$200 million. That’s what China’s fastest growing and second-most popular ecommerce platform Pinduoduo (PDD) invested in appliance and electronics retailer Gome last week. The move sees PDD join the ranks of Alibaba and Tencent as China’s tech giants, who have spent the last few years forging their way to supremacy in China’s brick & mortar retail segments.
The tech sector’s annexing of China’s physical retailers is likely to accelerate as a result of COVID-19. Low foot traffic to malls and shopping streets has seen many traditional retailers struggle since late January, particularly those who have been slow to adapt to the new reality of online sales and contactless delivery. As a result, some chains may not make it through the pandemic. This will create easy targets for cash-rich tech firms who have fared better through the pandemic.
For struggling retailers, the allure of new capital, technology and a shot in the arm from Alibaba, Tencent, PDD and potentially even Douyin’s parent ByteDance will be matter of survival. This will see further consolidation in China’s fragmented retail scape, and a broader rollout of New Retail.
Stores who have rolled out New Retail initiatives have been the standout performers of China’s brick & mortar retailers since the pandemic began. Alibaba’s Hema was swift to adapt to the challenges and as a result saw their app’s daily average users grew 127.5% from a year ago. Their New Retail component can be attributed to much of this success – not the digitally-integrated in-store ‘experience’ that has been hyped up since New Retail was first launched, but infrastructure that allows simple and convenient purchase delivery. Its data-backed stocking decisions have also allowed it to swiftly adapt to fast changing consumer preferences and behaviour since the outbreak.
Before COVID-19, a mature Hema store made 3-4 times more revenue per square metre than a conventional supermarket, helped by the additional delivery sales from the app which can account for 60-70% of some store’s sales. And it is more profitable. We saw this with Carrefour, who made their first quarterly profit in seven years following improved operating efficiencies through the digital transformation of its stores and delivery, following last year’s acquisition by Suning, part owned by Alibaba.
The tech giants’ knack of making physical retailers more profitable, coupled with other synergies such as expanding the attractiveness of their apps (which was one of the draw cards of PDD’s investment in Gome) and pooling more data, means that they can take over retailers and with a much greater ROI than other retailers who may also be considering the investment.
Going forward, expect to see China’s online and offline retailer sphere increasingly dominated by a handful of large tech companies. This will be both a blessing and a curse; it will mean that it will be easier to have your brand can be stocked across more retail points of presence, however, it is likely to lead to more monopolistic behaviour from the tech giants and increasing threats from their private label brands. Brands would be wise to be wary of this, and also hedge their bets through increased social commerce and community commerce, and the progressively viable direct-to-consumer models also accelerating as a result of COVID-19. Talk to China Skinny about how to best capitalise on these trends.
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