Subscribe to our newsletter

     By signing up, you agree to our Terms Of Use.


    • About Us
    • |
    • Contribute
    • |
    • Contact Us
    • |
    • Sitemap

    Why China Stands at the Forefront of a Retail Revolution

    Unmanned convenience stores and powerful price comparison platforms signal a broader shift toward data-driven retail.

    To borrow a popular term, I consider myself a serial entrepreneur. I started off studying medicine but wound up spending 15 years working in the hotel and online travel industries. When I was 40 years old, I made the transition to so-called new retail, a term referring to a combination of big data and artificial intelligence that enhances existing retail strategies. I now work in the business-to-business (B2B) sector, focusing on price comparisons between fast-moving consumer goods — that is, products that are sold quickly and at low cost, such as groceries, beverages, and toiletries.

    I believe technology has the power to transform retail, and if this transformation takes off in China, it could easily spread around the world. China’s quest to innovate a new retail model puts it at the forefront of global trends. While Amazon Go was busy trademarking its “No lines, no checkout!” slogan in December last year, Alibaba spent the summer building and launching its first fully automated unmanned supermarket.

    Driven by curiosity, crowds of Chinese consumers and journalists descended on the store to take a look around, and many new retail projects seized this brief window of opportunity to attract significant investment in their “no labor costs, low rent” unmanned vending machines. One such company, OwithO, launched by former senior staff at Alibaba, set a new retail industry record by raising 100 million yuan ($15 million) in seed funding.

    Many people believe the value of unmanned grocery stores lies in lower labor costs. However, while unmanned stores save money by eliminating cashiers, they often require more operations and security staff, meaning that overall expenditure remains roughly the same. Moreover, a combination of research and development costs, high rates of mechanical failure, and comparatively large quantities of damaged goods means the future of unmanned stores is perhaps not quite as bright as it seems.

    At the same time, people are vital to running successful convenience stores. Each store sells essentially the same products as its competitors: If a brand wants to stand out, it can only do so via its own-brand food, coffee, or customer service. Premade meals, and other nonstandard products can account for more than 33 percent of a convenience store’s total profits.

    Finally, unmanned stores represent a test of consumers themselves, as trust issues pose a major challenge to widespread adoption of the business model. At present, China’s credit system remains underdeveloped. The lack of a mechanism for recording user credit and the inability to accurately target and put a stop to theft both represent major potential stumbling blocks.

    Traditional stores continue to occupy a leading position in the Chinese retail industry. However, these stores’ supply chains are overly complex and inefficient. According to the latest Kantar consumer index report, the Chinese fast-moving consumer goods sector grew by only 2.9 percent in 2016, a 10-year low.

    Within the sector, supply has greatly outstripped demand, with large quantities of the same item flooding supply channels and overwhelming consumers. In addition, an excess of brick-and-mortar stores selling similar products makes it impossible to significantly increase sales numbers. Stores have no choice but to let operations costs rise, which is unsustainable in the long run.

    At present, non-manufacturing-related expenses account for about 40 to 50 percent of a product’s overall cost. Current integrated supply chains can increase a product’s price by 100 percent or more. Meanwhile, major retail brands such as Costco have managed to keep this figure under 14 percent. There is significant room in China for more efficient commodity circulation models, and matching the efficiency found in developed countries could give way to a potential trillion-dollar market.

    How can commodity circulation be made more efficient? Currently, the fast-moving consumer goods B2B industry can be divided into two main business models: the self-operated model and the broker model. In the former, the company acts as the primary dealer, negotiating with factories, buying up stock, establishing warehouses, and distributing products. The company profits by selling its products at a markup. This model has been enthusiastically embraced by venture capitalists and implemented by companies such as Jingdong New Path, a department of e-commerce giant

    The broker model involves offering an information platform to vendors and retail outlets alike, thereby increasing industry price transparency. At the end of the year, vendors are often willing to slash prices in order to shift inventory, but unequal access to price information means that many small-scale retail outlets are left in the dark about potential deals. The broker model compiles pricing information on a single platform, making it theoretically accessible to anyone. While it is simpler to run than self-operated models, making expansion easier, it is not profitable in the short term.

    The self-operated model, which involves investments in logistics and warehousing capacity, requires significant financial backing. One company that operates under this model, agricultural product vendor Meicai, recently raised $200 million in a Series D financing round, which it plans to use to expand its delivery capacity.

    Meanwhile, major investments in asset-light broker models showcase the fondness venture capitalists have for technology-based solutions. Ultimately, their goal is to achieve rapid growth by using technological advances to give vendors and shop owners access to more information, increase price transparency, and improve retail supply chain efficiency.

    In the past, replenishing inventory necessitated either finding sellers willing to come to the store directly or going to wholesale marketplaces and negotiating prices with vendors individually. Finding bargains was entirely a matter of luck. In recent years, a number of B2B e-commerce platforms have begun offering online ordering services. Prices differ from company to company, however, and it is common for shop owners to have more than 10 separate B2B apps installed on their phones.

    Business owners must check each app daily to see which companies are offering discounts, coupons, or freebies. Upon finding a deal, shop owners seize the opportunity to stock up. Overall, it is still a much more convenient process than traveling to a physical market or calling each vendor individually. However, checking prices on each and every app that’s available consumes a significant amount of shop owners’ time and energy.

    Recently, price comparison tools have begun to appear, listing prices from dozens of B2B apps on one platform. Shop owners can compare prices at a glance, markedly increasing efficiency. In a sense, the apps that China’s convenience store proprietors use reflect the stages of development of the country’s B2B industry — and more specifically, the effects of its increasingly advanced technology and algorithms.

    Thus far, established major players and startups alike have failed to develop a complete business model for new retail, and the entire industry remains in the beta phase. As we inch toward full realization of new retail, brick-and-mortar stores and online outlets will gradually cease to exist independent of, and in competition with, one another and will begin moving toward reciprocal promotion and mutual assimilation. Online outlets will be able to use their more efficient transportation channels to provide cheaper prices for shops; online outlets will also bring customers to the actual shops for the real-world shopping experience. In this new environment, e-commerce industry models and business practices will undergo a fundamental transformation, and China will hopefully lead the charge.

    Translator: Kilian O’Donnell; editors: Wu Haiyun and Matthew Walsh.

    (Header image: E+/VCG)