From the publication: “EMBRACING CHINA’S ‘NEW RETAIL’: as online, offline and logistics merge, some brands are pulling ahead by redefining consumers, merchandise and stores” by Bain & Company & Ali Research
Summary
The era of “New Retail” that Alibaba founder Jack Ma envisioned is starting to emerge across China in ways that promise big gains for consumer products companies that act decisively and systematically while causing others to lag behind. In 2016, Ma predicted a seamless merger of offline, online and logistics for a dynamic new world of retailing. His vision now can be seen in the millions of mom-and-pop stores throughout China that are taking on new life as order-and-delivery stations for e-commerce. It is there in the booming food delivery platforms such as Hema (盒马), which fulfills more than half of its orders online. And you can glimpse it in China’s ubiquitous mobile payments. Chinese consumers use their phones for 60 times more mobile payments than consumers in the US do.
Indeed, China’s e-commerce platform, represented by Tmall (天猫), is evolving to establish a New Retail infrastructure, empowering brands with data. Leading brands are gaining an edge by using the emergence of New Retail as an occasion to build a new consumer-centric model while at the same time creating operations that are more efficient.
“For starters, people are no longer viewed only as consumers. The most forward-thinking brands also see them in the role of co-producers.”
In the past, with relatively limited consumer insights, it was sufficient for a brand to identify target consumers and determine their needs. Now, armed with a comprehensive and dynamic profile, brands have new missions, such as finding ways to stimulate consumer needs, identifying look-alike consumers and turning consumers into brand ambassadors who effectively co-create the brand.
Also, products are advancing from commodities to become part of the consumption process and an integrated consumer experience. As the old business-to-consumer model evolves from the simple goal of meeting mass demand to a world of consumer-data-inspired personalized products and delivery, the best brands are determining how to integrate products into the overall customer experience—which includes not only shopping but learning about a product, using it and recommending it.
In addition, stores have extended from online-only or offline-only into a seamless omnichannel consumer experience that’s fully integrated. People can shop while enjoying content or while spending time on social networks. Brands are creating occasions beyond the constraints of time and location.
Winning brands are taking six steps to reshape the future and make the most of New Retail:
- Identify new governance principles for a customer-centric model
- Develop new flexibility and efficiency in R&D and supply chains
- Reimagine marketing and consumer management for New Retail
- Modernize route-to-market and retail formats
- Transform the organization and operating model for digital
- Invest in new technology development
As New Retail takes root, the brands that thrive will acknowledge that the changes they make today—the new capabilities they develop and the operating models they devise—won’t necessarily help them a year from now.
New Retail is a work in progress, requiring brands to constantly refine and reinvent themselves for new occasions, new formats and the steady flow of new ideas that will defi ne retailing tomorrow.
Introducing New Retail
For brands hoping to sell in China, survival means moving equally fast to capture this future ahead of competitors, both incumbents and digitally savvy upstarts. It will not be enough merely to keep up. Brands will be required to get ahead and help shape the vast changes, even as they completely overhaul the rules of engagement.
Consider the fundamental changes and ways that the best brands are responding (see Figure 2).
Consumers
People are no longer viewed only as consumers. The most forward-thinking brands also see them in the role of coproducers. Welcome to the C2B (consumer-to-business) age.
Merchandise
Products are advancing from commodities to become part of the consumption process and an integrated consumer experience. The best brands are determining how to integrate products into the overall customer experience: not only shopping but also learning about a product, using it, talking about it on social media and recommending it.
Stores
Stores have extended from online-only or offline-only into a seamless omnichannel consumer experience that’s fully integrated.
Changes Needed to Capitalize on New Retail
Step 1: Identify new governance principles for a customer-centric model
The best brands redefine the relationship among consumers, merchandise and stores in a way that makes the most of their operations while strengthening such fundamentals as the operating model and ability to develop new technology (see Figures 3 and 4). This starts by acknowledging—and acting on—two principles of New Retail. They put customers at the heart of operations, with full consideration of the end-to-end customer experience, from awareness to purchase to referral. In addition, they commit to embedding data and smart technology into their operations, breaking down the data silos within their organizations for cross-function interconnection and extending their links with the broader ecosystem.
Step 2: Develop new flexibility and efficiency in R&D and supply chains
New Retail is having a big effect on every corner of a brand’s operations. As consumer needs become more diversified, the potential consumer pool would shrink if existing R&D and supply chain strategies remain unchanged. We see the best companies transforming those operations to take advantage of retailing’s new realities, and making them more efficient in the process. These brands use real, comprehensive and timely understanding of consumers to optimize R&D and their supply chains (see Figures 5 and 6).
