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Online-offline integration set to be future for mainland retail players

Rather than facing extinction, conventional retailers are learning to live with their digital counterparts, while forging innovative joint initiatives aimed at boosting consumer service and maximising sales opportunities.

Photo: Retail revolution: payments go mobile. (Xinhua News Agency)
Retail revolution: payments go mobile.

"Double 11" or Singles Day can trace its origin back in the 1990s, when it was first adopted by university students across the mainland. At the time, few could have predicted that it would ultimately evolve into an annual online shopping event of the vast proportions it is today.

Today, with millions embarking on unprecedented shopping sprees in the run-up to the event – a move fuelled by a series of ever-popular highly-discounted flash sales – Double 11 is now a firm fixture on the mainland sale calendar. Its success – and its particular association with online shopping – has seen many predict that e-commerce will ultimately eclipse its high street counterpart.

Despite this, there are signs that, as the market matures, e-commerce and conventional shopping may find a way to co-exist, with some even positing the emergence of a mutually beneficial relationship between the two.

E-commerce bonanza

In the run-up to Double 11 Day 2013, two mainland B2C websites – Taobao and Tmall – established a new combined sales record of Rmb35 billion. This was nearly double the previous year high of Rmb19 billion.

This growth was partly fuelled by the extended range of goods and services now available online, including cars and several financial and insurance products. Uptake has also been driven by easier access to online ordering, with the use of mobile devices now beginning to overtake that of PCs.

Back in 2012, when mobile purchasing was first introduced, such devices accounted for just 10% of all purchases. Although final figures have yet to be announced, it is expected that 2013 will see a vast increase on this debut figure.

Although the figures surround it are distractingly vast, Double 11 is only one manifestation of the massive surge in e-commerce across the mainland. In 2012, the year-on-year volume of China's online retail sales market grew by some 50%. Among the larger businesses running online retail operations in Shanghai in 2012, sales grew by 75.5% year-on-year, reaching a combined total of Rmb23.859 billion. In terms of 2013, it is expected that online sales will have grown by an additional 40% over the course of the year.

As well as driving huge sales, e-commerce has also stimulated domestic demand and created new jobs, while lowering the required financial threshold for business start-ups. It has also created new opportunities for small and medium-sized enterprises (SMEs), as well as individual job-seekers. Its most significant contribution, however, maybe the new vitality it has injected into the market, largely thanks to the far lower market entry costs enjoyed by online stores when compared to their conventional counterparts. In terms of its knock-on effects, the rise of the online economy has also proved a massive spur to several ancillary sectors, most notably logistics, production and finance.

Online and offline not mutually exclusive

It is undeniable that the very ubiquity of e-commerce has had a major impact on the traditional shopping sector. Rather than being mutually exclusive, however, there are now signs of a new symbiosis between online and offline sales.

The elasticity of demand for different goods varies greatly. In terms of staple foods (grain, vegetables and meat for instance) and daily necessities (such as towels and tooth brushes), demand elasticity is very low. "Black goods" (TVs, hi-fi systems etc), "white goods" (refrigerators, washing machines etc) and furniture take up a lot of space and are constrained by the size of residential units, ensuring their demand elasticity is also relatively low. Increased online sales of these items will have a clear impact on the turnover of conventional outlets. By contrast, the demand elasticity for garments, footwear, bags and accessories is relatively high. As long as suppliers continue to offer innovative products, the market has the potential to expand, ensuring that both digital and conventional retailers can continue to trade successfully.

Some types of purchase are clearly only suited to physical locations. The most obvious examples here are wining and dining, and a variety of leisure pursuits, including watching movies, ice skating, visiting theme parks or using beauty, spa or gym facilities.

Spur-of-the-moment consumption – purchases made after dining or otherwise relaxing for instance – are also inappropriate for the digital domain. There is also a social element to shopping that is not catered to by online portals. At a very simple level, shopping can be an extension of socialising and mingling and constitute an enjoyable shared/bonding experience.

Overall, both e-commerce and physical retail sales outlets have different attributes, with neither likely to entirely supplant the other. E-commerce's strengths lie in its "anytime, anywhere" convenience and low prices. The strengths of conventional stores lie more in their facility to allow consumers to actually "experience" the products prior to purchase, trying them on (where appropriate) and benefiting from the individual attention of trained sales staff. Physical stores are also more convenient when it comes to the provision of after-sale services, such as the return of faulty goods, exchanges or repairs.

In many ways, the advantages of e-commerce are the weaknesses of physical commerce and vice-versa. In light of this, the integrated development of e-commerce and physical sales channels would seem a desirable future trend. Such partnerships and realignments are already taking place. Amazon.cn, for instance, teamed up with FamilyMart to enable Amazon customers to collect purchases at its partner's range of convenience stores. Similarly, in the run-up to Double 11 2103, Tmall invited non-digital enterprises to use its services in a bid to bridge the online-offline gap.

