Offline retail, one man’s demise is another man’s gain

Offline retail, for some it is ugly! Credit Suisse estimated that there might be more than 8,640 physical store closings at the end of 2017 in the US, which very likely will break the historical record of approximately 6,200 closures during economic recession year 2008. For Amazon, time to snicker. Last year the debut of its “just walk out” convenience store Amazon Go blew everyone’s mind. In February this year, the company opened its seventh bookshop in New York and is planning to launch six more. Although these efforts look rather experimental at this stage, Amazon might strike out its profound impact very soon.

At the same time in China, traditional retailers are gradually losing their offline territory as well. They say great minds think alike. Thus prominent players in e-commerce realize it should be their perfect timing to seize the opportunity. They are, in fact, taking this game to a much more aggressive level than Amazon.

JD, China’s second largest e-commerce company, announced in April that it intends to open more than one million convenience stores nationwide, even covering the most rural areas by using the franchise model in the next five years. The plan is just one of the colorful lollipops JD is sucking now for its brick&mortar ambition. It also decided to launch at least 10,000 specialty stores for consumer electronics and 5,000 baby&maternal care product shops in the next 3 years.

Xiaomi, one of the largest smart phone makers in China, is going to dive further into physical presence. In the past, the brand purely relied on e-commerce to distribute all their products. Since 2011, Xiaomi has dipped its toe into the water of offline. The latest statistics told it has now about 100 stores, with the average sales revenue of RMB70 million per store. These results convinced Xiaomi to push additional 1,000 stores within 3 years.

3 Squirrels” is one of the most popular online food brands specializing in selling nuts snacks. Founded in 2012, its astounding success was built upon the e-commerce strategy. During 2016 China 11/11 Single Day online sale, “3 Squirrels” was ranked the 7th on the top 10 best sellers on Tmall across all categories. Nevertheless, it determined to foray into brick&mortar. The goal is setting up 1,000 stores in the next five years, mostly in tier 3, tier 4 cities. It is estimated that for each store, the cost will be around RMB2.5~3 million while the revenue should exceed RMB10 million annually. On top of that, the company is even kicking around something much grander: a squirrel theme shopping mall and amusement park.

But all these players are eclipsed by China e-commerce king Alibaba. It is vigorously introducing a concept called “new retail,” which aims to integrate brick-and-mortar retail with its online channel, using big data technology and modern logistics. Its string of initiatives includes but not limited to:

  • It has invested in and partnered with traditional retailers, for instance:

Suning (China’s largest electronics retailer)

Intime (leading department store chain)

Balian Group (large retail conglomerate with nearly 5,000 outlets nationwide)

Sanjiang shopping club (one of the largest chain operation of community supermarkets)

  • It is now collaborating with PengXin Group (a conglomerate of real estate development) to design a big commercial property project, intending to bring many digital native brands into offline showroom space
  • It launched its own supermarket Hema Fresh, which offers home delivery within 30 minutes for online orders for customers located within five kilometers of the store. It has about 8 Hema store in Shanghai and just opened new ones in Beijing.

All these moves point to one conclusion: although the demise of offline retail has been flaring up, the arena remains attractive; or “Retail is NOT dead. Mediocre retail experience is dead” a famous quote from Warby Parker co-founder Neil Blumenthal. After all, to this day, 90% of worldwide retail spending is still in brick-and-mortar stores, according to eMarketer. In China, the e-commerce penetration might be a bit higher, but offline at least accounts for 80% of the total retailing value. 

The e-commerce giants are very confident to extend online success into offline. According to recent statistics dated in April 2017 from Kantar, all major retail groups lost shoppers except Yonghui, a regional supermarket chain in China.

The finding is intriguing as back in 2015 JD spent RMB4.3 billion to buy 10% stake in Yonghui. We cannot help ourselves but correlate Yonghui’s outperformance with JD’s influence behind. The course of future retail is already in the making in e-commerce players’ upper hands.

 

Author: Cecilia Wu