For example, as they deliver personalized products and services, they thoughtfully adapt to shorter R&D cycles. Importantly, they view their consumers as participants in the R&D process, engaging with them early in product development, conducting consumer testing before production and connecting frequently before a product launch to enhance loyalty.
Brands are making supply chains flexible enough to adjust to real-time frontline sales results and the more accurate estimates enabled by artifi cial intelligence (AI), the Internet of Things (IoT), blockchain and other emerging technologies.
Companies selling in China are at the forefront of this movement to use smart technology. The most advanced among them integrate all the parties in the supply chain, analyzing the full spectrum of available data to improve visualization, analysis and supply chain automation (see Figure 7).
For example, a visualized real-time supply chain enables these companies to track cargo and machine information to quickly detect and solve problems.
Nestlé has reaped significant benefits from its “One Set Inventory” unified supply chain, which serves different channels (business-to-business, business-to-consumer, offline-to-online and others), sharing its logistics service and inventory (see Figure 8). The move has dramatically improved turnover efficiency; the online product shortage rate has dropped from 22% to 5%; logistics costs lowered, reducing cross-region delivery from 60% to 10%. Now, nearly 80% of orders are delivered same day or next day.
Step 3: Reimagine marketing and consumer management for New Retail
New Retail changes the game in marketing and consumer management, too. The digital ecosystem that encompasses purchase, payment, delivery and all the other customer touchpoints provides the opportunity to reach consumers whenever and wherever they are online. That is why winning brands have extended the horizons for digital marketing. For them, online is not limited to a sales channel; rather, it becomes a consumer-centric closed loop for unlocking business potential (see Figure 9). It is a major shift in philosophy that turns marketing from a brand expense into a brand asset.
Cosmetics brand Estée Lauder takes a similar approach, continuously building, refining and drawing from its consumer database (see Figure 10). To enhance awareness, the brand recently initiated a campaign in which it blended ads with content to reach targeted potential consumers in multiple channels. Its precise consumer profiling enabled it to connect with more than 10 million targeted consumers in six days and attract more than 100,000 new followers. It then interacted with those consumers through diversified media, using each interaction as an opportunity to trace consumer behavior. This effort enabled Estée Lauder to reach more than 500,000 fans in a two-week period. About 12% of those consumers interacted with the brand and revisited the site to research or browse products. It then relied on Big Data to zero in on more than a million high-value, easy-to-convert consumers in its database and targeted them for resell. The effort boosted Estée Lauder’s conversion rate by 80% over previous approaches.
Step 4: Modernize route-to-market and retail formats
Distribution and retail formats are being reinvented with New Retail.
Let’s begin with distribution. Under the old and painful multilayered network, stores—especially traditional trade—had limited control and transparency; there was a lack of meaningful data, and the costs of distribution were high for limited channel penetration. Consider the traditional distribution path: A brand sells to multiple levels of wholesalers and distributors at the province, city and county level, which in turn supply local mom-and-pop stores. In addition to the many handoffs required, the markups at each stage and the lack of transparency on consumer behavior, any single distributor may have offered only limited SKUs (and mostly local brands) to these small stores. In recent years, this antiquated system started feeling the strains of China’s decelerating growth, with many distributors exiting the business.
Now, leading brands are replacing those old networks with streamlined electronic route-to-market (e-RTM) models that help them reduce costs with fewer levels, expand their coverage, and gain visibility into real-time inventory and sales data while improving point-of-sale and channel relationships (see Figure 11). Offering instant access to point-of-sale data at mom-and-pop stores, these new digital platforms help both brands and retailers.
Brands are able to make quick and better-informed decisions based on channel sales activity and consumer needs. These systems also arm them with the data needed to provide value-added services to each outlet. Retailers receive a product mix tailored to the actual sales activity in their stores.
“Brands have learned a key lesson as they build and adapt to these new digital route-to-market approaches: It is critical to hone brand strategies to gain the most from e-RTM and to select business partners thoughtfully, based on the unique characteristics of their product categories.”
We see three different approaches to e-RTM based on a brand’s relationship with traditional distributors (see Figure 12). The most collaborative model involves using the e-RTM system for placing orders but working with existing distributors for inventory control, warehouse management and delivery. In this model, retailers rely on either the existing distributors or brands for in-store execution.
A second model requires collaborating with existing distributors but controlling inventory and delivery.
A third, more disruptive, model relies on e-RTM for the entire process—spanning order placement, inventory control, warehouse management and delivery—but works with existing distributors or brands for in-store execution.
