Winter has come for traditional retailers in China

January 26th, 2018 | Loic

Traditional retailers in China are facing many challenges, with increasing competition from e-commerce now all rushing to open offline stores, hundreds of startups launching new shopping concepts and most importantly, ever-changing consumers (see my cofounder Bentley’s article on it).   

Retail winter apocalypse e-commerce

Winter is coming for traditional retailers in China. E-commerce and Startups represent thousands of White walkers coming to bite into China’s fast-growing grocery market

I worked three years for the leader of high-end supermarkets in China (Olé supermarkets, China Resources Group) and the last two on new technologies (mostly ARVR). Retail encompasses many many categories, so I will stick to the one I am most familiar with, the FMCG market, which according to Goldman Sachs is expected to reach $2 trillion by 2020 (online + offline).

My matrix to analyse retail in China is built on 2 axes: convenience (what’s useful, like saving time or money, what doesn’t cause pain) and experience (a pleasant surprise, a memorable event, a perfect customer service).

 

Traditional retailers used to have an edge over e-commerce: a place for shoppers to experience products

In my opinion, offline retailers have made three main mistakes that explain their current struggle:

-       Picking the wrong battles

-       Being refractory to technology

-       Not deepening the core advantages

An experience is an event or occurrence which leaves an impression on someone. According to my colleagues (all Chinese Millennials), the best online shopping experience should leave no impression, in the sense they already expect many choices, low prices, quick delivery and enough information. A good online experience is a non-experience. E-commerce is all about convenience and China excels at it.

 

Major Chinese B2C Ecommerce platforms

 

Screenshots of Taobao, JD and Tmall, China’s biggest e-commerce apps

 

A lot has been written about Millennials looking for experiences, about them still wanting to visit stores and supermarkets, but much less has been done. Offline retailers have been trying to launch their e-commerce platforms without the right design or technical thinking. Trying to fight back against e-commerce by bringing the fight to convenience was a losing battle, as they neither have the resources nor the team to do it (with 85% B2C market share for Alibaba and JD.com, there is just no room for another e-commerce app).

Scarcity and limited choices are not necessarily an issue, they can indeed become an advantage. Retailers don’t have to provide as many choices as online commerce, but they must provide the right products to each shopper. This is a big challenge and unfortunately, traditional retailers are not leveraging technologies that could solve this problem. On paper, the objective is simple: improving shoppers’ experience by curating and personalizing their offering. However, with almost no data about the person entering a store, supermarkets’ buyers and in-store staff are just guessing what shoppers want.

From a marketing funnel point of view, when consumers are physically in a retail shop, the chances of converting them into buyers are much higher than online, as they can see, touch, experience the goods or services. Online growth hackers would say the toughest part is done as shoppers can be influenced by sales assistants, by friends, especially since an offline shopping experience is above all else a social experience. Unfortunately, the conversion from visitor to paying customer is rarely measured and analysed, nor are the reasons for what e-commerce would call abandonment rate.

 

E-commerce giants are moving offline and bringing with them a bunch of unknown tools to offline retailers

After enjoying decades of tremendous growth due to the emergence of Chinese middle class, e-commerce players are now reaching a glass ceiling which leads them to attack where retailers though will be safe: offline, which still accounts for roughly 95% of total grocery sales in China.

Different but complementary strategies were adopted by Alibaba, JD.com and other e-commerce giants to gain more market shares:

-       Opening their own stores (Hema supermarket for Alibaba, 7 Fresh for JD.com)

-       Buying up stakes in existing supermarkets (Tencent invested in YongHui Super Spices, Alibaba in LianHua and recently in SunArt)

Alibaba New Retail is the perfect example of integrating existing technologies and applying them to a non-tech industry. They use (a lot of) data from Tmall, Taobao, Alipay, knowing exactly who, what and where online shoppers are buying goods, then open a supermarket nearby to serve them within 30 min. They are also supposedly selecting their assortment according to different local tastes, even if my own retail experience tends to doubt that – at least for now. In practice, they use consignment model and work with a handful of suppliers who provide the same merchandising no matter where in China.

