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China’s New Retail Revolution Is Giving Foreign Players Nightmares

Aug 29, 2018 by A. Alfaro
China’s New Retail Revolution Is Giving Foreign Players Nightmares

In January 2016, Alibaba launched its first futuristic chain of cashless supermarket Hema Fresh. It was the founder Jack Ma’s vision to bring together the convenience store of the future with the online shopping experience.

“Pure e-commerce will become a traditional business and will be replaced by the concept of New Retail - the integration of online, offline, logistics and data, across a single value chain,” Jack Ma, founder of Alibaba had said in a letter to the company's shareholders.

The rising rental cost in cities, the increasing cost of labour, and the decreasing profits of online business have made it suitable for many to adopt the new online-offline integrative model.

Hema, the unique online-to-offline (O2O) store, a.k.a., new retail, offers a unique experience for buyers. Shoppers can scan barcodes on individual items to pay for them using the Hema app. All payments are made through Alipay, Alibaba’s payment platform.

In a three-kilometre radius, delivery of groceries is assured within 30 minutes. Another feature in these stores is that buyers can opt to dine at the stores by ordering the in-house kitchen to cook the food they buy at the stores. Hema represents Alibaba’s bid to bring in a major disruption in the retail, e-commerce and logistics industries, all at one go.

All major e-commerce and retail players are aware of the market potential. But Jack Ma’s O2O store has taken the quantum leap which few would be able to match pace with.

According to a report by the consulting firm Founder Securities, the Chinese new retail market was worth USD 5 billion in 2017 and is expected to reach USD 263 billion by 2022.

https://cdn.thepassage.cc/filters:quality(70)/public/image/2018/08/Alizila.jpg

Image source: Alizila, news outlet of Alibaba Group.

Since its debut in Shanghai, Hema has already opened 26 stores across seven different cities and plans to open 2,000 more outlets. According to the Chinese portal Sohu, Hema’s first store was already profitable within a year.

While fellow native players have been quick to adopt Alibaba’s footsteps, traditional foreign stores such as the French multinational retailer, Carrefour are struggling to survive.

The growth of O2O in China

An astounding 86% of Chinese department stores have already started some kind of O2O project, 11% have plans to start one and only 2% have no plans to undertake O2O projects, a research by the analyst firm Fung Business Intelligence reveals.

E-commerce giant JD.com opened 7Fresh, its own O2O store in Beijing in January this year.

The 7Fresh store uses big data analytics to cater to consumers’ desires and has plans to open 1,000 stores within the next five years. Like Hema, it also offers delivery within 30 minutes.

The interest in O2O is an ever-growing one for retail stores. In January 2017, Rainbow launched its own offline retail chain, Sp@ce, which it plans to escalate to 150 stores by 2021. Similarly, Yonghui Superstores, one of China's largest supermarket chain operators and a Tencent’s investee, also launched its new retail unit, Super Species.

VC interest in players planning to have an active O2O play is also increasing. Within three months of its launch in July 2017, the convenience store Xingbianli received USD 14 million investment from Lighthouse Capital. Since then, it has secured investment from Sequoia Capital and China Renaissance. According to the tech portal 36Kr, Xingbianli has also received a strategic investment from Ant Financial, Alibaba’s fintech company.

Two-years-old BingoBox, another automated convenience store startup, raised USD 80 million in its Series B round last January. According to the company, it has 200 shops in 29 cities.

Decreasing e-commerce growth paves way for O2O

As rents have nearly doubled in the past five years in Tier I cities, labour costs have also shot up. Unmanned stores eliminate labour costs for operators. The decline in profits from e-commerce is another factor that aids the growth of O2O now.

The cost of customer acquisition has increased, while profits have declined.

In 2014, e-commerce sales volume grew by 49.7%. In 2015, the growth declined to 33.3% and in 2016 it further fell to 26.2%, according to the Chinese government and Founder Securities.

In comparison, the unmanned convenience store market was worth USD 5.8 million in 2017. According to the Boston Consulting Group, it is expected to reach USD 29 million this year and by 2020, it is slated to reach USD 482 million.

Under the circumstances, integration between online and offline has become an unavoidable path for e-commerce platforms.

Foreign players in a spot in China

This rapidly changing environment has come as a challenge to traditional retailers, particularly the foreign companies that operate in China.

