7 Aug 2014
O2O and Big Data: the Blueprints for the Future Mainland Retail Sector
As the boundaries between online and offline operators continue to blur, mainland retailers are increasingly focussed on mining Big Data and establishing the optimum O2O protocols, though many key strategic issues remain unresolved.
The slowdown of China's retail sector continued in 2013, according to the latest figures from the China Chain Store and Franchise Association (CCFA). Overall, the average growth rate of the country's 3,000 major retail businesses stood at 8.9%.
Retailers cited a number of factors as clearly contributing to the slowdown, chief among these was an 18% rise in average wages. Other factors were identified as an 11% increase in retail costs and a drop in the average net profit margin to between 0.1%-0.4%.
In terms of the individual performance of the various retail sectors, the figures indicate that while department store sales continued to decline, convenience store trade grew rapidly. In terms of hypermarkets, these reportedly flat-lined, a consequence, according to some, of an over-supply of outlets in the sector.
Almost inevitably, the online sector continued its inexorable growth. In 2013, the mainland's e-tail sector notched up Rmb1.8 trillion sales. This was up 42.8% compared to 2012 and accounted for 8.04% of the total retail sales of consumer goods. The transaction volume of JD.com, alone, grew by some 40% last year, reaching a total in excess of Rmb100 billion. For Suning, its online sales saw a growth of 43.86%, taking its total for the year to Rmb21.89 billion (inclusive of taxes).
With consumers becoming ever more sophisticated and with greater access to online price comparisons and peer reviews, manufacturers and distributors are having to come to terms with a new reality. Those companies that can anticipate and match changing consumer demands, mastering these new channels, will inevitably be the ones to prosper.
With such a requirement in mind, business models such as "omni-channel", "O2O" ["Online to Offline"], "online-offline integration" and "Big Data marketing" are now all being exhaustively tested and refined across the mainland's online sector. For many, they now represent the clear way forward for China's retailers.
O2O – who is in the driving seat?
According to the CCFA's figures, 67 of China's leading 100 chain store operators are already engaged in online sales, with 51 of them operating their own dedicated platforms. While it appears that many conventional retailers are now taking a lead in sector, not everyone is convinced.
Ingrid Wang is the Chief Executive of Cnshangquan E-Commerce Co Ltd, provider of integrated marketing platforms targetted at both businesses and consumers. She believes that traditional retailers are in danger of being outflanked by more committed and proactive native e-commerce operators. She sees such operators as now taking the lead in embracing the conventional retail channels and pioneering co-operation and integration in the sector.
She sees part of the problem as stemming from the operating model of many conventional retailers. With many of them operating on a lease basis, their online sales are inevitably constrained by supply chain management issues, a factor inevitably impacting negatively on the consumer experience.
She also sees the Korean model – where department stores operate on a buyer basis, allowing for easier integration of offline and online sales – as preferable. By adopting such a model, she believes mainland operators would be in a better position to establish their own online platforms.
One mainland company actively considering adopting this model is Suning. The company is currently trialling a buyer system in its maternity and baby products division. As of last year, it has established professional overseas buyer team, which is now actively sourcing from Hong Kong, Japan, the US and Australia.
O2O and Big Data
Differences about operational models aside, when it comes to O2O or omni-channel retailing, there is a clear consensus among industry players that Big Data is the key. There is a definite belief that it is only through the integration and application of online and offline data that it will be truly possible to understand consumer preferences and identify their needs.
Despite this consensus, a number of questions remain unanswered, most notably – where should this online and offline data be sourced from? How can the two data sets be combined? How should this data then be applied? These are fundamental issues and ones that are now not only preoccupying retailers, but also those in associated sectors, notably IT and marketing.
It is generally accepted that the application of Big Data is not just an IT project. It is an initiative that obliges companies to systematically integrate the data from all of the upstream and downstream links in its supply chain (the omni channels). This requires companies to look beyond their current CRM and ERP [Enterprise Resource Planning – a business management software suite] systems.
Instead, companies that are serious about harnessing the potential of Big Data need to redefine their business models. They need to interpret, integrate, process, abstract, data mine and analyse all the data collected from all of their channels in a highly structured fashion. Only then can they proceed to application and execution.
