[Ratings] Top-7 retailers at the forefront of China’s New Retail revolution

‘New Retail’. ‘Smart Retail’. ‘Boundaryless Retail’. The evolution currently taking place in China’s retail and ecommerce sector goes by a few different names, but in each case, it’s characterised by the use of technology to merge online and offline commerce. New Retail, the name most commonly used to refer to this trend, has been dubbed “the future of retail” (Alizila), with China “setting the pace for the rest of the world” (Bain & Company). Across China, grocery stores, shopping malls, supermarkets, hypermarkets and convenience stores are getting a digital upgrade designed to usher in the next generation of shopping experience. Rebecca Sentance specially for the Econsultancy.

With innovations like facial recognition, digital payments, rapid-fire delivery, big data, and shopping tailored to the individual, the New Retail experience is designed to be seamless, fast, and convenient. It combines the physicality and accountability of offline shopping with the speed and ease of online shopping and has breathed new life into bricks-and-mortar retail.

Alibaba – whose CEO Jack Ma coined the term ‘New Retail’ in 2016 – is one of the biggest driving forces behind this trend, aggressively acquiring or backing half a dozen different retail companies in a bid to realise its vision for a digitalised retail experience. But it’s not the only big player on the field. JD.com, China’s second largest retail company, has been rolling out what it calls ‘boundaryless retail’ via partnerships with some major western players including Walmart and Intel. Tencent, the tech giant behind the omnipresent super app WeChat, has also waded into the fight with some strategic partnerships.

With new acquisitions and announcements cropping up every few months, it can be hard to keep track of who is who in China’s New Retail landscape, why they matter, and how they’re innovating in the space. Here are seven retailers at the forefront of China’s New Retail revolution, and here’s what they’re doing to transform commerce in China.

1. Freshippo (Hema)

Alibaba-owned Freshippo (known as Hema Xiansheng in China) is usually the first name on everyone’s lips when talking about New Retail in China. Launched in 2016, Freshippo’s stores were the first example of Jack Ma’s vision for New Retail in action.

The emphasis – as the name implies – is on fresh food, with huge displays of fresh meat, fruit and live seafood available for shoppers to browse and choose from in the store. The experience is distinctly culturally Chinese, designed to resemble traditional “wet markets” that sell fresh meat, fish, produce and other perishable goods. Freshippo recreates this experience with added digital convenience: shoppers can use the store’s app to scan goods and find out information about their origins and freshness.

Online orders via the app are guaranteed within 30-minutes for customers living within a three-kilometre delivery radius of a store. This quick service encourages a ‘graze and pay’ approach, in effect using the shop as a showroom and ordering through the app. Deliveries are assembled directly in the stores, which double as fulfilment centres: they are infamous for large conveyor belts which move above shoppers’ heads, transporting fresh goods to be assembled behind the scenes.

In February, Fast Company reported that 11 million people have signed up for the Hema app, which accounts for 60% of all orders.

Freshippo uses data from its digital orders to determine which fresh goods to stock in-store, which reduces waste and enables the retailer to enact a “one-day farm to table” policy. Shoppers also have the option of dining in-store, with fresh fish and meat cooked to their specifications.

Payment is also carried out online, usually through Alipay, Alibaba’s payment service. Payment via facial recognition is also offered in some stores. Initially it was not possible to pay by cash in a Freshippo store, although the company was forced to revise this policy after it met with consumer resistance, and the Chinese government emphasised that it was illegal for Alibaba’s stores to reject cash payments. Shoppers who want to pay with cash need to queue at a separate counter, however, in order for staff to place the order on their behalf – adding a lot more friction to the payment process.

In late 2018, Alibaba also teamed up with Starbucks to bring another element of added value to Freshippo stores: coffee delivery. The company began gradually rolling out Starbucks delivery kitchens, known as ‘Star Kitchens’, within Freshippo locations to take advantage of the supermarkets’ delivery capabilities to provide fast and convenient coffee orders. This setup is an extension of a partnership between the two companies called ‘Starbucks Delivers’, which uses Alibaba-owned delivery firm Ele.me to offer “best-in-class” coffee delivery across 17 Chinese cities. The alliance is helping Starbucks to fend off the threat of Luckin Coffee, a wildly popular, low-cost online-to-offline coffee delivery service – more on this a bit later on.

