Thought Bubble: Embracing China’s “New Retail”

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:

  1. Identify new governance principles for a customer-centric model
  2. Develop new flexibility and efficiency in R&D and supply chains
  3. Reimagine marketing and consumer management for New Retail
  4. Modernize route-to-market and retail formats
  5. Transform the organization and operating model for digital
  6. 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.

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How will Urban Development metrics impact international business?

International businesses seeking opportunities in emerging Asian markets should take note of the market’s trends in urban development. For example, the emergence of Asia’s “mega cities” are evidently reflected in the planning and growth of their metropolitan transportation systems. In Asia, mega cities can be defined as “centralized urban clusters” where each cluster can host its own political and economic infrastructure while impressive physical infrastructure connect the clusters.

Let us take developing urban centers of Southeast Asia as example. The changing faces of Jakarta, Kuala Lumpur, and Manila (with great influx of rural migrant population into urban centers) take stronger developmental influence from the developed mega cities of Seoul and Tokyo, than from European urban centers of Berlin, London, or Paris.

Asia’s urban population growth and the demand rising from higher population density place greater stress on road networks. Congestion issues are better solved by high coverage metro networks complimented by light rail and bus systems. Moreover, regional cooperation is strong. Chinese, Korean, and Japanese companies are highly active in the construction of emerging cities’ metropolitan transportation networks in Asia where technology transfer can be instant.

Can your company develop a systematic approach to studying Urban Development & Transformation?

Here at BZ•IN•TL, we examine the factual (core base), behavioral (development) and potential (transformation) aspects to measure and analyze a city’s urban development and transformation. We then cross examine this across the city’s economy, demographics, technology and governance systems. This creates a strategic matrix by which we can judge current progress in, and thereby, potential for, sustainable urban development.

Core Base (Factual) is the city’s data. This includes the size of the economy, the number of residents, its current infrastructure (both physical and digital), and the policies available to support development.

Development (Behavioral) factors in the element of change. This includes core and emerging industries, population flow, adoption of new technology and investment in new infrastructure, and the role of the government in supporting new technologies and initiating implementation.

Transformation (Potential) describes the city’s other advantages. This includes the rise of supporting and new industries, talent specialization, presence of innovative technology, and overall ease of doing business.

Using the Analytical Matrix for Urban Centers, we can evaluate current progress and future opportunities in any urban center by harnessing pools of data and directing them towards impact for international businesses.

Leveraging Core Base, Development and Transformation metrics, we can evaluate overall synergy between all aspects of the city, and judge the ability of the city to be a sustainable urban center.

Analytical Matrix for Urban Center Studies

What is Urban Development and Transformation?

As humankind transitions to predominantly urban dwellings, cities are under greater pressure to not only expand and adjust, but more importantly to overhaul outdated infrastructure and systems. The economic, political, social and technological changes that cities will undergo to accommodate the urban shift is called urban development and transformation.

For national and local governments, the term means the forward-thinking policies to accommodate the expected 2.6 billion new urban inhabitants, and to more efficiently dispatch and distribute resources. For businesses, it is the opportunity to create and implement new data-based IoT technology to actualize blueprints for future cities.

Given its wide implications for our future shared societies, all business should plan for the short and long term effects of urban development and transformation, taking proactive viewpoints so that they are able to guide future smart cities instead of simply reacting to the inevitable urban shift.

Country Spotlight: India

Who is the ruling party in India?

The National Democratic Alliance (NDA) is the ruling party in India. The NDA is a coalition of parties led by the Bharatiya Janata Party (BJP) that was elected in the 2014 national elections. BJP leader Narendra Modi led the coalition to electoral success after promising to curb corruption, improve the ease of doing business, and increase foreign direct investment (FDI). In addition to the executive branch, the NDA holds a majority in the lower house of parliament as well as 15 of the 37 states and union territories.

India Gate, New Delhi | ©Photo by @jamesyangdu

Which sectors are open to foreign direct investment (FDI) in India?

The Indian government allows different levels of foreign direct investment for various industries. The following industries are open to foreign direct investment:

  1. agriculture, 
  2. plantations, 
  3. mining, 
  4. petroleum and natural gas, 
  5. defense, 
  6. broadcasting, 
  7. print media, 
  8. civil aviation, 
  9. construction, 
  10. industrial parks, 
  11. satellites, 
  12. security agencies, 
  13. telecom, 
  14. wholesale trading, 
  15. e-commerce, 
  16. retail, 
  17. asset reconstruction, 
  18. banking, 
  19. credit information companies, 
  20. insurance, 
  21. pension, 
  22. power exchanges, 
  23. white label ATM operations, 
  24. non-banking finance companies, 
  25. pharmaceuticals, 
  26. and food product manufacturing.