Another issue here is whether it is permissible or advisable for retailers – whether digital or conventional – to harvest the data of non-purchasing browsers. If such data is acquired, how then should it be used?
One individual who believes he has the answer is Xu Weihong, Managing Director of Kidswant, a mother and baby specialist retailer. He says: "Only 'warm' data is valuable. This is significant data that has been processed intensively and turned into market information.
"When coupled with an omni-channel supply chain management system, this data can be used to drive changes and generate demand. As far we are concerned, the most important data is member-related information.
"This includes the personal data of any Kidswant member, their frequency of store visits and their purchasing information. Based on this information, we can send out targetted, personalised marketing messages to our members."
The company has also been able to use its projected sales information to leverage its channel advantages and source centrally, allowing it to provide its customers with highly-targetted, heavily-discounted product choices. Overall, Xu believes that O2O offers a real opportunity to any company that does its homework properly.
O2O: in action
Moving away from the more theoretical approach, the O2O successes already being enjoyed by a number of companies across the mainland clearly illustrate its potential. Daphne is one of the leading women's shoe brands in China, with 6,700 offline shops across the country. Currently, the company manages 80,000 stock keeping units ("SKUs"), while its various websites receive almost one billion visits a year.
In online terms, Daphne has its own official website (www.daphne.com.cn), as well as a number of dedicated shops on many of the major e-commerce platforms. It is also actively experimenting with the omni-channel and O2O models. According to Michael Hu, Daphne's Chief Operating Officer, few companies have harnessed Big Data as effectively as his own company. At present, Big Data plays a key role in driving the company's sales planning and execution.
Hu's confidence stems from Daphne's success to date with Big Data-based, omni-channel operations. Citing his company's experience, he says: "Retailers should have the mindset of the Big Data era and look to transform from a product-driven business model to an omni-channel business model. Under an omni-channel business model, consumers become the core asset of any company.
"You need to utilise all of the available channels in order to interact with consumers. The strategic focus needs to be on changing from collaborative supply to collaborative demand. Your criterion for assessment also has to change from same-store sales and return on assets to sales per customer and return on customers. In truth, sales are no longer driven by products and services, but by consumers and market studies".
In line with the omni-channel model and the Big Data mind-set, Daphne has set out to redefine its data standards with regard to the collection, cleansing and consolidation of Big Data, as well as the modelling of such acquired information and the mining and analysis of that data. Based on its initial experimentation, it has now established a proprietary system for exploiting its data.
Once the processing of the raw data has been completed, then the application and execution of the Big Data-related objectives can be implemented. This has seen Big Data become the foundation of many of Daphne's consumer insights, as well as its data-driven supply chain and strategic decisions. The company has also adopted a dynamic planning execution and analysis system based on its Big Data inputs.
Similar success with Big Data has been recorded by quwan.com, a market-leading e-commerce platform specialising in novel and fun products. It is also the leading distributor of Google Glass on the mainland.
In terms of omni-channel development, quwan.com has its own e-commerce platform, while also running 50 dedicated shops on various major mainland e-commerce sites, including JD.com, Taobao and vip.com. According to Zhou Pin, the company's Chief Executive, quwan.com sets up stores across a range of different platforms in order to benefit from their individual market positions.
One of the more unique features of quwan.com is its adoption of a buyer system. By allowing its buyers to spend upfront on novel and fun products from around the word, it has been able to optimise its supply chain. In terms of its own niche market, the company has established that its consumers are hugely varied, making straightforward classification somewhat problematic.
In line with their increased penchant for individuality and greater access to information, consumers have higher thresholds in terms of product novelty and individuality. This is particularly the case with consumers in the tier-three and tier-four cities, where the existing conventional stores fail to satisfy their demand for more individualised products. Given their access to international market information via the internet, many of these consumers are only too keen to go online and order those novel and fun products that have proved big hits in the global market.
Currently quwan.com is looking at how best to achieve online and offline integration in order to give consumers a better shopping experience. It is currently in discussion with a number of offline domestic chain stores with regard to establishing a physical presence in several first- and second-tier cities.
China's retail sector is in the midst of a rapid transformation. This is being driven both by China's economic growth and by the expansion of its middle class demographic. There is no doubt that the O2O and omni-channel models are proving blueprints for the future development of the sector.
Wang Nan, Shanghai Office