China Online Sales Seen Tripling Driving Wareouse Surge:Retail

China’s largest online retailers expect sales to as much as triple next year, setting off a rush for warehouse space that’s pushing up rents in the world’s fastest-growing major economy.

“Everyone wants more warehouses,” Ji Wenhong, chief executive officer of luxury goods seller xiu.com, said in an interview. “Any warehouse bigger than 20,000 square meters will be leased the second it’s out on the market.”

Wal-Mart Stores Inc (WMT).-backed Yihaodian is looking for more space in anticipation of need. 360buy.com, China’s second- largest e-commerce company by sales, plans to invest as much as 6 billion yuan ($943 million) over the next three years to build seven distribution centers as the Beijing-based company expects 2011 sales to triple from last year to 30 billion yuan.

Yihaodian sells items from Nokia cell phones to Pampers diapers and Kewpie mayonnaise online and targets a tripling of revenue to 7.5 billion yuan for 2012 from at least 2.5 billion yuan this year. The growth would come after the Shanghai-based company learned from the mistake of not having enough storage space to accommodate rising demand, Yu Gang, president of the company said in an interview.

“Our sales may have gained another 10 to 20 percent if the business was not limited by the lack of warehouse and personnel during the first four months of this year,” he said. “We have learned the lesson.”

Still Need MoreThe company has increased warehouse space to 220,000 square meters (2.4 million square feet) from 40,000 square meters at the start of the year, a buildup that will suffice only until the beginning of next year, Yu said.“We will need even more after the Chinese lunar new year,” he said.

Storage and logistics facilities are needed in Beijing and Guangzhou, and probably Jinan, Xiamen, Xi’an and Shenyang over the next year to at least double the company’s total to more than 400,000 square meters, according to Yu.“This is part of a significant shift in the way China shops,” said Michael Cole, managing director of RightSite.asia, an online marketplace for industrial real estate in China. “I would expect to see this demand continue to increase for the next several years.”

The number of searches for warehouse space on his site “clearly outnumbers” searches for manufacturing or office space, Cole said. “There has been a dramatic increase in overall demand for warehouse space to support China’s retail growth and the e-commerce sector has been one of the biggest drivers of this demand.”

Rising RentsDemand is also raising costs. Rent on warehouses this year has already climbed about 5 percent for Yihaodian, Yu said.

Leasing costs rose in 2010 as well, gaining 7.7 percent on average and as much as 20 percent in high-demand areas including Guangzhou city, according to data compiled by Colliers International.

“The vacancy rate for good quality logistics space is best described as very tight, averaging only 7 percent,” Nigel Ingham, director of industrial services for East China at Colliers International, said in an e-mail response to questions. The market expects rents will rise as much as 7 percent for the first half this year as demand increase at “double digit” rates, he said.

Online retail sales in China, with about 485 million Internet users, soared to more than 80 billion yuan in 2010, compared with 5.5 million yuan five years earlier, according to estimates compiled by researcher Euromonitor International. Consumer electronics is the best-selling online category, contributing 8.2 million yuan, followed by media products at 6.2 million yuan, and clothing and footwear at 5.9 million yuan, according to Euromonitor.iPhones and Chanel

The surge in online sales is drawing money. Investment in China’s e-commerce industry has more than doubled to $2.2 billion this year as of the end of September, compared with $950 million for 2010, according to data from Beijing-based Zero2IPO Research Center.360buy, which sells goods from Apple Inc.’s iPhone 4 handsets to Chanel SA handbags, raised $1.5 billion in April from investors including Russia’s Digital Sky Technologies, a Facebook shareholder, and the Tiger Fund. The company may publicly sell shares in the U.S. next year, according to two people with direct knowledge of the matter.Xiu.com in August received a $100 million investment from U.S. private-equity funds Warburg Pincus and KPCB China as it expects to double warehouse space to 80,000 square meters by year-end, adding to facilities in Shenzhen, Beijing and Shanghai. Sales will probably more than quadruple to 1.2 billion yuan in 2011 from 250 million yuan this year, Ji estimates.

‘Vicious Circle’As sales climb, online retailers that don’t secure enough warehouse space may lose market share in a “vicious circle” as orders can’t be filled quickly, frustrating customers, said Richard Ding, chief executive officer of Royal China Group, a Shanghai-based investment and consulting company in retail and property. “Sales growth depends heavily on product offerings. Therefore, warehouses play a particularly important role.”

Internet and conventional retailers are expanding in China as urban per capita income rose 7.8 percent in real terms in the first nine months of 2011. Retail sales have grown an average of 17 percent a month in the year through September as the government aims to shift an economic expansion model driven more by consumption and less reliant on exports.

Chinese consumers will account for the world’s biggest share of luxury spending by next year, according to an HSBC Holdings Plc report in August.

Demand for retail space helped drive a 42 percent surge in commercial real estate investments in the country last year, according to Cushman Wakefield Inc.“Customer satisfaction is the number one priority in this business,”

xiu.com’s Ji said. “Logistics is the final step and the most direct impression an online retailer gives to customers.”