Managing Director & Senior Partner; Global Leader, Retail Sector
This is the fourth in a series of articles highlighting lessons from China on the future of retail. The first article looks at how consumer behavior in China is evolving. The second article explores how the online consumer journey is changing. The third focuses on how companies can capitalize on customer insights to improve innovation.
Most retailers understand that commerce will continue to evolve, combining both brick-and-mortar and online elements. The goal is an integrated process that gives consumers a seamless experience and allows companies to capture the maximum operational benefits across both physical and digital operations. So far, no retailer has achieved full integration, but most are somewhere along the path. Many retailers with brick-and-mortar locations have built online businesses, and online retailers are increasingly opening physical outlets to strengthen their brands and engage with customers face-to-face.
To capture the full benefit, however, companies will need to fundamentally rethink their processes and redesign integrated retail in new ways, with new technologies. This is a major transformation. It involves not only a deep understanding of a company’s value proposition to customers, but also a long-term mindset, given the investment of time and capital needed to digitalize the wide variety of processes needed to run the operations.
Companies in China are developing fully integrated retail, offering a glimpse of the payoffs it can provide. In this article, the fourth and final in a series on what companies in the West can learn from China, we profile several case studies and highlight lessons learned from interviews with executives leading the way.
Physical retail is here to stay: about 85% of retail sales still take place in brick-and-mortar stores. Yet much of the industry’s future growth will come from e-commerce, which allows companies to use customer data to learn far more about customers and meet their needs more quickly and effectively than can be done through traditional means. For this reason, most companies in the West have tried launching hybrid business models. For example, some retailers have rolled out click-and-collect offerings that connect back-end inventory with logistics solutions. Others offer loyalty programs that enable them to develop a single, comprehensive view of individual customers and to gather data on their shopping behaviors and preferences.
Recently, some online-only brands have started opening physical locations. For example, Bolia International, a Danish furniture company, initially operated online only before opening so-called concept stores in several European countries: customers can see furniture samples first-hand in a store and then place orders either in person or online. Similarly, Rent the Runway, a US company that lets customers rent designer dresses and fashion accessories, launched online in 2009 before opening stores in a handful of US cities.
Perhaps the best-known example of this trend is Amazon, which has begun experimenting with physical stores in the categories where it has the highest online penetration (books) and which recently acquired the Whole Foods Market chain. Some may think that the Whole Foods deal is about winning in the grocery segment alone, given the massive size of the market and the frequency of customer visits. At a more strategic level, however, the deal underscores the potential of a truly hybrid, offline-online retailer. For example, Amazon can potentially use Whole Foods stores to gain greater insights about customers and tailor online offerings for them in a more personalized way. The physical stores could also offer local distribution points for faster delivery or more convenient pickup points for nongrocery items.
Retailers in China are further along in the integration of offline and online shopping than companies in the West because of several factors:
Interviews with executives for both online and offline retailers in China confirmed our thinking. There is a clear role for physical stores in the retail universe. However, the role they play within an integrated retail experience changes depending on the category.
Functional. On one end of the spectrum, physical stores serve a functional role, such as providing after-sales service or serving as a staging point for last-mile delivery. This applies in categories where the products are standardized (such as electronics, books, and nonperishable grocery products) or where speedy delivery is imperative (such as the ultraconvenient delivery of prepared food).
For example, Xiaomi, an electronics manufacturer in China, recently began opening physical stores and is rethinking how to use the space they provide. Because Xiaomi understands that consumers can buy products through many channels, it is reorienting the in-store experience to consult with customers in order to better understand their needs. By integrating those insights across channels, Xiaomi is accelerating its product innovation with a steady stream of new products that meet changing customer demands. Xiaomi is also using stores to provide delivery distribution points and after-sales support.
Experiential. At the other end of the spectrum are stores that serve a more experiential or inspirational role—for example, in-home furnishings or lifestyle and fashion department stores. Because these stores sell nonstandard categories of products, the browsing and consultation elements are crucial to customers. Shoppers are less focused on efficiency and more on an in-store experience that is personalized and engaging. Intime Retail, for example, has integrated virtual-reality lifestyle and home decor services into its physical stores, creating a process that a customer begins online but completes in stores with the assistance of design experts.
Hybrid. Grocery stores fall somewhere in the middle of the spectrum. Some grocery products, such as packaged goods, are standardized, while others, such as fresh and prepared foods, are more experiential and involve time-sensitive delivery. Hema Fresh, a grocery format that Alibaba developed with integrated retailing in mind, illustrates the way comprehensive customer insight is influencing retail:
The concept is already proving its merit: efficiency on the sales floor is three to five times higher than for a traditional supermarket in China, and customer loyalty is extremely high. Users place an average of 4.5 orders each month. More than 50% of all orders are placed online; for more mature stores, the share of online orders can reach as high as 70%. As of October 2017, Hema had opened 20 stores across the country.
Although retailers in China are launching a wide variety of models and experiments, their experiences have generated many common themes that can serve as lessons for Western companies. In all cases, for example, retailers gain richer customer insights by digitally capturing customer interactions. And executives consistently speak about the imperative to begin digitalizing the full breadth of offline experiences.
In addition, Western retailers should take the following actions:
In an increasingly digital world, companies need to find the right business model—one that lets them capture the full advantages of both online commerce and physical retail. Companies in China are further along in this journey than their Western counterparts, and already they are experiencing the wide variety of ways in which digitalization helps them serve customers both offline and online. This is welcome news for the companies that are still working on developing integrated retail, because making these changes is not optional. As the retail industry evolves, retailers will need to evolve as well.