Future of retailDeloitte China

Redefine market share in time 3

The path to innovation 6

Removing the roadblocks 11

Contact 15

Future of retail | Redefine market share in time

3

The sales boom seen in recent years from Alibaba’s Singles Day shopping event is undoubtedly down to the unique digital environment in China. Now is the time to take a closer look at the players behind the innovative revolution and to define the marketplace of the future. Deloitte China Consumer Products and Retail Sector Leader Zhang Tianbing shares his insights on the future of retail. The unique digital landscape in China is a joint product of consumer preference, technology and a variety of market players. The two indicators that mark the forming of this landscape are the ever increasing penetration of online retail and adoption of mobile devices. Online retail revenue in China in 2016 totaled USD 758 billion, accounting for 15.5% of the retail sector, with the first three quarters in 2017 seeing online retail maintain an over 25% growth rate along with higher penetration rate. Meanwhile, the increasing adoption of mobile devices also prompted China’s shift towards digital retail. Not only have mobile devices become the primary media for online shopping – 82% of the Singles Day sales in 2016 were made on mobile devices, they have also become the top payment choice for consumers – third party mobile payment in Q2 2017 amounted to USD 4.2 trillion in volume.

In this unique digital environment, a variety of consumer-centered forerunners and pioneers, aided by improved tech and analytics, are reshaping the retail ecosystem and creating the future of retail:

Disruptor. As market forerunners, Alibaba, Tencent and JD have built on their exponential growth and expansion two multi-industry and consumer-centered ecosystems, thus becoming the leading force in facilitating the transformation of the retail sector via resource integration and technological advances.

Partner. The substantial development in China’s retail sector has made service and technology suppliers an integral part of the market. By providing relevant support for the retail system, these suppliers build partnerships with disruptors, jointly reforming the retail ecosystem through technology and innovation.

Retailer. Faced with the revolution in the retail sector driven by disruptors, conventional retailers are taking an increasingly proactive stance with regard to the changing consumers and technology as well as the transformation and reshaping of the retail ecosystem.

Disruptor

Tech & analytics

ConsumerRetailer Partner

Reshaping the future of retail through innovation

Redefine market share in time

4

Future of retail | Redefine market share in time

All the attempts made by these players are innovative efforts aided by tech and analytics to keep up with the changing needs and purchasing habits of the new generation of consumers. In its consumer research, Deloitte finds that the new trends in consumer needs have raised new demand for the market players:

Make it easy. Along with the product purchased, the life scenario and the very experience of such purchase are held in equally high regard by consumers. The new generation of consumers expect to enjoy efficient and effortless shopping experience at any time and in any life scenario.

Make it personal. Personalized consumer demands require players in the retail market to gain an in-depth understanding of their consumers and cater to their precise needs.

Make it special. In addition to sales events designed for the general public like Alibaba’s “Singles Day Sale” or JD’s “618 Festival”, consumers are looking for unique experience to celebrate and share the special moments of their lives.

Three dimensions of consumer demands

Major trends in consumption

Tech driven Health Event driven Connected

Personalization Experience Convenience Sharing economy

Make it Easy

Make it Special

Make it Personal

Give me effortless service delivered fast

Deliver experiences that’s memorable and

shareable

Know me and serve me

Make itPersonal

Make itEasy

Make itSepcial

Future of retail | Redefine market share in time

5

The profile of Jane

• Female

• 35-years old

• Married with one son

• College education

• Works as a finance controller at a MNC in shanghai

ActivityKey: Industry connect point

1 P.M.Browse insurance & wealth mgmt. Products

3:30 P.M.Afternoon tea/ snack

Food & beverages

6 P.M.Off work – drive home

Auto

7 P.M.TV Time

Media

9 P.M.Shower time

Consumer products

11 A.M.Bank services

Banking

3 P.M. Online shopping

E-commerce and traditional Retail

9:30 P.M.Mobile time (chatting & browsing)

TMT

Insurance & asset mgmt.

