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Comeback King – China’s Bricks and Mortar Retail Fights Back

31/12/2018

James Shepherd, Managing Director of Research in Greater China takes a close look at the rapidly changing shape of retail, turning the spotlight on Greater China to see how traditional retail is countering the seismic shift towards online shopping in the world’s largest retail market.

China’s e-commerce market has witnessed an incredible evolution on the back of rapid growth, innovation and high levels of technology adoption. However, given ever-increasing consumer expectations, a gap has emerged between the basic online shopping experience and the demands of China’s sophisticated shoppers in search of the most engaging retail experiences.

When China’s e-commerce market first took off and was recording double-digit sales growth (Chart 1), a number of market watchers predicted a complete apocalypse for traditional bricks-and-mortar retail formats. While traditional retail did not collapse, many of China’s established retailers and retail property owners experienced a period of acute pain.

Chart 1 – China Online & Offline Sales

comeback-king--chinas-bricks-and-mortar-retail-fights-back

Today, to a large extent, e-commerce is supporting China’s traditional retail market. On the one hand, the product pricing advantage that e-commerce operators once enjoyed has has been whittled away, following the entry of a swarm of new online players, fierce competition, talent shortages and M&A activity. It has become more challenging for China’s largest e-commerce players to fuel growth through online retailing (Chart 2) and are instead now leveraging their financial strength, access to debt, retail networks and consumer traffic to boost their bricks-and-mortar presence. This would have been unthinkable ten years ago.

Reflecting this resurgence of bricks and mortar, Chinese e-commerce titans JD.com, Tencent and Alibaba have all ramped up their efforts and put strategies in place to expand their store networks. Suning, another major online retailer, has opened unmanned “Suning Biu” branded smart stores, while online mobile phone seller Xiaomi now has 235 Mi-branded stores, with plans to add 1,000 more locations over the next two years.

Chart 2 – Annual Gross Merchandise Volume of Top 3 Chinese Online Retailers

comeback-king--chinas-bricks-and-mortar-retail-fights-back-2

Five Year Growth

 Taobao  Tmall JD.com 
 129%  378%   629%

 

Elsewhere, the “New Retail” format has emerged as an innovative and powerful model that Chinese retailers are pursuing in order to tap into rising consumer demand for retail experiences, higher quality goods and tailored products. Alibaba group’s online grocer, Hema, has opened 47 Hema Fresh supermarkets in 13 cities, and is targeting 100 store openings in 2018 alone. The concept is a major exponent of ”New Retail” through the use of omni-channel retailing. Its business model leverages a strong brand reputation that has been almost entirely developed online. Hema Fresh makes effective use of its omni-channel capability throughout the shopping experience, with tech-driven operations and management systems enhancing the consumer experience, strengthening operations and – most importantly – driving profitability.

In the fast fashion segment, a similar evolution is playing out. Despite the challenges in the bricks and mortar retailing environment for fast fashion in China, Japanese clothing retailer Uniqlo has bucked the trend and continues to expand rapidly, opening an average of 93 new stores per year. Along with this expansion, Uniqlo has driven the upgrading of its existing store portfolio with enhanced services, creating more user-friendly shelf placement and fresh experiences through the introduction of advanced technology. Uniqlo’s largest store in Shenzhen, with an area of approximately 2,600 sq m, was recently opened at the 230,000 sq m MixC World as a showcase for innovation, most notably its digital shopping assistant.

Looking to the future, big data will be at the heart of omni-channel retailing success, in order to capture a holistic view of the consumer from offline and online touchpoints. This will lead to enhanced efficiency, helping retailers to engage customer specific needs with pinpoint precision, thereby improving store performance through customized products and online design or in-store layout strategies. Other benefits extend to supporting site selection, store stocking, warehousing and route mapping for delivery.

In the new world of omni-channel retailing, bricks-and-mortar stores have begun to play an important role in integrating branding, product experience, offline services, consumer management, stocking and logistics. Successful online retailers of the future will likely be those that build a comprehensive store network and a powerful online ecosystem. These are the key ingredients for achieving deep market penetration and maintaining a competitive advantage and they will help to overcome operating barriers, as well as creating physical barriers to entry for competitors.

As a direct result of high levels of tech adoption and innovation, China’s retail market finds itself at the forefront of the evolution of e-commerce. No doubt, retailers and owners of retail property in other global markets that are experiencing their own challenges can take some comfort from the incredible China omni-channel story.


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