Let a thousand stores bloom: new retail in China

The original Dutch version of this post was published as an editorial in Financieel Dagblad, August 25, 2018.

Introduction

Recently I was looking for innovations at the cutting edge of retail and digital in Shanghai and Hangzhou. I travelled together with Froukje de Jong, a former marketer at Albert Heijn, Sara Lee / DE, Heinz and Coca-Cola, who nowadays is a sinologist with a network in Central China. She helps EU FMCG’s to get in contact with Chinese retailers and distributors. Froukje visits China regularly and speaks the language. We interviewed executives, expats and visited a lot of new retail. First conclusion: China retail accelerates and technology companies such as Alibaba and Tencent are the big driving force behind a lot of change.

Again Silicon Valley

Innovation is the fuel of growth. Every leader knows this, but not everyone manages it in the same way. Some leave it to consultants, others just find it less important because they already operate in a growth segment. I regularly travelled abroad with various executive teams to get inspired. These trips were aimed at spotting concepts that fit seamlessly into the company strategy: "steal with pride". We travel to Merci store in Paris, to see the newest household assortments, in Seattle we visit the new Amazon Go store or we go to Dubai to research the new City Walk Mall. A must visit is Silicon Valley to be informed on the campus of one of the tech companies about the latest developments in the field of digital, e-commerce or artificial intelligence.

Eclectic experience

All that commercial inspiration is usually gained in the West. But for organizations that are active in retail and e-commerce, a visit to China yields a multitude of ideas. Be prepared for an environment that is radically different and further developed. West Nanjing Road in Shanghai is not inferior to Fifth Avenue in Manhattan, the collection of known and unknown premium brands is even more extensive. The old French Concession neighborhood is friendly and green, with various trendy coffee shops, beautiful fashion boutiques and authentic local shops. Say le Marais in Paris, but more differentiated. Any avid coffee fan or retailer should visit Starbucks Reserve Roastery, also on West Nanjing Road.

The Seattle coffee chain has opened its most spectacular flagship here: a 2,800 m2 eclectic experience: coffee in hundreds of varieties, tea, non-food and a roastery in one. This store even sells alcohol and cocktails. From a design perspective, the store is perfect: beautiful and special materials have been used, the lighting plan and the acoustics are perfect. All apps for this coffee temple have been developed by technology giant Alibaba. For example, the augmented reality app with which you can follow the roasting of the coffee, or the digital shopping plan with an explanation of where’s what. And of course, everyone pays with AliPay on his smartphone, as you pay everything in China by smartphone.

Face recognition

Alibaba, originally an e-commerce company, has now started its own physical retail in China and works together with existing store formats. In the Changning district we visit their new Hema Supermarket. The word Hema, no link with the Dutch store format, is a combination of two Chinese characters: He and Ma. The first sign means a "lunch box" and the second sign is not by coincidence the surname of Alibaba's founder Jack Ma. But more relevant is that the name is also a pun for Hippo: Chinese internet companies like an animal as a logo of the brand.

Hema supermarkets are clearly higher positioned, serving the growing middle class. They are pleasant and well-organized shops of circa 4,000 m2, unlike a mega hypermarket that you can also find in China. You can order the most varied meals at a counter and consume them on the spot, and there is also a large fresh fish and shellfish department.

Striking are the dozens of young employees in light blue polo shirts, shopping baskets in their hands and PDAs around the wrist. Because they collect online orders, they walk extra quickly. Once a basket is filled, they hook it onto a conveyor belt running through the ceiling to the back of the store. From there, the order is delivered with the scooter at a home address a maximum of 3 kilometers further on, within half an hour. E-commerce but with the store as a distribution center. But it goes further: customers can select all sorts of items in the store and have them delivered at home. Meals can be ordered at home and delivered warm. Customers can also scan articles with the Hema app to check origin, food safety (rather relevant in China) and the temperature during transport to the store. There is no cashier: everyone pays via self-scanning and AliPay. Identification takes place via face recognition. In this way, Hema is able to realize sales that is 5 times higher than comparable stores.

