The Fung Global Retail & Technology team attended the 5th China E-commerce and Retail Innovation Summit 2017 in Shanghai. The theme of the conference was “using big data and internet technology to explore the future of New Retail.”
China’s retail industry will likely reach an inflection point with the advent of New Retail, which is the core message coming out of the 5th China E-commerce and Retail Innovation Summit. New Retail refers to the integration of online, offline, logistics and data across a single value chain. New Retail was one of the pillars of the “Five New Trends” first introduced by Alibaba Chairman Jack Ma in October 2016.
The potential to catapult Chinese retail ahead of its global peers: New Retail is expected to hold the solution for physical retailers and pure-play e-tailers and propel the industry’s transformation. McKinsey estimates that by 2030, China will contribute 30% of the global retail growth.
New Retail addresses the bottleneck of Chinese retail growth: China’s physical retail industry is defined by low operational efficiency, mall supply that is below most developed markets and a supply-demand imbalance between the top-tier and the lower-tier cities. A large proportion of Chinese rural consumers are underserved: China has 2.4 malls per 1 million people compared to the US, which has 12 malls for every 1 million people, according to AliResearch. Digital platforms have wider reach than physical stores, and will enable excess inventory to reach rural consumers.
China is “New Retail”-ready: China appears ready for New Retail, with: 1) a solid digital infrastructure―including big data, mobile internet, cloud computing and marketplaces―powered by data technology; 2) a digitally-literate consumer base, with e-commerce penetration of some categories exceeding 50%, according to PWC; and 3) a retail industry that is stagnating and is in need of new growth drivers.
The best way for retailers to position themselves: Those retailers that are able to most effectively adapt to the changing environment by leveraging disruptive technologies and big data will succeed. To satisfy consumers’ demands, retailers’ value chain will need to extend upstream to product design and innovation. A consumer-centric, data-driven offering focused on content is at the heart of the transformation. Retailers can utilize new touch points and content on the front end; smart manufacturing, supply chain and store operations in the middle; and 3D/4D printing, AR/VR, IoT and AI in the back end, according to Aliresearch.
Slow adopters beware: Enterprises that are slow to embrace the online and offline integration, and remain anchored in a standardized rather than a personalized product/service offering, will likely be negatively impacted. Those reduced to a traditional business are: 1) traditional retail; 2) traditional manufacturing; and 3) pure-play e-commerce.
Aligns well with Alibaba’s vision and national policy: Alibaba’s strategy for a digital economy ties in with the structural trend of China’s consumption upgrade. Chinese consumers and their consumption demand become an engine to drive the country’s economic growth. Alibaba expects gross merchandise volume (GMV) to double to ¥6 trillion in 2020 (from ¥3 trillion in fiscal year 2016) and further increase to ¥10 trillion in 2024.
Execution is the key downside risk: In our view, the positive impact of New Retail may not meet expectations should physical retailers in China be slow to embrace digital technology and omnichannel initiatives. The development of China’s physical retail industry has lagged that of its global peers and have been slower in adopting retail technology. Department stores in developed markets were built in the 1870s and have reached saturation. China, on the other hand, only began to develop its department stores in the past 30 years.
Jian Yang, Deputy President of Alibaba Research Institute (ARI), or AliResearch, discussed the retail landscape in the future and elaborated on the framework of the “New Retail.”
New Retail emphasizes a C2B (consumer-to-business) model, rather than B2C, whereby consumers proactively shape the demand signals to retailers. Alibaba believes its network and data technology assets will facilitate the transformation.
Retail has taken functions beyond selling and will include manufacturing and design. With e-commerce platforms such as Taobao and Tmall, manufacturers can effectively bypass distributors/agents, by having their own online shops and taking orders directly from consumers.
Characteristics of “New Retail”
There are three key characteristics of “New Retail”: 1) demand-orientation; 2) omnichannel; and 3) highly diversified retail formats.
Yang believes the Chinese retail environment is ready for New Retail, primarily due to three factors: 1) a new business infrastructure has been established; 2) a shift in consumer preferences to online shopping; and 3) the global retail industry is stagnating.
Yang also raised the issue of the supply-demand imbalance in Chinese retail, and how New Retail will address it.
