New Retail has barely kicked off, but is its end already near?

At first glance, the Hema supermarket in China looks like any other modern, upmarket grocery store, boasting aisles of fresh vegetables, fruit, meat, and even a huge selection of live seafood.

Except it’s not.

Inside, a customer picks up a carton of milk and scans its barcode with a mobile app. A page pops up on her smartphone, revealing details about the product, such as its price, place of origin, nutritional information, recipes, and a list of similar products.

Satisfied with her pick, she puts the milk carefully into a trolley already loaded with other products, and heads over to a self-checkout kiosk, where she pays by having the machine scan her face.

She leaves the supermarket and walks home, empty-handed. The groceries that she bought will be delivered right to her doorstep instead, within 30 minutes.

Elsewhere in the store, employees zip around filling bags for orders that have been made online, before placing them on a conveyor belt that leads into the delivery centre.

Welcome to the era of New Retail – a brand new world of retailing based on a seamless merger of offline and online shopping, and logistics. The goal is to redefine the shopping experience for consumers.

The term was coined by Jack Ma, founder of Chinese e-commerce titan Alibaba, who as early as 2016 had envisioned the concept as the future of retail. After all, the industry in recent years has been engulfed by disruption, driven by technology and ever-changing consumer demands.

But here’s the thing: in New Retail, players compete on speed, convenience, affordability or low prices, and critical mass – which can make or break the business.

And unfortunately, the costs are often high, and, where groceries are concerned, margins usually low.

This sounds hauntingly familiar to the bicycle-sharing business, once touted as the next big thing. Today, scores of rental bicycles are left abandoned in “bicycle graveyards”. Chinese start-up Ofo has gone from a billion-dollar tech darling to being on the verge of bankruptcy in less than four years.

Is New Retail set up to fail?

The New Retail scene has heated up rapidly in recent years, with billions of dollars being poured into developing related technology and operations.

For Alibaba, Hema serves as a test-bed of sorts for its New Retail strategy, while using its technology to help mom-and-pop stores across the country digitise operations.

Internet giant JD.com recently unveiled its own equivalent of the New Retail supermarket, 7Fresh, while Tencent Holdings is teaming up with partners such as Wanda Commercial Management Group, China’s largest shopping centre owner and operator, to drive what they call “smart” retail.

As a result, competition for market share – the one thing that matters most for tech start-ups – has been intense. Hema is even delivering orders worth just one yuan, even though supply chain costs are much higher.

Sustainability is a key concern.

Take the fresh produce/grocery business. The logistics-related cost of making a delivery from supplier to consumer stands at at least 30 yuan per order today, and higher if it involves cold chain logistics. Other research have showed the base figure to be even higher, at around 50 to 60 yuan.

Yet, the average order amounts to just 100 to 150 yuan. Typically, consumers buy fresh food for up to three to five days, and the small households in China means that orders tend to be small. In this fight for market share, the supplier’s margins inevitably take a big hit.

It doesn’t help that most e-commerce platforms are positioned to attract the most price-sensitive shoppers as well. With cheap prices usually comes lower product quality, and it becomes difficult for brands with better quality products to enter the game. This means that the standard of the goods and the average order sizes across the board will remain stagnant.

Perhaps the most damning factor is the lack of transparency in e-commerce sales. The truth is, it is not uncommon for suppliers to re-purchase products from online stores due to heavy subsidies, especially during big online shopping events such as Singles’ Day (11.11), in a bid to create false traffic.

What goes on behind closed doors is this: the supplier sells food at below their cost prices, which are sold on the e-commerce platforms at even lower prices, due to the subsidies. The supplier then re-purchases the goods, and resells them to the platform, making money through arbitrage.

This cycle is a vicious one, with no end in sight, or at least until the platform is able to reach a critical mass – if it does.

More than just smart shopping

As companies set foot into the next frontier of retail, they have to look beyond just providing a smart retail experience or consumers. The key here is to build a sustainable business.

To boost average order sizes and cover their costs, firms can look at introducing higher value products, with better brands that are targeted at customers with high disposable income.

Chinese social e-commerce platform Pinduoduo goes one step further to lower their costs by streamlining the product range for consumers, and helping factories to consolidate orders.

Sales for holidays and big online shopping events should be normalised instead of setting targets, so that suppliers will no longer be able to profit from arbitrage, while venture capitalists should invest responsibly, rather than be swayed by sky-high valuations that may not be backed by any profits.

Of course, it could be that as family sizes in China increase, online orders will grow too, allowing even low-value products to translate into a sustainable business model. Only time will tell.

But if there is any lesson to be learn from the unravelling of the bicycle-sharing business, it’s that the fight to stay on top in New Retail is going to take way more than just deep pockets.