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Marketing in the New Retail Age

Volume 3, 2017

By Janine Coughlin

Are you more likely to buy a new bottle of shampoo or a box of chocolate to reward yourself for making it to the end of a stressful work week? How much are you willing to spend?

These simple questions keep marketers up at night as they seek to understand what motivates us to buy things, and how to manipulate us into choosing one brand over another. Now e-commerce has disrupted decades of marketing and retail science by adding another question to the decision making process: would you prefer to go to a traditional store to make your purchase or order it online?

US consumers seem to prefer buying online; suburban shopping malls are turning into ghost towns as a lack of customers has forced their anchor department stores like Sears and Macy’s to shutter numerous locations, and once-strong retailers like Toys R Us, Payless ShoeSource and The Limited have recently declared bankruptcy. Bleak retail sector employment reports from the US Bureau of Labour Statistics show general merchandise stores cut 76,800 positions between January and May of this year.

Chinese consumers have also enthusiastically embraced e-commerce. Data from China’s Ministry of Commerce shows that in 2015, the total transaction value of e-commerce in the country expanded at a rate of over 35%, and the growth rate of online retail was 20.9% higher than total offline sales of consumer goods. But fierce competition between China’s e-commerce giants has led to the development of a new business model that combines online and off-line strategies with payment services, big data, and logistics. Alibaba founder and CEO Jack Ma christened it New Retail in his October 2016 letter to shareholders. “We are not merely trying to shift buy/sell transactions from offline to online, nor are we changing conventional digital marketing models to squeeze out a little additional profit. We are working to create fundamental digital and physical infrastructure for the future of commerce,” he said.

New Retail is also bringing innovation to retailing in the US, as Amazon’s recent US$13.7 billion acquisition of upscale American grocery chain Whole Foods shows. “The New Retail model is truly ground breaking, because it is initiated by internet pure players,” says Adjunct Professor of Marketing Michel Gutsatz. “All brick-and-mortar retailers have their own internet operations, but New Retail is a completely different approach. The internet pure players that have huge customer bases (Alibaba in China, Amazon in the US) realise that they need to complement their operations with physical stores – because customers still need the retail experience.”

So what does this mean for brands? How will it change the way they attract consumers? “For brands, they really need to understand what the purpose of the retail store is,” says Associate Professor of Marketing Jane Wang. “What role does it play in a consumer’s decision making journey? New Retail doesn’t mean getting rid of your inventory, and sometimes getting rid of your inventory doesn’t even reduce your costs by that much.”

Prof Wang adds that there is no one-size-fits-all New Retail strategy; the approach depends on the type of brand. For example, she expects FMCG (fast moving consumer goods) brands like shampoos and other utilitarian products will be especially hard hit by this shift to New Retail. “These are the goods that people are most likely to switch to buying online because they’re bulky and the physical and functional differences between them are small,” she says. “Even if I go to my local supermarket and see and touch these brands, I cannot really tell the difference between Brand A and Brand B.” She explains that customer experience design for these utilitarian products doesn't add value. Instead these brands must compete on back-end aspects like channels, promotion, and delivery in order to be able to pass on savings to the consumer. “People are likely to stick with what they’re used to and when they go online, they buy the cheapest one available,” she says.

On the other hand, what she calls hedonic goods, things like chocolate, provide more than functional benefits. “We can live without them, but we buy them because they make us feel good,” she explains. “The emotional benefits have a much wider space to be defined by the brands or by the marketers themselves.” These brands may employ KOLs (key opinion leaders) or use experience design — for example setting up a temporary pop-up store — in an effort to do this.

“I predict a lot of the competition between brands will shift into the emotional benefits,” Prof Wang says. “This is really a challenge and an interesting time for marketers to redefine the product categories they are in and what kind of values they can provide to consumers and how to define them both online and offline.”

Retailers must also adjust their strategies to survive in this New Retail environment. In her case study “FamilyMart: ‘Internet Plus’ Strategy” which won the 2016 Global Contest for the Best China-Focused Cases, Assistant Professor of Marketing Lin Chen explores how the convenience store chain has begun implementing a New Retail strategy in China. Though it has decades of experience in offline retailing, it is a new player in the world of online sales, and it is competing against several well-established Chinese internet giants, including Alibaba’s Tmall Supermarket which has a 58% market share, and JD.com which has 22.9%.

