With over 4,200 virtual shops Hong Kongs largest virtual mall eyes expansion

Think of shopping malls and you’ll probably think about physical buildings surrounded by giant parking lots. But, led by Asia, virtual shopping malls are springing up – and they’re increasingly changing the retail business model, including sticking it to traditional e-commerce retailers.

At the moment the world’s largest virtual shopping mall, which you can visit in Virtual Reality (VR), on the web, or via an app, is based in Hong Kong and its growth has been supercharged by the global pandemic as people were forced to stay indoors and traditional shopping malls were forced to shut their doors.

Paul Wong’s company, Hong Kong Television Network (HKTV), owns that mall and they make their money by leasing space in their giant virtual mall, HKTVmall, to over 4,200 retailers who can pedal their wares directly to consumers in the city. Retailers pay him a flat annual fee, of between $15,000 and $50,000 depending on the number of products, the equivalent of rent, as well as a percentage of their sales turnover.

By contrast, Hong Kong’s largest physical mall, Harbour City, packs in about 700 retail stores on two million square feet of crowded floor space.

"The online business model is more cost-effective in areas, especially in Hong Kong and Tokyo, where retail rental cost is extremely high," he says.

Physical malls' ubiquity and convenient locations in Hong Kong, often situated right next to residents' neighbourhoods or offices, have been a big draw for local consumers. The thriving physical shopping scene had impeded the growth of online commerce. There was a dearth of local offerings even for the globetrotting young generation, who are attuned to e-shopping on international websites. But in one stroke, the pandemic re-wrote this shopping tradition.

"Covid has forced retailers and suppliers to put more products online, on their e-shops, or on in our case HKTV mall. Businesses started to offer online alternatives. I think that's what is happening in the past few months. There was no supply in the past, only demand," Wong says.

New e-habits, once acquired, may die hard. He says when online shopping becomes a habit, consumers will stick to it, basing his conclusion on the data gleaned from his company's six-year operations since its switch to e-commerce.

Business had been growing steadily from a low base before Covid - sales turnover tripled in the three full years to 2019 to $180 million, with the pandemic giving it an extra boost, enabling sales to double in 2020 to $2.88 billion on a net profit of $183.6 million, reversing a loss of $289.9 million a year ago.

HKTV saw its share price almost double over the past year to $9.14 apiece, giving it a current market capitalization of about $1.1 billion. In January, the company’s market value peaked at $1.9 billion when its stock was trading at $16.28. Wong’s 44% stake left him just short of reaching billionaire status.

The reference to television in the company’s name harks back to a previously thwarted aspiration. A self-professed offline shopper at 58, he stumbled onto online shopping six years ago by sheer dint of bad luck. He had built up a full television production studio and a new office building only to find his application for a TV license rejected by the Hong Kong government. He then rejigged the company’s focus to online shopping in an integrated e-commerce service covering the full range, end-to-end, of online purchases.

At its five-story headquarters in a small tech park near downtown Hong Kong, robotic arms help sort out goods in a vast automatic warehouse, converted from the TV production studio, after retailers drop their goods here and before drivers dispatch them through door-to-door delivery.

The company is the city's largest courier in residential areas, served by its private fleet of more than 350 trucks, including several Isuzu trucks equipped with cold storage to keep frozen fish fresh and chocolate from melting in the tropical heat. They ferry more goods to residential households than DHL or the popular Shenzhen-listed SF Express.

HKTVmall has also opened physical outlets, a version of mom-and-pop stores with bare-wall design, where customers can pick up their orders and purchase fresh produce and frozen food. Grocery items are the only merchandise it owns and sells on its e-shopping platform. Toilet paper and cans of beer and coke are particularly popular.

"Groceries are a critical success factor. If you don't buy them every day, you will buy them every week. This is what we call a 'traffic driver.' Every day, 250,000 people in Hong Kong visit HKTVmall (the website or app). One of the main reasons is because we have groceries. It makes the difference between success and failure," says Wong, pointing to Amazon's acquisition of Whole Foods Market and Alibaba's acquisition of China's hypermarket operator, Sun Art Retail Group.

Wong himself was forced to set up an online grocery unit after his proposal to host online shopping for the city's grocery duopoly, Welcome and ParknShop, was spurned.

He does not plan to roll out any online shopping malls outside of Hong Kong, though. In his view, online retailing is a strictly local affair. Customer behavior is entirely different even in the Chinese-speaking world, from Hong Kong to Taiwan, Macau and Guangdong, he notes.

Wong has set his sights on developing the technology needed to power such malls elsewhere, however. HKTVmall is the first and only online shopping mall he has built. He aspires to erect similar online malls for would-be owners everywhere: to become sort of a virtual real estate developer for global online real estate. He says he has developed the tech know-how in-house by a team of 150 programmers based in Hong Kong and Taiwan. A whole turnkey system is ready to deploy, including AI-powered algorithms and other mechanisms. Think of it as virtual bricks and mortar.

The tech know-how has helped drive down the company’s “fulfilment cost” - the cost of completing a purchase order, including the cost of labor–to 11.8% of total general merchandise expenses, down from 40% five years ago when he first started using AI, robotics, and automation technology. This equates to $11.80 for every $100 purchase.

"This is very extremely low," he says, adding that, "In Japan and other countries, [e-commerce platforms] are not doing well. Because they don't have this. We want to help set up online shopping malls for [potential] online landlords. We have the technology to help. We are like an online construction company. We can help build an online shopping mall in any country for any businessman anywhere if they want to be an online landlord."