The government permits different levels of foreign direct investment in each of these sectors and approves foreign direct investment for these sectors through either the automatic or government entry routes.

Colaba, Mumbai | ©Photo by @jamesyangdu
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Industry Spotlight: Free Trade Zones in China

How do Free Trade Zones in China differ from those in other countries?

Free trade zones (FTZs) are a type of special economic zone used by the Chinese government to pilot preferential trade and investment policies. As of 2017, there are 11 FTZs in China. Each FTZ has its own strategic positioning within the larger economic plan of the Chinese government.

The first and largest FTZ, the Shanghai Pilot Free Trade Zone, was introduced in 2013. The government first piloted streamlined registration processes for businesses in the Shanghai Pilot FTZ before expanding the policy nationwide through the 5-in-1 business license.

FTZs in China differ from other countries because they are almost exclusively used for piloting programs and “testing” them before expanding nationwide. As such, preferential policies in FTZs must be replicable on a national scale.

In contrast, other countries use FTZs as customs-friendly zones to encourage exports or imports with preferential tax policies playing a major role. For example, in the United States, FTZs (known there as foreign trade zones) offer exemptions from state and local inventory taxes.

How did free trade zones in China evolve over time?

Founded in 2013, the first and largest FTZ is the Shanghai Pilot Free Trade Zone, which holds strategic importance as a financial and logistics hub. 

Two years later, in 2015, the government announced a second batch of FTZs, including Fujian, Guangdong and Tianjin. The second batch focuses on regional economic integration. The Fujian FTZ encourages closer economic integration with Macao and Taiwan, while the Guangdong FTZ does the same for Hong Kong. The Tianjin FTZ seeks to support the economic growth of the Beijing-Tianjin-Hebei region, as well as encourage offshore financial markets.

The third and latest batch was announced in 2016. This third batch of seven FTZs highlights the government’s intention to aggressively industrialize inland China and support the “Belt and Road” initiative. The FTZs include Chongqing, Liaoning, Henan, Hubei, Shaanxi, Sichuan and Zhejiang.

China’s Current & Planned Free Trade Zones
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Employment Market & Regulations in China?

What are minimum wages for first-tier cities in China?

First-tier cities include Beijing, Shanghai, Guangzhou and Shenzhen, so called because they are the most developed and economically vibrant cities in China. As such, they have higher average wages across industries than other provinces and cities.

Shanghai has the highest minimum wage rate in China. As of the April 1, 2017 update, monthly minimum wage stands at RMB 2,300 (US$347) and minimum hourly wage is RMB 20 (US$3). Shenzhen trails Shanghai with monthly minimum wage at RMB 2,130 (US$321) and minimum hourly wage at RMB 19.5 (US$2.9).

Beijing’s most recent minimum wage update was on September 1, 2017. Monthly minimum wage increased from RMB 1,890 (US$285) to RMB 2,000 (US$301). Minimum hourly wage (applied to non-full time workers) increased from RMB 21 (US$3.2) to RMB 22 (US$3.3).

Guangzhou’s monthly minimum wage is RMB 1,895 (US$286), and minimum hourly wage is RMB 18.3 (US$2.8).

What is the cost of hiring manufacturing workers in China?

The average wage for a manufacturing worker in China in 2015 was RMB 59,404 (US$8,951) annually – a 7.7% increase from 2014.

However, there is great variation between cities when it comes to average wage. First-tier cities, which are generally more expensive and pay higher wages, have more expensive manufacturing labor. As the tier lowers, so does the cost of labor.

In Beijing, a first-tier city, the average manufacturing wage was RMB 88,934 (US$13,400) annually in 2015. In Shanghai, another first-tier city, it was RMB 86,536 (US$ 13,039) annually. These were the highest average manufacturing wages in the country.

In addition, there is wage variation based on a coastal versus inland divide. Provinces closer to the coast are generally more developed and thus manufacturing workers there can command a higher wage than those in inland provinces. For example, in Jiangsu province, which border Shanghai to the north, the average manufacturing wage in 2015 was RMB 62,731 (US$9,452); in Shanxi province, southwest of Beijing, it was RMB 41,093 (US$6,191).

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