Market still holds potential; innovation is the key

In recent years, the propensity to spend (consumption expenditure as a share of disposable income) has been decreasing. The 2010 propensity to spend of Shanghai consumers was 73%. That figure fell to 69% in 2011 and fell again – to 65% – in 2012. In other words, consumers now tend to spend only 65% of their disposable income.

This decreasing trend makes it clear that there remains the potential for increased consumption. Many believe that the market has simply yet to offer the right products and services in order to unleash this untapped 35% of purchasing power. Realising this potential, however, could require greater innovation on the parts of retailers and suppliers.

Innovation crucial to e-commerce and conventional retail

From an e-commerce point of view, specific high-traffic shopping events have both their advantages and disadvantages. Last year's Double 11, for instance, attracted a huge level of consumer demand in a relatively short period of time. This sudden spike, however, also led to a number of problems, including a failure to deliver on time, problems with returned goods and consumer complaints about false discounting. In order to be less vulnerable to such peaks in demand and their associated problems, many e-commerce players are now looking at longer-term marketing strategies. 

Photo: Online drives delivery demand. (Xinhua News Agency)
Online drives delivery demand.
Photo: Online orders placed in-store. (Xinhua News Agency)
Online orders placed in-store.

From a physical commerce point of view, increased effort needs to go into brand building. At present, conventional operators tend to place undue emphasis on "hardware" – investing substantial sums in store decoration etc – while often neglecting "software", such as brand building. Consumer brand recognition is a complex issue, involving developing product, retailer and, even location awareness. This sees consumers generally faced with three key decisions:

  1. First, where to go shopping (i.e. choice of shopping district brand). In conventional terms (for Shanghai consumers, at least), this can mean deciding between, say, the Nanjing Road or Huaihai Road. For digital consumers, it is a question of which online portal to browse.
  2. Secondly, there is the decision of which store to go to within that chosen location (i.e. choice of store brand). In physical terms, this can mean opting for the Orient Shopping Centre or for New World. In e-commerce, it can mean selecting either Taobao or Tmall.
  3. Thirdly, for both conventional and online shoppers, there is the question of just which brands of products or services to invest in.

In the non-online world, these three key decisions represent a growing challenge. In general, shopping malls have become increasingly homogenous over recent years, making location differentiation somewhat problematic.

Within these malls, there has also been a proliferation of similarly-styled stores selling identikit products, with the same brands frequently widely available. With many businesses failing to establish their own identity, price variance has been the only point of difference for many retail businesses. This has acted to intensify price competition among conventional businesses, at a time when they are already losing market share to e-commerce operators.

Online-offline integration

Overall, it seems that online-offline integration is the coming trend. As, perhaps, a sign of things to come, Tmall ran an O2O (online-to-offline) initiative with 30,000 offline stores prior to Double 11 2013. This saw one participant – the Japanese fast-fashion retailer Uniqlo – report record single-day sales of over Rmb120 million. Its total sales volume, as a result of this cross-promotion, was said to be in excess of one million items, an increase of over 500% year-on-year. It is simply impossible for a conventional store to achieve this level of sales without an accompanying online dimension.

At present, the "buy online, collect offline" shopping mode is still in the very early stages of development, with physical stores serving solely as a point of collection at present. As this combined channel matures, it is believed that physical stores could benefit from providing the so-called "three guarantees" – guaranteed quality, guaranteed quantity and guaranteed repairs for online purchase. It is also expected that in-store online ordering will also be a facility offered by many such outlets. These two areas represent a very basic framework within which online/offline businesses can seek to build their collaboration.

To add to the complex array of offline/online options already available, mobile shopping and mobile payment are now well on the way to becoming key elements in the mix. Their appeal lies in the facility to make impulse/time sensitive purchases on the move.

For example, cinemagoers can purchase a ticket, select a seat and collect their tickets all via their smartphones. During last year's Double 11, almost one-third of the recorded Taobao transactions were completed via mobile devices, with almost Rmb11.3 billion worth of business conducted in this manner. Within the same period, WeChat's recently-acquired online shopping site, yixun.com (now part of Tencent Holdings Limited), handled around 80,000 orders.

Photo: Machine to machine ordering: WeChat vending machine payments. (Xinhua News Agency)
Machine to machine ordering: WeChat vending machine payments.

In terms of future developments, "in-vehicle online shopping" seems to be the next innovation likely to rewrite the retail rulebook. With dedicated applications already introduced by a number of businesses, including Shanghai's Lianhua Supermarket Holdings Co Ltd and China Unicom, consumers have already begun to make wide use of this facility.

This system allows customers to make their shopping selection from their handsets/tablets and then pull-up outside their store of choice in a designated parking position. Their order is then brought directly to their car, with all of the associated financial transactions carried out online.

With such innovation afoot – much of it playing to the combined strengths of online ordering/processing combined with immediate offline delivery and error correction – it would seem that the demise of the conventional retailer is far from a given.

Qi Xiaozhai, Special Correspondent, Shanghai

Content provided by Picture: HKTDC Research
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