The Future of E-Commerce and Retail Will Be Written in China
By Justin Leverenz, CFA, Director of Emerging Market Equities, Portfolio Manager & Bhavtosh Vajpayee, CFA, Senior Research Analyst
China’s experiments in shopping are moving into high gear. The world needs to pay attention. The Emerging Markets Equity Team was in Hangzhou, China, last week. In this, the second in our series of Insights articles on China Innovation, we argue that China is ground zero for the future of retail. The West will learn from and adapt the experiments that are already moving to scale in the East.
Consider Alibaba, the Chinese Internet giant whose wide-ranging businesses span e-commerce, offline retail, fintech, online video, maps and browsers, and artificial intelligence. By the third quarter of 2017, Alibaba’s business model appeared to have reached peak fruition, as the company took pole position as the world’s largest e-commerce platform (by a factor of at least 2x Amazon), but was also third in digital advertising, just behind Google and Facebook. What could possibly change?
Experiments in Retail
A lot, as we have seen in the last 12 months. Alibaba’s experiments in what it calls “new retail” have gained a scale and urgency scarcely imagined a year ago. Over 1 million of China’s 6 million mom and pop stores have signed up for the company’s Lingshoutong initiative.1Lingshoutong refits the shops, supplies them directly using Alibaba’s logistics channel, aggregates offline and online data, and extracts a monthly commitment of throughput in return.
Additionally, Alibaba’s high-tech food/grocery retail store concept, known as Hema, is expanding quickly. Exhibit 1. These outlets serve as walk-in restaurants, food and grocery purchase points, and warehouses for online delivery (within 30 minutes in a three-kilometer radius) – all at the same time. There are now 64 Hema stores in operation, with two being added each week. Already, Hema stores in operation for over 18 months are reporting revenues of RMB50k per square meter, up to five times what traditional offline stores can generate. Sixty percent of Hema’s sales are through the online delivery channel, making the stores far more productive, for far more hours of the day, than pure offline stores.1
Unsurprisingly, China seems uniquely ready to adopt the Hema concept. Organized channels for grocery are currently underdeveloped compared with the United States, where over 90% of grocery already passes through established super/hypermarkets.In China, wet markets, the Asian equivalent of farmers markets that sell fresh meat and produce, still account for more than 70% of the country’s grocery sector. This signifies the boundless potential for Hema as it keeps on driving the new retail experience involving online and offline integration.
There is more. Alibaba’s online shopping Taobao platform is no longer content with making ad-based recommendations, which were driven by keyword bidding by merchants. Recommendation feeds driven by consumer opinions have gained priority, as have sharing, short-form videos, and live streams. Taobao claims a 58% improvement in conversions when users view short-form videos. Additionally, gross merchandise value (GMV) driven by live streaming rose nearly four times in the past year.1
Ambitions are also rising at the recently acquired Ele.me, an online food delivery platform. Not content with its 167 million user base, Ele.me is now eyeing the nearly 600 million e-commerce user base of Taobao and Tmall, another Alibaba e-commerce platform, and the 870 million users of Alipay, Alibaba’s digital payments platform, to substantially expand its reach.1
Retail space owned by Intime Retail – now a part of Alibaba – is being used for experimental “Tmall pop-up stores,” which allows consumers to walk in, sample inventory, access a large apparel collection on giant touch screens within the store, pay with Alipay, and choose self-pickup or home delivery. Alibaba also has a furniture store that uses augmented and virtual reality to show consumers how an item will look in their homes. And retail stores owned by Sun Art Retail, in which Alibaba has a 31% stake, are dedicating space to products directly sourced from Tmall.
已被阿里巴巴收购的银泰零售旗下的零售空间正被用于试验性的“天猫快闪店”(Tmall pop-up stores)，消费者可以在商店内的巨型触摸屏上访问一系列服装，使用支付宝支付，并可以选择自助提货或送货上门。阿里巴巴还开设了一家家具店，利用增强现实和虚拟现实技术向消费者展示家具摆放在家中的效果。阿里巴巴持有高鑫零售31%的股份，高鑫旗下的零售店也为天猫产品提供空间。
The Need for a Retail Transformation
Is there a method to this cornucopia of initiatives? Alibaba’s new long-term target to transition from working with 10 million small and medium enterprises (SMEs) to 10 million profitable SMEs provides a clue.1 As e-commerce penetration rises to nearly 20% in China,2 the existing silos of offline and online retail raise vital questions: Are brands and merchants more profitable, or less, as e-commerce grows larger? Does Alibaba’s rising “take rate” – the percentage of GMV that flows into revenues – come at the expense of its merchants’ profitability, or is everyone truly better off? Do merchants enjoy better profitability even as Alibaba raises its own monetization?
