“COVID-19” epidemic: China retail–offline retail is sluggish, online retail rises against the trend
The unexpected arrival of the “COIVD-19” epidemic has caused a “different as night and day” situation in China’s retail industry: on the one hand, due to the need for epidemic prevention and control, many offline large-scale shopping malls have been forced to shut down, resulting in much bleak offline sales; On the other hand, online retail is rising against the trend and growing rapidly.

Such a scene reminds people of the spring of 17 years ago, when the SARS epidemic suddenly hit and offline retail was in a depression. At the same time, the nascent e-commerce business is booming and thriving. That change directly affected the future pattern of China’s retail industry.

Compared with SARS in 2003, the “COIVD-19” epidemic is more vigorous, sweeping a wider area, and it is more destructive to offline retail. People are forced to develop online retail habits for longer. Under such circumstances, some people predict that after the outbreak, China’s retail industry will have an inflection point, and online retail will overwhelm offline retail, becoming the most important form of retail. So, is this really the case?

1. Offline sales will not be replaced, but it will integrate online sales

To answer the question of whether online retail will become the main form of retail, we need to first look at the power comparison between online and offline before the outbreak, and see how it was before. According to data released by the National Bureau of Statistics, in the whole year of 2019, the nationwide online retail sales were 10.6424 trillion yuan, an increase of 16.5% over the previous year. Among them, the online retail sales of physical goods was 8523.9 billion yuan, an increase of 19.5%, accounting for 20.7% of the total retail sales of social consumer goods; Of the online retail sales of physical commodities, food, clothing and consumer goods increased by 30.9%, 15.4% and 19.8% respectively. In other words, the ratio of online to offline sales is 1: 4, and offline still has a clear advantage.

(Remarks: The growth rate of retail sales in 2014 was 49.7%)

During the epidemic, offline sales were hit hard, while online sales showed rapid growth. Some people even estimate that during this period, the proportion of online retail sales in the total retail sales of consumer goods may rise to 70%. In other words, online retail will gain an absolute advantage in the short term. But can the online advantage last after the epidemic? In my opinion, the possibility is relatively small.

Although on the surface, online retailing has indeed shown a “sweet spot here” situation this time, its advantages over offline are obvious. But at the same time, we must fully consider its particularity:

On the one hand, under the impact of the epidemic, the total plate of China’s retail industry has decreased. Affected by factors such as falling income during the epidemic, rising shopping costs, and poor offline shopping channels, many people have adopted a strategy of delaying consumption, delaying the consumption of non-essential products until after the epidemic, which has led to a substantial decrease in the total consumption of social retail products. Regarding this decline, different agencies have different estimates. The range is roughly between 0.1 trillion and 0.2 trillion yuan, and the total amount is not small.

On the other hand, as long as we take a closer look at the online sales during the epidemic, we will find that the growth trend is mainly concentrated in a limited number of commodity categories such as fresh food, daily necessities, and epidemic prevention supplies; Other types of commodities have not changed much, and some categories have even declined significantly. This phenomenon tells us that for a considerable number of people, online shopping may just be a helpless move under the circumstances that offline scenarios are not available. They did not show the habit of online consumption on more product categories.

In this way, one side is the reduction of the denominator and the other is the forced enlargement of the numerator. Even if the proportion of online retailing really reaches 70% as predicted, the amount of information given by this number is still very small. It is difficult for us to think that this is a sign of reversal online and offline.
After the outbreak, although online has gained a certain advantage, its relative position with offline retail has not fundamentally changed. With the gradual recovery of the epidemic, many customers who were forced to choose online consumption during the epidemic may return to the offline scene. In fact, this point has already appeared. Since late February, the epidemic situation in many cities has gradually improved, and large supermarkets have resumed business. Many large supermarkets have long queues once they open their doors. This fully shows that the resilience of offline retail is still very strong. From this perspective, if it is judged only from the consumption scenario, that offline will be completely replaced by online, it may be premature.

Compared with “replacement”, a word that can objectively express the direction of retail evolution in the post-epidemic era should be “fusion”, that is, mutual penetration and integration between online and offline.

On the one hand, during the epidemic, a large number of offline companies have adopted a large number of online technologies and sales models. A considerable part of these technologies and sales models will be inherited after the epidemic is over. For traditional offline companies, the biggest obstacle to accepting online technologies and marketing models is fixed cost. Usually, because offline sales are very easy to attract customers, companies will not encourage themselves to adopt these new technologies and use these new channels.

