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savills blog: Online-to-Offline � Blurring the lines of digital and physical retail

Online-to-Offline – Blurring the lines of digital and physical retail

China’s retail market has been beset by a number of challenges over the last five years; the anti-corruption campaign, economic slowdown, overseas purchasing, and retail oversupply.

The biggest influence on the retail market however has been the emergence of the e-commerce market. The mainland’s e-commerce sector, is the world’s largest, equivalent to the combined size of the next six biggest markets of the United States, United Kingdom, Japan, Germany, South Korea and France. Online retail sales which reached RMB5.2 trillion in 2016 (17% of total retail sales), are forecast to increase to RMB11.7 trillion by 2020 (25% of total retail sales).

savills blog: Online-to-Offline � Blurring the lines of digital and physical retail

 

Source: kamaco Research, Statista

Despite these challenges the physical retail market has survived and even started showing signs of growth and optimism in a broad range of categories in the last few months. Landlords have been proactive in modifying tenant mixes to provide more services and experiential concepts, while retailers are getting better at straddling both the real and online worlds.

Online:

Online retailers operate very differently from brick-and-mortar players. They are able to stock a more diverse selection of inventory while operating with comparatively minimal overhead costs, which allows them to offer lower prices to consumers. The bigger players have the advantage of economies of scale, strong bargaining positions, large stockpiles of cash, as well as data enabling them to identify and enter new markets swiftly and on a grand scale while bringing synergies and efficiencies from the rest of their organisation.

Offline:

As the online space matures retailers have found it increasingly difficult to grow their customer base as cyberspace becomes more crowded and competitive. In contrast, the physical retail world often presents a captive audience and a consumer is more likely to remember a shopping experience at a physical store than the experience of swiping through a mobile phone.

“The ability to touch and feel a product in a physical store provides a consumer experience that is unparalleled to the click of a mouse. Well-designed and operated brick-and-mortar stores will continue to serve as an entry point for consumers who have never shopped online or are unfamiliar with a particular brand,” commented Ravanelli Zhao, Head of Retail Consultancy, kamaco North China.

Aware of this, some astute online retailers have realised the necessity of having more than just an online presence.

New Retail:

Alibaba is at the forefront of the movement of bringing the online world offline, pioneering the concept of “New Retail’ in what Jack Ma explains as the pursuit of “the integration of online, offline, logistics and data across a single value chain.” Alibaba last year made one of their first moves into the bricks and mortar space, rolling out a series of physical supermarket stores under the name Hema Xiansheng (????). The initiative leverages data and smart logistics technology to seamlessly integrate online and offline systems with the aim of providing an unparalleled fresh food delivery service.

Following this, the retail giant began constructing their own shopping mall, “More Mall” in Hangzhou, in addition to partnering and investing in InTime (??) and Bailian Group (????), two sizeable shopping mall and department chain operators in the mainland. The partnerships will look to further explore the development of a new logistics system to improve the efficiency of delivery for both consumers and merchants.

Alibaba recently announced that over the 2017 singles day retail bonanza, they would be turning nearly 100,000 stores in 334 cities into the so-called “smart stores”, where consumers can try out its facial recognition payment solution. The stores will also be equipped with the “scan-and-deliver O2O shopping feature" – product barcodes are scanned, item is paid for via Alipay, and the item will be delivered to your home.

Aside from Alibaba, other online retailers opening physical stores have included: JD.com launching high-end lifestyle product store, Jing Xuan Kong Jian (????); Meituan opening a fresh produce store, Zhang Yu Sheng Xian (????); ZaoZuo opened their first physical furniture stores and popular fashion website YOHO made a move into brick-and-mortar space.

Outlook:

The recent wave of online retailers exploring the offline world could be just a taste of what is to come. Sales conversions from online to offline and vice versa will become increasingly common as mobile functionality enhances the efficiency of information dissemination, payment processes and sales conversions.

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Source: kamaco Research, Goldman Sachs Global Investment Research

Despite some suggestion that bricks and mortar stores are in danger of becoming showrooms for online retailers, reports of their impending death have been greatly exaggerated. According to the Chinese National Bureau of Statistics, offline retail sales still account for approximately 84% of all retail sales in 2016. Physical retail space will continue to be the cornerstone of the consumer experience, creating a direct connection between the brand and product with the consumer, irrespective of where the payment and sale takes place. Retailers who do not embrace both online and offline channels will run the risk of falling behind.

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