Author: Mr. Muyi Source: Hong Kong Stocks (hkstocks) When it comes to department stores, at some point they began to feel ancient and unfamiliar. The small department stores that once dotted the landscape have suddenly become hard to find. As for investment, people have been reluctant to touch department stores, as e-commerce has been the favored target for investors over the past few years. However, while we once thought e-commerce would force physical stores to close en masse, we are now surprised to see that, even as the praises of internet miracles continue, e-commerce and traditional department stores have come together. Marx told us that things progress through a spiral upward; this return is often a new beginning, the origin of progress. In June 2014, Alibaba Group strategically invested in Intime Retail, beginning its expansion from online to offline and entering commercial real estate. The Intime system has developed over 40 commercial projects nationwide, transitioning from pure department stores to comprehensive commercial real estate. The story ended with a privatization. In 2016, Alibaba completed equity investments in Sanjiang Shopping, a leading chain retailer in Zhejiang Province, and established a new strategic cooperation with Bailian Group, a retail platform under the Shanghai State-owned Assets Supervision and Administration Commission. At the end of 2016, Jack Ma proposed the concept of "New Retail." On the evening of September 26, 2017, New Huadu, a leading enterprise in Fujian's hypermarket, supermarket, and department store chain industries, announced that its controlling shareholder, New Huadu Group, signed a "Share Transfer Agreement" with Alibaba (Chengdu) Software Technology Co., Ltd. and Hangzhou Hanyun Xinling Equity Investment Fund Partnership (Limited Partnership) , agreeing to transfer 68.456 million unrestricted tradable A-shares (10% of the company's total share capital) to Alibaba Chengdu and its concerted action party, Hangzhou Hanyun. Whatever one might say about Jack Ma's lack of sentiment or ruthless corporate culture, no one can deny that he is a contemporary business genius, always at the forefront of business models. At the end of 2016, Ma formally proposed the concept of "New Retail," and behind the series of department store investments lies a profound strategic intent. At a time when online traffic costs are skyrocketing, offline traffic costs are a value depression, reminiscent of the strategy of Alimama (Taobao Alliance) using small site owners to encircle the cities from the countryside when Taobao was founded, or the patience of Cainiao in quietly acquiring land in its early days. This time, Alibaba is being very high-profile in New Retail, directly buying in the secondary market. The logic behind this is simple: there are only so many good commercial properties (offline traffic nodes), and many mature commercial districts have already been securitized. To get involved, one must find traditional local powers. And this time, it might be a generational opportunity. ************▌************I. The Transformation Needs of Department Stores from Retail History To discuss this opportunity, let's first review the history of China's retail formats. During the planned economy era (1949-1977) , there was a severe shortage of goods, and the economic environment was chaotic. The main trend was to nationalize private department stores to eliminate initial commodity monopolies. During the reform and opening-up era (1978-2000) , various department stores rose like mushrooms after rain. Excessive expansion and the proliferation of homogeneous goods led to disorderly competition, causing a downturn in the department store industry. 1998 became the "year of closures" in Chinese department store history. During the transformation and differentiation era (2001-2008) , after joining the WTO, foreign retail giants entered the Chinese market. The retail industry introduced chain organization models with chain supermarkets as the main format. Carrefour from France and Walmart from the US had already settled in China in 1995 and 1996, and now the largest retail brands have been replaced by foreign chain hypermarket brands like Carrefour. Additionally, traditional department stores were forced to transform. The emergence of specialized brands for office supplies, home appliances, pharmaceuticals, furniture, etc., and the partial withdrawal of internal business from department stores left them in name only, transitioning to chain supermarkets. However, outdated supply chain management and business models made it an industry with extremely low profit margins. During the e-commerce impact era (2009-2016) , after the establishment of Tmall in 2009, Taobao launched the "Double 11" shopping festival, which subverted the traditional retail industry. JD.com, known for its self-built logistics; Vipshop, focusing on brand flash sales; Dangdang, starting with books; and overseas Amazon all achieved astonishing growth. In reality, the retail industry had stopped developing for several years. Traditional hypermarket models began to be impacted and started transforming into super malls with entertainment features. Traditional department store groups left over from the department store era are struggling, many of which were once regional retail giants: such as Dashang Group in the Northeast; Golden Eagle Group and Wenfeng World in Jiangsu; Intime in Zhejiang; Rainbow and Maoye in Guangdong; Wushang and Zhongbai in Hubei; and New Huadu in Fujian. Most of these are still under local state-owned assets supervision and administration commissions, and local governments undoubtedly have the strongest desire to revitalize these dying assets. To revitalize them, it is absolutely impossible for one regional leader to integrate another; they are