The Age of New Retail in China

What is New Retail? It’s a term one often hears in connection with China—which shouldn’t be surprising because Jack Ma, the founder of Chinese e-commerce giant Alibaba, is New Retail’s greatest evangelist.

People who have heard a lot about China but haven’t traveled there can be excused for thinking most Chinese retail takes place online. In fact, a recent Ministry of Commerce report showed that online activity in China makes up less than one-fifth of total retail sales. That’s because most Chinese continue to shop at brick-and-mortar stores, and it’s why New Retail has much more in common with old brick-and-mortar retail than most people understand.

The two supermarket chains that have become the poster children for New Retail are Hema (Fresh Hippo in English), owned by Alibaba, and 7-Fresh, launched by Alibaba’s chief e-commerce rival JD.com. Hema and 7-Fresh have much in common, and it’s their overlap that really defines New Retail.

Both chains were founded so that their parent companies could leverage their existing digital technologies in a way that would make them important players in the physical retail space where most Chinese still shop. Offline thus becomes the new online.

Alibaba has gone all in on its new play. The idea behind Hema, headquartered in Hangzhou, was to take the online shopping experience that Alibaba’s customers already enjoy and transpose it from the virtual space into the physical world. Hema CEO Hou Yi sees no reason that his customers can’t have the same digitized shopping experience in-store as they have online. To that end, shopping at a Hema store is little different from shopping at Alibaba online, except that in-store customers can actually inspect the food they are buying.

Hema accomplishes this by labeling all of its offerings with bar codes. After installing the Hema app, customers can use their smartphones to scan the codes, which give them access to the same information they would find at Alibaba’s e-retail site. The code on a carton of eggs, for example, displays for the shopper details of the supply chain that carried the eggs from farm to store as well as nutritional information and reviews of the eggs by customers who have purchased them. The app even displays relevant government inspection certificates.

Unlike the typical American supermarket, which is dominated by aisles, Hema stores make use of a new design concept that individualizes each department with separate counters, in the way that some U.S. groceries highlight their fish and meat departments. Filling the store with counters slows the process of shopping down but in a way that encourages customers to engage more with the products they are buying.

Also unlike American markets, Hema stores double as distribution facilities. Anything that can be purchased in-store can also be ordered online; and if a customer lives within a three-kilometer radius of the store, delivery is guaranteed within thirty minutes. Commuters are thus incentivized to order groceries on their way home, confident that their order will arrive often before they do. For this reason, an Alibaba survey showed, home prices with each Hema delivery radius have soared.

The Beijing-based 7-Fresh stores also function as both offline markets and online distribution hubs; and like Hema, they integrate online digital technologies extensively into the shopping process. 7-Fresh’s most remarkable innovation, the Robocart, is a souped-up shopping cart linked to customers’ smartphones. Usually, it follows them around the store without having to be pushed. But if the shopper can’t find an item, it can also lead the way.

As customers find what they want and place those items in its basket, the Robocart automatically registers them, obviating the need for scanning. When the shopper is finished, the Robocart makes its own way to the checkout. 7-Fresh charges the cost of the items to the customer’s digital wallet, and JD.com’s fleet of delivery vehicles takes care of the rest. As with Hema, 7-Fresh guarantees delivery in thirty minutes within a three-kilometer radius.

Some aspects of New Retail have already made their way into the American marketplace. The new Amazon Go stores, for example, have also done away with checkout. Shoppers use the Amazon Go app to enter the store. Then they take what they want from the shelves and simply walk out. Amazon’s technology identifies what has been taken and charges the cost of those items to the customer’s Amazon account. No scanning, no checkout. Shoppers can also use the Amazon Go app to find out remotely what items a particular store has in stock.

The business implications of New Retail are profound and far reaching. Because both Hema and 7-Fresh require customers to download apps and open accounts, they essentially bind these customers—and their data, including shopping preferences—to Alibaba and JD.com, respectively. In terms of new customer acquisition, if nothing else, New Retail is clearly the winning play.

Despite all the doomsayers prophesying the coming retail apocalypse, the demonstrated success of New Retail in China shows us conclusively that a future does exist for legacy brick-and-mortar establishments willing to embrace new digital technologies.