Retail ecosystem being reshaped by data

Digital connectivity is creating truly "global" consumers. Consumers with the power, literally at their fingertips, to order almost anything from anywhere in the world. But resurgent nationalism and protectionism are imposing new tariffs and regulations on goods flowing across borders.

This paradox, coupled with geopolitical tensions and competition in emerging markets is forcing retailers around the world to rethink their business strategies.

Be it populous consumer giants such as China, India and Brazil, or newly emerging consumer markets such as Ghana and Bulgaria, national and localized factors such as internet connectivity, labor costs and corporate taxes are reshaping their retail sectors, enhancing their appeal to investors.

According to A.T. Kearney's 2019 Global Retail Development Index, a bi-annual study of the global retailing landscape, China and India remain the two most attractive developing countries for retail investment.

China has regained the top spot it ceded to India two years ago. At $3.8 trillion, China's total 2018 retail sales are more than three times India's $1.2 trillion. It is also larger than the combined retail size of 28 other countries ranked on the index.

China's retail sector is projected to grow almost 75 percent to $6.6 trillion by 2024, partly aided by fiscal and monetary measures to shield businesses from the effects of a global economic slowdown and protracted trade tensions with the United States.

The bulk of this growth will be driven by large e-commerce players such as Alibaba, Tencent and JD.com as their "new retail" model continues to merge online and offline retail.

Despite the stiff competition and high rents, China remains very attractive to global brick-and-mortar retailers as its consumers, especially in the larger cities, seek distinct products and new experiences.

German supermarket chain Aldi and the US warehouse club chain Costco opened their first stores in Shanghai this year. So did Canadian fast food chain Tim Hortons, with plans to add 1,500 locations in China over the next 10 years. Others, including Sam's Club and Starbucks, plan to expand, even though some companies including Metro, the German convenience store giant, Japanese retailer Takashimaya and UK fashion retailer New Look have decided to exit China.

And although traditional retailers such as local mom-and-pop stores hold 80 percent of the Chinese retail landscape, modern Western-style retail is catching up. Over the next five years, supermarkets and neighborhood stores as well as mass merchandisers will be the fastest growing areas of modern retail in China, with projected annualized growth rates of 15 to 17 percent through 2024.

However, the most profound impact on China's retail sector is from the "new retail" model introduced in late 2017, when Chinese e-commerce and internet giants began integrating traditional brick-and-mortar and online stores and even acquired several top-tier traditional retailers.

Today, Alibaba's Hema Supermarkets combine online and offline shopping with experience retailing, while JD.com has 7Fresh Supermarkets that feature smart carts, and Tencent has introduced its own smart retail strategy.

However, the relatively low margins in China's brick-and-mortar retail sector hold little appeal for high-margin and asset-light businesses such as Alibaba, Tencent and JD.com. It is their innovative data-driven platform models that are completely reshaping China's retail ecosystem.

These platforms act as a powerful middle office that not only drives consumer traffic to online and offline stores but also offer data-driven intelligent marketing services to millions of sellers based on consumers' shopping patterns.

In the near future, these platforms may act as traffic allocation centers for physical stores. An "order online and distribute offline" model operating within a radius of 3 kilometers could become the norm.

Also, the evolution of payment systems will make it possible for brands to track consumers' shopping behavior. Such data will enable the platforms to build large and comprehensive databases of consumer behavior, further enhancing their data power.

Regarding brick-and-mortar retailing, Alibaba, Tencent and JD.com's strategy is to expand the digital ecosystem, rather than deepen their involvement in retail operations. In fact, Chinese e-commerce giants are partnering with local mom-and-pop shops and helping them modernize their product procurement and sourcing functions at little or no cost.

In this possible future scenario, Alibaba will be the largest retailing data center and the largest supplier of data systems, while JD will be an important supply chain service provider and also offer supply chain hardware facilities. Tencent will monetize social media traffic in retail scenarios and is unlikely to participate in retail operations directly.

In the meanwhile, many innovative retail business models have emerged. Most notably social e-commerce player Pinduoduo which has gained traction by focusing on lower tier cities, super value and leveraging low cost social media traffic; O2O delivery platform Meituan, which gained a 500 million customer base via food delivery by over 2 million delivery staff and is now expanding into new businesses such as retail delivery and Meituan Cloud which is leveraging the company's consumer base, restaurant network and delivery capability.

The common strategy of these new business models is to first gain gross merchandise volume through major price advantage backed by significant capital investment.

They either get into the traditional retail business with a disruptive business model, such as Luckin which offers deliveries of high quality coffee at lower price than its main competitor Starbucks, or create new business offerings, such as that of Meicai which offers an O2O supply chain service to small restaurant players.

These are not much different from Taobao, which initially offered a free online platform to small shops. Yet, whether a business model can eventually bring shareholder value depends to what extent it gains consumer loyalty and can maximize value from such loyalty.

Over the next few years, despite China's current macroeconomic challenges, there is no stopping the country's retail revolution from powering ahead. The ability of "new retail" to harness, analyze and apply a wide range of consumer data will continue to set China's retail sector apart from the rest of the world.

The author is a global partner and head of consumer and retail practices of A.T. Kearney Greater China.