essentially the same, cannot solve their own problems, and politically it is not allowed. For offline department stores and supermarkets, the former's advantage lies in location, the latter's in supply chain, but their disadvantage is their store formats, which no longer have the ability to attract traffic. Store format innovation is precisely the strength of e-commerce, such as giving you a Hema Fresh. Offline has foot traffic (traffic), but lacks monetization methods. Therefore, introducing large e-commerce platforms is a good move to revitalize these resources. So why would e-commerce companies take on such heavy work, especially Alibaba? In short: traffic costs. ************▌************II. Bottlenecks and Ambitions of E-commerce Platforms The essence of retail never changes: efficiency and experience. The emergence of e-commerce brought about improvements in efficiency, mainly in two aspects:
One is eliminating channels;
The other is using information for precise sales to increase sales. But e-commerce cannot completely replace physical stores. Information matching is a feature of online products, but ultimately, products and services must return offline. Experience is provided by offline merchants. No matter how fast and convenient online products are, they cannot escape the fact that offline merchants ultimately provide the services. Some services can only be experienced offline. Logistics cannot achieve hourly efficiency. Urgent daily needs and services still rely on offline. Additionally, offline shopping has entertainment and social attributes. According to CBNData statistics, offline retail still accounts for over 74% of total retail, remaining the main force. The most important reason is that online promotion is becoming increasingly expensive, and business is getting harder. The root cause is the asymmetry of channels and traffic. Computer desktops and phone screens have limited space. Facing infinite information, the competition is for customer attention. High-priority traffic, such as frequently used WeChat, Baidu, and Taobao, plays the role of information filtering, thus occupying huge traffic. Consequently, customer purchasing behavior is influenced by these major attention-grabbing entry points. So now, starting a small internet business is not about designing a website, but about creating a WeChat public account. Currently, the BAT giants monopolize most of the internet traffic. Traffic from social media is basically monopolized by Tencent. Baidu obtains PC-side information traffic through search engines, and Alibaba divides shopping demand traffic through e-commerce. BAT occupies the high-traffic scenario entrances, forming a basic monopoly pattern, with 10% of the entrances taking over 90% of the traffic. Offline, the core of retail site selection is foot traffic, while online retail's core is traffic. The more effective traffic one occupies, the more sales conversions one typically gets. This was the traffic dividend enjoyed by internet companies in the past few years. But now, this dividend has come to an end, and customer acquisition costs are irreversibly rising. According to Huatai Securities' calculations, taking JD.com and Vipshop as examples, in 2016, Vipshop's average customer acquisition cost per annual active user (annual active users refer to users who made at least one purchase within the year; average customer acquisition cost per annual active user = marketing expenses / increase in annual active users) was as high as 183.08 yuan, an increase of 135.47% compared to 2012. JD.com's was 147.67 yuan, an increase of 126.19% compared to 2012. The rapidly rising customer acquisition costs significantly increased the operational pressure on traditional e-commerce. (Left: Vipshop, Right: JD.com customer acquisition costs) After 2015, e-commerce customer acquisition costs began to soar sharply. Now, the industry average customer acquisition cost is generally above 100 yuan, with Taobao estimated at around 100 yuan. But here we must specifically mention WeChat, which has the lowest customer acquisition cost model. Almost every Chinese mobile phone user has WeChat installed, and nearly one-third of mobile internet time is spent on WeChat. With the largest user coverage, the highest frequency of opening, the longest usage time, and the absolute majority of active users, WeChat should have the lowest customer acquisition cost. This is Tencent's biggest advantage, and it also explains why Jack Ma is the most active in developing online-offline integration, after all, e-commerce is still Alibaba's lifeline. Do you think JD.com is rushing to collaborate with various non-Taobao companies for traffic guidance because it wants to? NetEase's "Jingyi Plan," Toutiao's "Jingtiao Plan," Baidu's "Jingdu Plan," and Tencent's "Jingteng Plan" - these may seem impressive, but behind closed doors, they are all about spending money... Even JD.com, whose capital operation capabilities are far inferior to Alibaba's, has long invested in Yonghui Superstores, a domestic offline fresh food retail giant, to seek synergies. In the era of internet marketing with increasingly high customer acquisition costs, it is basically unplayable. Now, e-commerce platforms led by Taobao under Alibaba are developing offline with three major needs: 1. Lower traffic costs. Online-offline integration can reduce customer acquisition costs. One important reason for high traffic is the need for precise information. Information reflects customer needs, and matching services based on needs is the ultimate goal. But the more precise the traffic, the more expensive it is. However, for offline merchants, every user who visits the store is a precise customer for them, and such users can match the services they provide. Online-offline integration is the key to reducing traffic costs.
