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What’s the next big step for new retail in China?

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The concept of “new retail” was first raised by Jack Ma, the founder and chairman of China’s e-commerce giant Alibaba. The term refers to new forms of customer experience based on the integration of online with offline services, and big data with related technologies. Chinese internet and mobile services provider Tencent, in order to take on Alibaba’s new retail strategy and compete for the market, has also designed its own “Intelligent Retail” concept. Similarly, JD has its “Unbounded Retail”, while NetEase has developed “New Consumption.” Each of these brand initiatives has different emphases according to their particular businesses and target customers, but they all aim to upgrade their existing products and services with advanced technology, such as big data, AI, and so on. In doing so, each company hopes to dominate the retail market.

Here we analyze new retail and talk about its development, investment, and related technology. We also identify opportunities for startups, investors, and tech giants themselves.

O2O and new retail compared

O2O, which refers to the integration of “online” internet technology and “offline” services and business opportunities, has prevailed in China since its launch in 2012, yet its continued expansion faces numerous obstacles:

The first being a lack of technology supporting, big data, Internet technology, AI, and cloud computing.The technical infrastructure wasn’t property developed by the time companies began rolling out O2O strategies and concepts.

Secondly, the immaturity of the mobile Internet has prevented O2O from taking off. When WeChat was released in 2011, it wasn’t designed as the mega mobile Internet app it is today. Plus, mobile terminals only contributed less than 15% of e-commerce orders at that time, while today they constitute as much as 50%.

Third, it has proven particularly difficult for participators to work together. For example, the average age of online employees is 25 years old, while that of the average offline workforce is about 43 years old, a difference of nearly two generations. Moreover, the average age of online customers is about 22 years old, while the average age of offline retail shoppers is 49 years old. This is according to the comments of Wan Mingzhi, general manager of Zhongbai Holdings Group (a Chinese supermarket operator), during the Haitong Securities’ annual investment strategic meeting.

By the year 2016, the majority of the above limitations had been removed thanks to the development of big data, AI, supply chains, and other related technologies. Now it’s time for companies to expand upgraded O2O services and merge online with offline services for an improved and higher-tech customer experience. Perhaps this is why Jack Ma brought up the concept of new retail last year. We ought to remain mindful, however, that “new retail” is simply a name for a range of new strategies; we should pay more attention to the related enterprises, technology, markets, and new services and experiences.

Development of new retail

Until now, more than RMB 50 billion (USD 7.6 billion) flowed into the new retail industry. Unmanned retail shelves alone have attracted more than RMB 5 billion (USD 760 million) in investment.  

Currently, three major forms of new retail have emerged around us: unmanned convenience stores, unmanned vending machines, and unmanned shelves. Each is designed for different consuming scenarios and customers.

Unmanned convenience stores are often placed near residential communities, typically accessible within 200 meters of customers. For example, if you have the urge for instant food or snacks at 2 a.m. and an unmanned convenience store exists near your home, you’re quite likely to take advantage of it. Traditionally, consumers have enjoyed 24-hour convenience stores like 7-11, but evidence suggests that it is difficult to recruit employees to work shifts between 9 p.m to 7 a.m. As a result, unmanned convenience stores are appearing around communities given that they not only motivate customers to shop at night but also solve operational problems like the lack of employees willing to work overnight.

Photo from Baidu Images.

As far as smart vending machines, the Chinese market has 215,000 available for customers, primarily in first-tier cities. They are mostly deployed in crowded public areas, such as shopping centers, subways, railway stations, and shops selling drinks, snacks. In comparison, Japan has five million smart vending machines, while the US has six million. Due to growing market demands in China, 10 million smart vending machines in China are expected by the year 2025. Naturally, such a massive market constitutes a wealth of opportunities for manufacturers, startups, and investors.

Investors have already poured over RMB 5 billion into unmanned shelve technologies, which will mainly expand business into offices, with snacks, drinks and other instants foods available for purchase via smartphones. In terms of time, consumers spend one third of their time in their local community, and another third at the office. Therefore, further development of unmanned shelves in offices seems inevitable given that more than 100 million people in first-and second-tier cities spend a third of their time there.

Though the future is bright, we can not neglect the problems apparent in real scenarios. Many people care about damages from cargo, devices, as well as problems associated with theft. In the case of unmanned convenience stores, potential thieves face many cameras and sensors, and due to these devices, employees can identify damages in time, and proceed to repair them. For unmanned vending machines and shelves placed in public places and other startups specializing in these areas, it’s more wise to pay more attention to facilitating sales and leave security considerations to public monitoring.

Integration with new retail

As part of its new retail strategy, Alibaba has launched its Hema Store, which sells fresh foods using new retail concepts. Currently each of Hema’s stores on average completes over 5,000 orders on a daily basis. The company plans to open 2000 additional stores in the next five years.

Moreover, many traditional convenience stores are adapting to new retail concepts to facilitate their retail businesses, such as offering popular products based on big data analysis, enabling door-to-door delivery in short time frames with the help of efficient supply chains.

Unmanned convenience stores, mentioned above, have various advantages. The following are among such advantages:

Further upgrades of consumption. Customer demand from products and services is increasing, which is why new retail was initially raised as a strategy for an upgraded services and experience.

New retail does not intend to replace e-commerce but instead contributes to it by providing professional experience in various vertical industries, such as fresh food requiring quick delivery. Fresh food cannot be shipped using traditional logistics and thus has higher shipment demands. In the case of instant food, customers want the convenience of being able to access it anytime and anywhere. Thus, the fresh food industry is not suitable for the e-commerce consumer model. Unmanned retail is clearly a better choice in this particular area.

Though new retail looks quite simple from the surface, its background requires hefty investment for logistics, big data, supply chain, etc. That’s why we are already witnessing capital flow into the new retail industry. Yet,  startups from within the industry still have trouble becoming profitable given the fierce competition and underdeveloped support background.

Opportunities for participants

Last month, China’s e-commerce giant Alibaba invested USD 2.87 billion for a major stake in China’s top hypermart operator, Sun Art Retail Group. The move is part of a wider push into offline retail. Likewise, on December 15, Chinese internet giant Tencent invested USD 636 million in a 5% stake in Yonghui Superstore, a move demonstrating its aspirations in retail.

We can expect these tech giants to invest more in new retail cases in the future. But what about startups in the industry? Must they combine with Alibaba or Tencent, or can they manage to compete for market share on their own? Though Alibaba and Tencent are showing their power by acquisition and investment in other enterprises, the development of new retail remains in its early stages. As the above analysis shows, the market is vast, and participators can position themselves in the right place to conquer the market. But no single entity can individually control everything, as the industry depends on various organizations to develop and support an ecosystem; this includes big data, AI, supply chain, management, among others. Each part of this support network will help facilitate vertical industries and more business potential.

Last but not least, new retail will become dominate by online technology, as the traditional retail was dominated by offline services. Online-oriented retail technology and services are likely to take the retail industry to a new level to meet escalating consumer demands. Undoubtedly, the next five years will be a new era in new retail industry.

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