Summary of Key Points
This article reflects on the "space tax" era in physical retail, which prevailed from the mid-1990s to around 2010, through the author's personal experiences in the industry. The space tax referred to all the additional costs that retailers had to pay to secure scarce physical locations—such as prime store spaces or display shelves in chain stores—not just rent, but also entrance fees, display stand fees, and festival-related expenses. Essentially, it was a form of rent-seeking for the right to use those physical spaces. There were two phases of this tax: initial scattered and arbitrary charges (fragmented rent-seeking) and later systematic fees imposed by chain store systems (institutionalized rent-seeking). At its peak, these costs were passed on to consumers or manufacturers, who sometimes cut corners to save money. This trend was eventually challenged by the rise of e-commerce, which introduced a new type of tax: the "traffic tax." However, the two forms of taxation did not completely replace each other; instead, they reached a new balance through ongoing competition.
I. The Space Tax: Not Just Rent, but the Sum of "Location Monopoly Fees"
You can think of the space tax as all the fees that retailers had to pay to get a good location where customers could see their products. It included not only explicit rent and transfer fees but also hidden costs within chain stores, such as paying for promotional events or prominent display spaces on shelves. Together, these expenses represented the cost of monopolizing prime locations. For example, if you wanted to sell snacks at the entrance of a school, you would have to pay more in rent to the landlord and additional fees to secure the best selling spot.
The author provides several examples: In 2002, when negotiating the transfer fee for a store, the seller said, "Don't want to pay 200,000? There are others waiting in line with cash." In 2003, trying to open a store at Shenzhen's Seg Mall required an initial investment of 500,000 yuan for exterior advertising. When computer profits were high, retailers could pass on some of these costs to consumers (by charging a few thousand more per unit). As profits declined, they started cutting corners by using lower-quality components, which damaged their reputation.
II. Two Types of Space Tax: Fragmented Charging vs. Systematic Exploitation
The space tax evolved in two stages:
1. Fragmented Rent-Seeking (1995-2005): There were no uniform rules at the beginning, and each market (such as Zhongguancun or Guangzhou Pacific Digital) set its own terms. Retailers had to beg for good locations, and sellers could charge whatever they wanted, often requiring them to buy additional services like advertising. This chaos ended with the rise of large chain stores.
2. Institutionalized Rent-Seeking (2005-2010): Chains like Gome and Suning began to include these fees in their contracts, making them more formalized. Fees such as barcode fees (for each product sold), display stand fees, and festival-related expenses became standard. At this point, chain stores acted more like middlemen, with procurement decisions based on how much money they could earn rather than the quality of products. For instance, during a 2006 renovation of their flagship store on Zhongshan Road, the purchasing manager assigned specific fees for each category, including entrance fees based on location and advertising space.
III. The "Impossible Triangle" of Who Bears the Cost
When space tax levels reached their peak, there were three potential outcomes, none of which could be achieved simultaneously:
- Landlords reducing prices: Unlikely, as good locations were always in high demand.
- Manufacturers lowering product quality: They might use cheaper components to save costs, but this would harm their reputation in the long run.
- Consumers bearing the cost: Prices would rise, potentially driving customers away.
The author cites an example from 2011 when chain store executives pressured manufacturers to supply products at below-cost prices, squeezing their profits. Although product quality was not affected in the short term, this strategy could be unsustainable for manufacturers in the long run, as it undermined their profitability.
IV. The Power Struggle Between Online and Offline Retail
2012 marked a turning point with the rise of e-commerce, which replaced some of the space tax through "traffic taxes"—fees associated with online advertising and customer acquisition. Suning and JD.com took different approaches:
- Suning's Mistake: They tried to control both offline locations and online traffic by acquiring payment platforms like Tenpay and Tiantian Express. However, they failed to compete with Alipay and eventually had to sell Tiantian Express. Later, by joining Tmall, Suning's physical stores became part of Alibaba’s ecosystem, forcing them to pay both rent (for the physical space) and traffic fees (for online sales), breaking their own closed-loop model.
- JD.com's Success: They exchanged equity for control over online platforms and payment methods, focusing on logistics (such as 211 Express Delivery). This allowed JD.com to maintain full control of their business model, ensuring a stable profit margin despite giving up some equity.
The essence of this battle is that a closed-loop ecosystem (where information, transactions, and fulfillment are all under one company's control) is more valuable than mere scale. Companies like JD.com have a lasting advantage because they don't rely on external platforms for revenue.
V. The Dynamic Balance Between Space Tax and Traffic Tax
The space tax has not been completely replaced by traffic taxes; instead, a new balance has emerged:
- 2010-2020: Online traffic taxes increased, while offline space taxes decreased as retailers shifted to online sales.
- After 2020: Offline rent began to fall, but the fees charged by online platforms (in the form of transaction commissions) rose. Retailers are now forced to pay both types of fees.
This shift reflects a transfer of power from physical locations to online traffic. The fundamental principle remains the same: whoever controls access to customers can charge fees. The competition between space tax and traffic tax will continue, with manufacturers or consumers ultimately bearing the burden of these costs.
The value of this article lies in its ability to make the abstract concept of the space tax tangible through personal anecdotes, showing that online advertising fees are essentially a new form of the same old problem. Whether offline or online, retailers must always pay a price to be visible to customers.