China retail: Engagement factors

Maternity and baby products retailer Kidswant has more than 170 stores across China and stocks about 20,000 different products. When Jing Hong, a partner at Hillhouse Capital, wanted to explain how technology is transforming traditional brick-and-mortar retailers, Kidswant was the example she settled on. The company equips sales assistants with mobile devices that are used to track individual customer preferences and target shoppers with particular offers, Hong told the AVCJ China Forum.

Hillhouse’s investment in Kidswant in 2015 coincided with a broader transformation in the retailer that involved changes to store layouts and the introduction of a fully-fledged multi-channel strategy. An improved website and an app were key components of the latter effort, bringing cross-border purchasing, flash sales, and a wealth of related services to users.

Kidswant, which is also backed by Warburg Pincus, had always wanted to tap the growing percentage of parents who would pay a premium for products where they felt they could trust the manufacturer and vendor. The multi-channel approach means that its 3,000 certified childcare consultants have more information and touchpoints through which to engage with these consumers, using online resources to monetize offline retail more effectively.

The question for Hillhouse is whether it can repeat this trick in a different segment and on a larger scale. Working in conjunction with senior management and CDH Investments, Hillhouse recently submitted a HK$53.1 billion ($6.8 billion) buyout offer for Belle International, a footwear and sportswear and apparel retailer that has 20,716 outlets in mainland China, as well as more than 100 in Hong Kong and Macau.

The investors are promising “a fundamental transformation” so that Belle can compete effectively and remain the longstanding market leader for ladies’ footwear in China. In addition to contributing financial and operating resources, they will work with the company to explore new retail models and invest in technology, infrastructure and talent.

“It has become clear that our traditional retail business model is in urgent need of integration with the digital economy, and an effective new strategy and execution capabilities will be necessary to enable us to compete in the long term,” Baijiao Sheng, Belle’s CEO, acknowledged.

Belle has posted 13 consecutive quarters of negative same stores sales growth, a reflection of how e-commerce has played havoc with its business model. Revenue was up slightly at RMB40.8 billion for the  year ended February 2016, but net profit plunged 38% to RMB2.93 billion. Footwear took the biggest hit as same store sales declined more than 10% and gross profit margin fell by one percentage point. Belle’s stock has lost 70% in value since February 2013.

Turning around primarily brick-and-mortar retail brands in the face of an e-commerce onslaught is not easy – as perhaps TPG Capital can attest, in light of its ongoing efforts with sportswear retailer Li-Ning. But do Hillhouse and its co-investors have a better chance in ladies’ footwear, given the higher average price points, more discerning consumers, and the importance attached to trying before buying?

The maternity, baby and child (MBC) experience is instructive but it does not directly translate. While private equity investment in traditional retail has declined in recent years – prior to the announced Belle transaction, at least – MBC remains the exception to the rule, arguably due to a recognition that quality and safety are paramount for families in first-tier cities. It is unclear how quickly other retail segments will follow suit, particularly in areas where tastes are more fickle and brand loyalty is weaker.

However, there is a growing consensus in China that brick-and-mortar players must upgrade their offerings, emphasizing the kind of consumer experience that sets them apart from e-commerce. Success is contingent on combining technological insight and shop floor expertise in order to establish which modes of engagement and retail channels are most effective.

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• Topics
• Greater China
• Buyouts
• Consumer
• Technology
• China
• Hillhouse Capital Management
• CDH Investments Management