RetailOnline-to-offline

With the lines between online and offline shopping becoming increasingly blurred, many retailers are being forced to reshape their business models

to stay relevant. Jemelyn Yadao looks at the reinventing process in the Mainland and how Hong Kong can learn from it

Illustrations by NULLA Collective

SHOPPING IN TWO WORLDS

26 September 2015

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“ We’re seeing a lot of retailers focusing on experience and with experience comes loyalty.”

T wo things stand out at a store housed inside Central’s creative hub PMQ: racks of

premium silk garments in a rainbow of colours and customers who are more preoccupied with the comput-ers placed right beside the rails.

This compact pop-up shop was set up by Grana, a Hong Kong-based e-commerce fashion start-up. It doesn’t carry inventory and is essentially one big fitting room – customers try on the brand’s entire collection of menswear and womenswear offline and make purchases online while they are in-store. It’s a retail model – and busi-ness phenomenon – that is gaining prominence not only in Hong Kong and the rest of the world, but espe-cially Mainland China.

Thanks in part to high smartphone penetration in Asia, Chinese consumers now expect a seamless experience between websites, mobile applications and physical stores of their favourite retailers. In response, retail businesses in Greater China are increasingly ditching a linear shopping experience and embracing an omni-channel strategy, particularly through online-to-offline or offline-to-online (O2O) retailing.

The online-to-offline busi-

ness model involves offering services on the Internet to drive online visitors to make purchases in-store, while the offline-to-online model enables customers to purchase goods through online channels while in physical stores. Simply put, O2O is the ability to move seamlessly between digital and physical retail environments. Figures show there is huge poten-tial in China with its O2O market reaching 98.7 billion yuan in 2012 and expected to be reaching 418.8 billion yuan this year, according to data released by iiMedia Research.

As part of implementing O2O, retailers could, for example, adopt in-store technologies such as real-time targeted offers, explains Colin Light, Partner and China Experi-ence Centre and Digital Leader at PwC in Hong Kong. “Say I’m standing in Landmark and getting pushed to my mobile are targeted offers specifically for me, according to not only where I am but also when I am – so what time of day, what my attributes are, what is it I’m likely to be looking to buy,” he says. “That’s a good example of receiving a digital experience in a physical space. It’s clearly designed to entice me to go into a certain store and use that par-ticular offer at that particular time.”

With Hong Kong’s retail sector

currently hurting – sales fell for the fifth straight month in July – as a result of a further slowdown in Mainland tourist arrivals and a weaker yuan, the trend of offering a more integrated and personalized experience to boost customers is now more irresistible than ever for the city’s retailers.

Experts believe that the eco-nomic slowdown has indeed forced a very large portion of retailers to focus for the first time, with seriousness, on customer relation-ships. “Now what we’re seeing is a lot of retailers focusing on experi-ence and with experience comes loyalty,” says Light. “Loyalty isn’t always about the next money-off offers. It’s also about creating that VIP, differentiated experience for your customers.”

This retail model is not only being embraced by brands like Grana, which raised US$1 million from investors in July, but also by China’s largest Internet players. In March last year, Alibaba invested around 4.3 billion yuan in Intime Retail, one of the leading depart-ment stores in China, to form a joint venture and develop an O2O business. Alibaba’s Tmall.com will have access to Intime’s inven-tory, broadening the variety of merchandise available, and cus-

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RetailOnline-to-offline

tomers can pick up online orders at Intime stores, according to the companies’ statements at the time of the announcement. In August of the same year, Tencent, Baidu and Dalian Wanda Group announced a 5 billion yuan joint venture also to exploit O2O opportunities.

Mobile-first millenialsThe pressure put on offline retailers to re-evaluate their business models is driven largely by the buying habits of millennials, say experts.

“This is a consumer group that makes up about a quarter of the world population and it’s slowly replacing the spending power of the baby boomers,” says Carl Berrisford, Analyst for UBS CIO Wealth Management. “They will be a consumer force to be reckoned with in the next 10 to 20 years.”

Millennials are anything but traditional when it comes to retail shopping. They are less brand-loyal and more interested in engaging retail shopping journeys, he notes.

“They want experience and they’re not getting a good experience in Hong Kong.”

Asia’s offline retail market has so far responded very poorly to the online shopping challenge, says Berrisford, adding that unless Hong Kong’s retail market adapts to the spending habits of millennials, retailers will continue to struggle. “If you go to the United States and Europe, the retail experience is quite different,” he says, citing London’s dynamic Nike store,

Chinese consumers are the ones more likely to engage with the new trend than their peers in other countries.

28 September 2015

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which adopted a treadmill with gait analysis equipment to help custom-ers buy the right pair of trainers for how they run. “Hong Kong in particular is vulnerable because it uses a volume-based model based on traffic where they haven’t had a lot of value added [services], and that’s going to have to change now.”

