Asia consumer & technology: Multifarious merchants

The most striking aspect of the idea that the pandemic is pushing offline retail online is its magnitude. It represents a seismic and irreversible shift in a $25 trillion global industry that touches every person on earth. Slightly less well understood is that this observation is an almost useless oversimplification at the business level.

Within the B2C retail space, business modeling has been sub-fragmenting in myriad ways since the dawn of the internet, especially in communication-based terms of reaching out to the customer, gathering information, and delivering a message. The high-tech processing of mass volumes of data has evolved advertising from slow-motion strategies using style and persuasion to automated routines for optimal positioning and real-time engagement with consumers.

The acceleration in uptake for the virtual, online, and digital facets of retail also parallels an evolution in consumer expectations, including rapid access to almost anything, and consequently an explosion in methodologies for meeting this demand. The largest players have the luxury of taking an all-of-the-above approach with ecosystems that allow customers to make purchases however they want, online or off. Smaller operators must be more selective, but picking the optimal model isn’t straightforward. 

“The internet era is over as an investment theme. Internet has instead become an infrastructure,” says Erhai Liu, a founding partner at China’s Joy Capital. “The new trends in the retail sector are offline stores, private domain online traffic, and faster online penetration. The consensus view is that public domain traffic is becoming more and more expensive, so private domain traffic becomes a must, and the combination of online and offline is inevitable.”

The group thing

China is the leader in most of these themes, especially in terms of mobile digital engagement and social commerce. The most popular post-pandemic models include community group buying, whereby neighborhood groups achieve bulk discounts by circulating special offers on social networks, submitting orders to an online sales channel, and then personally distributing the goods when they arrive. Neighborhood team heads are commonly young full-time mothers.

The key innovation here is the online mobilization of an offline community; while groups communicate internally via social media, they are defined by physical proximity. The model significantly reduces customer acquisition costs compared to online marketing and is, in theory, quickly scalable.

The main risks include the fact that community leaders can leave anytime or even move to a rival platform. Also, the physical pick-up process can be demanding for users. They are typically required to gather on time in front of a certain building and await delivery.

Still, investor faith in the concept has been palpable this year, with players such as Yipin Shengxian raising RMB2.5 billion ($360 million) in August, and Nice Tuan securing about $240 million across three funding rounds. In June, Tongcheng Life, a start-up incubated by online travel agency Tongcheng-Elong, closed a $200 million Series C round.

Local internet giants have not been left behind; JD.com, Meituan-Dianping, Alibaba Group, Pinduoduo, and Didi Chuxing have all launched their own community group buying businesses this year. “[Ride-hailing platform] Didi has no upper limit on the investment in Chengxinyouxuan [its community group buying brand], and we will strive to win the largest market share,” says Wei Cheng, CEO of Didi.

Social commerce is now said to represent more than 10% of China’s $5 trillion retail market, which by most accounts edged the US this year to become the world’s largest. One of the twin engines of this development, alongside community group buying, is live-selling via membership-based platforms or influencer-hosted online streaming channels akin to traditional TV shopping. See an influencer speaking in a red shirt, tap the shirt on the touchscreen, an order form appears.

Buying off the screen in real-time dates back to Home Shopping Network in the 1980s, but the seamless functionality of the category’s current iteration benefits much more from the impulse-buy factor. Live-selling is almost exclusively the domain of the inexpensive – clothing, snacks, and jewelry – no matter how sophisticated the product suppliers. Its breakthrough is that the awareness-to-consideration-to-purchase stream of shopping causality has collapsed to a matter of seconds, while also creating a data loop that allows for simplification of the supply chain.

“Instead of selling from inventory, influencers are basically creating inventory after completing a sale. All the data that gets collected behind the influencer about what people are looking to buy gets fed into the supply chain, and the products get manufactured and delivered,” says Chinta Bhagat, a managing partner at consumer-focused L Catterton Asia. “You have no stockouts because there’s no stock. There are higher return rates, but no store or marketing costs except the influencer itself. So, supply-chain costs come crashing down – at least theoretically.”

