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New retail china
Tom Doctoroff, IAA Vice President, Strategy

New Retail in China: Promise, Progress and Pitfalls

New Retail in China: Promise, Progress and Pitfalls

New retail – or business models that converge digital and offline experiences – has blossomed in China. The advances of Chinese companies compared to, say, Amazon Go, a supermarket that basically offers “click and collect” convenience, are impressive.

The country’s progress is driven by factors unique to China, ranging from progress made in harnessing data to the psychological and emotional drivers of the Chinese people.

What is New Retail?

China’s New Retail movement was kicked off in 2016 when ecommerce king Alibaba’s CEO Jack Ma made the following declaration: “Pure e-commerce will be reduced to a traditional business and replaced by the concept of New Retail – the integration of online, offline, logistics and data across a single value chain. This phenomenon, he predicted, would result in greater experience-focused customer engagement – on both community and individual levels -- through leveraging data technology.

New Retail is not only about “immersive experience” – for example, L’Oreal’s whizzy magic mirror that helps women choose a “right for me” lipstick at the cosmetics counter. Instead, it should maximize the value of lifetime customer relationships. It results in incremental revenue by dint of deeper understanding of consumer desires. From “products tailored to my desires” to proactively “bunding” categories based on life stage to customized offers “pushed” based on location, New Retail enablers brands to “understand my needs.”

The China Context

One word to describes the development of New Retail in China: fast. Hybrid “online plus offline” (O+O) players ranging from Hema supermarkets to Red (Xiao Hongshu) didn’t exist five years ago.

Growth has been fueled by several factors.

Economic. First, the economy has galloped apace for over 40 years, resulting in a scaled middle class. By 2022, the country, already the world’s largest country if GDP is measure by purchase parity power (PPP), more than 60% of Chinese will be middle class. These consumers are insatiable, accounting for almost 40% of global luxury sales.

Generational. Second, the digitally-native Post 90s generation – that is, individuals between 1990 and 1999 -- leapt-frogged from desktops to mobile phones, devices most often used for shopping. According to CNBC, in 2017 97.5% of Post 90s connected to the internet with their phones. This compares to only 35.8% with a laptop. 

The new generation is also driving the growth of the country’s digital economy. iResearch, a consulting firm that supplies online business services in China, reports that ten percent of Post 95s purchase online every day.

Governmental. Third, due to the central government’s long-standing practice of “managed competition,” China’s digital ecosystems are high centralized and integrated. Alibaba, for example, provides consumer-to-consumer (C2C) business-to-consumer consumer (B2C), and business-to-business (B2B) sales services via web portals, as well as virtual payments (Alipay), electronic services, shopping search engines and cloud computing services. The corporate behemoth is capable of knowing where you are, what you want and when you want it.

Psychological. Fourth, most fundamentally, New Retail is charged with emotion. Consumers use new technology, inherently personalized and experiential, as a means of identify affirmation. Due to digital connectivity, the rise of social platforms as well as increased incomes, the world view of Chinese shoppers has expanded. People want to show the world they are in touch the latest trends and new lifestyle choices.

Practically all e-commerce sites double as social media platforms. “Experience display” generates something even more covetous: “social currency,” the timeless means of advancement in competitive, Confucian China.

From Convenience to Inspiration: The Drivers of New Retail

Shopping experience is enhanced by the integration of online and offline technology. However, payoffs vary. Some are utilitarian while others also have deep emotional resonance.

Functional Utility

Yum!’s KFC app has generated more than 100 million users. The benefit is basic: efficiency. An ability to order outside the restaurant minimizes waiting time. It also provides choice of dining experience – in-store or grab-and-go. But KFC is also amassing consumer data which are being leveraged to offer personalized vouchers and tailored menu suggestions based on past orders.

Bian Lifeng – loosely translated at “bee hive efficiency” – elevates convenience into “community membership.” The company operates three hundred unmanned and cash-free convenience stores powered by data that identifies local preferences. Every transaction is scanned, enabling “tailoring” of inventory in different neighborhoods. Stores in wealthier areas offer more international goods. Some shops sell prepared chicken sandwiches while others sell beef or pork. Consumers, meanwhile, enjoy discounts when they pay with the Bian Lifeng app.

