by Franklin Chu
This article first appeared on SmartBrief, a leading publication for retail & e-commerce news
E-commerce is getting physical. As the respective e-commerce leaders in the US and China, Amazon and Alibaba are now strategically investing more in offline retail expansion.
Consumer demand for omnichannel options has prompted these retailers to grow beyond their e-commerce excellence by opening physical stores.
We compare and contrast the companies' offline strategies, and discuss how US retailers can adopt their best practices for effective omnichannel retailing.
Amazon’s walk-out technology versus Alibaba’s mobile payments technology
Both Amazon and Alibaba have branched into offline retail with their Amazon Go convenience stores and Hema smart grocery stores. There are 14 Amazon Go stores in the US, whereas there are approximately 120 Hema stores from Alibaba located throughout China.
Both retailers leverage online customer data and technology to customize product selections for certain demographics in certain regions. This approach ensures that average sales per customer and sales per square foot are higher than those of traditional retail stores. However, the two retailers offer very different shopping experiences.
Amazon Go convenience stores streamline customers’ transactions by requiring them to download the Amazon Go mobile app beforehand and swipe the QR code on it when they enter the store. Then, as customers pick up items from the shelf, sensors detect which item has been removed and use heat mapping technology to detect when that customer has left the store. As the customer leaves the store, the items are automatically checked out and his or her pre-registered credit card is charged.
Alibaba’s Hema smart grocery stores operate on a slightly different model, catering to Chinese preferences for mobile payments technology. Customers pay at self-checkout counters where they can use a traditional point-of-sale system to check out the items one by one. They can use the Hema app, Alipay mobile payment apps, or even cash to pay for their orders. What’s more is, Hema now lets customers use facial recognition technology to pay for their goods, as long as their face is pre-registered on their Alipay apps.
So the shopping experience is slightly different, largely because the way American and Chinese consumers pay for their goods is different. For Amazon Go, the experience appears to be a bit more seamless and encourages the customer to buy more items as he or she is unaware of how large the shopping bill is growing as they shop.
But getting started for the first time can be complicated because the customer has to first download the Amazon Go app and link it to his Amazon account before he or she even walks into the store. This process may make it difficult to solicit less tech-savvy customers.
Alibaba is ahead in omnichannel retailing
But Alibaba wins when it comes to omnichannel integration.
It starts with Hema’s food courts, which serve fresh imported food such as lobsters, sushi and more. The goal is to draw more foot traffic that can then be converted into paying customers who order groceries through delivery services – Hema customers can use the app to deliver groceries to their door if they live within a 3 km (1.9 miles) radius.
This strategy makes sense because consumers have to eat food every day, whereas they might only go to a grocery store once a week. The food court incentivizes customers to buy groceries more frequently.
Here’s an example:
1. A customer goes to the food court for lunch or dinner.
2. Since the customer is already there, he or she might as well buy some groceries, even if that person just went grocery shopping over the past weekend.
3. A day or two later, the customer has a craving for bananas and orders some on the Hema app to be delivered to his home. While browsing the app, the customer also sees some toothpaste and remembers that the family is almost out of their current supply. The customer adds a tube to the shopping cart as well. Both the bananas and the toothpaste are delivered to the home within 30 minutes.
This strategy of upselling the customer seems to be working. According to Hema, 60% of its transactions come from online. A mature location generates more than RMB 800,000 (~$115,000 US) of sales per day and more than RMB 50k (~$7,000 US) in annualized average sales per square meter.
How Amazon and Whole Foods have fared with its omnichannel strategy
Amazon’s $13.7 billion acquisition of Whole Foods in 2017 hasn’t yielded the same results; nor has it upended the traditional grocery store model.
Following the acquisition, Whole Foods lowered prices and now offers two-hour grocery delivery service, but American consumers are more spread out geographically and are still reluctant to order their groceries online.
To add to that, Amazon already has over 100 million Prime members, one for nearly every household in America. There’s only so many more customers Amazon can convert to new Prime members.
And while traffic at Whole Foods increased 16.5% year-over-year in the first quarter of 2019, revenue increased by just 1% year-over-year. Analysts have mentioned that Whole Foods’ selection of organic goods isn’t appealing to Amazon’s mass-market consumers, who may not be interested in eating organic goods, especially if the average order is over $200 per shopping basket. While Amazon may tweak the product selection at Whole Foods, it has to do so carefully, or else risk losing Whole Foods’ original loyal members.
However, Amazon is rumored to be planning a large-scale expansion of Whole Foods stores across the continental United States, so it remains to be seen how Amazon’s plans for grocery retail will play out. Right now, it’s still too early to tell.
1. Amazon’s “Just Walk Out” Shopping experience lets customers walk out of the stores and have their items automatically deducted from a pre-registered credit card. Alibaba’s Hema stores encourage customers to check their groceries out at the end with Alipay mobile payments.
2. Alibaba’s Hema strategy revolves around converting foot traffic into online customers. Customers can eat dinner at Hema’s food courts, buy groceries there, and later use the Hema app to buy more groceries and other items.
3. Amazon’s acquisition of Whole Foods has driven more Prime members to shop at Whole Foods, but its omnichannel strategy faces headwinds. American consumers are more spread out, making delivery difficult, and they’re still reluctant to purchase groceries online.
Franklin Chu, managing director of Azoya USA, is an expert and speaker on China cross-border e-commerce. Franklin also serves as President of Sage Capital Group Inc. a private equity and investment management firm and is a graduate of Yale University and Harvard Business School.