Those gaining traction include InTime, an Alibaba-owned Chinese department store, and Matahari, a traditional Indonesian retailer that embraced the strategy during the pandemic. Uptake in Southeast Asia is just as notable as in China. Industry researcher iKala estimates the number of live-sales in the region rose by 13 percentage points between the first and second quarters of this year, accounting for two-thirds of total e-commerce engagements. Vietnam and the Philippines are frontrunners.

India is relatively behind trend, but the dam is expected to crack in due course. Early movers include Meesho, which has raised about $200 million from Facebook and several global VCs, although the start-up functions more as a showcase for home businesses than a conduit for established retailers. Investors see upside in live-selling in the direct correlation between rising online sales via mobile and falling costs of data. India has by far the cheapest mobile data in the world, with one gigabyte costing just $0.09.

In contrast, online traffic in China is getting too expensive. “Everyone is starting to feel that a purely online model is too expensive to scale – it’s hard to create a new consumer-facing e-commerce platform today,” says Ron Cao, founding partner at China’s Sky9 Capital, who was an early investor of Pinduoduo in his previous fund. “Some companies have already adjusted their direction to provide SaaS [software-as-a-service] tools to integrate the industrial supply chain instead of directly creating an e-commerce platform.

“I think offline represents a greater opportunity at this moment. The post-COVID presents an interesting test point to experiment with new innovative retail concepts, new brands, and offline-to-online business models.”

O2O agendas

Cao believes Luckin Coffee, China’s would-be Starbucks, could represent a workable offline-to-online model had it not been involved in fraud. He emphasizes that before Luckin Coffee, digitized retail models in China were all online-to-offline. The company, which admitted to inflating sales in the months following its US IPO, operates under an asset-light model, occupying small-scale stores with no cashiers, where the emphasis is on digital ordering and payment, and take-out. Data are used for precision marketing and supply chain optimization. Luckin grew to some 3,600 outlets within a year, although losses were substantial. 

Financial and ethical woes notwithstanding, Luckin’s traction is a useful illustration of how new retail is expanding offline. Rui Han, a partner at Gaorong Capital, offers a similar example in Perfect Diary, an online cosmetics brand that spent RMB196.4 million in the first nine months of 2020 to open 163 physical outlets. It currently operates more than 200.

“After consumers complete transactions in offline stores, they are led to the online community. The company provides services through all channels,” Han explains. “The online and offline presences generate traffic for one another. The ultimate goal is to bring consumers better products, better designs, and better performance and experience.”

While widespread physical locations still make sense for food services, grocery, and convenience stores, the trend in larger format businesses is to downsize. This is especially true for department stores, whose traditional appeal in terms of having a wide variety of items in one place has been significantly weakened by the internet. Department stores also suffer disadvantages versus smaller standalone boutiques in the cost of real estate and carrying large inventories that may not move.

Survival tactics for these large players have presented a few investment opportunities, mostly related to the repurposing of space for logistics and new business lines in food and entertainment. The idea is to create a physical space for socializing. Investors speaking to AVCJ on the subject noted that customer basket sizes were 70% larger when customers shopped in a group and that experience showrooms could generate up to 4x revenue per square foot versus traditional models.

In terms of new construction, emerging markets will not need to build out large store space to the same degree that developed markets have in the past. Instead, they will repurpose locations as fulfillment centers, or dark stores, as Indian hypermarket DMart has done at two of its largest locations in Mumbai. Quartering off 150-200 square feet inside supermarkets and department stores for a pharmacy is also expected to be a growing trend in these markets, where the sector is poorly organized. 

Evolve or die

Efforts to reinvent the department store space have been most ambitious in the West, however, with the UK’s Selfridges repositioning itself as a sustainability lifestyle brand and ramping up activities in digital marketing and media streaming. Meanwhile, in the US, Nordstrom has launched a chain of 2,000-3,000 square-foot experience stores with online shopping collection and return points. The stores, operating under the name Nordstrom Local, also feature a concierge service to facilitate brand engagement and e-commerce transactions onsite.

