The Automation Revolution is Taking Over China’s Physical Retail Industry
Report by Comet Labs Research — Beijing
After becoming the world’s largest e-commerce market, China is now transforming the physical retail world with its abundance of online data and recent introduction of omnichannel retail technologies.
In the United States, Amazon Go ignited the race toward a seamless checkout store, and several startups have begun developing their own approaches to the challenge. (Including one we invested in — Stay tuned!)
But in China, adoption of this technology is already much further along.
Online retail has experienced exponential growth in the last decade or so, accounting for 15% of China’s total retail sales as of 2017. The rapid adoption of smart mobile devices in recent years has inspired internet companies to expand offline, with millions of new brick-and-mortar stores adopting a range mobile offerings such as online payment services, orders, and delivery.
More recently, many online retailers in China have tapped into retail design, seeking to integrate their existing digital ecosystems with physical retail locations. These companies have leveraged existing data about Chinese consumers to equip their physical stores with location-based product offerings, targeted marketing, and well-established supply chain networks. New data generated by these stores’ consumers is expected to further improve merchandising, distribution channel efficiency, and user experience in a timely manner.
E-commerce giant Alibaba has even coined the term “New Retail” to describe this trend of digitization in the Chinese market.
Spearheaded by major Chinese tech companies, “New Retail” has been readily embraced by conventional retailers of all sizes, many of which have introduced technological solutions to their stores, undergone strategic investments from tech companies or altered their business models.
Extending Digital Retail Networks to the Physical World
Mobile shopping has accounted for the vast majority of online retail transaction volume in China. Due to the concentration of China’s online retail on only a few platforms, major players in e-commerce and the digital payments industry have accumulated an abundance of user behavior and location-related data.
Alibaba established a series of fully-digitized stores in the last couple of years, which heavily leveraged the company’s online data about shoppers. Many of the products now offered in-stores by Alibaba’s new stores are sourced from merchants on Tmall, the company’s online business-to-customer marketplace.
A smartphone is all it takes for walk-in consumers to make purchases at these stores. Consumers living nearby can also make their purchases through a mobile app at home and enjoy expedited delivery right to their location. To improve their customers’ shopping experiences, these stores adopted a variety of new technologies, such as smart displays that let consumers test out furniture or clothing in a virtual setting before they buy.
Under this model, Alibaba rolled out several concept stores including Home Times (a furniture store), ONMINE (a snack store), and Hema (a supermarket chain). A few of Alibaba’s concept stores are located in stores of InTime, a leading department store chain that Alibaba acquired a controlling stake of in early 2017. Alibaba not only opened dozens of these stores across the country, but also assisted in the renovation of many local retail chains that it holds stake in.
The Hema supermarket chain was created to tackle existing problems with online grocery sales, such as produce losses and last-mile delivery. Mobile app users living within 3 kilometers from a Hema store can have store items delivered to their home within 30 minutes. The store also provides on-site cooking services, a 24-hour urgent delivery service, and plans to deliver ready-meals.
Online grocery sales have also been growing rapidly in China. As a result, the Hema model caught the attention of Alibaba’s direct competitor JD.com, Yonghui (a leading supermarket chain), and Suning (a leading electronics and appliance chain). 7 Fresh, JD.com’s digitized supermarket chain, also capitalizes on data sourced from its online retail platform. While Alibaba’s Hema utilizes a third-party delivery service, JD’s 7 Fresh operates through well-established in-house logistics.
Since launching, Hema opened in more than 30 locations and plans to increase their number of stores to over 100 by the end of 2018. JD’s 7 Fresh, unveiled in November 2017, aims to open up to 1000 locations in the within the next three to five years.
To effectively promote their digitized storefronts, Alibaba, JD, and Tencent — a shareholder in JD and director competitor of Alibaba in digital payments — have made massive investments into the largest retail companies in China.
Additionally, these companies have been aggressively promoting retail solutions to existing mom-and-pop retail stores to help digitize their inventory management and make operations more efficient.
Alibaba’s Ling Shou Tong (LST) end-to-end retailing solution brought 500,000 small stores on board as of August 2017. Through a mobile app, registered stores have access to Alibaba’s data insights, online marketplace suppliers, logistics services and even finance offerings provided by Alibaba’s digital finance arm. The software system even recommends items to both shop owners and shoppers based on data from local consumers.
JD also launched a similar solution and aims to have one million small retail stores adopt the solution by the end of 2018. To differentiate from Alibaba’s service, JD partnered with Tencent. The “JD-Tencent Borderless Retail” initiative (not an official translation) provides retail solutions based on data from not only JD’s online and offline channels but also Tencent’s social platforms, which has the greatest number of Chinese active users. Apart from receiving insights about consumer behavior, businesses will also have access to customized marketing campaigns across JD’s online marketplace, JD’s platform on Tencent’s WeChat social app, and offline stores of JD’s brand partners.
Following the “New Retail” trend, standalone tech brands that have both an online and offline presence are also redesigning their distribution channels. Lenovo, the leading consumer electronics brand that has both online sales channels and more than 10,000 retail stores across China, plans to upgrade around 1000 stores to a new data-centric design by 2020. Xiaomi, a leading smart device maker that previously relied entirely on online sales channels, is now renovating its concept stores across China.
Toward Full Automation
Tens of thousands of fully-automated small-footprint convenience stores and connected kiosks have been implemented across China in the last year or so.
Technologies created for shopper identification, checkout, and security may vary, but almost all enable consumers to shop completely through their smartphones.
The recently unveiled smart vending machines created by Alibaba will be introduced at retail shops which have adopted its LST retailing solution. Sun Art Retail, the leading hypermarket operator in which Alibaba has acquired a minor stake, already installed its unmanned kiosks within a three-kilometer radius of each hypermarket.
Apart from retail stores, several companies made heavy investments in linked sectors, such as logistics and warehousing technology. For example, JD launched an autonomous delivery robot in 2016 and opened a fully automated packaging and sorting facility in late 2017.
While there may be skepticism regarding the efficacy or maturity of the newly digitized store solutions, major e-commerce players including Alibaba and JD made substantial investments in technologies that further disrupt the conventional retail industry. Both Alibaba and JD have even developed blockchain applications for food supply chain tracking and authentication, and will likely implement that same technology in other verticals soon.
We’re anticipating that the vast majority of physical retail stores in China will transition to full autonomy in the near future, driven by digital services integration built on the foundation of consumers’ data.
And if Amazon has proved anything here in the US, retail brands need to be prepared for the competitive threat of technology companies entering the physical world. While US companies are aware of this growing trend, China is showing us that we’re much closer to that future than we initially predicted.
Physical retail isn’t dying. It’s evolving.
The Comet Labs Research Team in Beijing explores industry and AI technology trends in China, and seeks to understand how they might serve as helpful cases for startups in the United States and around the world.
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