Azoya

What does the ‘New Retail’ battle tell us about China’s retail market trends?

Tencent reinforced its retail alliance by purchasing Yonghui and VIP.com stocks, to compete with Alibaba’s ‘New Retail’ strategy. ‘New Retail’ is getting more and more serious.

by Azoya Lab

The idea of ‘New Retail’ was first introduced in 2016, and by the end of 2017, it is more than just a distant concept. With Tencent starting to invest in bricks and mortar chains in China, reinforcing its retail alliance by M&A in the capital markets, we are now seeing a clearer picture of how the Chinese retail market reacting to the ‘New Retail’ model.

Tencent

Alibaba

JD, Walmart, VIP,   Yonghui

Intime, Auchan, Sun Art, Suning

In the spotlight of the transaction with Tencent is Yonghui’s latest bricks and mortar innovation, the Super Species chain stores, which integrate modern supply chain and operation technology, and provide Chinese customers new experience with shopping groceries and fresh food. Tencent’s claims to leverage WeChat’s payment and social media strength to drive its next phase of growth.

#1 Groceries and fresh-food retail business will be revolutionized by new technologies

Bain & Company’s 2017 report showed that approximately 60% of daily consuming goods in China are sold via supermarkets and marketplaces, while e-commerce only accounts to 7%. Bloomberg Intelligence’s analyst highlighted fresh food and groceries as a high-frequency purchase categories, one that both Alibaba and Tencent is keen to pursue. With over 1000 Yonghui stores planned to launch in 2018, it will be a perfect ‘New Retail’ technology testing fields for Tencent, and a good shopping scenario to promote WeChat Pay.

Fresh food ‘New Retail’ model vs convenient store model


Convenient store

Hema (Alibaba)

Super Species (Yonghui)

Yonghui Life (Yonghui)

Model

Retail

Retail, catering, O2O

Retail, catering, O2O

Retail, O2O

Category

Fast food, convenient food, groceries

Fresh food, groceries (more SKUs)

Fresh food, groceries (more SKUs)

Fresh food, groceries

Size

50 – 100 m2

4000 - 10000m2

500 - 1000m2

200m2

Online pct.

varies

50%

10%

-

Operator

Franchise & chain

Chain & partnership

Partnership

Partnership

Delivery

Outsourced

Within 3km

Optimizing

Optimizing

Payment

Multiple

Alipay & cash

Multiple

Multiple

Store

From hundreds to thousands per company

Currently a dozen, planned 50 + for near future

Currently 24 +, planned 50 – 100 in 2018

Over 50 already, 82 signed and will be launched recently (2017 December)

Fresh food e-commerce has been a hot topic in China in recent years, but the business has many challenges from supply chain, logistics and costs management. Meiriyouxian, one of the leading 2h fresh food delivery platform in China, told media earlier this year that they had successfully broken even in some regions, which means that the business model of O2O fresh food business works, and customers are willing to pay for a higher price for convenience and quality.

WeChat’s dominance in social media will be able to contribute to Yonghui’s expansion in both fresh food market and supermarket operation, to integrate WeChat’s LBS service to fuel online to offline business of Yonghui, as well as to cut cost reaching and retaining customers.

#2 Blurring boundaries between online and offline

After a decade of astonishing growth, e-commerce in China is now challenged by rising operation costs from marketing and logistics. A recent study by Ping’an Security showed that e-commerce operation costs are close to offline retail operation: selling through China’s major marketplaces could cost 5-10% (Tmall for 5%, JD for 8%, Amazon CN for 10%)of revenue, and a lot more for marketing and logistics (from our experience we presume at least 20% for marketing and 10% to 15% for logistics). While operating an 800 square meter flagship store in tier 1 cities could cost 5-8% (or 12 million RMB) for rent and around 600,000 RMB estate management fee.

Rising cost of e-commerce operation has driven some of the market leaders to rethink their strategy of offline retail. With the use of new technologies, some believe that bricks and mortar stores will be able to drive more traffic to offline store, and benefit from the integration of supply chain and membership systems. And hence the birth of ‘New Retail’ concept.

To some extent, the retail landscape in China is very similar to modern warfare – e-commerce as air force that provides targeted reach to customers, while offline retail as army to gain market share and sales volume, but costly. Cross-border e-commerce is a like long-distance missile that serve as a fast and strategic approach to test market response. Retailers could need combination of all above to fully tackle the massive China market. Combination of online and offline showed great potential as to improve store efficiency.

#3 Improving retail efficiency thanks to big data

The ‘New Retail’ transformation first took place in department stores, as in earlier 2017 Alibaba privatized Intime, one of the first listed department store chains in China. The deal offered Alibaba an opportunity to restructure the department store business by integrating customer data, payment, marketing and new in-store technology to improve bricks & mortar efficiency.

P&G said in a news report that they can now understand department store customer’s online behavior through integration with Alipay and Taobao, which allow them to create much more targeted campaigns to promote new lines of ‘SK-II’ brand.

Recent news of Alibaba Intime’s joint venture with Nanjing’s local department store business is a sign of Alibaba exporting its ‘New Retail’ transformation. Alibaba had also bought in Sun Art’s stock to expand the ‘New Retail’ to cover different sorts of retail forms, such as department store, offline marketplaces and convenient stores.

Rising new players are more aggressive to challenge the retail market. For example, Hema removed the ‘hidden rule’ of slotting allowances, which encourages more suppliers to launch through their platform at lower prices, which can result in more competitive business model against traditional supermarkets and marketplaces. Data powered supply chain and logistics could potentially optimize the overall supply chain efficiency, cut down cost and unnecessary resources.

What’s most important is that the traditional approach of ‘customer seeking for merchandises’ methodology will be replaced by ‘merchandise seeking customers’. Having the business intelligence to understand and analyze offline traffic will be one of the key features of ‘New Retail’, as well as higher flexibility to manage suppliers and stocks. 


WeChat Alibaba

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