Have you ever wondered why Chinese tourists, who travel all over Europe with massive amounts of cash, are now becoming easy prey for robbers? This is not just because some Asian credit cards do not work in Europe. Chinese tourists are generally unable to pay electronically as they would do normally in their own market, using WeChat or Alipay on their smartphones.
Western retailers should look East. Unless they learn from China’s retail market (the world’s biggest and most innovative), they could face steady decline.
Chinese retailers are re-inventing retail by using digital technologies to simplify and personalize the customer experience.
Chinese consumers are often perceived as the early adopters in retail. Although there may be some truth in this claim, it represents only part of the story. Chinese retailers, mostly driven by e-commerce giants like Alibaba or JD.com, are re-inventing retail by using digital technologies to simplify and personalize the customer experience. This is exactly what needs to be done so that consumers feel they identify with or belong to a particular brand or retailer.
In addition, the new era of retail goes beyond a perfectly fluid omnichannel experience with the retailer. With the goal of becoming essential to each partner in each link of the retail value chain, Chinese retailers are facilitating the entire purchasing experience, even including other merchants. To do this, they are leveraging the value of data: specifically, predictive analytics in addition to digital technologies.
First, Chinese retail giants aim to “accompany” their customers in many aspects of their daily life. Examples include using Alipay to pay for ‘anything, anywhere’; and WeChat, which incorporates among others messaging, social media and a mobile payment app. They are also very active in leveraging customers as brand ambassadors: consumers are encouraged to become the privileged partner of Key Opinion Leaders (KOLS) – namely, those who act as influencers with expert product knowledge, providing the retailer with live streaming platforms. In summary, Chinese retailers know their customers intimately. They have gained this knowledge from leveraging information from many sources to exploit customer influence in the market.
Second, these giant companies want to become the privileged partners of other current retail players. Alibaba is equipping small grocery stores in rural areas with a suite of mobile tools (Ling Shou Tong) to manage their points of sale. Thanks to these tools, they can supply merchandise from Tmall by benefiting from sales prediction systems followed by delivery within two days, even in remote areas. This is an example of leveraging information and predictive analytics at work, again, to understand the market demand for products. Close to 100,000 grocery stores were already in the Global Shopping Festival in 2017, Alibaba’s yearly three week of promotions and products offerings from around the world (note 1).
Becoming the privileged partner for the different players along the value chain, Chinese retailers can be considered much more than simply excellent merchants. They are contributing as community facilitators, creating a sense of belonging towards all players in the retail value chain.
Western retailers may not be able to adopt many of Chinese companies’ most innovative retail business models since technology, customer behavior and consumer demands are simply too different. However, there are important opportunities to leverage some Chinese ideas selectively and adapt them to Western markets. One thing is certain: no Western retailer can afford to ignore the success of China’s retail market. They must learn from it and adopt techniques that can work in Western markets.
At one time, the USA was the most dominant player in the international retail market. However, in 2016, China overtook the USA to become the most innovative, largest and exciting player in retail market (note 2).China has gone from being a copycat to becoming a leader of innovation, helped by a huge customer base (its population is about 1.4 billion) and the fast adoption of new technologies. The pace of change in China’s retail market is astonishing, presenting both an opportunity and a threat for more sluggish Western retailers.
China’s retail market is a tempting target − and not just because of its size. Unlike Western markets where, typically, a handful of retailers dominate consumer goods and services, the Chinese retail market of physical stores is more fragmented with hundreds of department store chains, but none with major market shares.
Chinese retailers excel at using data to create an intimate connection with their customers. China’s huge e-commerce companies, such as Alibaba and JD.com, are often cited as exemplary data-driven companies that use customer and market data to personalize relationships with customers and increase efficiency. Yet few people seem to know that these new retail giants are also engaged in societal initiatives, for instance favoring the development of small businesses in rural areas - a new type of corporate social responsibility. They also have a strong emotional connection with customers.
Apart from that, Chinese retailers are distinguished by integrating themselves in the existing ecosystem more than imposing their way of working. This represents a true outside-in approach towards doing business. This approach is necessary for creating and reinforcing the sense of belonging that customers demand in today’s retail sector.
In 2025, 44% of worldwide luxury sector sales will be transactions made by Chinese shoppers (note 9).
Although China is still classified economically as a developing country (note 3), much has been written about its highly-connected rise. It is important to remember some key facts and figures to provide context.
The most influential media form in China is the internet, which has introduced video advertising and live-streams online that are very popular and effective in China. KOLS leverage videos, live streaming, and vlogs as marketing channels using tested marketing techniques such as sponsorship and discount codes to promote their own products and to influence the sales of existing brands. (note 10)
Alibaba and JD.com have launched their own live-streaming platforms so that brands and retailers can create partnerships with influencers to promote and sell their products to their followers. (note 11)
Alibaba has invested in a series of videos advertising their app, “2nd Floor Taobao”, which tells a new story on a weekly basis. All videos are commonly available in the evenings where studies have shown that people are more susceptible to influence. The stories are connected to the products and are highly interactive for the viewer.