Chinese Physical Retail Development Lags Global Peers
The development of China’s physical retail industry lags that of its global peers, with manifestations in the following areas:
The New Retail model of Alibaba will be more flexible and should be better able to address the supply-demand imbalance within China.
The speaker gave an example of how retailers can use Alibaba’s digital economy to overcome oversupply. For example, the Global Financial Crisis in 2008 prompted an oversupply and sharp decline in global trade. Through Taobao, excess inventory can be sold to consumers in lower-tier cities and young consumers in higher-tier cities.
Taobao enabled retailers to reach new groups of consumers that traditional retail was not previously able to cover. For example, the catchment area of a physical store is typically 10 km. A typical Taobao shop has exposure to 0.5 billion registered Taobao users a day.
The framework of New Retail will consist of the following:
On the front end, new retail emphasizes the introduction of: 1) new touch points; and 2) new demand for content.
The middle line of New Retail emphasizes consumer-centric analysis that is powered by data technology. Retailers can leverage data technology to understand consumers’ preferences, loyalty and feedback by integrating data collected from all channels.
The back end of New Retail is primarily responsible for driving the transformation of the infrastructure from one premised in the industrial economy to one that is founded on the digitized economy.
The technological components of the back end of New Retail include:
Retailers that can most effectively adapt to the changing environment by leveraging disruptive technologies and big data will succeed.
In the future, the retail ecosystem will change significantly. The platform economy will redefine the future of retailing. New Retail is expected to hold the solution for physical retailers and pure-play e-tailers.
Retailers’ value chain will need to extend upstream, to product design and innovation, in order to satisfy consumers’ demands.
Pure play e-commerce: The e-commerce market in China is almost saturated. Currently, GMV at major online marketplaces is approaching a ceiling, as indicated by the slowing growth rate. Without the support from innovative technologies and physical stores, pure e-commerce players will find it hard to survive in the new business environment.
Traditional retail: At present, the prevalent model of traditional retail in China is based on real estate. This is expected to be negatively impacted, with the advent of New Retail. The problem with traditional retail real estate is the unsustainability of the business model, according to AliResearch. Depending on revenue generated mainly from local customers will pose as a ceiling to a retailers’ growth potential. Online presence is among the most effective solutions for traditional retailers and provides the optionality for further revenue growth.
Traditional manufacturing: Manufacturing has been focused on standardizing output. With the increasing demand for personalized and customized products, the traditional manufacturing process will be changed. The old production-marketing-selling process (B2C) will be replaced by a new one, starting with a consumer’s order; the manufacturers will then need to realize the order so as to complete the deal (C2B).
In our view, the impact of New Retail could be less positive as expected should physical retailers in China be slow to embrace digital technology and omnichannel initiatives. The development of China’s physical retail industry has lagged that of its global peers, as the country leapfrogged to online retailing without laying a very solid foundation for offline retail.
The conference also covered many ways that retailers can incorporate new retail initiatives into their businesses.
Speaker: Jessie Qian, National Head of Consumer Markets, KPMG China
Jessie Qian discussed the prevalence of mobile commerce, and suggested retailers to find a balance between online and offline, and design KPIs to optimize performance.
China’s mobile evolution: Chinese consumers have entered the mobile era and are leading the global transition towards m-commerce. Some 90.4% of consumers in China have used smartphones for online shopping, according to KPMG.
New purchasing patterns: Consumers are influenced by both online and offline factors when making purchasing decisions. A survey shows that nearly two-thirds of consumers will read online reviews and recommendations and compare prices online. Consumers also prefer to touch and feel the products in physical stores.
Omnichannel retailing: It is crucial for retailers to manage their online presence and closely monitor their customers’ feedback. Integrated omnichannel retailing will be the primary trend in the future.
Speaker: Vishal Bali, Managing Director, Nielsen China
Vishal Bali discussed the theme of channel fragmentation and the tactics necessary for retailers to win.
A growing consumer base: Rising income is driving a willingness to spend on luxury. Chinese consumers are among the most confident consumers globally, according to Nielsen’s research. The number of households in China with earnings of over $50,000 has been increasing at a 29% CAGR for the past eight years. Chinese consumers are becoming more sophisticated in their pursuit of beauty, enjoyment and quality.
