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Print Edition> Business
UPDATED: May 4, 2015 NO. 19 MAY 7, 2015
An Unlikely Engagement
As the e-commerce industry eats into brick-and-mortar stores, retailers consider gearing up for a deal
By Deng Yaqing

GHOST MALL: Few consumers visit one of the shopping centers located on the downtown Beijing Financial Street (IC)

Three years ago, Wang Jianlin, Chairman of Dalian Wanda Group Corp. and the owner of China's largest department store chain, made a bet with Jack Ma, founder of Chinese e-commerce company Alibaba Group, at the 2012 CCTV China Economic Persons of the Year award ceremony.

"If e-business manages to take up 50 percent of China's retail market by 2022, I will be most willing to lose 100 million yuan ($16 million) to Jack Ma, and vice versa," said Wang, incarnating the war between offline and online retailing in the country.

Yet online sales have experienced dramatic growth in the past two years. In 2014, the e-retailing transactions in China totaled 2.82 trillion yuan ($456.5 billion), a surge of 49.7 percent from the 1.89 trillion yuan ($305.9 billion) registered in 2013, making up 10.6 percent of the total retail sales of consumer goods, according to China E-business Research Center. The center estimates that e-retailing transactions in China could exceed 4 trillion yuan ($647.5 billion) this year.

Squeezed by drastic e-commerce expansion as well as the current economic slowdown, brick-and-mortar retailers are trapped in a morass of slow growth and negative profits. According to the China National Commercial Information Center, physical retail business in China slipped into single-digit growth in 2014 and has begun to suffer further shrinkage in 2015. In January and February, the value of sales in 100 key retail enterprises dwindled by 1 percent, the worst result since 2011.

"Attack is the best defense. What really matters now is turning the rival's territory into a battlefield," said Yang Jun, CEO of Yunhou.com, an online-to-offline (O2O) platform under Bubugao E-commerce Co. Ltd.

Transformation needed

While online vendors enjoy the luxury of collecting data on their respective consumers' behaviors, physical retailers can't quantify their shoppers' habits the way online stores can count their clicks.

Most brick-and-mortar retailers tend to attract consumers with discounts. Their promotions are usually carried out in the form of media advertisements, phone calls and text messages, which are far from being accurate, said Yang.

In response to the challenge from e-business, many physical retailers have tried to set up their own e-shops, a practice that has resulted in lackluster sales. At the same time, some pure e-commerce platforms also confront logistics and delivery problems. "In my opinion--and maybe theirs too--those are signs for the two to team up," said Pei Liang from the China Chain Store and Franchise Association.

"The concept of O2O refers to the combination of offline display and experience; and online promotion, marketing and payment," Zou Yi, General Manager of Shanghai-based Linkease Investment Consulting Co. Ltd., told Beijing Review.

Aside from the strategy of O2O, retail on all fronts may find its savior through other means.

"Special attention should be paid toward enhancing consumer experience and shopping environment, controlling prices and adjusting the attractiveness of the commodities physical stores provide," said Zou.

These days, consumers are not just satisfied with the basic functions of commodities. To cope with the trend, some manufacturers have begun to unveil high value-added products to bring consumers the added courtesy of touching, testing and family interaction in physical stores," said Lu Ning, Senior Vice President of home appliance retailer Gome's e-shop.

The rapid growth of e-business concentrates on commodities with high margins, while the margins of those products sold by physical stores are often swallowed by property owners and retail channels, according to a study by Jiang Ruxiang, a Ph.D. of sociology from Peking University. For example, half of the money a consumer pays for a cup of coffee in Beijing's central business district goes toward the rent of the café.

However, most physical retail enterprises take it for granted, and try to step into e-business on such a basis, said Jiang, noting that these retailers haven't realized that intermediaries should be eliminated to reduce cost.

"The retailing industry is in urgent need of a channel restructuring. If the commodities physical retailers sell are as cheap as they are in online shops, they will have an upper hand over their online competitors," said Zou.

Moreover, in some sense, online and physical stores are compatible with each other, which allows the existence of an integrated retail model. "For example, online retailing is fit for digital products, household appliances and basic consumer goods, while it better behooves brick-and-mortar retailers to sell products targeted at consumers who value on-site consumption experience and always lead the trend, said Zou.

"Department stores should differentiate the brands they sell from those available in online shops," said Tao Wensheng, co-partner of Allpku, a Chinese management and consulting company, who noted that efforts should be made to analyze consumer demands and psychology.

"Compared with overseas successful templates such as Macy's in the United States and Seibu in Japan, Chinese department stores are still the 'middleman landlord,'" said Zou, adding that self-branded products should be developed and released to help win market space.

Future growth

Brick-and-mortar stores still maintain certain advantages which online stores cannot replace--at least right now.

"Although consumers can surmount geographical restrictions and be recommended commodities they are most likely to buy by shopping online, physical stores maintain unique advantages--closeness to consumers and firsthand experience," said Zou. "It's hard to imagine a middle-class man buying his suit online without trying it on."

According to a consumer insight report published by world-leading management consulting company Accenture in 2014, 75 percent of urban consumers in China compare the prices quoted by online and offline retailers before they make major purchases, and more than half of them will go to physical stores to experience and evaluate these products in person. The report indicates that urban Chinese consumers are trying to create a more satisfying and comfortable model of shopping by seamlessly integrating the two channels.

Wu Pinhui, Chief Marketing Officer of Uniqlo in the Greater China region, suggested that the Japanese casual wear retailer doesn't expect its e-shop will outweigh physical retailing, and the company will value the latter even more in days to come.

"There's a lot of room to create and provide fresh consumer experience in the retailing industry, and we will go all out making it more convenient for consumers to enjoy such services," said Wu.

Though the gamble between Wang Jianlin and Jack Ma was later cancelled by Wang himself, the wrestling will continue into the future. Physical retailing will never be replaced by e-commerce, Zou believes.

"After going through a series of restructuring and adjustments, brick-and-mortar retailers will regain their growth momentum," he said.

Zou's assertion may sound like wishful thinking, but it appears that physical stores still have a few cards left to play.

Copyedited by Kylee McIntyre

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