A previous WSL study for BearingPoint (research conducted in 2017) (note 12) found that Chinese consumers are willing to try innovative services to help them shop and make buying decisions. These include seeing a hologram or 3D version of a product online (77%), shopping in a fully automated store (70%), using facial recognition, fingerprints and/or voice to validate payments (67%).
Retailers already know that the smartphone is the backbone of today’s unified commerce but don’t act enough on it.
China’s retail industry has developed in an inverse way to the retail sector in the West. In China, e-commerce and social media developed first whilst modern bricks-and-mortar stores developed second. Consequently, China’s first-generation of retailers have had more access to customer data than their Western counterparts, benefiting from the absence of barriers on personal data protection. They have also shown that they can leverage this customer data effectively to show the way on expanding the new retail paradigm: “unified commerce” (note 14), to include the focus on leveraging information.
WeChat is the clearest example of a unified commerce mix. Founded in 2011 and owned by Tencent, WeChat is a versatile social media and mobile app for sending text messages (SMS/ MMS) and for making voice and video calls. It is also used for sharing photos and games. Earlier than its Western counterparts, Tencent understood the benefit of mixing social and commercial data, so that customers can be supported not just on their shopping journeys, but more widely in their daily lives. This is why WeChat, its major application, has been the first app to cover a wide range of services.
Chinese retailers have proven that they can leverage their customer data effectively to show the way on expanding the new retail paradigm: “unified commerce”.
WeChat has reached the one billion account mark in the world, albeit mostly in China, where more than half of the population uses it: over 300 million people use WeChat’s electronic wallet function online and offline on a regular basis.
Leveraging mobile payment capabilities and social data has proved crucial for retail commerce, hence the alliance being built by Tencent and JD.com, the second largest Chinese e-commerce platform in China. Both internet giants are making numerous co-investments in e-commerce (for example, the event-sales fashion site VIPshop, in 2017) and brick-and-mortar retailers (for example, Better Life, a conglomerate owning department stores, hypermarkets and convenience stores, in February 2018) to increase rapidly the number of physical and digital points of sale that use their payment and e-commerce capabilities.
In 2016, Chinese e-commerce giant Alibaba Group Holding Ltd became the world’s largest retail platform, with its total trading volume online in the fiscal year ending in March 2016 surpassing Walmart’s annual sales. (note 15)
Yet Alibaba’s future is not just about e-commerce: it concerns what Jack Ma, its founder and CEO, calls “new retail” − the integration of online, offline, logistics and data in a single value chain. Jack Ma has been able to redefine shopping and leapfrog the USA and Europe in retail innovation, a feat closely tied to the company’s research and development team, which makes up half of Alibaba’s 50.100 workforce.
Alibaba is making life easier for customers, by providing services along the whole shopping journey, combined with operational excellence. In China, Alibaba operates its own version of Netflix, its own Spotify, and its own payment solution. After logging in once and verifying ID, a customer can use all of Alibaba’s retail and entertainment services. Customers at KFC, the fast-food restaurant chain, can pay for their meals using facial recognition technology co-developed by Alibaba.
As part of a five-year plan to shorten delivery times to 24 hours nationwide, and 72 hours worldwide, Alibaba is investing heavily in logistics capabilities whilst also leveraging big data strongly. For example, anticipating order behaviors enables the company to relocate relevant products from multiple warehouses into one, so cutting down delivery time, packing, and pick-up costs. Using these assets, Alibaba is at the forefront of new retail, the blending online and physical commerce.
Other new retail giants such as JD.com are also heavily investing in these fulfillment capabilities, including drone deliveries to cover remote areas to the point that, today, over 90% of eCommerce orders in China benefit from same- and next-day delivery.
At Hema, a food supermarket chain owned by Alibaba, customers are offered “Easy select, easy pay, and easy enjoy” functionality in-store. In other words, customers scan product barcodes to discover products’ origins or composition, and item suggestions are sent to their profile accounts. Customers can shop hands-free by scanning items using a mobile application, which can then place orders to be delivered to their home address. Picking rails are hooked onto the ceiling to route online orders to scooters, enabling a 30-minute delivery fulfillment period within a three-kilometer distance. At the checkout, customers give a list of QR codes without having to show all their items, and can pay online using Alipay, Alibaba’s online payment platform. Traditionally, Chinese like to have virtually anything delivered. Hema will be the basis for... coffee deliveries, according to a partnership between Alibaba and Starbucks announced in August 2018.