The very notion of the “future of retail” stems from the changes brought along by disruptors and the future landscape of the retail sector will continue to change as the transformation deepens. According to Zhang Tianbing, “leading disruptors such as Alibaba and Tencent & JD are devoted to facilitating penetration at a range of consumer touch points and propelling the transformation via resource integration and innovative models, which will inevitably trigger another significant change in the future of retail – retail competition will no longer be bound by conventional notions of products and geographic markets. Future competition will be a battle for consumers and their time, with the key criterion to assess market share being the percentage of the 24 hours of a consumer’s day occupied by the market player.” Tencent’s WeChat has already taken up 30% of smartphone users’ time

in China, while Alibaba is also trying tirelessly to occupy consumers’ time with increasing investment in social network, media and entertainment. By taking up more time in the daily life of consumers, disruptors can reinforce the connection with consumers and provide precisely personalized products and services based on the consumer profile generated from collected data, meeting consumer demands around the clock. This can be seen in the examples of Alibaba and Amazon:

Alibaba’s ecosystem consists of a variety of elements including shopping, media, finance and logistics. Through this ecosystem featuring high level of O2O integration, Alibaba is able to meet consumer needs on all fronts, to integrate consumer data and form the most valuable core – consumer insight.

Amazon's entry into fashion has shown the market another strength of disruptors. Equipped with more direct consumer engagement and more comprehensive consumer data, disruptors are able to gain profound understanding of consumers and use this insight in the design and production of their own brands to precisely cater to consumer demands. Moreover, aided by ever more sophisticated consumer insight, disruptors may also explore more precise segmentation, further challenging the long-established positions of conventional brands.

In this article we have covered the characteristics of consumers and market players in the transformation towards the future of retail and the idea of engaging consumers in different life scenarios around the clock. More articles on the future of retail will be released on major trends and coping strategies.

Reshaping the future of retail through innovation

6

Future of retail | The path to innovation

In the first article of this series, Deloitte China Consumer Products and Retail Sector Leader Zhang Tianbing shed a light on the definition of the Future of Retail, along with its key players and their characteristics. In this new battle for around-the-clock consumer engagement, what is the basis that prompts disruptors, partners and conventional retailers to innovate? Which pathways should each player choose? In this article, Zhang shares more insights on the path to innovation in the Future of Retail.

In Future of retail: redefine market share in time, we have already explained the key players in the retail market of the future, along with the changes in consumer needs and the new notion of market competition – shifting from a competition for channels to a competition for consumer engagement in different life scenarios around the clock. In

the second article of the series, we are going to take a closer look at the basis, opportunities and pathways for innovation in this transformation towards the future of retail.

In China’s unique digital environment, the three key consumer-centered market players, the disruptor, partner and conventional retailer are all reshaping the retail ecosystem with the aid of increasingly more sophisticated technology and analytics. With an ecosystem revolving around consumers, the ever-changing consumer needs have become the core driver for the decision-making and transformation of market players, bringing new opportunities and challenges.

Faced with changing consumer needs, it is imperative for market players to make full use of data and technology as well as consumer

needs to back and guide the transformation, ensuring innovative consumer engagement in different life scenarios around the clock and catering to every consumer demand in a prompt and precise manner. This innovative consumer engagement allows companies to occupy more time in the 24 hours of a consumer’s day, reinforce consumer retention and further refine consumer profile.

A battle for consumer’s time via multiple touch points. Alibaba and Tencent & JD provide a useful example; in addition to upgrading the core competitiveness of the long-established platforms, the two dominant ecosystems are taking progressive steps to ensure maximum consumer engagement in various life scenarios via e-commerce, SNS, entertainment and payment. The innovative consumer engagement model is the battlefield for the

Changing consumer needs

Data-driven/technology enabled

Innovative consumer engagement

Channel IntegrationSingle channel operation excellence New format, model & service

New opportunities in the Future of retailNext generation opportunities emerge in the retail space

The path to innovation

7

Future of retail | The path to innovation

major ecosystems to fight to occupy maximum share of a consumer’s day. By providing increasingly diverse services and contents, the two ecosystems are aiming to attract and retain consumers by ensuring continuous satisfaction.