A recent report by PwC, however, shows consumers from Hong Kong and China are actually driving the O2O trend more than shoppers elsewhere. While globally

many retailers – such as Burberry with its London flagship’s interactive mirrors – have been experimenting with in-store digital technologies, Chinese consumers are the ones more likely to engage with the new trend than their peers in other countries, the PwC report points out.

The report also finds that real-time personalized offers – such as digital coupons, exclusive branded content, or social media contests – help make shopping experiences

better for 40 percent of Chinese consumers, compared with 27 percent of their global peers. This reflects the greater maturity of Chinese customers in terms of how they want to use mobile and social interaction as part of their overall retail experience.

Also according to PwC’s research, 86 percent of Chinese consumers, compared with 68 percent of consumers from the rest of the world, stated that they had intentionally browsed products at

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RetailOnline-to-offline

a store before purchasing it online, driven mainly by lower prices. This so-called showrooming is another signal for Chinese retailers to cre-ate omni-channel experiences.

Omni-value strategyRetailers in China and Hong Kong are no longer seeing e-commerce as a threat, and are approaching profes-sional consultants, like accounting firms, to discuss how to create unique and seamless experiences between online and offline.

“Most of our [retail] clients are undergoing a review of the opera-tion model, to transform from a multi-channel retailing company to an omni-channel one,” says David Lung, Deloitte China’s Consumer Business Industry Managing Part-ner. “So we’re talking about treating their customers at the centre, not just talking about the channel itself.”

For some firms, building a combined-channel strategy for clients to meet customers’ needs means pulling together the expertise of their digital, customer and analytics practices. “We review [the client’s] current strategy, how they segment, what their customers would want from an omni-channel environment – [for example] is the ability to return or pick up online-purchased items in physical stores what they need?” says Lung. “And most importantly, how the latest technology can help them get to where they need to be.”

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Another key area of focus is how to build a holistic supply chain strategy to drive cost optimization and enhance effi-ciency. Retailers that are embrac-ing O2O can potentially reduce the costs of holding inventory, but this is not guaranteed if a company continues to run separate inven-tory pools to service online and offline, cautions Lung.

“If companies continue to treat this as multi-channel versus omni-channel, there is an inherent risk of rising inventory costs if there is no integrated pooling and visibility of inventory,” he says.

Retailers also potentially have to bear with an increase in shipping costs, Lung adds. “With that said, if online allows for optimization of bricks-and-mortar portfolio (e.g. reduction in stores and size) or an ability to capture potential loss revenue from out-of-stock situations at bricks-and-mortar channels, these savings or opportunities should also be considered in the context of incremental shipping costs.”

Of course, not everyone will opt for O2O. Retailers that decide not to implement this strategy yet and that still want to remain competitive may instead focus on transforming their physical stores into “experi-ence shops” and offer unique prod-ucts or experiences. As an example, Lung cites a leading supermarket chain that is known for setting up its fresh produce section to repli-

cate the products of a wet market, but in a clean environment. “The company has a core focus in fresh foods to enhance the experience in-store for customers, a service that sets them apart from e-commerce retailers at the moment. It’s one of the ways for traditional retailers to do well,” he says.

Malls take advantageHong Kong’s shopping malls should also address the question of how to complement physical operations with e-commerce in order to be successful in the future, says Mareen Fung, General Man-ager of Sun Hung Kai Properties Group and Founding Chairman of the Institute of Shopping Centre Management. This is due not only to the changing spending habits of shoppers, but also to the fierce competition from shopping malls and complexes in the region.

“Mall operators must promote activities by using emerging digital platforms,” Fung says, reinforcing

that such factors are considered added-value for customers, and could lead them to choosing malls instead of street stores. “Under-standing and adapting to the ever-changing shoppers’ behaviour is essential to enhancing the malls’ competitive edge.”

The O2O partnership between Mainland Internet giants Ten-cent, Baidu and Dalian Wanda Group – China’s largest shopping mall developer – perhaps sets a good example for Hong Kong’s malls to follow. With the alliance, e-commerce services will be set up in Wanda’s commercial real estate properties, including Wanda Plaza shopping malls. The three compa-nies will reportedly share user and membership systems, create pay-ment and internet finance prod-ucts, and integrate big data. “It will take two to three years or even a shorter period [for us] to make it clear what the Wanda e-commerce company looks like, and how much value it can produce,” Wang Jianlin, Chairman of Wanda, told the press in 2014 announcing the joint venture.

The trend of experimenting with O2O is likely to continue to be the focus of retailers in Greater China. By recognizing that mobile can enhance and not replace the physical shopping environment, more retailers will be offer-ing customers the best of both worlds.

“ Understanding and adapting to the ever-changing shoppers’ behaviour is essential to enhancing the malls’ competitive edge.”

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