“New Retail”, the Apple of Chinese Tech Giants’ Eye Explained


New Retail refers to the integration of online, offline, logistics and data across a single value chain. New Retail was first introduced by Alibaba Chairman Jack Ma in October 2016. But Alibaba is not the only tech companies are invested in “New Retail”, the following are the Chinese companies that have been adopted the New Retail model.

New Retail experiments have the same features:

  • People should no longer be viewed as consumers. Forward-thinking brands also see them as co-producers.
  • Products should no longer be delivered to a mass market to meet a generalized need but be experienced through a personalized shopping journey from research to purchase, to use, and discussion on social media.
  • Stores should be omnichannel, fully integrated online and offline, providing more diverse opportunities to engage with a brand beyond the limits of time and space.
  • Brands should embrace new technologies, sharpening their capacity to target consumers with what they want, when they want it. AI, for example, can be better used to predict demand and forecast supply, Internet of Things technology can be used to track stock movements, and AR can be used to get customer feedback before rolling out physical products.

The potential to catapult Chinese retail ahead of its global peers: New Retail is expected to hold the solution for physical retailers and pure-play e-tailers and propel the industry’s transformation. McKinsey estimates that by 2030, China will contribute 30% of the global retail growth.

New Retail addresses the bottleneck of Chinese retail growth: China’s physical retail industry is defined by low operational efficiency, mall supply that is below most developed markets and a supply-demand imbalance between the top-tier and the lower-tier cities. A large proportion of Chinese rural consumers are underserved: China has 2.4 malls per 1 million people compared to the US, which has 12 malls for every 1 million people, according to AliResearch. Digital platforms have wider reach than physical stores, and will enable excess inventory to reach rural consumers.

China is “New Retail”-ready: China appears ready for New Retail, with: 1) a solid digital infrastructure―including big data, mobile internet, cloud computing and marketplaces―powered by data technology; 2) a digitally-literate consumer base, with e-commerce penetration of some categories exceeding 50%, according to PWC; and 3) a retail industry that is stagnating and is in need of new growth drivers.

The best way for retailers to position themselves: Those retailers that are able to most effectively adapt to the changing environment by leveraging disruptive technologies and big data will succeed. To satisfy consumers’ demands, retailers’ value chain will need to extend upstream to product design and innovation. A consumer-centric, data-driven offering focused on content is at the heart of the transformation. Retailers can utilize new touch points and content on the front end; smart manufacturing, supply chain and store operations in the middle; and 3D/4D printing, AR/VR, IoT and AI in the back end, according to Aliresearch.

Slow adopters beware: Enterprises that are slow to embrace the online and offline integration, and remain anchored in a standardized rather than a personalized product/service offering, will likely be negatively impacted. Those reduced to a traditional business are: 1) traditional retail; 2) traditional manufacturing; and 3) pure-play e-commerce.

Aligns well with Alibaba’s vision and national policy: Alibaba’s strategy for a digital economy ties in with the structural trend of China’s consumption upgrade. Chinese consumers and their consumption demand become an engine to drive the country’s economic growth. Alibaba expects gross merchandise volume (GMV) to double to ¥6 trillion in 2020 (from ¥3 trillion in fiscal year 2016) and further increase to ¥10 trillion in 2024.

Execution is the key downside risk: In our view, the positive impact of New Retail may not meet expectations should physical retailers in China be slow to embrace digital technology and omnichannel initiatives. The development of China’s physical retail industry has lagged that of its global peers and have been slower in adopting retail technology. Department stores in developed markets were built in the 1870s and have reached saturation. China, on the other hand, only began to develop its department stores in the past 30 years.




New Retail = Consumer-Demand Oriented + Data-Driven Retail

New Retail emphasizes a C2B (consumer-to-business) model, rather than B2C, whereby consumers proactively shape the demand signals to retailers. Alibaba believes its network and data technology assets will facilitate the transformation.

Retail has taken functions beyond selling and will include manufacturing and design. With e-commerce platforms such as Taobao and Tmall, manufacturers can effectively bypass distributors/agents, by having their own online shops and taking orders directly from consumers.


Characteristics of “New Retail”

There are three key characteristics of “New Retail”: 1) demand-orientation; 2) omnichannel; and 3) highly diversified retail formats.

  1. Demand-oriented: Facilitated by data technology, retailers will be able to define the evolving needs of consumers and create products and services with the best experience for them. Retailers will redesign touch points with consumers according to their needs.
  2. Combination of physical and digital retail (omnichannel): Physical and digital retail will be perfectly integrated and the retail value chain will be reshaped.
  3. Highly diversified retail formats: Multiple retail touch points will emerge in logistics, culture and recreation, restaurants, etc. More retail formats will emerge, supported by data technology.


China is ready for new retail

Chinese retail environment is ready for New Retail, primarily due to three factors: 1) a new business infrastructure has been established; 2) a shift in consumer preferences to online shopping; and 3) the global retail industry is stagnating.