Establishing around-the-clock consumer engagement also helps data collection and analytics. In meeting consumer needs and establishing consumer interactions through comprehensive touch points, ecosystems are able to collect multi-dimensional and comprehensive data from consumers to gradually form precise consumer insights and profile, which will in turn drive the optimization and personalization of each specific touch point, thus ensure that the ecosystem is readily present for every consumer demand to deliver fast, personalized and precisely unique experience.

In striving to engage consumers in all life scenarios around the clock, companies are taking proactive and innovative measures to transform into the future of retail in the following three aspects:

Transformation and optimization of conventional value chain In order to keep up with the fast-changing consumer needs and optimize the operation efficiency of the system, market players in retail are faced with pressing need to digitalize the entire retail process, using effective analytics to maximize the value of data and propelling value chain transformation. Drawing from extensive professional service experience, Deloitte employs a full suite of comprehensive methodology, analytics, experts, and industrial insights to aid retail enterprises in strategy, consumer interaction and marketing, procurement and sales to

drive value chain transformation and optimization. The key applications of retail analytics are:

Strategic planning based on analytics: Aiming at long-term development and objectives, data analytics can help companies make a wide range of strategic decisions including new market entry, market expansion and growth strategy.

customer lifetime value and share of wallet using next best action modelling during the retention stage.

Consumer interaction and marketing analyticsCustomer and marketing analytics

Marketing mix optimisation

Digital & social marketing analytics

Customer segmentation

Multi-channel behavioural

analysis

Online journey optimisation

Advertising/marketing analytics

Maximise marketing roi throughmodelling and test/learn

Purchase channel analytics

Increase sales by improving basket size and conversion

Customer analytics

Maximise customer lifetime value and share of wallet using next best action modelling

Single customer view, CRM &

lifecycle management

Up-sell & cross-sell

Customer experience

optimisation

Customer at risk & reactivation

Awareness Consideration Customer conversion Growth Retention Advocacy

8

Future of retail | The path to innovation

Customer insights and marketing based on analytics: There are three front-end stages of interaction between enterprises and consumers: awareness, conversion and retention. By optimizing various checkpoints in the three stages with effective analytics, companies can maximize return on investment through data-based modelling and test/learn in the awareness stage; increase sales by improving basket size and conversion during conversion; and maximize customer lifetime value and share of wallet using next best action modelling during the retention stage.

Procurement and sales based on analytics: For the back-end supply chain, the three stages are: design and planning, manufacturing and shipment, and distribution and

liquidation. By using corresponding analytics, companies can optimize every decision-making process in the supply chain. For instance, in the design and planning stage, using analytics and client insights, companies can ensure more pertinent and profitable assortment and pricing strategy; consumer demand and forecast are taken into account in determining store sites, space and inventory allocation to maximize store profit. In the manufacturing and shipment stage, data-driven exploration of consumer demands will help guide procurement, manufacturing, inventory management and other day-to-day operation activities. In the distribution and liquidation stage, retailers can forecast the result of markdown and promotional activities based

on inventory and sales record, and develop plans that do not affect the profit margin and profiablity.

The application of digital manufacturing technology also propels the demand-centered supply chain system. An example would be the Speed Factory in Europe, Adidas introduced robotics to optimize production and manufacturing process, so boosting efficiency and lowering the cost. By transforming its globalized supply chain system to a local market supply chain, Adidas managed to reshape and optimize the conventional value chain.

