Opinion: The Changing Face of Internet Retailing

Thursday, 16 November 2017 | News

What’s going on in retailing? The much-heralded demise of bricks and mortar is not as straightforward as originally thought.

True, this year’s Singles Day in China clocked gross merchandise volume of US$25.3 billion, 39% above last year’s US$17.8 billion, while Sears and Macy’s are closing stores and Toys “R” Us, Payless, Gymboree and Radio Shack are part of a string of recent retail bankruptcies in the US.

However, something more was happening as, via pop-up smart stores and in-store technology, Alibaba and brands helped drive online traffic to brick-and-mortar stores, further erasing the boundaries between the two. In fact, over 140,000 brands and merchants, 60,000 of which were international, took part in T-mall’s shopping extravaganza, offering 15 million product listings to consumers. While still a relatively small part of 11.11, Alibaba’s expansion of efforts to bring more stores and retail consumers online – even down to the “mom-and-pop” convenience store and the village level – means a broadening of its reach across China and its consumer base.

As consumers strive for instant gratification through online orders with delivery, retailers struggle to meet the demand and reduce costs of delivery and free merchandise returns.  To do this they are engaging customers online to interact with the product—inviting them to virtually try on the color, the style and accessorize—and then go to the store to pick up the merchandise.  With pop up stores of fast moving merchandise, and smaller format stores for Walmart and Target in high traffic areas, the omni-channel shopping experience is underway in the US as well.

What is unique about China is that the brick-and-mortar infrastructure has never reached the level of density that the US and Europe had reached before the online revolution. Therefore, there are no big powerful “brick-and-mortar” incumbents to displace.

In fact, the penetration of online retail is only 15% (on average) of total retail in China. This percentage varies by category (higher in apparel, lower in groceries). Therefore, there is still a lot of “white space” to conquer.

Brick-and-mortar formats are changing. Alibaba’s Hema Supermarkets, for example, offer a unique blend of experiences, social interactions and services that pure play E-Commerce players cannot replicate online.

There are several good reasons for mixing online and offline retailing strategies, consistent with Amazon’s recent decision to buy Whole Foods and Alibaba’s to create Hema Supermarkets.

  • Brand Building: To create an inspiring immersive environment where customers can truly experience the brand, brick-and-mortar shops are still recognized as more effective that a website, even those deploying virtual reality.
  • Convenience: To provide convenience to customers, so that an online order can be picked up at a close store rather than at home where the risk is that the customer is absent when goods are delivered (hence, Amazon Key, the new service that, through swipe and cam tech, authorizes unlocking of doors in 37 US cities to allow home deliveries). In some categories of retailing, such as perishables, customers especially like to be able to see/smell/test the goods before they buy as returns can be difficult.
  • Relationship: To build "stickiness" for ongoing repeat transactions with customers, it is hard to beat a human touch, for example, providing advice or tutoring on how to use products. For example, Walmart is holding holiday parties this month – complete with toy demonstrations and workers in reindeer hats – as it "cranks up the volume on store experiences."
  • Underlying logistics: Logistics and fulfillment are an important aspect of online commerce. Having a presence in proximity to customers, especially for fast-moving items, is important.
  • Underlying data: Brick-and-mortar presences may capture date that online sales wouldn't, that can inform an online presence. For example, Amazon's purchase of Whole Foods stores also provides it with a unique opportunity to understand customer buying behavior in the food category, which drives the most transaction frequency. Put simple, if people are what they eat, Amazon and Alibaba through omnichannel strategies will gain the date – and already have the unique data analytics capabilities – to leverage this information with other product ares and lifestyle services, which few other players can do.

Pascal Martin, Partner

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