These questions create a fundamental need to transform the way retail works. Analysis suggests that between 2011 and 2016, when e-commerce grew dramatically in China, selling, general, and administrative (SG&A) costs rose significantly for several retail categories as they tried to keep up. Exhibit 3. Specifically, consumer appliances saw their SG&A costs rise 340 basis points, apparel saw a near 500 basis point rise, and personal care spent 80 basis points more.3 These rising costs reflect the parallel universes that exist today; offline retail channels, demand management, space planning, supply chains, and consumer analytics have little in common with e-commerce. Increasingly, brands and merchants seem to be running two businesses for the same product, which unsurprisingly leads to cost inflation.
The true promise of omnichannel retail, or new retail, is a more profitable merchant. The future economics of giant e-commerce platforms will likely emerge from this promise, and the hope that these platforms will not simply maintain their share of a shrinking pie, but maintain or increase their share of an expanding one. Not content to be appropriators or gatekeepers of consumer demand, these platforms increasingly aim to help fundamentally change the way consumers shop.
Points of Friction Are Likely
Not all will be smooth, of course. The real world possesses far more points of friction than online businesses traditionally encounter. Offline or omnichannel initiatives address a target market that is five times larger than online retail, but one-fifth as profitable, or even less so in the initial years.4 Even as the strategic rationale for ongoing initiatives is inescapable, reported profitability is likely to head downward and stay volatile. Indeed, fundamental questions linger. What shall we consider GMV in an omnichannel world? Will walking into a Hema store be considered “offline,” while ordering the same food via the app be considered “online”?
Elsewhere, the expectations of consumers and merchants will remain fluid, exposing new threats and opportunities. Consider Pinduoduo(PDD). Founded in 2015, PDD has grown quickly to become China’s third largest e-commerce platform and has attracted 344 million annual active buyers to its unique model of social commerce, a group-buying model that weaponizes social networks such as Tencent’s WeChat to propagate offers. PDD’s rise offers inescapable proof that there are still unmet consumer needs, despite everything we have already seen in China. And merchants need more too – more analytics, higher returns on their ad spends, and more handholding with their supply chain and IT systems. There are companies seeking to address these needs: Meituan, for example, is not just China’s largest food delivery and restaurant booking platform, it also provides restaurant management software that is helping to cement its lead.
And thus, to the future of retail. What drives shopping? Needs, of course, but also habits, impulses and, increasingly, fun. Shoppers seek convenience, price, and experience, but also identity and social connection. In the future, will it really matter where we notice a product, where we try it, pay for it, or how it is delivered to us? These ideas are not new, but as e-commerce platforms and offline retail move into each other’s turf, they have acquired an immediacy not seen before. Theory is moving into financial forecasts, and extant silos of thought are beginning to be challenged – just earlier, and faster, in China.
译文来源：三泰虎 http://www.santaihu.com/46538.html 译者：Jessica.Wu
Chrisx8 hours ago
When I visit China, I enjoy good food there most. You can order fruit plate, coffee, salad, snack, Peking duck, sea foods, baozi, jiaozi,spicy foods etc and it will deliver to your hotel room in 30 minutes. That delivery system is unbelievable. I usually order 5 KG fruit plate after exercise, it is always delivered within 30 minutes. They even guaranteed the plate will be free if delivered later then 30 minutes. This things is impossible in US.
Kurtz3 hours ago
you are clearly Chinese. .and your country is a toilet haha. all fake food and terrible
John3 hours ago
@Kurtz exactly, can spot their chinglish a mile away. As for hotel service and food quality, I suggest Bangkok ( or heck, any major Asian city apart from the prc) COMPLETELY blows anything Mainland can offer out of the water.
DESMOND4 hours ago
The future of tariff-commerce will be written in US. The world's most advance tariff eco-system will be in US and no country could come near, not even China. But no country would be interested either.
I have Bigly words that I know.4 hours ago
Considering we had paypal for years, how did they miss the mobile payment sector to be so far behind.
Treeeee3 hours ago
In China, they don't even need to bring wallet any more, just a cellphone can pay everything and do everything online, much much advanced than the junk paypal.
Simon10 hours ago
Kevin4 hours ago
The US just seat & watch doesn't know which direction to turn.
Kurtz3 hours ago
hahaha China is a toilet
Q3 hours ago
No it won't
Moises3 hours ago
Liberals keep on sending our manufacturing to China! You will realize the huge issue once it’s too late
John2 hours ago
@Treeeee I can’t even disparage Mainland because it feels like insulting a fat kid. Just feels wrong