Dynamic / predictive routing

Flexible network

Demand sensing

Assortment analytics

Pricing strategy

Demand forecasting

Agile manufacturing

Analytics-driven

sourcing

Design & planning Distribution & liquidationManufacturing & shipment

Markdown analytics

Event-based risk analytics

Flow optimization

Store clustering

Trend identification

Multi-echelon inventory

optimization

In-season inventory balancing

Supply chain analyticsAnalytics can be used in other areas across the value chain

9

Future of retail | The path to innovation

Cross-channel integration Integrating multiple channels, especially online and offline channels, is of key significance to enterprises striving to ensure innovative consumer engagement in various life scenarios. There are obvious discrepancies between e-commerce enterprises and brick-and-mortar retailers regarding resources and technological competitiveness. Integrating resources and data from various scenarios and processes and forming systematic solutions for consumer needs will substantially boost the efficiency and competitiveness of the entire ecosystem. As an example, the Tmall mini store launched by Alibaba’s LST platform effectively pooled resources and respective strengths of retailers, brand owners and mom-and-pop stores and helped them address their pain points and develop digital competence, ultimately enabling integrated cross-channel services. In this very process, store owners not only get a better selection of goods, but are also able to optimize procurement order placing and day-to-day management through the use of digital devices; through shared channel resources, distributors can now come into contact with more offline mom-and-pop stores and upstream brands; while brand owners aided by this integration can interact with more consumers via the LST platform, boosting distribution efficiency. Furthermore, as the platform that prompted such integration, LST is also able to integrate all resources in the Alibaba system in order to improve consumer touch points and the ecosystem at large.

Model and service innovation The changing consumer needs are resulting in increasingly noticeable discrepancies in business models in the retail space. In the fast-changing market environment, as a principal touch point in consumer interaction, the retail outlets in various business models need to stay open-minded when it comes to innovation and use innovative models and services to ensure higher consumer satisfaction. A good example would be Alibaba’s Hema stores. After two years of fast development, this new species in the retail landscape has established a highly efficient business model featuring a combination of shop front and storage as well as seamless integration of retail, in-store dining and delivery services that bridges online and offline retail, and meets diverse consumer needs with more precise and efficient product, service and experience. In this innovative model, the physical store focuses more on consumer experience, while the online channel, backed by mobile devices and a fast delivery service of 3 km radius, covers a larger number of consumers and handles more sales.

To sum up, technology and analytics are undoubtedly the foundational enabler for all the pathways mentioned above. According to a joint global survey by Deloitte and MHI, new technologies including cloud computing & storage, sensor & automatic identification, inventory & network optimization, robotics & automation are already widely adopted worldwide as key drivers of enterprise optimization and innovation; while emerging technology such as wearable & mobile technology, predictive analytics, 3D printing, Internet of Things and driverless vehicles are looking at exponential growth and increasing adoption rate in the coming five years. The advances in tech and analytics are allowing more opportunities and possibilities of interaction between businesses and consumers, as well as providing companies more approaches in reshaping value chain. To ensure continuous innovation and the transition towards the future of retail, it is essential for companies to stay open-minded about new technological revolution and make full use of these technological advances to enable strategic transformation.

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Future of retail | The path to innovation

In the second article of the Future of retail series, we took a closer look at the basis, opportunities and pathways for innovation in this transformation towards the future of retail. More articles on the future of retail will be released on major trends and coping strategies.

Technology and analytics, the foundational enabler of new retailAdoption rate

Source: 2017 mhi/deloitte annual industry report - next generation supply chains

5-Year Compound Annual Growth RateIn-Use Today

Cloud COMPUTING & STORAGE

Sensor & automatic

identification

Inventory & network

optimization

Robotics & automation

Wearable & mobile

technology

Predictive analytics

3d printing Driverless vehicles &

drones

Internet of Things*

10%

20%

30%

40%

50%

0%

5-year compound annual growth rateIn-use today

11

Future of retail | Removing the roadblocks

In the first two articles in the series, Deloitte China Consumer Products and Retail Sector Leader Zhang Tianbing shared his insights on the market characteristics and potential innovation pathways for the future of retail. Meanwhile, what are the pressing challenges faced by disruptors, partners and conventional retailers in the process of transformation and innovation, and what coping mechanism should be adopted? In this article, Zhang delves deeper into the obstacles and coping mechanism in the transition towards the future of retail.

