.”

Lomo stores selling film-photography products demonstrate that good sales stem from good service. Photo: Matthew Fulco

Interestingly, many of the Taipei’s stores customers are under 30 – the demographic in Taiwan most likely to shop online. “Young people are more willing to experiment, to try something different,” Yu says. “A lot of them grew up with digital cameras, so analog is something totally new for them.”

Most importantly, the store’s staff is knowledgeable. During a recent visit to the shop by Taiwan Business TOPICS, Yu spent more than half an hour explaining to a young customer how to operate her new Diana F+, a lightweight plastic film camera favored for its dreamy images. Yu patiently walked the customer – who had never used a film camera before – through the steps of loading the film, operating the camera, and choosing photo subjects.

“You can see why physical retail remains valuable,” Yu says. “The customer could have bought it online, but once it arrived at her door, she still would have needed us to show her how to use it.”