Marketing in China: Understanding 'New Retail' and Alibaba's Role in It
Alibaba has recently invested significant sums of money in brick-and-mortar stores, including Yintai Group, owner of department store chain Intime; electronics retailer Suning; and supermarket operators Sanjiang and Bailian. Alibaba chairman Jack Ma has branded the acquisitions part of the company’s “new retail” strategy. But what does the concept mean for the future of retail in China? eMarketer’s David Green spoke with Nishtha Mehta, founder of CollabCentral Consulting, which specializes in omnichannel marketing, to get the lowdown on what new retail might mean for retail brands in China.
eMarketer: Is “new retail” such a big deal, or is it just a reaction to what consumers are demanding anyway?
Nishtha Mehta: It is a big deal and it is not just a response to existing consumer demand, because in China—you create demand in this market. The biggest example of the difference between new retail and the old typical order is trying to remove the middle man, the distributor.
Ecommerce is plateauing and offline traffic conversion is lower, so [retailers] are seeking to increase traffic because the other big issue is that online there’s a huge cost of traffic acquisitions. But who will be able to link the data best is the million-dollar question.
eMarketer: Give me an example.
Mehta: So if Nishtha goes and she’s interested in buying X-brand shoes and she cannot find them immediately, can that store online or offline tell her, “You know, on that street it’s available until so-and-so time, only three pairs are left.”
Or when I enter the store, they can recognize my face and determine my grocery shopping habits for the last three months and have all my groceries available on the payment counter.
Or let’s say I want to buy groceries for tonight’s cooking. Instead of telling them to be delivered at my home, because there’s nobody there, I could tell them, “Oh, I’m going for this meeting at so-and-so place and on the way there is this other store. Can I just pick it up from there?”
It’s the entire chain that is digitized both physical and online. And every small store can become the go-to store for fulfillment—that’s where new retail is different.
“It’s the entire chain that is digitized both physical and online. And every small store can become the go-to store for fulfillment—that’s where new retail is different.”
eMarketer: Could you please explain Alibaba’s play with having acquired a number of brick-and-mortar stores?
Mehta: It’s an evolution of online to offline [O2O], moving from having an offline store and driving traffic to an online store, or vice versa, to truly interconnecting online and offline. O2O, omnichannel—it’s all jargon, but what I see behind this acquisition tree and the “new retail” idea is that Alibaba is trying to build a network, an ecosystem. They are trying to acquire different offline assets and a net of physical stores so that they can integrate with their online infrastructure and cloud computing data to provide a seamless integrated service.
eMarketer: How do you think they will execute this?
Mehta: First, they are creating a seamless and consistent consumer-centric experience. Second, you have a clear tapering of growth in the ecommerce ecosystem. [China’s ecommerce sales growth is forecast to fall from 48.6% in 2014 to 36.1% this year, according to eMarketer estimates.] Jack Ma has said that they realize ecommerce is slowing, and they need to infuse a jolt of “caffeine” back into physical stores by making them technology-savvy as a way to accelerate. And No. 3 is mobile payment.
eMarketer: So Alibaba is setting up a framework for brands to tap into, and make that transition to a digitized store experience?
Mehta: I think you’ve used the right word “framework.” Alibaba is very pragmatic, and they are enabling brands to experiment with different models. They’ve admitted it might not work, but they are setting up a framework or a package offer because they are the enablers of data, logistics, of the partnership with the physical stores, of the entire infrastructure, and they understand consumers better because they have access to actual data. Unfortunately, brands alone don’t have access to sufficient data in China.
“Alibaba is very pragmatic, and they are enabling brands to experiment with different models.”
eMarketer: So it will be attractive for brands to partner with Alibaba on new retail because they’ll have access to more data?
Mehta: Yes, I think it’s already happening. Two years back they were so reluctant to share data, now it’s changing. Alibaba is clearly seeing an opportunity to help retailers and brands to use technology to make the seamless customer-centric experience work. They will use technology to transform inventory management by securing an offline physical store so consumers can really have access to buying anytime, anywhere on the go.
eMarketer: Is this strategy going to be open to independent brands, or will it lead with a department store model? And is it likely to lead with luxury brands because they already have access to strong CRM [custom relationship management] data?
Mehta: If you look at Alibaba’s strategy in the last 10 years and moving forward, you have to ask, why are they making partnerships with all these countries? They open an office in Australia, they want to create 1 million jobs in the US. They want to have partnerships with each and every country in Europe. Why?
Because their vision is to enable the grassroots—small businesses and sellers—to create omnichannel or fingertip shopping. Personally, I don’t see luxury as the leading driver for new retail. The people who benefit are doing day-to-day stuff. Food is big in China [along with] consumer durables and tourism. Luxury is just one of them.
eMarketer: What does this mean then for competitors like Tencent and the daily services they have invested in and that are already integrated with WeChat, rather than Alibaba’s local services platform, Koubei? Does this leave grocery players like Ele.me, which is backed by Tencent, out in the cold?
Mehta: Obviously there is going to be competition. Koubei is interesting. They have about a 40% to 45% year-on-year growth rate, though they’re losing money. But who doesn’t lose money right now in this business?
“They open an office in Australia, they want to create 1 million jobs in the US. They want to have partnerships with each and every country in Europe.”
They recently received a huge investment [Koubei closed a $1.1 billion financing round in January], and I think the advantage of Koubei is that it is integrated inside Alipay. They are also exploring offering virtual stores inside Koubei to offline shops. I’m also hearing that they want to enable more of the local community service providers.
eMarketer: What advantage would working with Koubei offer me if I was a small or local business owner that running a WeChat store would not?
Mehta: I see them very differently. WeChat is good for CRM. Think of WeChat as a second step: It’s an ecosystem where you still have to spend money extensively and have clear marketing to drive traffic to your WeChat store. It’s not magic; you have to make it discoverable, and it’s not easy.
But Koubei is a marketplace for local service where you’re already going, where the consumers are and it’s easy to be discovered. So it’s not either or, it’s both.
eMarketer: What do you think the timeline might be before we see these services being integrated and new retail impacting consumers’ lives?
Mehta: I’ve been here 12 years and the incremental growth in digitization in mobile payment and everything else is happening now at much faster speed. The government is fully behind the innovation agenda and are pouring in money. Mobile payment is the biggest enabler for omnichannel or new retail or fingertip shopping—whatever you call it—and that is growing hugely. So I would say it’s a matter of a few months to less than two, three years before it goes mainstream because consumer demand is improving, and that will drive O2O sales.
“Mobile payment is the biggest enabler for omnichannel or new retail or fingertip shopping—whatever you call it—and that is growing hugely.”
eMarketer: How do you think it will play out as Alibaba increasingly goes head-to-head with Amazon around the region—in India, Singapore and Malaysia, for example?
Mehta: They have a common vision, but Amazon has a different strategy—getting into drone delivery and other innovations. Alibaba has an advantage because they understand all the data, and they’re able to collaborate to attract offline stores. That’s the difference I see.
Amazon is still experimenting with creating offline Amazon stores. But Alibaba is trying to either acquire or partner with offline stores like Suning and Intime. From being a platform, they want to become a network.
Amazon is still pitching itself more as a space or a service provider. If you look at the India example, Alibaba is investing in Flipkart and that again is the network model, but Amazon is focusing on Amazon India. They want to have the branding of Amazon and people to come and use Amazon. But Alibaba is not hung up on, “Please come to the India Tmall” or whatever. Both are open to experimenting, which is why it makes it so interesting. Maybe things will have changed dramatically in six months. That’s the beauty of it.