  1. New business infrastructure has been established: The accelerating pace of globalization 3.0 is driven by high internet penetration and technologies including big data, cloud computing, mobile internet, smart logistics, internet finance and a national marketplace. In the new era, the world will be connected by a uniform digital platform, and international trade will be driven by individuals rather than multinational companies.
  2. A shift in consumer preferences, as digitally-literate consumers prefer online shopping: In China, the online consumer base is growing at a faster pace than the global average, according to PWC. The e-commerce penetration rates for some categories are over 50%. Quality, instead of prices, will become the key consideration for consumers. They prefer high quality and personalized products. This new generation of consumers will lead global consumption growth. China will be playing an important role in the transformation of the global retail industry. McKinsey estimates that by 2030, China will contribute 30% of the global retail growth.
  3. The global retail industry is stagnating and will need to seek new growth drivers: Traditional brick-and-mortar retailers are experiencing little or even negative growth, while e-tailers are increasingly taking a bigger share. China’s physical retail industry is at an early stage with low operational efficiency. Diversified retail formats are expected to emerge.



New retail is particularly relevant to China

Chinese retail has the issue of the supply-demand imbalance and New Retail is the response to it.


Chinese Physical Retail Development Lags Global Peers

The development of China’s physical retail industry lags that of its global peers, with manifestations in the following areas:

  • Department stores in developed markets were built in the 1870s and have reached saturation. China, on the other hand, only began to develop its department stores in the past 30 years.
  • China’s mall supply per capita is below that of most developed markets. There is a significant regional supply-demand imbalance in China, as tier-1 cities have an oversupply of mall space, while the lower-tier cities are undersupplied. In other words, a large proportion of Chinese consumers are underserved.



New Retail will potentially catapult China’s retail industry ahead of its peers

The New Retail model of Alibaba will be more flexible and should be better able to address the supply-demand imbalance within China.

Retailers can use Alibaba’s digital economy to overcome oversupply. For example, the Global Financial Crisis in 2008 prompted an oversupply and sharp decline in global trade. Through Taobao, excess inventory can be sold to consumers in lower-tier cities and young consumers in higher-tier cities.

Taobao enabled retailers to reach new groups of consumers that traditional retail was not previously able to cover. For example, the catchment area of a physical store is typically 10 km. A typical Taobao shop has exposure to 0.5 billion registered Taobao users a day.


New Retail uncovered

The framework of New Retail will consist of the following:

  • Front end: Context, consumers and products
  • Middle line: Marketing, distribution and C2B channel
  • Back end: Infrastructure, 3D/4D printing, AR/VR, IoT, AI and other technology



New Retail―Front End

On the front end, new retail emphasizes the introduction of: 1) new touch points; and 2) new demand for content.

  1. New touch points: New Retail will emphasize multiple touch points for retailers to interact with consumers. In addition to the traditional retail touch points (such as department stores, outlets, convenience stores, shopping malls), there will also be new ones (live broadcasting, smart devices, mobile devices, VR).
  2. New demand for content: Retailers will need to fulfil consumers’ demand for content, as shopping will also include a social dimension for consumers to interact with each other and retailers. In the past, it was adequate for retailers to satisfy consumers’ demand for functions and experience. In the future, the new breed of consumers will expect high quality, personalized product and service offering and a seamless payment experience.



New Retail―Middle Line

The middle line of New Retail emphasizes consumer-centric analysis that is powered by data technology. Retailers can leverage data technology to understand consumers’ preferences, loyalty and feedback by integrating data collected from all channels.



New Retail―Back End

The back end of New Retail is primarily responsible for driving the transformation of the infrastructure from one premised in the industrial economy to one that is founded on the digitized economy.

The technological components of the back end of New Retail include:

  • 3D/4D printing: This can create highly customizable products. It is predicted that 3D printing will be widely used in fashion in the future.
  • AR/VR/mixed realty: This can provide a virtual retail experience. VR has applications in Alibaba Buy + VR store, test driving, tourism, etc. AR was used by Pepsi, Converse, IKEA, Shiseido, Topshop and AR games.
  • Sensors and IoT: This can enhance customers’ experience through automated checkout, layout optimization, customer tracking, personalized promotions and inventory optimization.
  • AI: This will integrate the entire retailing process with machine learning technology, smart robotics and personalized recommendations.



How Retailers can Win in the New Environment

Retailers that can most effectively adapt to the changing environment by leveraging disruptive technologies and big data will succeed.

In the future, the retail ecosystem will change significantly. The platform economy will redefine the future of retailing. New Retail is expected to hold the solution for physical retailers and pure-play e-tailers.

Retailers’ value chain will need to extend upstream, to product design and innovation, in order to satisfy consumers’ demands.


Slow Adopters Beware

Pure play e-commerce: The e-commerce market in China is almost saturated. Currently, GMV at major online marketplaces is approaching a ceiling, as indicated by the slowing growth rate. Without the support from innovative technologies and physical stores, pure e-commerce players will find it hard to survive in the new business environment.

Traditional retail: At present, the prevalent model of traditional retail in China is based on real estate. This is expected to be negatively impacted, with the advent of New Retail. The problem with traditional retail real estate is the unsustainability of the business model, according to AliResearch. Depending on revenue generated mainly from local customers will pose as a ceiling to a retailers’ growth potential. Online presence is among the most effective solutions for traditional retailers and provides the optionality for further revenue growth.

Traditional manufacturing: Manufacturing has been focused on standardizing output. With the increasing demand for personalized and customized products, the traditional manufacturing process will be changed. The old production-marketing-selling process (B2C) will be replaced by a new one, starting with a consumer’s order; the manufacturers will then need to realize the order so as to complete the deal (C2B).


Execution the Key Risk

In our view, the impact of New Retail could be less positive as expected should physical retailers in China be slow to embrace digital technology and omnichannel initiatives. The development of China’s physical retail industry has lagged that of its global peers, as the country leapfrogged to online retailing without laying a very solid foundation for offline retail.

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