Prof Lin says that most traditional retailers enter the online market by setting up a website that offers the same merchandise at the same price as their offline stores, which is one reason why most traditional retailers will struggle to thrive in the New Retail environment. “This creates channel conflicts; their biggest online competitors may not be the same as those offline, and what attracts consumers may be different as well,” she says. “When FamilyMart China decided to expand into e-commerce last year, they thought about consumer behaviour – what would someone be more likely to buy at their neighbourhood FamilyMart store vs. what would they be more likely to buy online.” FamilyMart decided that the physical retail stores should be geared to meet individuals’ needs for small, last minute items, while their online store is focused on goods that meet the needs of a family, she explains.

FamilyMart also uses pricing to differentiate its offering from competitors. For example it offers wine online at a significantly lower price than its competitors, but requires consumers buy it by the case rather than the bottle. This business model is similar to what big box retailer Costco does in the US in its offline stores. Partly in an effort to better track and understand its customers’ habits and preferences, FamilyMart China’s parent company, Ting Hsin International Group, launched a VIP card scheme that works across several of its brands including the fast food chain Dicos. FamilyMart has also set up a New Retail division that is focused on developing innovative ways to collect and analyse its customers’ data to better meet their needs.

Big data has been another big challenge for traditional retailers. “People are so crazy about big data, big data, big data,” says Prof Wang. “But I think few people really understand its value. It’s important because it reveals some patterns about why people behave a certain way. While the data in itself shows you an existing pattern, I think it requires insight to understand this pattern and how it can really be useful to you.”

Prof Gutsatz says traditional retailers lack the online DNA to shift gears and move into the New Retail world. “They do not have the know-how or the ecosystem, they are focused on their retail operations and stores,” he says, noting that there have already been some high-profile failures. For example in an effort to “learn” how to do online sales in China, in 2012 US retailer Neiman Marcus took a 44% stake in the Chinese fashion website Glamoursales.com (now mei.com) which it ended up offloading just two years later when profits didn’t meet its expectations. The following year, in 2015, Alibaba made a strategic investment of more than US$100 million in the platform. Another example he cites is Swiss luxury brand holding company Richemont buying Net-a-Porter, then, not being able to figure out what to do with the online luxury retailer, made a deal to merge it with YOOX Group, an online pure player.

As internet pure-players like Amazon and Alibaba buy up more traditional retailers, Prof Gutsatz wonders how they will manage these acquisitions. “How do they integrate them? What new marketing do they use?” He says another issue is how to merge the two business cultures. “With companies like Amazon moving to a less human-operated model, with robots in warehouses and drones for delivery, retail is a human-operated business where sales persons are central. How can these two cultures merge?”

Even before it acquired Whole Foods, Amazon made news for a proto-type retail store it set up in Seattle last year that required few staff to operate. It can track electronically how customers move through the store, and what items they pick up from the shelves and put in their baskets. The store has no checkout counters; it can automatically charge customers for items they carry out of the store. China already has un-manned retail outlets – the convenience store chain BingoBox debuted last year, and quickly found itself with a couple local competitors.

As we are still in the early days of New Retail, it’s hard to know what it will really mean for consumers in the future. Prof Lin notes that Alibaba and JD.com are both making significant investments in artificial intelligence and predicts that we may see virtual reality used to bring the online shopping experience close to the offline one.       

Prof Wang has a rather bold prediction. “We might actually see the death of the brand,” she says.  “With big data, the smart company that has superior analytic tools and can really ‘read’ their customers, then at least for functional FMCG products like shampoo, I don’t know how long it will take but in the foreseeable future it may happen.”

She says that platforms like Alibaba, JD.com and Amazon will have very detailed information for every consumer about what they buy and how frequently they buy it. They could share that data with the brands and work together to deliver individualised products to consumers.

“Imagine if there is a product that has no brand, but it’s perfectly tailored to me and my preferences. Nike offers consumers some customisation, and customised Nike products are particularly powerful. But is this because Nike is a powerful brand, or is it because customisation is powerful? I’m not sure,” she says. “When the platform can ask big data to provide perfectly beautiful, functional products, you don’t really need the brand to gauge the quality.”