SCB Magazine - 2018 Annual Resource Guide
Redefining the Retail Industry in China

Once known as the world's manufacturer, China has emerged as a destination for retailers from around the world to sell. A growing middle class with consumers willing to spend, Chinese retail sales grew 9.6 percent in 2016 and was on track to surpass that for 2017. Primarily fueled by e-commerce, retail is undergoing a big change and evolving in what is called O2O – online to offline. -Cathy Morrow Roberson, Founder/Head Analyst, Logistics Trends & Insights LLC

Redefining the Retail Industry in China

China’s retail sector is fragmented. Research from Denzan Shira & Associates indicates that the top 100 retailers account for only 11.0 percent of total retail sales. Improving infrastructure and the rise in urbanization have resulted in retailers focusing on third- and fourth-tier cities. Even though e-commerce is driving much of the retail sales, it’s difficult to believe that online sales in China account for just 15 percent of all retail. But as sales grow, the worlds of e-commerce and physical stores are blurring in what Alibaba has dubbed “The New Retail,” which is “the integration of online, offline, logistics and data across a single value chain.”

Indeed, Alibaba is taking a leading role by acquiring a major department store chain, Intime Retail, an 18 percent stake in Bailian’s Lianhua division—some 3,600 supermarkets and chain stores spread across the country as well as opening its own storefronts.

Not to be outdone, China’s second-largest e-commerce provider, JD.com, has partnered with Walmart. The American retailer has taken an equity stake in the online marketplace while JD.com acquired Walmart’s Yihaodian website. Together, JD.com and Walmart plan to deploy a jointly developed supply chain and back-end system to integrate inventory management. When a customer places an order on JD.com, JD’s proprietary order management system will analyze data from both companies’ stock systems to determine whether a JD warehouse or Walmart store is closer to the customer, and dispatch a JD courier accordingly.

The O2O strategy is growing but at the same time, cross-border e-commerce is also pushing Chinese retail sales and is driving volume growth to express and logistics providers. Forrester Research notes that cross-border e-commerce will grow 20 percent to $627bn by 2022 with China driving the increase. Furthermore, Forrester Research indicates that two-thirds of cross-border online shopping is done through marketplaces, with clothes and consumer electronics the most popular purchases. This is beneficial to China’s two largest e-commerce providers, Alibaba and JD.com.

The retail growth is quite telling in terms of parcel volumes. According to China’s State Post Bureau, for the first half of 2017, parcel deliveries in China totaled 17.32 billion units, a 30.7 percent increase from the previous year. Even though 98 percent of the deliveries originated in China, there were 360 million international parcels delivered in the first half of 2017, a 29.2 percent increase over the same period a year earlier.

As O2O blurs online and physical retail stores, supply chains will become more automated and responsive to meet the needs of the customer. Unmanned stores, robots and drones are all being utilized to test their efficiencies and more creative solutions will likely emerge in the coming years.

The Outlook

Much like other countries, China’s retail industry is undergoing massive change thanks not only to the growth of e-commerce but also its growing middle class. E-commerce providers Alibaba and JD.com are leading the charge to connect with physical stores. As a result, supply chains are becoming more responsive as automation takes a front seat to improve efficiencies.

China’s retail sector is fragmented. Research from Denzan Shira & Associates indicates that the top 100 retailers account for only 11.0 percent of total retail sales. Improving infrastructure and the rise in urbanization have resulted in retailers focusing on third- and fourth-tier cities. Even though e-commerce is driving much of the retail sales, it’s difficult to believe that online sales in China account for just 15 percent of all retail. But as sales grow, the worlds of e-commerce and physical stores are blurring in what Alibaba has dubbed “The New Retail,” which is “the integration of online, offline, logistics and data across a single value chain.”

Indeed, Alibaba is taking a leading role by acquiring a major department store chain, Intime Retail, an 18 percent stake in Bailian’s Lianhua division—some 3,600 supermarkets and chain stores spread across the country as well as opening its own storefronts.

Not to be outdone, China’s second-largest e-commerce provider, JD.com, has partnered with Walmart. The American retailer has taken an equity stake in the online marketplace while JD.com acquired Walmart’s Yihaodian website. Together, JD.com and Walmart plan to deploy a jointly developed supply chain and back-end system to integrate inventory management. When a customer places an order on JD.com, JD’s proprietary order management system will analyze data from both companies’ stock systems to determine whether a JD warehouse or Walmart store is closer to the customer, and dispatch a JD courier accordingly.

The O2O strategy is growing but at the same time, cross-border e-commerce is also pushing Chinese retail sales and is driving volume growth to express and logistics providers. Forrester Research notes that cross-border e-commerce will grow 20 percent to $627bn by 2022 with China driving the increase. Furthermore, Forrester Research indicates that two-thirds of cross-border online shopping is done through marketplaces, with clothes and consumer electronics the most popular purchases. This is beneficial to China’s two largest e-commerce providers, Alibaba and JD.com.

The retail growth is quite telling in terms of parcel volumes. According to China’s State Post Bureau, for the first half of 2017, parcel deliveries in China totaled 17.32 billion units, a 30.7 percent increase from the previous year. Even though 98 percent of the deliveries originated in China, there were 360 million international parcels delivered in the first half of 2017, a 29.2 percent increase over the same period a year earlier.

As O2O blurs online and physical retail stores, supply chains will become more automated and responsive to meet the needs of the customer. Unmanned stores, robots and drones are all being utilized to test their efficiencies and more creative solutions will likely emerge in the coming years.

The Outlook

Much like other countries, China’s retail industry is undergoing massive change thanks not only to the growth of e-commerce but also its growing middle class. E-commerce providers Alibaba and JD.com are leading the charge to connect with physical stores. As a result, supply chains are becoming more responsive as automation takes a front seat to improve efficiencies.

Redefining the Retail Industry in China