By Assistant Professor of Marketing Lin Chen

When Amazon’s US$ 13.7 billion acquisition of the upscale American grocery chain Whole Foods was announced last week it sent shock waves through the retail industry. For months, analysts have been writing the American shopping mall’s obituary, often pointing to e-commerce — and Amazon — as the cause of the death. Bleak retail sector employment reports from the US Bureau of Labor Statistics show general merchandise stores cut 76,800 positions between January and May, while Amazon announced plans in January to create 100,000 full-time positions over the next 18 months. Then there are the many recent bankruptcy filings by once-strong apparel retailers like Payless ShoeSource and The Limited, and management shuffles by others trying to get their mojo back, including J.Crew, Banana Republic, and Abercrombie & Fitch.

Will the combination of Amazon’s online expertise and Whole Food’s offline assets become the business model that saves retail? Maybe – but traditional bricks-and-mortar retailers looking to resuscitate their flagging fortunes would do well to look to China for ideas, where Chinese e-commerce giants like Alibaba and JD.com have already tried this online-to-offline (O2O) business model, buying up popular offline chains in the Chinese market. Their experiences show that O2O is not a magic pill, and today in China, a new business model called New Retail, has evolved.

E-commerce is as popular with Chinese consumers as it is with Americans, and in some places it’s even more convenient. For example Chinese e-commerce giant JD.com guarantees same-day delivery on most items in large cities like Shanghai and Beijing. Popular Chinese mobile payment apps such as Alipay and WeChat Payment provide online retailers with a wealth of big data about consumers that can be used to increase efficiency and profits. Data from China’s Ministry of Commerce shows that in 2015, the total transaction value of e-commerce in China expanded at a rate of over 35%, and the growth rate of online retail was 20.9% higher than total offline retail sales of consumer goods. Yet despite fierce competition from e-commerce, some traditional retailers are managing to stay relevant with Chinese consumers by developing innovative new business models that create synergy between their online and offline offerings and increase sales in both channels.

The ways in which convenience store chain FamilyMart has adapted to the rise of e-commerce in mainland China offers some useful lessons; last year its mainland operations enjoyed a remarkable 26 percent growth rate. Founded in Japan in 1972 it has 18,000 stores around the world, and entered mainland China in 2004 with its China operations run by a subsidiary of Ting Hsin International Group, a Taiwan-based food manufacturer and distributor with a wide range of popular fast food brands such as Master Kong, Dicos, and Wei Chuan. Though it has decades of experience in offline retailing, FamilyMart is a new player in the world of online sales. When it decided to expand into e-commerce last year, it was going up against several well-established Chinese giants, including  Alibaba’s Tmall Supermarket which has a 58% market share, and JD.com which has 22.9%.

So how did FamilyMart China make a go of it online while still growing their offline business, and what can the retail industry in the US and elsewhere learn from its New Retail strategy?

Do something different

Most traditional retailers enter the online market with a website offering the same merchandise at the same price as their offline stores. This creates channel conflicts – for example, their biggest online competitors may not be the same as those offline, and what attracts consumers may be different as well. FamilyMart wanted to avoid channel conflicts, so they decided from the outset to offer different products online. They also thought about consumer behavior - what would someone be more likely to buy at their neighborhood FamilyMart store vs. what would they be more likely to buy online.  Therefore, their offline stores are geared to meet individuals’ needs for small, last minute items, while their online store is focussed on goods that meet the needs of a family.

Provide good value

One way that FamilyMart has differentiated itself from its online competitors is through pricing. For example, in its online store it offers wine at a significantly lower price than its competitors, but requires consumers buy it by the case rather than by the bottle. This business model is similar to what Costco does in the US in its offline stores.

Get to know your customers

FamilyMart China’s parent company, Ting Hsin International Group, launched a VIP card scheme that works across several of its consumer retail brands, including FamilyMart and the fast food chain Dicos. This allows them to learn more about who their customers are and their consumption habits. FamilyMart has also recently set up a new retail division that is focussed on developing innovative ways to collect and analyse consumer data to better meet customer needs.

Give shoppers a reason to return

When customers sign up for the VIP card, they get a coupon offering a deal on coffee at an offline FamilyMart China store. Coffee is a popular item – many stores sell around 100 cups a day. When someone goes to redeem their coffee coupon there’s a good chance they will add another item or two, which helps boost offline sales.

Play the margins

FamilyMart charges customers an RMB 100 sign-up fee for the VIP card and uses this money to cover their online operations costs. With 800,000 people signing up in the first six months of the card being offered, this provided a cash inflow of RMB 88 million (US$ 12.9 million) This is also similar to Costco in the US, which charges shoppers a membership fee to be able to access its offline stores; Costco’s profit comes mainly from its membership fees. Amazon’s Prime membership scheme is another example of this. To lower its logistics costs, FamilyMart lets its online customers avoid a delivery fee if they pick up their online purchases at their local FamilyMart store. This also gets them back into the offline store, where they may also make a purchase.

If traditional retailers want to co-exist with e-commerce they need to better understand their core competencies and figure out what they can offer that will set them apart from the e-commerce giants in their market. They should stop assuming that what works offline will work online – its two very different competition landscapes. A recent report by Credit Suisse says that around 2,880 store closings were announced in the US between January and April this year, and analysts project between 25 to 30% of US shopping malls may close in the next five years. Retailers need to think fast if they want to be among those still standing in the future.

 This column includes knowledge from Prof. Lin’s  case study “Family Mart: ‘Internet Plus Strategy’”. The column was first published by The Economist Intelligence Unit.