Luckin is a coffee delivery service that is imprinted with New Retail DNA. It also is a direct threat to Starbucks. The brand has opened two thousand brick-and-mortar physical stores, mostly in upscale commercial districts. A cup of coffee is approximately fifty percent cheaper. Smart phone ordering and delivery operate seamlessly. The result: expanded consumption occasions and locations in a country that still prefers tea to coffee. Notable for its bold blue cup, Luckin appeals to China’s increasingly confident urban consumers. A dash of social currency is generated by “buying smart” rather than carrying an increasingly ubiquitous logo.

Learning and Lifestyle Liberation

The best New Retail transcends practicality and provides experiences that enrich life.

Hema supermarkets, owned by Alibaba, elevates grocery shopping to multidimensional product reassurance and lifestyle liberation. China is the ultimate low-trust society. Food, specifically, is dangerous stuff. QR code displays reveal the origin of every product – where it was made, where it’s from – as a guarantee of quality.

In addition, the Hema purchase process frees consumers from the tyranny of the check-out line while introducing new levels of “seamless product trial.” Shoppers can “graze and pay” with Alipay as they go.

Finally, the supermarket opens new worlds of discovery. Hema turns shoppers to connoisseurs of the exotic. Buyers are instantly provided information about, say, a novel dessert’s provenance or recipe ideas for unusual seafood dishes. Given the ubiquity of social media platforms WeChat and Weibo, cuisine is translated into “face.”

Red (Xiao Hongbao) is hybrid social network and e-commerce platform that broadens the world view of Post 90s females. The site offers high-quality international fashion brands. It is known for the endorsements of online opinion leaders (KOLs). One celebrity handbag review generated more than four million views. Red allows consumers to feel ahead-of-the-curve by knowing the latest global fashion developments.

Furthermore, the platform’s merchandise is “curated” to maximize tribal affiliation through: a) celebrity-endorsed “crazes” for selected items, b) authentic reviews rooted in shared stories and c) AI-generated personalized content based on purchase history. Red boasts fifty million active users and has just opened an offline experience store in Shanghai. More will follow.

Yi Tiao is for people who don’t go with the flow. The online platform streams high-quality videos produced by craftsman who sell their own products. An example: one popular “maker” carves abstract wooden figurines with holes in the chest area. He calls his line “People with a Broken Heart.” Yi Tiao has opened three offline stores designed to immerse shoppers into different lifestyles and product categories. It was launched two years ago and has already attracted one million “members” for whom “niche” is tantamount to cool.

Personal Progression and Achievement

The pinnacle of New Retail is reached when the combination of data, on- and offline fusion and immersive experience result in personalized offers that inspire individuals to realize life goals.

Nike’s House of Innovation, first debuted in Shanghai, suggests a hint of things to come. “Members” are digitally introduced breakthrough shoe technology as well as inspirational stories of athletes who embody the “just do it” spirit. Membership services include: a) personalized training, b) “first right” access to limited-edition series and “collabs” with other brands and c) participation in digital design workshops to customize shoes.

The House of Innovation is a beautiful example of retail experience that brings Nike’s brand’s purpose to life.

A Long Road to Rome

However, Nike has not yet translated genuine personalization into a sustainable business model. Nor have other “traditional” brands – that is, those not born as digital ecosystems. Why? The current commercial landscape does not encourage mold-breaking innovation. First, transactional efficiency trumps loyalty rooted in emotional equity. Second, businesses lack experience-design know-how. Third, the majority of local companies have been slow to structure themselves for New Retail.

In conclusion, China’s New Retail scene is perhaps the most advanced in the world. Relative to Western markets, consumers and businesses both benefit from functional efficiency. Consumers also enjoy expanded horizons and liberated lifestyles. However, immersive personalization, the El Dorado of New Retail, remains elusive due to structural and cultural barriers that will be slow to fall.


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