China’s new way of retail ‘new retail’

• Strong growth in China’s retail industry and market outlook
• What is the ‘new retail’?
• Investment in the Chinese retail industry

With the advent of online retailing, biggies such as Amazon are disrupting the retail space. Past two years have been tough for the typical brick-and-mortar stores all around the world, which have witnessed many of these giants fall from Macy’s shutting around 100 stores in the US, Marks and Spencer reducing the store count in the UK to Toys “R” US completely shutting their operations in the US.

However, amid all this, China’s unique retail revolution, first the O2O (Online-to-Offline) strategy and the more recent one the ‘new retail’ (omnichannel capabilities) has allowed for online as well as offline retailers to witness a rather strong national consumption. China is known as the largest e-commerce market in the world, its e-commerce sales crossed US$ 1 trillion-mark last year (2017). The nation boasts of its street vendors preferring m-payments over cash, groceries being delivered to customer homes in less than an hour. China is setting standards for the future of global retail. It is the biggest and undoubtedly the most important consumer market in the world today. The country is home to c. 800 mn smartphone users, with mobile payments, social media, e-commerce forming ubiquitous part of the retail consumers’ journey.

PWC’s analysis shows that e-commerce is expected to account for 23% of the retail sales in China in 2021, up by 13% from 2016. China’s e-commerce has benefited from its rampant adoption of m-payment technology, social commerce models, as well as e-wallet systems. These have allowed for the transition of the retail industry to the O2O model, wherein retailers use the online medium (anything digital) to attract buyers to their physical stores (offline). In this respect, iResearch (a consulting group) estimates that O2O sales will be worth approx. US$105 bn by the end of 2018, up from a mere c. US$10.5 bn back in 2011.

In spite of this strong growth, retailers in China have not limited themselves to simply the O2O model, but have rather transitioned on to the omnichannel strategy. PWC’s Global Consumer Insights Survey found that with respect to shopping habits as compared to the global average of 22%, 50% of consumers in China are likely to buy products weekly using the online platforms. Further, as compared to the global average of 21%, 59% of Chinese consumers are likely to buy groceries online. The country’s cashless society is backed by 86% of its consumers using the mobile payment mode for payment against the global average of a mere 24%. The aforementioned numbers are further strengthened by the fact that when it comes to adoption of a new technology or innovation, Chinese consumers continue to be the first movers or adopters. For example, the survey found that 44% of the Chinese population was willing to consider a delivery method of a low-value product via a drone versus a global average of 22%. This strong shift towards greater adoption of digital medium by buyers has pushed Chinese retailers to transition from just O2O to omnichannel, which allows a greater level of flexibility for customers to choose how and when they want to interact with the merchants. This seamless integration of online and offline extends from the rampant adoption of the wireless internet, mobile payments, AI (artificial intelligence), sensors, big data analytics, etc. in China.

Omnichannel or ‘new retail’ allows for greater integration of online and offline rather than simply driving traffic from one mode to another. Herein, digital becomes a platform for not just boosting the online growth, but instead for everything right from customer engagement to brand building, physical store formats and supply chain operations. While online sales have enjoyed the growth, physical stores do not seem to be left far behind either. For instance, China’s tech giant Xiaomi, which previously solely operated via the online channel is now heavily investing in physical stores and opened 200 stores domestically and another 130 international stores in 2017 alone. While an online-only presence helped Xiaomi keep its operational costs low, it had to open physical sales in order to tap into the customer base of rural areas, and thereby, pushed itself for the adoption of a new retail model rather than being purely online based.

What was once envisioned by Jack Ma, the father of Chinese retail (back in 2016), is now being witnessed for real by the world. Ma’s prediction for an online-offline merger as well as logistics translating into a seamless new world of retailing can be seen as resulting into millions of mom-and-pop stores in China. These enjoy a fresh lease of life and act as the order and delivery stations for e-retail. New retail, by proliferation for both the AI and big data, is being used by brands to provide for a compelling customer experience, while it is simultaneously transforming the retail business models. Additionally, new retail allows retailers to redefine offline retail by implementing learnings from their online operations such as enhanced inventory management among others. For instance, Alibaba, once a pure play e-commerce player, realised the inevitability of establishing an offline presence in order to maintain its growth rate. In this regard, let us consider Hema’s example, which is Alibaba’s technology-driven supermarket store, wherein buyers can look up for products information in a store by simply scanning a product code, further place the order for home-based delivery and then make the payment, all via a dedicated Hema app. Buyers can also order fresh food (including seafood) to be cooked and served in a store. Alibaba, including others, rely rather heavily on analytics to boost its retail strategy. For example, Hema knows practically everything about its customers from their phone numbers, payment and other financial activities, home addresses, purchasing history, etc. This information is then further used to design enticing deals for targeted customer groups. This strategy has paid off, the company reports that sales/area is 3x-5x of other comparable supermarkets. Alibaba is also trying to replicate the business model of Amazon Go, with its unmanned supermarket Tao Café, where, just by simply scanning a personalised QR code right at the entrance of the store, consumers can simply pick up their choice of items and conveniently walk out of the store. The items are automatically detected and charged from a customer’s Alipay account.

Needless to say, China’s retail industry has seen investments galore. In November 2017, Alibaba splurged c. US$2.87 bn for a 36.16% stake in the country’s top hypermart operator Sun Art Retail Group. This was followed by a 38% stake in Shiji Retail in Feb. 2018, a company that specialises in big data analytics for hotels and retail as well as a 15% (US$867 mn) in Beijing Easyhome Furnishing. These investments enhanced the company’s offline presence with an addition to Alibaba’s existing investments in Intime Retail and Suning Commerce Group. Tencent, the proud owner of all famous, WeChat app, invested US$636 mn for a 5% stake in Yonghui Superstores, which was followed by an investment in French supermarket chain Carrefour. The aforementioned stores now provide for a cashier less checkout backed by Tencent’s WeChat app. Additionally, the company also splurged on a 14% stake in the Wanda Commercial for US$5.4 bn. Furthermore, JD.com, the e-commerce giant with an intent to open one million unmanned convenience stores by 2021 has partnered with China Overseas Land & Investment. This is just in addition to the company’s existing O2O app, which retailers use to support grocery orders from customers. JD.com has also partnered with Walmart and installed JD kiosks in the US supermarket stores in the country.

As Chinese consumers are willing to adopt the next big technology and are not necessarily bogged down by privacy concerns, companies such as Tencent, Alibaba and several other cash-rich start-ups have been able to roll out different retail models and technologies in contrast to other nations, wherein users’ privacy is considered paramount and therefore, is more cautiously guarded. Once discredited for simply mimicking and lacking innovation, China is setting up new standards for global retail, where both the online and offline channels are leveraging on each other’s strengths. The country is building a unique and vibrant retail atmosphere, where major local, as well as international brands, are vying for customers’ attention and increasing wallet share, the internet mammoths are competing to build an extensive digital ecosystem, where heavily funded start-ups are persistently innovating consumer experience altogether.