The growth of Japanese stores such as FamilyMart, 7-Eleven and Lawson, despite landing in China 20 years ago is slow. Except for FamilyMart, none of the above-mentioned companies are profitable in China. According to retail portal Lianxiajia, all the three companies have opened 10 new stores per year on an average, which is minuscule compared to Alibaba, JD.com and Suning—another Chinese retailer that plans to open more than 5,000 unmanned stores across China this year.

Threatened by the new competitors, Japanese convenience stores have tried countermeasures. In January this year, 7-Eleven opened its first unmanned convenience store in Taiwan. However, it is still in testing stage and it is not known whether it will enter Mainland China.

The Japanese retail outlets have not adapted to market expectations in China. For example, in Japan, the market share of Japanese convenience stores recently surpassed that of supermarkets, Lianxiajia says. In China, these stores control just 8% of the retail market share. As a result, the Chinese market is young and is more open to disruptions.

Japan, where cash is king, is very different from China when it comes to payment eco-system. According to Bloomberg, the value of cash in circulation was equivalent to 20% of Japan’s national economy in 2016, the highest among major developing countries.

A 2017 Boston Consulting Group report says WeChat Pay has around 800 million users, followed by Alipay’s 520 million users.

In the meantime, 7-Eleven reached an agreement with Meituan, one of the largest group-buying and food delivery company. The 7-Eleven stores in Beijing will offer their products for delivery on Meituan’s application. The store has reached similar agreements in other cities such as Chengdu and Chongqing. Lawson and FamilyMart are also cooperating with Meituan, Ele.me and other delivery services to reduce the distance between customers and stores.

Following this O2O trend, instant delivery of goods will become widespread in China. More than 12 billion instant deliveries were carried out in China in 2017 and the figure is expected to reach almost 16 billion in 2019, an iResearch report says.

However, most of those orders were food deliveries from restaurants (84%) in 2016. Only 2.5% of the total instant deliveries in 2016 served supermarkets or convenience stores.

With the rise of O2O, that figure is also expected to go up in the coming years. According to Joshua Xiang, executive vice president of research and development, Suning, “Chinese customers are crazy about new gadgets. Chinese companies, technology and retailers are more innovative than American retailers”.

The US retailers are also struggling in this new environment in China. Walmart entered China relatively early, in 1996. Almost 22 years later, Walmart has 424 stores and has failed to lead the industry as it does in the US.

Walmart is not the only US company that has decided to team up with a local partner to keep up with the new trends. In August this year, Starbucks and Alibaba officially announced their strategic partnership deal. Starbucks will list its beverages and food on Alibaba’s Taobao, Tmall and Ele.me. By the end of the year, these platforms will serve Starbucks’ 1500 stores across 20 different Chinese cities.

According to the agreement, Starbucks will also “deepen its cooperation with the new retail store Hema”. Some analysts pointed out that this move could be motivated by Luckin Coffee, a new Chinese startup that is disrupting the coffee market. Aggressive promotions via discount offers and strong social media presence, coupled with timely delivery, Luckin has become very popular in first and second-tier cities. It claims its average delivery time is 18 minutes and is planning to open 2000 stores in one year.

When asked if Starbucks’ partnership with Hema, is a result of the strong competition posed by Luckin Coffee, Starbucks’ CEO Kelvin Jonathan said, “We have been negotiating this deal for over a year. The Chinese market is the fastest, we have many competitors, and in the future, we will have even more.”

After the agreement between Alibaba and Starbucks became public, Guo Jin, vice president of Luckin Coffee, declared, “Adding delivery and mobile payments do not equate to new retail if the basic business model does not change.”

European retailers in China such as Carrefour are also finding it difficult to adapt to the new environment. In the last few weeks, there have been rumours in the Chinese media about Carrefour’s alleged withdrawal from China and its complete acquisition by Tencent. Although Carrefour has denied these rumours, it is true that its business has slowed down in China. According to NetEase News, its business has plummeted by 10% every year since 2009.

In 2015, Carrefour launched its own convenience stores, “Easy Carrefour”. But since then, it has opened only 30 stores. The new retail is here to stay. Traditional retailers will have to adapt and innovate if they want to survive. Quoting Jack Ma: "Today is cruel. Tomorrow is crueller. And the day after tomorrow is beautiful."

A. Alfaro

A. Alfaro is a Beijing-based freelance reporter. He focuses on China's politics, culture and society. He can be reached at varofaro@gmail.com. 

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