How China is shaping the future of retail 

A decade ago, global retailers looking for inspiration on how to market to the next generation of consumers used to look to European or U.S. stores for best-in-class innovation and creativity. 

But a lot has changed in the past decade, according to Neil Stern, a senior partner with McMillanDoolittle, who gave a riveting breakfast presentation at the Private Label Trade Show about the next big trends in the retail industry.

And a lot of that change is happening in China.

“Ten years ago large retail and other retail infrastructure in China almost didn't exist. You had a huge amount of immature trade and mom and pop retail,” Stern said. “There were no shopping centers, no big box stores. So in China you literally have this blank canvas. And if you take a blank canvas, a lot of technology, and a lot of infrastructure and you say, ‘Well, what might retail look like?’ That's what's happening in China. You really have this phenomenon of what's called new retail. And what new retail is is kind of merging together the old and the new. Taking new retail formats and new business models and making it work with the infrastructure and the online shopping environment.”

Stern says Chinese retailers are excelling at bridging the gap between e-commerce and physical retail. He used a term for their success that isn’t “omnichannel”; he says it’s more about “online-to-offline” commerce, which blurs the lines between online shopping and bricks-and-mortar. And it is this new kind of retail that looks the most like where things might be headed in the U.S. market.

“What does online-to-offline mean? It’s the link between online discovery and actual commerce that happens in the physical world,” Stern says “How do you link together in a seamless way all the things that are available today from an online perspective and all the advantages and tangible assets that we have in retail stores? That's really the key to thinking about what retail is now.”

The proof of the success of the online-to-offline model is in China’s e-commerce market, which is growing at a scale “never seen before,” Stern said, adding that China has an online sales penetration of 23.1 percent compared to 9 percent in the U.S.

“China's overall retail market is now larger than the U.S. but China is growing at a faster pace. And of course a lot of this is being driven by e-commerce,” Stern said. 

When you break down China’s e-commerce growth by category, 8 percent of its grocery sales are transacted online; in the U.S. it’s 2 percent. But in China that online grocery number is expected to grow to 15 percent. And Chinese consumers also have higher expectations when it comes to delivery. While most Americans are satisfied with two-day delivery, 29 percent of Chinese consumers expect same-day delivery, compared to 6 percent in the U.S.

Stern detailed several examples of Chinese retailers leading with their online-to-offline business models: Alibaba, JD.com and others. 

Alibaba specifically runs physical stores called Hema (pronounced Hoo-ma) that have small physical footprints (around 10,000 square feet) but also act like fulfillment centers. So Hema customers can shop Hema.com, shop the physical Hema store, and can also shop the Hema store but also have groceries delivered. 

The Hema banner has about 65 stores with an army of employees on scooters who deliver groceries to a customer’s door within 30 minutes. Hema stores also leverage technology such as digital self-checkout, mobile checkout and facial recognition.

“What Alibaba did was build a store that has an emphasis and focus on fresh products,” Stern said. “And they put a lot of technology behind the fresh products so every product that's on the shelf can be scanned with a QR code. And every store has a distribution center. An employee can scan products and they go into a bag on a conveyor belt and go directly to the back of the store. So the store has the excitement of a supermarket along with the efficiencies of a distribution center. Hema brings the online and offline elements together in a seamless way.”

So what are the implications of all this Chinese innovation for the U.S. retail industry? Stern offered several predictions:

• Amazon Go will be expanding its cashierless technology to its 365 and Whole Foods Market banners.
• Walmart will launch cashierless technology to all its Sam’s Club stores.
• Aldi will be launching stores that are most similar to China’s Hema, an online-to-offline model.
• One of the big Chinese players is shopping for retail real estate in the U.S. and will likely be opening a high-tech store such as Hema.