It helps reduce costs related to returned items, which can represent as much as 20-30% of online sales in segments like apparel. How these strategies will play out long term remains to be seen.

There is no clear Asian analogue for Selfridges or Nordstrom Local yet. In the meantime, department stores appear to be a rapidly dying breed in the region’s most developed markets. Singapore is arguably the biggest graveyard, with department store exits in recent years including John Little, Sogo, Daimaru, Yaohan, and Oriental Emporium. Last month, Robinsons shut its doors after 162 years.

For most large-format stores, survival is expected to be a matter of merging with established technology players rather than executing a digitization initiative in house. This is largely due to cultural hurdles in terms of company DNA and the difficulty of convincing best-in-class digital talent to join legacy brick-and-mortar businesses. Traditional retailers are known to spend about 2% of sales on IT, versus 10-12% at the likes of Amazon, and their margins are too thin to take this much further.

Recent activity on this trend includes Alibaba acquiring Sun Art Retail and Taiwan’s RT-Mart, as well as Flipkart taking a stake in India’s Aditya Birla Retail. Investors in India note that although online only represents 3% of the $800 billion local retail pie, consumers are increasingly disinclined to shop in 30-40,000 square-foot stores versus outlets in a range of 2,000-20,000 square feet.

“While we don’t expect big box stores necessarily to fade away, we have observed a shift in the types of stores consumers prefer. They have been exploring other ways to shop, especially during COVID-19,” says Rupen Jhaveri, a managing director at KKR who led his firm’s investment in Reliance Retail.

“We believe in the near future, there will be a stronger focus on small-format stores as retailers begin using these premises in a hub-and-spoke model as pick-up points for buyers and distribution centers for last-mile delivery. E-commerce doesn’t only mean the Amazons, JioMarts, and Flipkarts of the world sending packages directly to your home. There’s also a B2B2C angle, which involves hyper-local deliveries facilitated by small-format stores.”

Central to Reliance Retail’s plan is its work with JioMart to bring digital services to the mom-and-pop sector in India, which includes about 25-28 million businesses. The idea is to plug neighborhood stores into the JioMart distribution ecosystem and provide them with access to technology such as smart point-of-sale equipment, inventory management systems and demand forecasting tools. This is expected to clean up disintermediated supply chains and drive business for all stakeholders.         

KKR says Reliance wants to be a partner rather than a competitor in this space, but its approach does suggest potential for rollups. Across emerging markets, many individual-operated small stores have gone bankrupt during the pandemic, creating consolidation opportunity for private equity investors, observes Albus Yu, head of retail at China Growth Capital.

“When we walk down some commercial pedestrian streets, we find that many self-employed small shops are closed or sublet,” Yu says. “They didn’t have enough capital to survive a three-month lockdown. However, VC-backed brands or chains with strong cash flows survived and they can now expand.”

Second wind

By and large, Asia’s mom-and-pops are expected to survive whether they adopt new technologies or not, thanks to intangibles such as neighborhood loyalty and the lifestyle factor. Shopping as a social activity and a way of stepping out of the house, even without making a purchase, is seen as too deeply rooted culturally to subside significantly post-pandemic. In the organized, investable retail space, this outlook is perhaps most relevant in the shopping mall.

Gaorong’s Han notes that China’s shopping malls have recovered faster than their counterparts in the West by exploiting hybridized offline-online channels and helping mall operators attract young consumers and form new customer groups. “These measures have given traditional shopping malls new vitality,” Han says.

The strategy is not unlike that being tinkered with in the department store space: create a hangout environment for spending the whole day with a group of people and wire it with as much digital gadgetry as possible. To some extent the bells and whistles will be about driving footfall by enhancing the immediate experience; try on lipstick or a dress using augmented reality. In many ways, it will be about analyzing shopper behavior to perfect product positioning.

“You need to marry smart digital marketing with offline experiences,” says Derek Sulger, founder of consumer buyout firm Lunar. “Just because you can shop online doesn’t mean you won’t go to the mall. And just because you can order food online, sometimes you still want to go to a restaurant. In China, digital is very expensive, so if you’re going to do something online, you really need a great product and good margins.”

