Why You Should Look to China for the Future of Retail
Chinese companies have been weaving together the online and offline worlds, trying for an ever more seamless fit
By Li Yuan
The Wall Street Journal
Updated July 13, 2017 8:48 p.m. ET
Shoppers at a cashierless BingoBox convenience store in Shanghai last month. Venture capitalists consider such stores a hot retail experiment. Photo: Wang gang/Imaginechina/Associated Press
The retail industry is in a state of flux. American retail stores are shutting at a record pace. Amazon.com is experimenting with new formats for brick-and-mortar stores and its $13.7 billion deal for Whole Foods Market is seen as a sign of accelerating change.
For a glimpse of the future, U.S. retailers and e-commerce companies should take a look at China, which is already a big test lab.
Chinese companies have been busy weaving together the online and offline worlds, trying for an ever more seamless fit. Convenience stores that have no sales assistants or cashiers are popping up in big cities. E-commerce company Alibaba Group Holding BABA +1.08% and its rival JD.com JD 0.80% have poured money into department stores and grocery chains.
Alibaba is launching fresh-produce grocery stores in the Whole Foods vein, with the first 13 open in three cities. There, customers can order, eat in, take out and arrange for groceries to be delivered to their homes—all done by phone. No cash or credit cards. Only Alibaba’s affiliated payment app, Alipay, is accepted.
Joe Tsai, Alibaba executive vice chairman, explained the virtues in a recent call with investors: “So now the store knows your preferences and can give you a personalized selection of products on your mobile app no matter where you are. It knows you and can predict your needs.”
To do this, companies are creating efficiencies by integrating payment systems and streamlining inventory and delivery. More important, investors say, it is the gathering of data on consumer habits that is crucial: It creates opportunities for retailers to cater to customer needs and leverage sales online and offline.
“China has about the most fertile soil for testing out new formats of retail,” says Zhang Ying, a partner at Sinovation Ventures, which has invested in the unmanned-convenience-store startup F5 Future Store.
Chinese e-commerce giants’ offline acquisitions and presence
28% stake in listed department-store chain Intime Retail Group Co. with plans to take it privateNearly 20% stake in consumer-electronics chain Suning Commerce Group Co. 35% stake in grocery chain Sanjiang Shopping Club Co. 18% stake in Lianhua Supermarket Holdings Co.Launched Hema Xiansheng, a fresh-produce grocery chain JD.com10% stake in Chinese supermarket chain Yonghui Superstores Co. Ltd.Opened a JD.com “experience center,” where customers can test products, in a Wal-Mart store in ShenzhenPlans to open one million JD convenience stores and 5,000 baby and mom “experience stores” _________________
China is an ideal market for experimenting because its traditional banking and retail industries are weak. A generation ago, stores had little to offer and service to match—legacies of the planned economy. Credit cards, nonexistent back then, still aren’t common, while smartphones are everywhere.
China’s e-commerce market is now bigger than those of the U.S., U.K., Japan, Germany, France and South Korea combined, according to consultancy McKinsey. Meanwhile, sales growth for China’s top 100 brick-and-mortar retailers fell to zero or contracted in the past three years, from double-digit growth only five years earlier, according to the official China National Commercial Information Center.
Chinese also have rapidly taken to using their smartphones to make payments and to scanning QR codes, those waffle-patterned bar codes that can be affixed to goods or store shelves. Roughly 67% of China’s 731 million internet users used mobile-payment technology in 2016, according to government data, and half did so in physical stores.
True, the e-commerce companies are going offline because they need to. As big as China’s e-commerce industry is, sales of online merchandise made up only 13% of the total last year. And the growth of online merchandise sales has slowed from 50% in 2014 to 33% in 2015 and 26% last year.
Companies and investors say that the more data retailers collect on online and offline spending, the more accurate their customer profiles can be—and the more targeted their offerings. Two consumers who purchase the same toilet paper, for example, could have vastly different income levels—and thus greatly differ in what they spend on other products and services.
For venture capitalists, the hottest retail experiment is the cashierless convenience store. In recent weeks, GGV Capital announced an investment in startup Bingobox and Sinovation did so in F5. Alibaba unveiled a cashierless convenience-store concept last weekend. Amazon’s version, Amazon Go, has been delayed by technical glitches; its high-tech system of cameras, sensors and algorithms to track customers got overwhelmed when more than 20 people were in the test store at one time.
While the Chinese ones are in testing mode, too, they are still being rolled out, fixing bugs as they go. F5 is upgrading its cooking machine to reduce the time to prepare food. BingoBox had to shut a store in Shanghai this month because the indoor temperature was so high the doughnuts melted.
The attraction for investors is scale. Convenience stores are the fastest-growing category of retail, driven by younger consumers more willing to pay for convenience than their cost-conscious elders. The consumer-profile data, says Sinovation’s Mr. Zhang, could be more valuable than the food and drink sales.
At an F5 outlet in the southern city of Guangzhou recently, 24-year-old Carson Zhang ordered a bowl of hot noodles with balls of minced fish for 10 yuan ($1.47) by clicking an image on a screen. He paid by scanning his smartphone, waited for about one minute for the food to be delivered by a robotic arm to a pickup point and ate at a counter. “I came to the convenience store for convenience, not human interaction,” the pharmaceutical salesman said as he left to catch a movie.
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Appeared in the July 14, 2017, print edition as 'In Retail, China Serves as a Test Lab.'