There’s no question that Freshippo and Alibaba have set the bar for what New Retail in China should look like, and it has even inspired imitators overseas: iFresh, Inc., a US-based Asian grocery company, opened up a new outlet in New York in January 2019 that was directly inspired by Freshippo and Alibaba Group’s New Retail strategy.

But while Alibaba may have been the original architect of new retail, the concept has since developed and spread beyond Alibaba and grocery to other retailers and verticals.

2. 7Fresh

JD.com’s 7Fresh tends to be mentioned in the same breath as Alibaba in discussions of New Retail. JD.com refers to its version of New Retail as ‘Boundaryless Retail’, likely to avoid any accusations of stealing Alibaba’s strategy – but at heart it’s clear that the two concepts have the same aim: bringing online and offline closer together.

7Fresh, like Freshippo, is also a chain of grocery stores. 7Fresh was more recently-launched than Freshippo, with the first store opening in January 2018, and its outlets are less numerous, although 7Fresh is reportedly aiming to open 1,000 stores across China in the next three to five years.

7Fresh’s supermarkets target high-income consumers wanting a more upmarket grocery experience, and stock sought-after produce like Iberian ham, Japanese seafood and French pastries. Much like Freshippo, the produce is available to sample and choose from in the store, with orders then assembled and delivered to the shopper’s home, often within 30 minutes if they live within five kilometres of a store.

Its spacious stores – 7Fresh’s first outlet in Beijing’s Dazu Plaza shopping centre is 4,000 square feet in size – have smart shopping carts to guide shoppers to their desired aisle, large-scale digital signs, and QR codes that can be scanned for product information. Many items in the fruit and vegetable aisle can also be placed on RFID readers, where product details will be displayed on a digital screen.

7Fresh might seem to be on the back foot competing with the more well-known and better-established Freshippo, but it has armed itself with some smart strategic partnerships. JD.com owns a 10% stake in Yonghui Superstores, a domestic supermarket chain, and the two companies recently teamed up to invest five million RMB (nearly US$750 million) into establishing a sourcing and distribution line for Thai tropical fruit. The retailer has also received $550 million of investment from Google, and in December 2018 announced a partnership with Intel to develop smart retail experiences. US retail giant Walmart is also a major shareholder, and the two are working together to expand JD.com’s operations into Southeast Asia and the US.

3. Suning.com

As China’s largest omnichannel retailer, Suning.com is a natural entrant into the New Retail space. Unlike Alibaba and JD.com, Suning has had no need to open new bricks-and-mortar stores in order to enact its Smart Retail strategy, instead integrating smart technology into its existing stores. The retailer opened its first self-service ‘smart’ store in Nanjing in August 2017, and later rolled out another four in Shanghai, Beijing, Chongqing and a second Nanjing location.

As an electronics retailer that also sells household appliances, cosmetics, books and general merchandise, Suning.com has taken New Retail beyond groceries and perishable goods and shown how the concept can apply to other verticals.

A July 2018 profile by The Drum reveals how Suning has integrated smart technology into its stores. Shoppers need to download the Suning Finance app and link it to their bank card to start shopping in Suning’s smart stores, which they then access via facial recognition. Inside the store, customers can peruse a range of goods including electronics, sports clothing and equipment, and even some groceries. A complex bundle of RFID technology, video analytics, Bluetooth technology and button gravity sensors detects when an item is picked up from the shelf, prompting product information to be displayed on a smart screen.

Unsurprisingly, Suning’s smart stores are a data goldmine – to enter one is to have all sorts of data collected about your purchasing behaviour and actions inside the store. The shelves will record how frequently items are picked up and how long for, giving an insight into the popularity of individual products. The stores also collect data on customers’ age, gender and emotional reactions to different products – all in the name of optimising the shopping experience, but also at enormous benefit to the retailer.

