Your Quarterly E-Zine
Edition 11 • December 2019

This website contains the latest edition of Forsyth Barr Focus, a quarterly on-line magazine written by senior members of Forsyth Barr's investment team.

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RETAIL'S BRIGHT HOPE

E-commerce is killing conventional retail stores. At least that’s the conventional wisdom; stock prices of retailers and mall owners have struggled in recent years as investors priced in a gloomy outlook for the sector. Recent developments in China suggest there is hope yet. There, retailers like Alibaba and Luckin Coffee are using technology to blend the best parts of online shopping into the in-store experience.

The concept of ‘New Retail’ was popularised by Chinese e-commerce giant Alibaba, after it opened the world’s first digitally interactive bricks-and-mortar supermarket, “Hema”, in Shanghai in 2015. The popularity of the Hema stores has seen Alibaba open new stores at a rate of one a week in 2018, and people are moving houses in order to be closer to them.

The Hema supermarkets created an entirely new shopping experience as an extension of Alibaba’s online offering. Physically, the stores are bright and vibrant (see a video tour here), but it is the technology the stores possess that makes them so interesting. Shoppers connect to the supermarket via a mobile app that allows them to scan product barcodes to add merchandise to their cart or to a watchlist, or simply to learn more about the product. Once they have finished selecting their purchases, customers can choose whether they want their groceries packed up and handed to them when they leave the shop, delivered to their house for free, or cooked to be enjoyed in store. Alibaba’s New Zealand Country Manager, Pier Smulders, described how he feasted on NZ sourced lamb, oysters and wine in a Hema store – demonstrating how diverse the Hema offering is.
 
The shops are enhanced through the integration of big data and artificial intelligence. Based on user purchase data, Alibaba can make tailored recommendations to customers directly to their devices while they are in store. Additionally, Alibaba uses online sales data to identify what products people in a certain area are buying and can use this information to ensure local stores are stocked with the most appropriate product mix. 
 
Alibaba is now taking this supermarket model and applying it to the apparel clothing business. In July, Alibaba introduced a “FashionAI” store that gives shoppers an online experience while in a traditional clothing store. When users take items off the rack, nearby interactive mirrors will recognise the item and offer other clothes which pair well with the item. Using the mirrors’ touch-screen features, users can read about the item, browse the availability of sizes and colours, and request that the item be placed in a changing room for them. Once in a changing room, another smart mirror allows customers to request more items or different sizes. All the items a customer tries on are saved on their phone, in case they decide they want to purchase it online at a later time.
 
Alibaba’s innovative supermarket has proven to be a trailblazer, as different iterations of the new retail model have been adopted by many businesses in China. Luckin Coffee, founded in October 2017, already has 660 stores and is valued at over US$1bn. The chain is changing coffee culture in China. It differentiates itself from competitors through cheap prices and a digitally-based retail business model. Luckin’s offering is cashless – customers order and pay for their coffee via a mobile app, and can either pick up their drink from the nearest Luckin store, or have it delivered to them for a small fee. Luckin is disrupting Starbucks’ growth in China. As a response to Luckin’s quick rise in popularity, Starbucks recently paired with Ele.Me to provide coffee delivery. 

The Luckin Coffee example shows that businesses can learn from what Alibaba has done, and change the way they operate to disrupt traditional business models. Whether it’s through adopting a local delivery network or providing a cashless payment system, using online sales data to determine the best product mix for local stores, or offering real-time recommendations to customers, there are many opportunities for retail stores to greatly improve the customer experience and operate more efficiently at the same time. 

Rob Mercer
Head of Private Wealth research

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