 

Jack Ma eat at his New Retail concept Hema Supermarket

 Jack Ma during the opening of the first Hema Supermarkets, eating north American crab freshly cooked in store

Another example is provided by JD.com, which has segmented its users with 10,000 personas. Face recognition technology would be easy to implement in their new 7 Fresh stores to recommend suitable products to each in-store shopper, to personalize coupons and discounts or to suggest product match.

E-commerce was basically born with a simple promise: making goods and services available anywhere, anytime. If you consider Taobao, JD or wechat and its e-commerce integrated system, that’s now done. But with billion goods available from any smartphone, e-commerce players understood that consumers want an experience so their stores are designed toward this goal: pick your own lobster, eat fresh seafood inside the supermarket, discover new trends, learn more about products and ultimately, have fun!

By owning users’ data and mastering online tools, they can dedicate their efforts to create delightful experiences.

 

Offline retailers, change or die 

While on a transformation mission with Ole, I used to spread a simple message: change before you have to. From Vanguard’s CEO to Chengdu sales assistant, I tried to make everyone realize that it’s (relatively) easy to become the leader, but extremely hard to stay on top.

 

Loic Kobes in Ole Vanguard China Resources office

Nice reminder from a young manager, Loic Kobes, first foreigner in Ole Supermarkets

 Innovation can be developed internally or be outsourced, but each stakeholder needs to understand its necessity to stay relevant. Unfortunately for traditional retailers, and without sounding too depressing, I see only two options available: transform themselves into tech companies or collaborate with startups.

In their defence, retailers probably don’t have means to realize what’s really happening in R&D labs, garages, co-working spaces or online forums. To put it in a nutshell, those places are where the future is created. Too often, retailers remain outside this ecosystem.

Each technological wave brings new giants: Sears, JCPenny, Macy’s or Target were all born before the internet revolution, which brought new ones (Amazon, Alibaba, eBay). Some old players managed to transform themselves – through massive acquisitions for example as Walmart did. Technological revolutions will bring a bunch of new leaders. Smart retailers will be associated with them, the rest of them will die.

 

Amazon vs offline retailers USA market valuation

 

Nothing to add here, numbers speak for themselves

 Big headlines (Alibaba paying $2.9 million for 36% of SunArt shares or Tencent acquiring 5% of Yonghui for $636million) are the top of the iceberg. The entire retail is changing for one simple reason: consumers are different.

 

The promised land

 Digitalization, Omnichannelization, Platformization, Entertainmentization, O2O, OMO, consultainment… Doesn’t matter which fancy word, EVERYONE is talking about how to change the retail industry and lead New Retail, by opposition to old retail which I would define by low tech integration. From a consumer point of view, terminology doesn’t matter, all they want is precisely all – from Latin Omni, all, which could give a hint of the best term to pick.

But the truth is, its hard to provide it all and no one exactly knows how retail will look like. At Coolhobo, we believe it will be radically different from today and that change will be driven by e-commerce players and startups. Technologies such as blockchain, iOT, ARVR, drone delivery, robot shopping assistant or AI will play a major role and I understand the fear of traditional retail decision-makers who don’t necessarily understand those technologies. The solution is simple though: start experimenting in one store, measure the progress, analyse the data and roll-over if it has a positive impact. See Nescafé Demo devlog here

 Coolhobo ARVR shopping demo

Our team is working on new AR shopping concepts, here are some of the them

 

Innovation can also generate new revenue sources: sub-renting spaces to brands for promotion activities, selling data about shopping trends, becoming an offline media. For those who explore new possibilities, the future looks bright.

Technology is retailers’ winter, but shoppers are less afraid than them to adopt new technologies. In fact, consumers are willing to share their data if it’s for their mutual benefit. This is the reason why China is leading the retail transformation. Chinese citizen demand tech integration into every aspect of their life, retail can no longer deny it.

In the next articles, I will dig further into some innovative concepts using new technologies to create the future of shopping, as well as AR technologies that are helping us to map the physical world. Stay tuned and keep learning!