The Extension of Luxury
Strategies for luxury retailers
Speaker: Mark Heap, Asia Pacific CEO, MediaCom
Mark Heap discussed the technologies that will power the future of retail.
Media is an opportunity to connect with consumers: Brands can use media as a channel to connect with their customers and drive revenue growth. Dior let consumers customize their limited edition bags through WeChat for 2016 Valentine’s Day. The bags were sold out within two days.
Media as an experience: New technologies such as VR and AR allow retailers to provide vivid shopping experiences for their customers. Compared to physical stores, media technologies are more convenient and efficient, and can effectively reduce the cost for retailers and drive bottom-line growth.
Speaker: Santiago Wang, Senior Marketing Manager, Uber
As a global service provider, Uber has set several excellent examples of how businesses can apply unique marketing strategies in an innovative and effective way.
UberBoat: During Miami Art Week in November 2015 in Miami, Florida, Uber provided a transport service that combined boat and car service. UberBOAT allows riders to travel between Miami Beach and the Art Districts by jetting across Biscayne Bay on luxury yachts. The service solved the traffic congestion problem during Miami Art Week and increased the number of local Uber users.
Uber Ice Cream: For the past two years, Uber has held this ice cream delivery event in over 400 cities. During the week-long Uber Ice Cream event, Uber users can get ice cream delivered to their specified location within minutes. The activity became a hot topic on social media platforms.
Uber Lion Dance: To celebrate Chinese New Year, for the past few years, Uber has been offering lion dance activity on-demand in Singapore. Users can request a lion dance show from one of the troupes.
The conference was attended by multinational and domestic retailers, brands, e-commerce platforms and service providers. Speakers included KPMG, Nielsen, AliResearch, North Face, Starbucks, Nestlé, JD Worldwide, Lenovo, Gap, Uber and Tencent. The theme of the conference was “using big data and internet technology to explore the future of New Retail.”
Alibaba’s strategy ties in with the structural trend of China’s consumption upgrade. Chinese consumers and their consumption demand has become an engine to drive the country’s economic growth.
Alibaba’s gross merchandise volume (GMV) reached ¥3 trillion ($463 billion) in fiscal year 2016. Alibaba expects GMV to double to ¥6 trillion in 2020 and further increase to ¥10 trillion in 2024
Alibaba Founder and Chairman Jack Ma predicted a radical change in the global retail industry in the future. In his opening keynote at the 7th Alibaba Computing Conference in October 2016 and in a letter to Alibaba’s shareholders, he said, “Pure e-commerce will be reduced to a traditional business and replaced by the concept of New Retail―the integration of online, offline, logistics and data across a single value chain.”
The “five new trends” framework was proposed by Jack Ma as a prediction of the landscape of the future business world. The five emerging trends that he highlighted were:
1. New Retail
New retail refers to the integration of online, offline retail and logistics. The role of logistics is to optimize inventory management and minimize inventory.
2. New manufacturing
New manufacturing refers to the transformation to a C2B from the current B2C model. Customization and personalization to the individual consumer will be the emphasis of new manufacturing.
Future manufacturing processes will be more intelligent, customized for individual consumers and make use of IOT, AI, smart machinery and data technology.
The sequence of the manufacturing process will be reversed. Manufactures have to constantly evolve to cater to consumers’ demand, instead of driving decisions by themselves.
3. New Finance
New finance points out the variety of investment projects and the importance of small- and mid-sized companies in the future.
The future finance industry will support 80% of enterprises (including small- to mid-sized companies, as they will be driving economic growth and innovation). In the past, the development of the finance industry was premised on the 80:20 rule, whereby banks support 20% of enterprises (the larger companies), which are expected to drive 80% of overall economic growth. In the future, the core focus of finance industry will be to promote development of 80 per cent of small and mid-sized companies.
The last two elements – 4. new technology and 5. new resources – both emphasize the important role of data. AI, cloud computing, new energy and big data will be the core of future advances.
The gist of New Retail is to catapult China to data-powered, consumer-centric omnichannel retail from traditional retail.
Data technology is required to bring China’s retail industry into the era of New Retail. Alibaba’s role will be to bring data technology to empower physical retailers to be truly consumer-oriented.
We will continue to monitor the progress of New Retail and the transformation of China’s retail industry.