However, in the epidemic situation, the use of these technologies and channels has become the key to enterprise survival. This objectively produced a “reverse force” effect, prompting companies to invest fixed costs in these areas. Once these fixed costs are invested, the marginal cost of maintenance thereafter is relatively low. For example, the development of an APP or applet may be more expensive, but the application of them no longer requires too much additional investment. In this case, we can foresee that most offline companies will continue to use these online resources after the epidemic has ended.
On the other hand, during the epidemic, many online retail companies have strengthened their offline layout in order to enhance the consumer experience and seize offline resources. For example, during the epidemic, JD.com actively increased its support for offline physical stores, including JD.com convenience stores, 7FRESH, JD.Pharmacy, etc., so that they can meet the residents’ consumption during the epidemic, especially community group purchases need; Alibaba has also strengthened Hema’s 1 + N strategy. Based on the original fresh stores, it has increased the laying of Freshppo Mini, allowing its services to reach the community better. Obviously, these offline layouts will also have a sustained effect after the epidemic, allowing traditional online retail companies to enter the offline market.

Under the interaction of the above two forces, the boundary between online and offline will be further broken, and the two retail formats will likely usher in a deeper integration after the epidemic. The battle between traditional offline supermarkets and traditional online giants will also intensify. From this perspective, perhaps in the near future, we will no longer have to distinguish between online and offline, and such questions as whether online will replace offline will itself become meaningless.

2. Digital capabilities will be key

After the outbreak of the epidemic, many experts and institutions have made suggestions for retail enterprises, suggest them to take active actions and turn crises into opportunities. Among these suggestions, digitalization and online marketing layout will be among them. Since the epidemic has greatly reduced offline demand, the offline losses will be supplemented online. Can we change our thinking and ask for benefits from online? Everyone knows the truth.

In fact, after the outbreak, many retail companies thought of this for the first time. However, the results later showed that there were very few cases of truly getting rid of the crisis in this way. The reason is very simple, to achieve online sales also must have the ability. The building of these capabilities is actually not that easy.

For example, after the outbreak, Yonghui Supermarket showed extremely strong growth. Its January sales reached 12.5 billion yuan, a substantial increase from the same period last year. When many people analyze why Yonghui grows against the trend, they will simply attribute the reason to that Yonghui is doing fresh food, which gives it an advantage during the epidemic. But this is obviously untenable. In fact, as long as it is a large supermarket, it will almost always run the fresh food business. Under the epidemic situation, the fresh demand faced by everyone is common, the difficulties are common, and the methods used are also common, but why did Yonghui win in the end? To a large extent, we have to find the answer to Yonghui’s digital capabilities.

As early as a few years ago, Yonghui, a representative of traditional supermarkets, formed a strategic alliance with Tencent, and actively used the tools provided by Tencent to build its own digital capabilities. In order to explore new retail formats and digital transformation, Yonghui established Yonghui Yunchuang in 2015. With the help of Yonghui Yunchuang platform, Yonghui has incubated multiple online and offline retail forms such as super platform, Yonghui life and Yonghui life to home three retail formats. And these new retail forms are the bridgehead for Yonghui to break into the community during the epidemic and win home services and community group purchase business.
While fully incubating new retail forms, Yonghui has also invested heavily in the construction of digital infrastructure. In 2015, Yonghui established its own technical team, launched the Yonghui Life APP, and took the lead in promoting the application of WeChat scan shopping and applets in the domestic retail industry. In 2018, Yonghui purchased Tencent Cloud Service and built Yonghui Cloud on this basis. With the support of these digital infrastructures, Yonghui began to practice the concept of “full-point retail” very early, and is committed to connecting online and offline, building a three-dimensional business matrix of full-point users from online to offline.

In addition, Yonghui also used intelligent technology to strengthen its traditional advantage-the supply chain. With the intelligent analysis provided by Tencent Cloud, Yonghui not only optimized the transportation route, but also carefully selected the locations of stores and warehouses, striving to optimize the transportation costs.

It is through the construction of this series of digital capabilities that Yonghui can actively develop community sales as soon as the epidemic situation arrives, open mini stores in the best location, and reach out to the community to ensure smooth supply chain. From this perspective, although the so-called digitalization and onlineization seem to be simple, they have a lot of work to do.

3. The retail service market will usher in a new round of development

As long as we look at the news reports since the outbreak, we will find a lot of inspirational corporate self-help stories:

For example, affected by the epidemic, Xibei suffered heavy losses and cash flow difficulties. Under the predicament, Xibei actively transformed to online, seeking business opportunities. Shortly after the outbreak began, service managers at stores in Xibe added more than 30,000 customers through corporate WeChat.

When offline stores are unable to operate, more than 200 store account managers across the country pass Xibei ’s relevant information to consumers through the WeChat friend circle and group messaging function every day. The shopping mall and WeChat takeaway applet are linked to the store staff information, so that consumers can easily find the entrance to purchase and complete the online booking operation. Through this combination of “corporate WeChat + community operation + small program”, Xibei was able to effectively complete the entire process from online marketing to final conversion at a low cost, thereby gaining valuable cash flow during the crisis.

