All this talk about the U.S.-China trade war forgets where the future lies. China isn't the world's factory anymore. It's the world's biggest shopfront. Whether that's on Nanjing Road in Shanghai, your computer screen, or the mobile phone in your hand.
Japanese retailers are doing a better job than their U.S. rivals in selling into those "shops." Increasingly, they don't care if the sales are offline or online. The best of the best has latched onto the "New Retail" concept pioneered by Alibaba (BABA) and are combining their physical presence with strong digital sales.
Japanese brands such as Casio Computer (CSIOY) and Uniqlo, the clothing brand of parent Fast Retailing (FRCOY) , have been early, successful movers. Others I'll highlight later are catching on.
The pace, like most things in China, is electric.
Before China's capitalist-leaning reforms truly kicked in, the merchandise in all stores was kept behind counters, and consumers stood on the other side. Even in the 1980s, shoppers had to ask sales staff to hand them goods if they wanted to check anything out, let alone buy something.
That started to change in the 1990s with the advent of shopping centers and department stores. Walmart (WMT) and overseas rival supermarkets like the French brand Carrefour (CRRFY) started opening big-box stores in China in the late 1990s. The first online stores started in 1999.
Flooded with fakes and counterfeit merchandise, the Chinese branch of the Internet remained the Wild Wild East. That changed in 2012, when Alibaba opened its Tmall e-commerce channel, with stricter controls and selling higher value goods.
Alibaba has also led the way with what founder Jack Ma calls "New Retail." That combines online sales with an offline presence, backed by Big Data and fast delivery to seamlessly combine the two.
The country's economy is increasingly driven by domestic consumption and consumer spending. Retail sales for China's 1.4 billion population still grew at 9.0% last year, albeit down from 10.2% in 2017. That's masked by a particularly savage decline in auto sales, due to changes in the tax rate that caused a 15% spike in 2015, followed by a 4% drop last year to their weakest on record.
New Retail sales kicked off with 39 billion yuan (US$5.8 billion) in sales in 2017. They should double every year through 2022, Nomura (NMR) predicts, based on data from market-research tracker Qianzhan. That would bring them to 1.8 trillion yuan (US$266 billion) for 2022.
The Japanese brokerage expects three adaptive phases for New Retail.
The first, and most obvious, adaptation is for retailers to adapt existing offline stores. This requires physical restructuring. The second phase deploys online tools to attract customers to physical stores. Finally, retailers need to use Big Data to integrate online and offline.
Alibaba is showing how. It started opening physical stores itself in 2014, getting consumers to come to offline stores and pick up merchandise ordered online. In 2015, it started the process in the opposite direction, encouraging consumers to come to offline stores and try out merchandise, whether or not they bought anything in the store. QR codes and one-click registration let consumers save, online, the goods they like so they can order them later, online.
Its next phase is to apply the Big Data yielded from online and offline sales, as well as the use of its Alipay mobile-payments app, with more than 900 million users. This databank fuses the real and the digital worlds, and lets brands see what their customers are doing, and who they are.
Nomura reports that this has delivered insights that the brands had themselves not gleaned. The Chinese skincare brand Lin Qing Xuan, for instance, has uncovered a shift in the age of its consumers from female college students to female teachers.
Brands will want ... need, in fact ... to work with and through Alibaba even if they also compete with the company. Their success will depend on how adept they are at this New Retail.
Casio Computer opened a "smart" New Retail store in Hangzhou, Alibaba's hometown, in 2016, to coincide with "Single's Day" in China, which falls on November 11 (or 11/11). The manufactured sales day draws exceptionally heavy online traffic.
Casio, selling its namesake watches and all manner of other electronic consumer goods, worked with Tmall on the store. It featured huge screens to display new products to shoppers. And Alibaba's Big Data tracked registered consumers coming to the store, to offer them tailored merchandise.
Casio was the third-most-successful seller of accessories that day. It has maintained the momentum, and last year generated more than 100 million yuan (US$15 million) in sales on Single's Day.
Uniqlo also teamed up with Tmall on Single's Day in 2016. That helped parent Fast Retailing unify online and offline pricing, and offer click-and-collect service. Uniqlo launched a mobile flagship store ahead of Single's Day last year, with streamlined ordering. For Single's Day, it ran both click-and-collect to bring consumers into stores, and QR code scanning in stores to take offline consumers online.
Uniqlo generated more than 1 billion yuan (US$150 million) in sales on Single's Day 2018. It's the only fashion brand out of eight companies to breach that mark.
Uniqlo (No. 4) and the minimalist brand Muji, listed under parent Ryohin Keikaku (RYKKY) (No. 48), both ranked in the top 100 most-promising brands for New Retail, in a Chinese ranking.
There's a handful of other Japanese retailers with strong prospects for New Retail penetration in China, thanks to their existing store network.
Asics (ASCCY) , most famous globally for its running shoes, has a large network of stores in eastern China, and to a lesser degree the central and northeast portions of the huge nation. Its sales were down 2% in the United States at last count, and flat in Europe. They're up 4% in Japan but advancing 40% in China, thanks to strong demand for its Onitsuka Tiger brand of fashion sneakers.
The makeup brand Shiseido (T:4911) likewise has a large footprint across those three huge parts of town, a more-even split between northeastern, eastern and central China. Its sales are up over 20% in China, driving record company-wide sales of ¥1.1 trillion (US$9.9 billion) and record operating profit of ¥108 billion (US$980 million) last calendar year.
Sony (SNE) and Canon (CAJ) could follow in the footsteps of Casio, all three with a large network of Chinese stores.
These bricks-and-mortar stores were once seen as a future if not existing drain on earnings. Now, the retailers able to sell through flagship stores on Tmall, their own online presence, and their physical stores are set to make those stores pay by driving business fluidly online and offline.
Consumer goods that are highly experiential should thrive in the new environment.
Retail is dead. Long live the New Retail!
