Michael Norris
Oct 31, 2018

How we misread 'new retail'

'New retail' in China has thus far been less about consumers and radical technology innovation, and more about the bottom line. However, the revolution is just getting started.

How we misread 'new retail'

The concept of 'new retail' turned two years old this month. Like ‘innovation’, ‘digital disruption’ and ‘digital transformation’, 'new retail' is a concept that’s prone to multiple definitions and interpretations. Lack of common understanding has led to the reduced opportunity for meaningful discussion of its implications. As a Chinese concept, it is subject to further oversimplification as it is translated and explained to Western audiences.

In the sections that follow, I’m going to:

  • Identify the main deficiencies in the West’s current understanding of 'new retail';
  • Suggest a more suitable way to understand 'new retail';
  • Anticipate how all definitions and interpretations of 'new retail' will be tested as 'new retail' evolves.

Deficiencies in our current understanding 

The following examples represent how 'new retail' is commonly presented to Western audiences:

FT: Melding of online and physical stores […] spurred by a desire to build bigger data footprints of shoppers by drawing from their behaviour in shops as well as on their smartphones.

Forbes: No one physical consumer experience has to be the same from one individual to the next anymore — that is 'new retail'.

Asia Times: A seamless connection between the online and offline world, with the focus on the consumer experience.

The majority of interpretations are adapted from Alibaba’s own definition of 'new retail', which goes like this:

A consumer-centric, data-driven form of retail, the core value of which is to improve the retail industry's operating efficiency." (This is the author’s idiomatic translation.)

There’s nothing wrong with working from Alibaba’s definition. However, the translation, adaptation and re-framing process invariably lead to blips. From the examples above, you’ll see the definition’s first half has been represented pretty faithfully in Western commentary.

The second half, however, is frequently left out.

That omission is critical, particularly when you consider how Alibaba’s 'new retail' spearhead, Hema, talks about its own performance. Hema’s financial results were revealed for the first time at Alibaba’s Investor Day in September.

Revenue per square meter (RPSM), also called Revenue per square foot or sales per unit area), a measure of operating efficiency, is front-and-centre.

Figure 1: A snippet of Hema’s results, as reported at Alibaba’s Investor Day on 18 September. A "mature" store is defined as a Hema store in operation for more than 1.5 years. There were seven such stores as of 31 July.

Hema’s CEO, Hou Yi, has been quoted as saying that 'new retail's potential lies in creating zones of highly efficient retail operations.

Lei Jun, Xiaomi’s CEO, went even further saying that "highly efficient operations are the core of 'new retail'".

From these, it’s safe to presume that a number of commentators, media outlets and consultancies have overlooked the part of 'new retail' that Alibaba (and others) are most focused on right now: operating efficiency.

Toward a more accurate understanding 

For those who aren’t particularly familiar with the retail industry, RPSM is the primary measure of store success. RPSM minus cost per square meter (CPSM), gives a benchmark (gross profit per square meter) which can be applied across a franchise chain or competitor set.

Because of our skewed understanding of 'new retail', one of the things we’ve overlooked is Hema’s RPSM performance. Hema’s RPSM has been reported as three to five times larger than peer competitors.

That’s a significant industry breakthrough. So, how does Hema achieve such a strong RPSM result? I’ve identified some of the levers it pulls.

Factors affecting revenue How Hema increases each factor
  • Hema processes offline orders to premises in a 3-mile radius
  • In mature Hema stores, 50-60% of store revenue comes from online orders
Basket size
  • Hema’s on-premises food court encourages additional in-store discretionary spending
  • Push offers through Hema’s app entices consumers to place bulk purchases online
Conversion rate
  • Individual Hema store inventory is based on the neighbourhood’s Taobao, Tmall and Alipay data, which allows stores to anticipate and meet changing demographics, needs and preferences

Repurchase rate
  • Purchase and payment through Hema’s own app give SKU-level data on each consumer, which is used for retargeting

Taking this into account, what I propose is a way to understand 'new retail' that accords with how Alibaba is approaching its own 'new retail' strategy.

It goes like this:

  • When data, digitization and technology are deployed in retail value chains and improve RPSM and/or decrease CPSM, it’s probably 'new retail'.
  • When data, digitization and technology are deployed in retail value chains but don’t improve RPSM or decrease CPSM, it’s probably a gimmick.

This isn’t a ‘sexy’ interpretation. It’s certainly not as exciting as “merging the best of online or offline” or “creating new retail experiences”. However, it’s superior to most prevailing Western interpretations because:

  • It’s faithful to Alibaba’s original definition
  • It zeroes in on what Alibaba is focused on
  • It’s tied to a clear and measurable outcome.

When this way of understanding is applied to often-cited 'new retail' innovations, we get a clearer picture of what is (and what isn’t) 'new retail'. Think about the following examples.

Smart mirrors have been placed in retail locations both in China and abroad. When done well, they have the potential to increase conversion and basket size through personalised recommendations. When done poorly, they don’t affect conversion or basket size at all.

Unmanned stores, such as Shanghai-based Bingo Box, hope to improve slim profit margins by eliminating staffing costs. However, it’s presently unclear as to what extent costs of fulfilment and individual RFID tags eat into any savings realised.

Car vending machines are purported to increase efficiency for dealers and buyers, but some analysts are divided as to how sales conversions will fare without a sales representative on site.

Smile to pay has been credited with thinning lines during peak periods, but it’s unclear whether biometric data collected can be used to further drive RPSM.

There’s some 'new retail' potential there, but some PR stunts too. RPSM gives you a lens to tell the former from the latter apart.

The 'new' in 'new retail'

At this point, you’re probably a little perplexed. Data, digitisation and technology are used to increase revenue or reduce cost. There’s nothing really new about that.

You’re right. We’re in the first wave of 'new retail' innovation, ‘RPSM revolution’. In this phase, the ‘new’ in 'new retail' is hard to articulate, because we’re amidst a somewhat familiar mix of business and digital transformation.

But there’s still a lot of run left in 'new retail'.

In the second wave of innovation, ‘radical reshaping’, there’s potential for breakthroughs in R&D, manufacturing and supply chains that can be rightly called ‘new’.

This will be even more true for the third wave of 'new retail' innovation, ‘upending everything’, where our understanding of the retail industry’s fundamentals will be challenged. I’ve set out some preliminary thoughts on what these might entail below.

Wave Underlying logic What we might see

Wave 1: RSPM revolution

Improve RPSM across China’s retail industry

  • B2C touchpoints expanding and diverging across ‘purchasing’ and ‘shopping’
  • Precise tracking and targeting
  • Data-driven product development and testing

Wave 2: Radical reshaping

Stimulate industry-wide efficiency by reshaping activities across the entire retail value chain

  • Advanced demand forecasting
  • Data analytics shortening R&D cycles
  • Mass adoption of D2C subscription models
  • Modular production for extreme personalization

Wave 3: Upending Everything

Achieve breakthrough innovation and efficiency by reconstructing the retail value chain

  • Re-examination of retail fundamentals
  • Mixed-reality (MR) for consumer co-creation
  • AR/VR ‘friendvocate’ bots
  • 4D printing in local maker communities

I fully expect that, as we move from ‘boosting efficiency’ to ‘radical reshaping’ to ‘upending everything’, our definition and understanding of 'new retail' will shift.

Given that we misread 'new retail' for its first two years, we’re fortunate this shift hasn’t been too quick. However, we’ll need to be more attuned as we move into an increasingly disruptive territory.

Michael Norris is presently Research Manager at Resonance’s consumer insights, strategy and digital innovation team, SMART. 

Campaign China

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