In Redefine market Share in time and The path to innovation, we have covered the characteristics and potential innovation pathways for the future of retail. The third article in this series will center on the obstacles faced by various enterprises in the transformation and the corresponding coping mechanism, in order to provide a fresh perspective on how to remove these roadblocks.

In China’s unique digital environment, disruptors, partners and conventional retailers are all striving to reshape the retail ecosystem to be more consumer-oriented with the aid of increasingly sophisticated technology and analytics. While conventional retailers are busy transitioning to the new age of consumption, e-commerce businesses are concentrating on strengthening their cooperation with conventional retailers to develop innovative retail models. However, the core obstacle on the road ahead seems to be the very accomplishment these established retailers used to take pride in. Yet what is the reason behind this seeming paradox?

The established players in consumer products and retail are usually built on the bedrock of organization, people and infrastructure compatible with the market environment of their glorious past. However, this very cornerstone that has made the company is now hindering its transformation into the future of retail. In the past couple of years, major leadership reshuffling has been seen in a number of renowned MNCs in the consumer products and retail sector, with the entire industry feeling the aftershock. The past achievement has become the roadblock for these experienced market players, preventing them from seizing the golden opportunity to embrace the future of retail and severely hindering their performance.

In more specific terms, the three key aspects - organization, people and infrastructure - are each posing major challenges in the transformation. The internal structure built by conventional retailers around the past success has been rendered obsolete in the new retail ecosystem which features significantly different market environment and calls for new organization and new people. Conventional players in retail and consumer products: The organizational structure built on old business models is no longer compatible with new retail. While the success of these players in the past might have been largely attributed to heavy dependence on wholesale and distribution, the changing market environment in recent years meant that these companies had to expand the existing organizational structure to cope with increasing competition. The direct sales, self-run e-commerce channels and third party e-commerce channels were given a lot of attention lately and have been included into the existing system. However, in this updated system, various channels remained relatively independent and disconnected in their departmental setting, management and resources.

Removing the roadblocks

12

Future of retail | Removing the roadblocks

In the future of retail, the center of the entire ecosystem has shifted from businesses to consumers. In order to excel in the market, enterprises need to cater to consumer needs with highly integrated products and experiences. The old organizational structure featuring separate and parallel channels and market segmentations, which is no longer compatible with the consumer-centered omnichannel model favored in the future of retail, has now become a major roadblock on the path of transformation.

As business and organizational structure determines people and infrastructure, the senior management and infrastructure compatible with conventional business model have to go through a complete overhaul for the company to embrace the new retail model.

A major obstacle in the conventional organizational structure lies in the fact that different and fragmented business units are held in the hands of a few individuals with vested interest. Conventional enterprises owe its past success to distributors and channels. As a result, heads of corresponding business units have worked their way up to senior management and are reluctant to change the existing organizational structure and resource allocation. Furthermore, the added cost incurred during the transformation and the short-term negative impact on overall business performance also made it difficult for the leadership to take the leap.

For enterprises in the retail and consumer products sector, their infrastructure consists of the IT system, human resources, finance, etc. Conventional retailers had built their infrastructure in line with their internal operation and organizational structure, yet this existing infrastructure has already been rendered obsolete by the consumer-centered omnichannel model in new retail. For instance, in the past, many multinational retailers reliant on the distributor model had already established supporting IT infrastructure. As new channels developed in recent years, these companies started to annex new modules that are completely independent and fragmented in IT and organizational structure. The lack of integrated overall design and planning in infrastructure has prevented these enterprises from transitioning towards consumer-centered omnichannel service in the future of retail.

