Growth of unmanned retail stores in China

• The concept of unmanned retail stores
• Companies venturing into the unmanned retail business in China
• Technology used in unmanned retail stores

As the world is moving towards a greater degree of automation, one of the latest trends that are picking up is the set-up of unmanned retail stores. Few pioneers for this trend are surprisingly the e-commerce companies. Amazon has set up a few unmanned stores in form of Amazon Go in the United States. This has picked up traction, particularly in China. The Chinese e-commerce giants Alibaba, Tencent Holdings and JD have begun to set up stores towards the end of 2017. The customers who shop in these stores scan products at shelves, check-out counters or on the shopping cart and the payment is done on a mobile app.  In addition to the e-commerce companies, several other companies have come up with the format of unmanned retail outlets in China.

Some names are as follows:

• BingoBox launched unmanned convenience stores, where customers can pay through WeChat or AliPay. The company has received CNY 100 million in Series A funding through venture capital firms GGV Capital, Qiming Venture Partners and Source Code Ventures China.
• F5 Future Store has launched 24-hour convenience stores through total funding of CNY 54 million, which occurred in two series. The investors include Sinovation Ventures, Innohub Capital and TCL Capital.
• Bianlifeng was started by Qunar CEO Zhuang Chenchao for selling of high-quality import goods. The founder invested CNY 300 million in the venture.
• FxBox, founded by Zhao Liang received Series A funding from Cherubic Ventures and is valued at CNY 250 million.
• Xiaomai started convenience stores in Beijing with funding of CNY 125 million from Aplus Venture.

According to the China Unmanned Retail Industry Research Report, the total market size of unmanned retail stores was CNY 40 million in 2017 and it is expected to reach CNY 3.3 billion by 2020. At present, there are more than 200 unmanned retail stores in China. The total customers of unmanned retail stores in China were 5 million in 2017 and these generated total sales of CNY 39 billion.

One of the main advantages of this concept is the savings on employee expenses. The savings on employee expenses will result in a significant improvement in EBITDA margin in the United States and Western Europe. However, the labour costs are not a major cause of concern for Chinese companies as it has had traditionally low wages. The population of China is ageing and with the one-child policy, the birth rate has also gone down. The supply of labour is expected to reduce in the coming decades and is expected to be one of the major factors for higher wages in the country. The growth of unmanned retail stores will help the industry to reap high margins in the coming decades when the labour costs go up. According to the below chart, the average annual wages in China have grown significantly at a CAGR of 10.9% from CNY 29,229 (2008) to CNY 74,318 (2017).

One of the major concerns regarding the growth of unmanned stores is whether these will be successful in delivering the same shopping experience without human intervention. Currently, unmanned retail penetration is in the convenience stores industry. This has not entered fashion, home appliances and electronics goods retail, which requires human assistance to help shoppers select products. The ageing population which has become very used to the human intervention may be reluctant to visit an unmanned retail outlet selling fashion goods. On the contrary, the unmanned stores will improve the shopping experience in convenience stores and supermarkets, in which the customers know exactly what they want to buy as customers will no longer have to wait in a long queue for check-out.

The stores may be unmanned but the level of automation may vary from company to company. Most of the present unmanned stores are semi-automatic, wherein the customers have to scan all the products and complete the payment process. In the current format, basically, the customers do everything that in-store employees would do and the stores only have the necessary checks and security measures to ensure that there is no theft or shoplifting incident. However, there are also proposed formats which would deploy very advanced technologies such as face recognition, product recognition and automatic checkout. The day such technologies get implemented, all that customers would have to do is to pick products of their choice and take them home because as soon as a customer enters a store, the smart cameras in a store would recognize the customer. Furthermore, when a customer picks up products, the cameras would recognize the products and scan their prices. When a customer is done with shopping, the payment for products would be automatically processed. The technology is still in the development phase but does not really seem too far away. A few stores in China have already implemented the facial recognition technology, but there is a limit on the number of faces inside a store that a camera can recognize. One of the most valuable advantages of advanced technology would be the accumulation of massive consumer data that can be used for behavioural analytics, spend analytics and consumption analytics.

The competitive advantage of companies will depend on their data availability and data structuring. The companies that will be able to use the data for smart and dynamic pricing to charge from customers a maximum price that a customer would be willing to pay for a product, will be at a competitive advantage. The accumulation of a high level of granular data will also help companies in much-enhanced inventory and demand planning. The companies will be able to maximise their revenues by reducing the loss of revenue on account of stock-outs and will also be able to reduce their inventory carrying cost. However, with such advanced technology, data accumulation will not be without resistance as a lot of people would not want to trade their privacy for a fancy convenience. The customers who value their privacy may avoid visiting these stores and go for the traditional retail stores as far as possible. These advanced technologies will definitely improve the EBITDA margins for companies. However, investment in such technologies will require high capital expenditures. If wages in China rise in the near future, as is expected, then the investment in advanced technology is certainly worth making.

The online retail sector is growing and poses competition for the traditional brick and mortar retail stores, but the traditional brick and mortar retail stores are expected to stay in the next few decades. Similarly, the unmanned retail stores will pose competition to the traditional retail stores, but they may not be able to completely wipe off the traditional retail stores. People will prefer a shopping experience filled with interaction and advice of knowledgeable sales-men at-least for differentiated product lines such as fashion and gadgets.