Melvin Ng, senior director of market development, PRS In Vivo
China’s retail market is heating up. Recently, police were deployed to manage massive crowds that overwhelmed Costco’s first store opening in China and ecommerce giant Alibaba recently said that it will open 100 stores of its supermarket concept Freshippo (formerly called Hema), over the next year.
From an outsider’s lens, it would seem like the Chinese have a nearly insatiable appetite for new retailers and present a huge upside for investors. This is only somewhat true. While IDC estimates that the Chinese grocery market is expected to grow annually by nearly 6%, the Chinese consumer’s demands are unique, and those companies who simply replicate Western business models and marketing strategies are almost destined to lose.
Take for instance two among the several, high-profile failures of Western retailers in China. One of the biggest belongs to Tesco, which debuted in China in 2004, but failed to make any significant headway. Tesco wrongly believed it could entice consumers with their “secret weapon” Clubcard, because it was already extremely popular in the UK.
But Chinese consumers already had an average of four store loyalty cards which they habitually toggle between for the best deals. The Clubcard wasn’t enough of a differentiator to win them over. After years of losses, Tesco relinquished control of its stores to a local player.
Why Amazon struggled in China
U.S. ecommerce giant Amazon shuttered its domestic ecommerce marketplace business in China this year. Although it was successful early on, with a market share of over 15%, that share has plummeted to less than 1%. Analysts said the company struggled to compete with local competitors and couldn’t adapt well to Chinese consumers who demand low prices and instant delivery.
So, what have Costco and Freshippo done right in Chinese retail and where did Tesco and Amazon go wrong?
First, it all comes down to understanding the consumer.
Unlike Tesco, Costco actively tested its products on Chinese consumers for years, before ever opening a store. Five years ago, it began selling its signature Kirkland products on Tmall Global, Alibaba’s cross-border B2C platform designed to sell international products to Chinese consumers. It created familiarity between the Chinese and its brand, who came to view Costco and Kirkland’s lowest price and highest quality to be a compelling differentiator.
By the time Costco announced it would open physical stores in China, the Costco brand already had a very strong and loyal following. Consumers in China couldn’t wait to see what other low price & high-quality products like Kirkland they would find at Costco stores.
Alibaba’s New Retail model
Alibaba’s Freshippo has drawn consumers in by completely reinventing the in-store buying experience. It is the embodiment of “New Retail”—the term Alibaba founder Jack Ma coined to describe the full integration of online and offline retail to create the ultimate shopping experience.
Shoppers use their smartphones to scan products or price tags to see reviews, coupons, product origin information and pricing, among other things. They do this through the Freshippo app, which uses the same Alibaba login credentials shoppers use for other Alibaba services, such as its Tmall and Taobao marketplaces. That makes making sign-up very easy.
Shoppers can shop in different ways: Buy at the store and take the products home with them, buy at the store and have the products delivered to their homes, or buy at home from the Freshippo app and get the product delivered. Freshippo delivers products in just 30 minutes to shoppers.
While Freshippo is light years ahead of the average grocery retailer in the West, it is already old news in China. The first Freshippo launched in 2016. Since then, retailers like Alibaba have been taking New Retail to the next level thanks to the large amount of consumer data they collect and analyze through their vast ecosystems.
This allows Alibaba and other big players like JD and Tencent to offer very personalized experiences for shoppers and to anticipate consumer needs and interests. For example, Tmall has just unveiled its 2.0 flagship online store where every feature, product recommendation and piece of content on the page is customized for the individual shopper. No two Tmall pages or shopping experiences are the same.
What U.S. retailers can learn from China
So, what can U.S. retailers learn from this? First, China is likely the weathervane for understanding what happens next in retail in the West. We are already seeing signs in the West pointing to expectations of maximum convenience as well as enjoyable experiences (e.g. Amazon Go, pop-up stores and restaurants, direct-to-consumer brands opening physical stores, etc.). In China, brick-and-mortar is functioning as much as experience destinations as for purchasing.
China also affirms that consumer behaviors and preferences are fluid. Consumers can move comfortably between online and physical retail. Here in the U.S., 30-minute shipping is not the expectation, but neither was next-day delivery just 10 years ago. Technology innovation evolves consumer preference, in every market. And, it’s an ever-moving target.
Those retailers and brands banking on legacy products’ ability to continue to win over today and tomorrow’s consumer are destined to fail as consumers evolve. Consumer preferences in every market change quickly. Companies that understand the constantly evolving consumer and their journey, and constantly push themselves to create the products and experiences that consumers crave, are the ones that will win in every market.
PRS In Vivo, part of BVA Group, is a global market research and consulting firm. Melvin Ng is based in Shanghai.
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