Another example is the famous clothing brand Peacebird. During the impact of the epidemic, Peacebird was forced to close half of its stores in the country, which would have a huge impact on its income. In this situation, Peacebird is actively looking for new retail routes. They opened up connections with customers through online platforms and live broadcast platforms. By launching WeChat online member specials, WeChat spikes, applet distribution, and live broadcasting in different regions, they still achieved a daily sales of over 8 million.
As another example, due to the impact of the epidemic, the sales of Yintai Department Store, a traditional offline mall, have been greatly affected. Faced with this situation, Intime actively explored online and obtained customers through live broadcast and other methods. Relying on BA hand-amended live broadcast and online shopping platform Miao Street, sales have been restored to nearly half by mid-February.

If you look at these examples in isolation, they seem to have very little information. At best, they are just a few examples of traditional enterprises struggling to save themselves. But if these examples are put together, we can see an important trend, that is, the retail service market will likely usher in a major development after the epidemic.
Compared with “retail”, the term “retail service” is much less famous. Simply put, “retail service” refers to a series of activities that provide services to retailers, thereby generating added value.

Under normal understanding, the retail activity (“Hand the goods from the merchant to the consumer”) seems to be simple and integrated. But in fact, this activity can be split into many links, each link will produce corresponding value, and the entire link will constitute a value chain. Based on this feature, Kotler called retailing a “multi-product production” in his classic book “Marketing Management”. The results of each link can be regarded as a single product, and finally the value generated by all products is combined to form the total value of the commodity. Obviously, increasing its added value at any link will increase the value of the entire final product.

In reality, a large number of retail enterprises will split many parts of the retail process and leave it to third-party enterprises. For example, services such as advertising and logistics are essentially a part of retail, but most retail companies will outsource these services to specialized companies for operation.

Adding these companies specializing in providing services to retail together forms a huge retail service market. China Internet Economics Research Institute of Central University of Finance and Economics has published a report entitled “China’s Online Retail Service Industry: Pattern, Competition and Ecology”. According to this report, in 2017, China’s retail service market volume has reached 6 trillion yuan, accounting for about 18% of total social retail sales.

Before the outbreak, although the retail industry continued to change, the overall pattern was relatively stable and balanced, so the growth rate of the retail service market will be relatively slow. After the epidemic, with the intensification of online and offline integration, this market is likely to usher in a round of rapid development.

As we pointed out earlier, affected by the epidemic, on the one hand, offline companies have developed online businesses, on the other hand, online companies have sunk to offline. For these two types of enterprises, they have entered markets they are unfamiliar with. If they are to rely solely on their own power to lay out the facilities required by these new markets, huge investment will be required. In contrast, using some third-party services will be a more cost-effective option. Faced with this situation, the vast number of retail service providers have a huge use.

From the current point of view, a large number of giant companies have seen the business opportunities of retail services, and among these companies, traditional giants such as Ali and Tencent are clearly ahead.

In the eyes of many people, Alibaba is a retail enterprise, which is actually a misunderstanding. In fact, what Ali does is a platform that provides services for retailers. Because of this, since its inception, Alibaba’s slogan has been “Let the world have no difficult business.” In practice, Alibaba has always been adhering to the concept of serving merchants. In addition to traditional platform services, Alibaba’s cloud services, supply chain finance, and logistics services have also developed rapidly in recent years. For traditional enterprises that want to achieve online, these services will provide a good help.
For Tencent, the role of its retail service provider is more obvious. Ten years ago, Tencent raised the banner of “smart retail”. At the time, many people did not understand the concept of “smart retail”. But in fact, as long as we think a little, we will find Tencent’s so-called “smart retail” refers to “smart retail services.” Tencent itself does not intervene in the specific business of retail, it is only responsible for providing its partners with intelligent tools to support the growth of partners, and then share revenue with partners.
In addition to the two giants Ali and Tencent, companies such as JD.com, ByteDance, Meituan and Kuaishou also played more or less the role of retail service providers. In this epidemic, many retail companies have borrowed tools provided by these service providers to achieve self-help and development.

With the integration of online and offline retail, the competition in the entire retail market may be divided into two markets-one is the positive retail market, and the other is the retail service market behind. Correspondingly, the competitive situation in the entire retail market will become more complicated. This epidemic clearly catalyzed the arrival of this trend.

    For more data sources and analysis, please refer to the “Analysis Report on China’s Retail Industry Market Forecast and Investment Strategic Planning” released by the Foresight Industry Research Institute. At the same time, the Foresight Industry Research Institute also provides industrial big data, industrial planning, industrial declaration, industrial park planning, Industrial investment and other solutions.

(Source of the article: Economic Observer Chen Yongwei-retail changes after the epidemic)