At the Consumer Electronics Show 2019, Suning also showed off some of the futuristic innovations it will be bringing to its smart stores in the future, including an AR-powered virtual fashion experience called Magic Runway, and the Biu Robot, an intelligent vending machine that will move around a venue carrying goods for shoppers to sample and buy.

By Q1 of 2018, Suning’s Smart Retail strategy was already paying dividends in the form of a 46% rise in omnichannel sales – and Suning has plans to scale up in a dramatic fashion. In February it acquired 37 outlets from major department chain operator Wanda Department Store, and reportedly plans to open 15,000 new bricks-and-mortar stores this year.

Furthermore, on Sunday Suning announced that it had purchased a controlling stake in Carrefour China. French multinational retailer Carrefour was another would-be player in the New Retail space, and had previously opened two smart supermarkets in Shanghai and Shenzhen. However, this wasn’t enough to salvage Carrefour’s prospects in China, with sales down almost 10% in 2018 compared to 2017.

The deal between the two companies is expected to complete by year’s end, and will see Suning’s online-to-offline model and logistics network integrated with Carrefour’s strong supply chain and experience with FMCG.

4. Luckin Coffee

Coffee start-up Luckin Coffee has attracted a great deal of attention in China as a possible challenger to Starbucks. Founded in October 2017, Luckin opened its first stores in Beijing and Shanghai in January 2018, and reportedly sold more than five million cups of coffee in four months. It has pursued a strategy of aggressive growth, opening more than 2,300 stores to date and planning to add another 2,500 in 2019, which would give it more outlets than Starbucks has opened in China over two decades of operating in the country.

Luckin has also managed to dramatically undercut its rival in price, pricing its cups 20% cheaper on average than Starbucks. It can afford to do this thanks to the cost savings it has achieved by digitising its operations: many of Luckin’s outlets are simply take-out kitchens, where customers order coffee through the app for collection or delivery. If a delivery doesn’t arrive within 30 minutes, customers will receive a free coffee. The take-out kitchens are also cashierless, with all payment carried out digitally (a policy that may meet with resistance, given the backlash that took place when Freshippo enacted the same approach).

However, Luckin Coffee has stressed that it will not be simply a “coffee delivery brand”: chief executive Jenny Qian Zhiya stated at a press briefing in Beijing that take-out kitchens will ultimately only comprise 15% of its network, with sit-down cafés making up the bulk. But the delivery kitchens have worked in Luckin’s favour in these early stages, by allowing it to expand rapidly and build up a buzz around its product.

In May, Luckin Coffee went public with a $4 billion IPO that saw its shares take off – but they slid below their IPO price just days later, with analysts questioning the viability of Luckin’s business model. Like many disruptive start-ups, Luckin Coffee has prioritised initial growth above all else, and taken huge losses to capture market share, with operating costs that are three times its revenue.

However, others see huge potential revenue opportunities in the as-yet untapped coffee market in China. While it remains to be seen whether Luckin can restore public faith in its business model, it has undoubtedly already changed the game for coffee in China by bringing New Retail to coffee sales and creating demand for a fast, no-nonsense, online-to-offline coffee experience. Starbucks’ aforementioned partnership with Freshippo is just one example of the way Luckin has its rivals scrambling to imitate its success.

5. Wanda/Tencent

Wanda Commercial Management Group, the country’s largest owner and operator of shopping centres, has teamed up with tech giant Tencent to develop China’s first smart shopping mall.

The mall, located in Beijing’s Fengtai Science Park, opened in May 2019, featuring holographic ads, advanced payment technology (including facial recognition payment and online vouchers), and a VR gaming zone. It makes use of Tencent’s proprietary technology to provide entertainment to shoppers, part of a growing trend of “retailtainment” that aims to turn shopping centres into leisure destinations.

The collaboration has put both Wanda and Tencent on the Smart Retail map and has direct benefits for both parties in terms of data and revenue. In a statement announcing the partnership between the two companies in May 2018, Wanda said that “the cooperation will bring in enormous online traffic through WeChat and other platforms, enabling them to undergo smart upgrades, build a robust membership system, and increase the company’s overall value.”