The success indicates there is more to come, there are now 60 Hema’s in China, but Alibaba's ambition is 2000 stores over 4 years. Meanwhile, the digitization of the format is unstoppable. We visited a Hema with a robotized restaurant: Robot.He. Customers choose something tasty in the store (Chinese people love to select the right shellfish in aquariums), walk to a counter, have their Hema app scanned and then their order is sent to the kitchen, via a system that is the most comparable to an airport luggage transport system. In the meantime, the customer is assigned a table via a different interface, where 15 minutes later the order is delivered in robotized box via a belt. We had a delicious meal, and also ordered some side dishes via the terminal at the table.

Unmanned shops

A robotized restaurant far-fetched? It even goes beyond that: we visited an unmanned bookstore, close to Fudan University. With face recognition and AliPay you can enter, and at the unmanned exit you just scan the selected books, as easy as that. Alibaba develops similar technology innovations with the American fashion brand Guess (smart mirrors) and with Korean cosmetic brand Innisfree (smart skin analyser). Is Alibaba the sole player with what in professional lingo is called O2O (online to offline)? Major competitor Tencent is on a similar trajectory. With French Carrefour they opened a supermarket in Shanghai called Le Marché. It is the answer to Hema, but larger in size. Le Marché's Scan & Go app is integrated with Tencent's WeChat, the highly successful all-in-one app. Retail conglomerate Suning opens unmanned sports stores. In their shop in the Wujiachang customers enter through face recognition, after you have logged in via the app, which will give you suggestions based on your search and purchase history. You pay automatically based on RFID technology. China is teeming with experiments that until recently we only knew through that one Amazon Go store in Seattle.

No serious player in China discusses separate channels, offline and online, they are focused on a perfect interweaving of experiences, which Alibaba calls "new retail". It means that the convenience of the customer is central. With one app, orienting, buying and paying is possible, as personally as possible, independent of location.

This is the new Chinese Revolution, but now one that is embraced by the middle class, who are open to quality; their purchasing power has increased significantly. The use of smartphones is further than in EU and US. In particular the convenience of cashless payment is evident; everyone pays everywhere with their smartphone.

Two meetings per week

How is such a complex and large organization as Alibaba governed and what makes them so successful? We had an extensive interview with a top executive of Alibaba, on campus just outside of Hangzhou. Imagine a hip environment, with many coffee bars and creative spaces. You would even think that you are in Mountain View (the Google HQ in California). Of course, there is a mall with high-tech store formats where Alibaba experiments with new retail. Founder Jack Ma's conviction that it must be easy to do business anywhere is deeply rooted within the organisation. With more than 67,000 employees the company is managed as if it were a start-up. There are many self-managing teams, it seems almost disorganised, creativity is important. I noticed two quotes; "First human, then colleague" and "fail fast, learn faster". This is possible because the average age is only 27. No e-mails (if you are contacting someone there, you will of course do so with WeChat), there are only two meetings per week (please check your own agenda). Decision making is super-fast; if you wait too long you get a signal "you are delaying the process".

All controls and communication take place via Ding Ding, the Alibaba company app. The business line is just as important as the HR line, which indicates that culture and personal development are vital for the development of the organization. Evaluation interviews and assessments are more intensive and frequent than we know them in Europe. In short, Alibaba is managed completely differently from the large corporates as we know them in the EU or US.

600 million cameras

Are there only superlatives? Of course not. We were interested in data privacy, which is quite important when you start working with facial recognition. Nobody we've interviewed said that the lack thereof is an issue (there are nearly 600 million CCTV cameras in China). There are no walls between companies and the government. Consumer data is not completely shielded. But the overwhelming reaction to our Western mindset is: this socialist market economy and the role played by the central government have led to very great progress.

In barely 25 years, prosperity has risen so strongly that it seems inconceivable to doubt the intentions of the same government that made this possible.

Another PowerPoint

Western companies can learn a lot from the latest retail developments in China; easy shopping and personal. There is a rapidly growing middle class that is open to technology and embraces change. Companies experiment on a large scale. They do not linger in an IRR or another PowerPoint presentation. The cooperation between "old" retail companies and new technology conglomerates provides added value for customers and therefore companies.

In the 70s and 80s the Chinese copied us, we bought cheap products, had high economic growth, and we thought everything was fine. Now the roles have been reversed, we have been overtaken. Ground-breaking retail and O2O innovations take place in China. Smart professionals and executives should travel more often to the East, to get inspired on how retail can get a boost. Skip Seattle next time.