Consumer-centered competitive Strategy

Source: Deloitte Analysis

Where to sell

Decide on channel for purchase

How to cover broader market

Drive sales from consumer

interaction

What is the company's advantage

What is needed

What to produce

Decide on products

Channel strategy

Compare/select

channelProduct strategy

Compare/select

products

CompanyCentered

Customer Centered

Goal Goal

13

Future of retail | Removing the roadblocks

As a case in point, Kodak failed to lead the digital revolution after inventing the digital camera and was eventually edged out of the market by fast-growing digital camera brands. Its bankruptcy could be attributed to the “people” obstacle mentioned above. Despite being fully aware of the revolutionary significance of the new products and technology as well as its technological shortcomings, Kodak was unable to mitigate the conflicts between the conventional film camera segment and the new digital camera segment. The senior executives that rose to power with film cameras were in charge of resources and decision-making. Focusing on short-term business development, the leadership refused to jeopardize their vested interest for long-term potentials and opportunities. In today’s fast-changing retail market, this tale of caution is of increasing significance and relevance.

Online retailers: Both e-commerce giants like Alibaba and JD and SNS consumer data-based internet companies like Tencent are busy developing transformation solutions by offering enabling data and tech, as well as resource integration. For example, by providing brand owners and mom-and-pop stores with support in logistics, channels, data and technology, Alibaba’s LST and JD’s Xintonglu (both are newly launched B2B platforms) are striving to connect brands, conventional retailers and mom-and-pop stores to ensure o2o integration and connectivity. Although e-commerce businesses are equipped with the technological competence and resources to aid conventional retail and help brand owners partially transform into omnichannel operation, the major obstacles mentioned above still exist and tend to emerge as the cooperation deepens. The fragmented organizational structure means that a top-down approach is required where the leadership takes the initiative to

coordinate all internal and external resources as well as all divisions, set up clear internal evaluation and business segmentations of human resources, and make pertinent investment in infrastructure to facilitate the transformation. For e-commerce businesses that are trying to give conventional retailers an external push, all of these optimization measures are major challenges.

There are a few actions to take in face of these challenges: Adopt a top-down approach where the leadership takes the initiative to embrace transformation into the future of retail. It is imperative for conventional enterprises to shift from the multi-channel parallel operation model to consumer-centered omnichannel model that covers all life scenarios of consumption. MNCs in China should reinforce horizontal coordination and overhaul business and organizational model.

Omnichannel management in the Future of retail

Source: Deloitte Analysis

Traditional channel management

Stage of Consumption

Online sale

Offline sale

Omni channel management in new era

Demand Research Compare Purchase Receiveproduct

Return&refund Demand Research Compare Purchase Receive

productReturn&refund

Stage of Consumption

Online sale

Offline sale

Traditional channel management

Stage of Consumption

Online sale

Offline sale

Omni channel management in new era

Demand Research Compare Purchase Receiveproduct

Return&refund Demand Research Compare Purchase Receive

productReturn&refund

Stage of Consumption

Online sale

Offline sale

14

Future of retail | Removing the roadblocks

Facilitate organizational integration. An integrated and consumer-centered organizational structure should be built to increase consumer engagement and empower consumers. Meanwhile, integrated design for business model and internal structure should be adopted to facilitate supply chain optimization and omnichannel integration.

Set up comprehensive supporting arrangements for the transformation. Comprehensive transformation should be carried out via organizational restructuring, staff training, performance evaluation optimization and competence development, in order to optimize business flow, resource circulation, and system support to ensure all are in line with the overall transformation plan.

Interconnected supply chain

R&D Planning Purchase Manufacture Delivery Support

Data

Report

Data

Report

Data

Report

Data

Report

Data

Report

Data

Report

Digital

Core

Delivery

R&DManu-facturing

Planning

Support

Purchase

Data Center

AnalysisData

Analysis

Analysis

Analysis

Analysis

Analysis

Data

Data

Data

Data

Data

Separated but repetitive data processing and analysis due to data and report with split parts

Data integration with transparent data flow and traceable analysis process

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Future of retail | Contact

Tianbing ZhangLeaderDeloitte China consumer products and retail industryTel: +86 21 6141 2230Email: tbzhang@deloitte.com.cn

Sunny JiangProject ManagerDeloitte China consumer products and retail industryTel: +86 21 6141 2285Email: sunjiang@deloitte.com.cn

Contact

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