In many markets, the emergence of the shopping mall as an innovation investment destination will run into systemic challenges around high rents and the high costs of upgrades. Ethan Hsu, head of retail Singapore for commercial property consultancy Knight Frank, observes that a mismatch in rental expectations between landlords and tenants could slow momentum in necessary architectural modifications such as redesigned food courts and curbside delivery facilities for tenant brands.

“In the long term, landlords will have to recognize that if they want to draw traffic to the mall with more experiential concepts and designed spaces meant to bring people together, operators will not be able to meet their rental expectations,” Hsu says.

“I do see a trend toward more flexible rent structuring, where it’s a partnership between landlords and tenants, and the rent is tied to a percentage of what the operator earns in revenue. That will be needed to bring in the new concepts that bring in people.” 

 

CASE STUDY: Aibee - Mall rats 2.0

Aibee, one of China’s leading AI suppliers for mall operations analysis, walks this line by providing retailers with a heat map of what customers are doing, whether it’s stopping to check out a shopfront or trying on a specific clothing item in a specific color. All the data gets logged. The technology tracks shoppers all the way up to the restroom. When they come out, it knows who they are. Sort of.

“We have a very big concern about data privacy. We are not actually tracking the individual using facial recognition,” says Harry Hui, founder of ClearVue Partners, which joined a RMB522 million ($75 million) round for the company late last year.

“We are in fact creating a digital avatar of who this customer is with markers, so if you come next week with a different haircut, we would still know it’s you. The digital avatar is a very advanced algorithm that allows us to track the consumer with 90% accuracy. All that data is then clustered into groups of customers because it’s less important that we know individually who’s buying what – it’s more important that we’re addressing the demographics.”

Aibee tells shop owners how many people lingered outside, visited inside, what they looked at, what they bought, their age, sex, what other shops they frequent, and how often they come to the mall. In addition to optimizing product placement and marketing, the technology is touted as helping shop owners harness intellectual assets previously only accessible in the minds of employees.

“In the past the leasing director would have a feel for all of this, but they would have no data, and when that person leaves your company, you, the owner, lose all the intelligence,” Hui says.

“Car dealerships are using this in a big way for the same reason. Every time a sales rep leaves, their customer base leaves with them. With our system, the dealership retains that customer data, and that’s a valuable asset when you know you have a customer who has walked in here 3-4 times and test-driven certain cars.”

 

CASE STUDY: Shihuituan - Lower-tier hero

The company has raised $240 million in the past 12 months from the likes of Joy Capital, GGV Capital, and CDH Investments, taking its overall funding to $300 million. Traction picked up further following a merger with industry peer Niwoning, a portfolio company of GGV and CMBC Capital, in August.

“Nice Tuan has perfectly integrated online and offline traffic. Such a model is closest to users, and provides better services,” says Erhai Liu, a founding partner of Joy. “Fresh produce is a large industry with intense community coverage and high consumption frequency. Why hasn’t it transformed in the past two decades, rather than only at this point in time? It is because of the development of the internet infrastructure that has solved the problems of payment, logistics, and user management.”

COVID-19 has been a catalyst for growth. When the country was locked down and supermarkets and wet markets no longer accessible, Shihuituan was designated an official supplier by numerous provincial and municipal governments.

This matched well with the company’s focuses on lower-tier cities. Plans in this area include building three million pick-up points in the next three years. The objective is to ensure a majority of China’s urban and rural residents have to walk no more than five minutes to collect their orders.

“We can create more value in lower-tier cities and rural areas, where the customers have fewer choices,” says Ying Chen, the founder of Shihuituan. “That’s where we can provide the largest commercial and social values.”

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• Topics
• Greater China
• South Asia
• Southeast Asia
• Consumer
• Technology
• Expansion
• China
• India
• Indonesia
• TMT
• Vietnam
• Growth capital
• Joy Capital
• L Catterton
• Gaorong Capital
• coronavirus
• covid-19
• ClearVue Partners
• Sky9 Capital
• KKR