Bestseller Fashion Group, which operates 8,000 stores in more than 500 Chinese cities, has used its new distribution platform to create a seamless omnichannel experience for consumers (see Figure 13).
The company combines its online and offline loyalty programs to build an in-depth customer profile, merging information from a consumer’s activity on social networks, Taobao, Tmall, its own website and other sites with data generated from the consumer’s visits to physical stores. It uses data from the more than 30 million customer loyalty members to build customized consumer operations and then engages consumers with differentiated content based on their unique behavior.
This approach has helped the company synchronize inventory between its online and offline channels and spur activities that have streamlined logistics costs, such as order online and pick up in store. These moves have helped Bestseller reduce its average delivery time from three days to one-and-a-half days.
Step 5: Transform the organization and operating model for digital
Building a framework and operations around customers and data is critical for brands hoping to master New Retail. However, those big moves will not yield sufficient results without redesigning the organization to make full use of New Retail’s power. Many brands entered the era of New Retail not only with limited capabilities for acquiring and analyzing data, but also with organizational structures and operating models that make it difficult to share and act on insights gained from that data. Winners understand the need to focus on organizing for data.
Among the most important considerations: The organizational structure must allow for seamless coordination among functions, which is something that traditional organizations rarely accommodate.
As companies adapt their organizations to the changing needs of New Retail, it is critical that the organizational design reflect the company’s stage in its digital transformation (see Figure 14). For example, in a company’s early days—when digital’s major role is that of a new sales channel—the digital team will be most effective if it operates within the sales unit.
If digital is primarily used for marketing and consumer engagement, the digital team can operate within the marketing department.
Alternatively, if the company is slightly more advanced in its digital transformation, that team can operate independently, with dotted-line reporting to both sales and marketing. This structure provides such benefits as the synergies created by combining digital and traditional advertising.
While the ultimate goal is to be able to move quickly, brands need to recognize that developing enterprise-wide agility does not happen overnight. A multi-stage journey typically takes two to three years to complete (see Figure 15). The path begins by setting up technology, tools and other elements of a supporting infrastructure and empowering a few Agile teams in selected areas. The next stage involves expanding those teams in waves to establish Agile operations in complete business units or functions.
All Agile teams operate according to the same manifesto: Teams are cross-functional and empowered, activities are time-boxed around specific outcomes, work is iterative and incremental, and problems are solved in a modular and adaptive manner. Digital requires many new or upgraded capabilities, so it is critical that brands clearly define responsibilities (see Figure 16).
Step 6: Invest in new technology development
New technologies give brands the opportunity to boost their operational efficiency as they deliver a better customer experience (see Figure 17). Today and tomorrow, companies face many challenges as they develop a game plan for new technology, choosing from the evolving options for improving decisions and connecting business operations.
Similarly, brands must consider the best approach for adopting a single technology across multiple functions to deliver the most extensive benefits.
For example, they can employ AI to obtain forecasts that are more accurate, assist in after-sales service, collect consumer feedback and plan optimal product distribution. As a first giant step to move out ahead of rivals in this new world of retailing, brands need to assess their current digitalization status (their “point of departure”), set clear goals for their digital transformation (their “point of arrival”), and spell out a clear implementation plan and roadmap (see Figure 18).
As New Retail takes root, the brands that thrive will acknowledge that the changes they make today—the new capabilities they develop and the operating models they devise—won’t necessarily help them a year from now.
New Retail is a work in progress, requiring brands to constantly refine and reinvent themselves for new occasions, new formats and the steady flow of new ideas that will define retailing tomorrow
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Our Take
From our vantage point on-the-ground in China, the transformational changes taking place in the retail sector is nothing short of breathtaking. Renewed infrastructure for sales, marketing, manufacturing, and the rest of supply chain logistics is already taking shape and could have dramatic impact on other Asian markets and eventually the world.
Judging by the speed of adoption and change integration demonstrated by Chinese retail players in the past, we already know that their western counterparts will be placed under great pressure to catch up in order to complete in the highly competitive but equally lucrative Chinese market.
Sometimes the matured retail distribution infrastructure in developed markets can act as a hindrance to our receptivity to change. Perhaps this is why many of us are genuinely surprised by the speed of China’s economic progress during these last ten years. Therefore, we must keep our minds fresh and our eyes open to China’s ongoing progress in New Retail.
Conversely, companies that have already invested time and resources into China are doubly incentivized to commit to change. As we can learn from the above publication, meaningful change cannot be executed in isolation within an organization, by single business unit, or in a single product line. But rather, change needs to be implemented from our foundational strategic thinking, through our organizational structure all the way to our technological infrastructure upgrades.