2. Expand internet-famous products and increase product dependence on the platform. The internet reflects the 80/20 rule everywhere: 20% of products often bring over 80% of profits. For internet-famous products born online, there is naturally a need to expand offline to increase customer coverage. E-commerce platforms like Alibaba can serve as channel connections and operations for these internet-famous stores, fully utilizing their energy. By doing platforms online and also laying out offline, and taking offline platforms into their fold, future retail will have to rely more and more on Alibaba's platform.
3. Expand richer experiences. The next direction of retail will be the internet returning to industry, with industry development as the main focus and internet transformation as a supplement. Products that are difficult to provide online can be expanded offline, such as higher-end products and personalized services. More complete data can also be used for trial and error, achieving a high degree of integration of efficiency and service, bringing retail to a new height. Perfect. Therefore, further inference: e-commerce companies like Alibaba will not build offline facilities step by step; the greater possibility is direct acquisition. And the struggling traditional department stores, with abundant offline resources in their respective regions, are a perfect match. They are ready to do big things, and the market has great expectations for such O2O models. After New Huadu announced Alibaba's 10% stake, its stock price hit the daily limit for three consecutive days. So how big is this pie, and how fast will such actions be? ************▌************III. New Retail Is Galloping In At the Third World Internet Conference in 2016, Jack Ma proposed the concept of New Retail, claiming that the era of pure e-commerce is over, and online and offline must be connected in the future. Liu Qiangdong also has a "Four Retail Revolutions Theory," with three core points:
Externalization: Hand professional matters to professionals;
Intelligentization: Professionals have the ability and strength to invest in intelligent algorithms, computing power, and data;
Efficiency: This is the ultimate internal goal. Only when efficiency is improved can we talk about improving customer experience. I think it mainly expresses the following:
Those who did traditional retail before did not do well because they were not professional enough.
Professionals are those with internet big data thinking, which is the general trend, like JD.com.