This new type of shopping experience is also available at Home Times, Alibaba’s furniture and home-decor store chain, which opened a physical store last year in Hangzhou. Most products come from Alibaba’s B2C shopping platform, Tmall, (note 16) which takes into account the behaviors and preferences of consumers within a radius of eight kilometers from the store to make the assortment. Prices are displayed on electronic labels and synchronized with e-commerce tags. Also, augmented reality is used: screens enable customers to test furniture in a virtual home.
The “unmanned store” is another model illustrating the merger between online and offline, and Western retailers are playing catch-up.
In January 2018, Amazon Go opened a supermarket in Seattle, America, with no checkout operators or self-service tills. It made headlines worldwide. Amazon’s technology automatically detects when products are taken from or returned to the shelves and keeps track of them in a virtual cart. When you’re done shopping, you leave the store. The purchases are billed to a customer’s bank card when the person exits the building. All you need is an Amazon account, the free Amazon Go app, and a “recent-generation” iPhone or Android phone.
China’s retail industry is again ahead of the West. One month earlier, in December 2017, JD.com announced plans to open hundreds of unmanned convenience stores in China. (note 17) By August 2018, over twenty stores had opened in China, and one in Jakarta (Indonesia).
JD.com’s “unmanned” convenience stores use facial recognition technology to register payment and product identity. Cameras attached to store ceilings recognize customers’ movements and generate heat maps of their activity to monitor flow, product selection and preferences, which helps store owners to pick stock more efficiently. Through the use of big data, artificial intelligence, and other innovative technologies, “We know where the customer is and what they like and can ensure that the right products are in place”, according to Bao Yan, Director of Planning, JD Logistics, in a recent media interview (note 18)
JD.com claims it can better predict which of the products in its warehouses are suited to its customers according to demographics and tastes. By relocating relevant products from multiple warehouses into one, it reduces picking costs, packing, and delivery times. Plus, customers also receive fewer parcels per single order. (note 19)
Market-leading Chinese retailers are extending their traditional role beyond simply being excellent merchants. They have become privileged partners and community facilitators of the various players along the value chain, creating a strong sense of belonging towards each player. Western retailers should look towards the East to make this shift in their own strategy.
An effective and aligned online-offline strategy will help not only the retailers but also their suppliers and trading partners reduce costs and improve operational efficiency.
Not only are leading Chinese retailers transforming their business operations, they are reinventing their entire business models by introducing new revenue streams.
Both Alibaba and JD.com are developing bespoke “retail-as-a-service” strategy models, pioneered by Richard Liu, JD.com’s founder.20 They are diversifying into becoming service providers for other retailers, brands and other types of partners, just as Amazon has become one of the world’s largest suppliers of web services in addition to its e-commerce platform.
This online-offline strategy will not only improve their business; it will also help their suppliers and trading partners reduce costs, improve operational efficiency, and reach new consumer groups. How? Through the company’s assets, including smart logistics and supply chain management as well as advanced Internet marketing tools, all powered by big data and artificial intelligence. More importantly, it introduces new revenue streams that are not based on inventory, rather on their own in-house IP assets. This translates into even more growth for these already successful organizations.
As an example, JD.com partnered in May 2017 with US retail giant Walmart, the largest retailer in the world. JD.com hosts the company’s e-commerce platform in China, enabling shoppers to buy products directly from Walmart stores, benefiting from JD’s same- and next-day delivery network that covers of a population of more than 600 million.
Partners may also be brands. Danone Waters China (DWC), a subsidiary of Danone Group, has opted to work with JD.com to distribute its products throughout southwest China. The companies will build a shared warehouse in Chengdu, the capital of China’s southwestern Sichuan province, which will use JD.com’s logistics to fulfill online and offline DWC orders for the region.
Other types of partners include automotive manufacturer, Geely, which uses a JD.com platform to enable users to control various aspects of their car remotely and also open up on-board e-commerce capabilities. They also include alliances, such as the one between Walmart, JD.com, IBM, and Tsinghua University, which are all collaborating in a Blockchain Food Safety Alliance designed to enhance food tracking, traceability, and safety in China, a leapfrog to compensate for the Chinese state insufficiency on food security.
One way of adapting a business model could be to follow an ecosystem approach. (note 21)
Regarding Alibaba, a strong focus is to partner with bricks-and-mortar retailers to leverage its expertise in the “stores of tomorrow”. In 2017, it announced the launch of franchises across China: 10,000 small convenience stores will become official Tmall franchises by the end of the fiscal year 2018.
Alibaba also signed partnerships with French retailer Auchan (November 2017). Other large Chinese retailers have since announced similar plans and partnerships with foreign retailers.
Retailers should go beyond the simple act of selling goods and services and develop a ‘connection’ with their customers.
Leading Chinese retailers go beyond the simple mercantile relationship. “Our true legacy will not only be how many consumers we reach, but the overall impact we have on society”, according to Richard Liu, JD.com’s Chairman and CEO. (note 22) This mindset has materialized in several places at multiple levels.