For Tencent, it will offer “access to huge volumes of offline traffic and varied consumption scenarios, directing its online traffic and technology into its offline resources and accelerating the implementation of Tencent’s smart retail strategy.”

6. RT-Mart

In 2017, Alibaba invested close to US$3 billion in a 36% stake in Sun Art Retail Group, a leading Chinese hypermarket complexes operator with a nascent ecommerce business. Sun Art owns a hypermarket chain called RT-Mart, and last year Alibaba outfitted 100 of RT-Mart’s 400 stores with New Retail technology, modelling them on its Freshippo stores.

As part of the upgrade, RT-Mart has gained a delivery option for in-store shoppers, with arrival guaranteed within one hour for addresses within a three kilometer radius of a store (a setup which by now will sound very familiar). Orders are fulfilled in-store in the same fashion as they are at Freshippo, with goods moving on a conveyor belt above the shopping floor. RT-Mart has also begun to stock more fresh items through its Daily Fresh program, with meat, vegetable and dairy products restocked on a daily basis.

Another addition to the newly-upgraded hypermarkets is a ‘Smart Mommy and Me’ corner stocked with imported and domestic products for infants and new parents. These have kiosks that allow customers to browse through Tmall, Alibaba’s massive B2C online store, and buy products by scanning a QR code.

The New Retail upgrades have resulted in a huge increase in online order volume from RT-Mart’s stores: according to Alizilla, one Shanghai store now sees 5,000 online orders per day at its peak, up from close to zero before the upgrade. Alibaba plans to complete the upgrade of RT-Mart’s remaining 300 locations by the end of the year.

7. Super Species

Yonghui Superstores, a supermarket chain operator in China, is adept at switching up its business model to move with the times. It has stayed afloat by experimenting with different store sizes and formats to offer different types of shopping experience to consumers.

In 2017, the company began rolling out Super Species, a smaller supermarket brand aimed at introducing shoppers to Yonghui’s online platform. Super Species targeted middle-class consumers who like to combine shopping with dining, allowing customers to choose their favourite foods to be cooked in store. It places more of an emphasis on offline shopping than competitors like Freshippo, but still allows shoppers to purchase goods through the Yonghui Life app and offers delivery to homes in a three-kilometre radius of a store. An investment from Tencent in December 2017 also helped to strengthen Super Species’ technological infrastructure, adding WeChat Pay to the range of payment methods.

So far, this all sounds par for the course with New Retail – but there’s one area in which Super Species stands out from the crowd. In June 2018, a Super Species store in Guangzhou became the first to offer delivery via drone.

Yonghui and Tencent partnered with drone maker Ehang Smart Technology to launch driverless aerial drone deliveries from the store, reducing delivery time from 30 minutes to 15-20 minutes. The deliveries are carried out by four-rotor drones carrying up to 500 grams of goods to homes within a 4.5 km radius. In the future, Ehang plans to increase this radius to seven kilometers, with drones carrying up to five kilograms of goods.

Watch this space

There’s a lot of justified excitement around New Retail in China, both inside and outside of the country. All of China’s major tech and retail companies are competing fiercely for a stake in the space, which looks set to be the future of retail. With brick-and-mortar retailers faltering in countries like the US and the UK, it is particularly encouraging to see a model that plays to their biggest strengths, combined with the strengths of online commerce and the latest tech.

However, New Retail is not a silver bullet – and there have been casualties. Last week, Nikkei Asian Review reported on the closure of unmanned convenience stores across China, with companies like Buy-Fresh Go and i-Store experiencing sharply declining sales and bankruptcy. The report attributes the decline to a combination of factors including the high margin needed to keep unmanned stores open, the unappealing nature of the goods stocked in unmanned convenience stores, and the fact that store operators were not making the most of their data.

It’s an important lesson for retailers in the space, and shows that there are some verticals where the New Retail model might be less suitable – or will need careful handling in order to be a success. Companies like Alibaba, Tencent, Suning and Yonghui are clearly in this for the long haul, and are prepared to invest the resources that they need in order to make New Retail work. But there are also sure to be plenty of shifts ahead as new companies and technologies enter the space, and either become serious contenders or a cautionary tale.

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