You traditional retailers should not try to cross efficiency to achieve so-called service experience; leave it to the professionals, like JD.com. The traffic dividend period for e-commerce has ended, and the retail industry turning to O2O mode is the most feasible path now, returning from "virtual" to "real." Currently, offline retail is developing in two main directions. The first is sinking into convenience stores. Each convenience store is both a sales machine and a data collector, coupled with efficient logistics links. In theory, customers will receive the most refined classification, and the data obtained will be the most accurate. Moreover, with the help of data, there is no need for hypermarket-style product display. If you can also save on rent and labor, that would be even better. Alibaba's unmanned retail is probably doing this; The second is the establishment of super malls. In the past, retail only did simple sales, with low added value, plus channel costs and labor operation costs. E-commerce + logistics can do these things in minutes, but high-level services cannot be done by e-commerce. So another idea is to build malls into large comprehensive shopping centers that integrate entertainment, social interaction, offline content output, and shopping, deeply mining experience and extending the value of online star products, while also expanding advertising business. Taking internet-famous stores as an example, the core of New Retail becomes the integration of people, goods, and scenes. Internet-famous stores have their own scene attributes. Through live streaming, social media, and other channels, they directly give consumers demand. In the future, these demands will be directly connected to offline experiences. While watching the internet-famous store's live stream in the mall, you can reach out and grab the product. If this can be achieved, retail will become completely different. Rich offline resources combined with online operation models, and the mutual complementarity of online and offline resources, can make this pie very round and complete. In the blink of an eye, from the internet to mobile internet, and mobile internet development to this day, it seems to have reached a window period. In the past, the internet promoted the development of retail. Now, the internet returns to the real economy, recombining, with offline becoming an important carrier again and the internet as a supplement. Taking NetEase Yanxuan as an example, through the combination of internet technology and offline, and through data on user needs and feedback, consumers experience products in physical stores, place orders online, and have them delivered to their doors. Although there is still a distance from the ideal, it is a solid step. Importantly, it proves that New Retail generated by the combination of online, offline, products, channels, and other factors is not a fantasy. Other major e-commerce platforms are also building their own O2O models. NetEase's Yanxuan and Kaola are continuously absorbing overseas brands with strong IPs and accelerating the expansion of overseas OEM factories and supply chains. JD.com joined forces with Walmart to launch the "88 Shopping Festival" with online-offline linkage, mainly to achieve mutual conversion of online and offline user traffic. Suning and Alibaba's offline cooperation shows that e-commerce platforms are shifting their attention from online to offline, intending to develop a unique business model of transitioning from online to offline. The More Mall shopping center established by Alibaba, in addition to operating traditional offline brands, also includes related Taobao brands. The product richness of More Mall will surpass traditional shopping centers. The establishment of More Mall will bring these internet-famous brands born on Taobao from the internet to reality to a large extent. Consumers can have the most direct contact with these products and can also make first-time purchases of new products. Alibaba can also firmly grasp these brands through unified operations to create value for Alibaba. Now, the big data architecture can support the big data analysis requirements needed for New Retail. These data will serve as the basis for formulating promotion directions when launching new products. To improve customer retention and repurchase rates, store managers and other leadership levels currently refer to consumer data when formulating daily operational strategies and directions. The rise in online costs is irreversible, which will force e-commerce companies to continue advancing the O2O process. Before Jack Ma formally proposed the New Retail concept, Hema Fresh, which has a close collaborative relationship with Alibaba, had already completed its offline New Retail planning. Alibaba's current investment characteristics are offline department store groups with absolute influence in their regions and abundant resources. This process is believed to continue, and incorporating department store groups into the Alibaba system may be a future trend. ************▌************IV. Epilogue At the end of 2016, Jack Ma proposed the term "New Retail." Now, from consumers to merchants, everyone has realized the true connotation of the New Retail era—the enhancement of consumer experience. The consumption upgrade that has been touted for years has actually been happening slowly, and the times are changing rapidly. Traditional department stores face the need to transform themselves and improve competitiveness. Without platform support, they have a large amount of offline resources that cannot be utilized. E-commerce giants also have the desire to reduce online costs, develop new operation models, open up big data, and pursue offline resources. The two are likely to hit it off immediately. This combination will usher in a new wave of retail. Appendix: According to the above logic, traditional department store groups that occupy high-quality commercial district resources in core cities and have had no private placements for 18 months are the most likely to be invested in by large e-commerce companies (incomplete statistics, with state-owned enterprises given priority). The 3rd (CFIC) China FMCG + Internet Conference will be held in Chongqing in November 2017. The conference will closely focus on the theme "New Forces, New Ecology," inviting 1000+ distributors, 500+ brand owners, founders of 200+ B2B platforms, and 100+ investment and financing institutions to jointly explore a new chapter of cross-border integration! November 8-9, 2017 Xinyue Hall, Chongqing Yuelai International Conference Center Registration is now open. Long press the QR code below or click "Read Original" to register. Add friend and note "Conference Registration" Click the link below to review the highlights of the 1st and 2nd FMCG + Internet Conferences: 2016 "FMCG + Internet" Summit Forum -END-