In Western countries, historically, the opening of hypermarkets and shopping malls killed city centers and accelerated the decline of convenience stores in rural areas. However, in China, leading Chinese retailers such as Alibaba or JD.com have focused on the disadvantaged rural market by becoming the privileged partner of small grocery stores in these remote areas, creating wealth in areas that, until now, did not benefit from the famous Chinese growth curve. This new role of the retailer, assuming a social, even societal, responsibility, creates a strong ‘sense of belonging’ towards customers.
Alibaba has developed an initiative called “Taobao villages”, which support communities in rural areas to develop e-commerce activities. This is done with the connection to its e-commerce platform and a set of online services, including e-learning, medical services and a travel agency, supported by e-commerce training. Thus, e-commerce in may help ease poverty in China, or at least bring more jobs to rural China, which comprises 45% of the population. It is estimated that each new online store in a Taobao village creates 2.8 “direct” jobs. In total the online stores have created 1.3 million jobs. (note 23)
JD.com is also investing in mainland China. In April 2017, it announced a five-year business plan, to open one million physical convenience stores. These convenience stores are almost exclusively franchise-based and operated by independent investors, to which JD Finance provides loans. Half of these stores will be in China’s countryside, and the applicants are mostly migrant workers who have returned to their villages or small towns. JD.com has also leveraged a drone-delivery program in remote areas to continue to provide products to those who might otherwise not have access. In addition, they have formed a partnership with farm owners to develop sustainable farming leveraging technology and a reliable farm-to-table delivery.
China’s new retail giants and customers are eager to adopt new and sophisticated shopping and relationship mechanisms. It is a special – and perhaps unique – retail model.
They are now going beyond simple merchant-to-consumer relationships to creating emotional connections with their customers by leveraging data and social networks to develop their soft power and by committing to social roles, such as developing commerce in isolated rural areas.
More than the consumer relationship, Chinese retail giants are building their own new model of retail. Providers and other retailers are not necessarily direct competitors anymore; they may be privileged partners, using their collective skills in data and artificial intelligence to retrieve consumer data and share them with the different players, so that they can offer the customer a personalized experience. They also take into account that lines are increasingly blurred between retailers, brands and customers, which is why they become more than sellers: they evolve into platforms of expressions for KOLs, the best way to promote products while increasing consumer trust degree. As privileged partners, Chinese retailers become community facilitators by creating a strong sense of belonging with every player in the value chain.
This model cannot be replicated as such in Western countries. China benefits from the critical mass of its 1,4 bn inhabitants, a strong government support, and a lack of regulation on personal data. Conditions that Western countries cannot match.
However, Western retailers (who are mostly trailing China’s innovative retailers) should be inspired − and no less worried: for example, JD.com are investing EUR 1 billion into their expansion into France, to being to realise their European ambitions.(note 24) Western retailers should up their game and learn from China, adapting their most innovative retail technology and strategies for Western markets. One priority should be to use social media and alliances with non-retailers to create more “customers for life”, leveraging upcoming retail-as-a-service offerings.
Western retailers have already discussed many of these pivots to strategy. However, as the pace of change in retail accelerates, continued inaction could cause serious harm to their profits and reputation. Our next report will focus on Japan, to understand how digital technology can help retailers improve the experience shopping in a country with a very mature retail market and a tradition of superior customer experience.
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Romain François, Julie Short, Hiroshi Nakata (ABeam), Sophie Todeschini, Alvin Wang
The authors would also like to thank Tanja Schwarz and Julie Short from the BearingPoint Institute, Angélique Tourneux from BearingPoint, Michael Agar from Agar Design, Christopher Norris from CopyGhosting, and the team at WSL who did the research.
The target group for our research was early adopters of technology for shopping. To qualify as an early adopter, a person must have completed four of the following actions within the last 30 days:
Other survey details:
Fielding period: September 5-19, 2017
Shopping criteria: responsible for at least some consumer product shopping for the household
Affinity for technology: early adopters of technology for shopping
Age: Millennials, 20-36, born between 1981 and 1997
China is a potentially lucrative target for foreign retailers, due to the size of its population, its growing and increasingly affluent middle class, its rapidly changing retail environment, and technological and retailing innovation. There is plenty of room for further growth because China’s retail market is much less crowded than in the West. With around 10% of the store density of the US market, it is a still considered relatively undeveloped.
Nigeria shares some characteristics with the Chinese market. For example, it also has a rising middle class. In addition, there is a shortage of physical retail infrastructure – an issue that’s often resolved through the smart use of technology.
South Africa is another country with a rising middle class, and an undeveloped physical retail presence. However, as a more established market, it lacks the unbridled potential of China or Nigeria.
Japan has been a highly-developed market for much longer than the other three countries, focused on the latest personal technology, and offering a superior customer experience.