Author: Kaisi Chang

Editor’s Note

OMO stands for online-merge-offline, which is when boundaries of the online and offline worlds are eliminated due to the comprehensive integration. The OMO era follows the O2O era where new investment prospects appear from the online sector’s empowerment of the offline sector. Some questions being asked include: what kind of opportunities and value depressions are the result of retail enterprises during the OMO era? Where will future breakthroughs take place? After thorough analysis, Source Code Capital exclusively presents Source Code Research Report Issue No. 10.

Viewpoints

• Revaluation of offline stores
• Fully tapping into offline traffic
• In-depth integration of retail channels with supply chains

The era of new retail began in 2017. After e-commerce prevailed over offline retail, in the spring of 2017 new opportunities emerged in new retail. The wide variety of innovative ideas is impressive, and at the core, it is reliant on technological measures to increase efficiency and enhance experience. We have researched and analyzed various forms of technological dividends inherent to retail. Our findings are explained further in this report.

1. Revaluation of offline stores

Since 2017, offline traffic saw extremely heated competition. In the past, innovation in offline traffic was achieved through mobile payments, and transaction data was digitalized. But the race to accumulate offline traffic rapidly entered the competition arena. Hema Fresh is a prime example of the most specific and bold attempt at this kind of business transformation. Hema Fresh launched a new business model which integrated its retail stores and the lead warehouse, with an emphasis on customer experience through in-store catering and other benefits. This new business format greatly enhanced space utilization efficiency, and created new capabilities to merge traffic flow between online and offline modalities. The power of online-offline integration have inspired an entirely new way of valuing the asset value of retail stores. 

Source of photo: Internet

Multiple large enterprises were quick to respond to this method. Meituan and JD, among other industry titans, rolled out Zhangyu Fresh and 7Fresh to challenge Hema Fresh’s business format. By late 2017, online-offline integrated sales had become a standard configuration among new retail enterprises.

The speed and force at which many traditional offline retailers made the transition to online completely superseded expectations. Fruit retailer Pagoda, for instance, saw its online portion of sales quickly exceeding 20%.

By combining the power of online and offline sales, premium quality retail stores will be able to reap additional value from their core assets. More importantly, when retail store density increases and forms a network, the scale effect of offline-online traffic will become more visible. We discovered that in certain cities, 10% of permanent residents actively patronize convenient store networks on a daily basis, making convenience stores the de facto gateways of traffic.

Source of photo: Source Code Capital

2. Fully tapping into offline traffic 

The value of traffic is not only reflected in direct transformation to purchases, but also in the usage and depth of data underlying this traffic. That being said, innovation in offline traffic is far from perfect. In comparison to online transactions, most offline scenarios have only succeeded in the digitalization of transaction data, but lack the ability to obtain data with respect to users’ identities, retention, and conversion rates. Nonetheless, when compared to online, the data collected from offline scenarios is more abundant in depth and dimensions. Current technology still remains in the phase of conducting headcount and in heat mapping traffic. It is unable to sustain further analyses and operational optimization.

Source of photo: Internet

We believe that with the development of technology, there is ample room to evolve in this sector, and society will witness a new upsurge in outstanding startups. 

3. In-depth integration of retail channels with supply chains

In the traditional Chinese business system, retail brands and retail channels are two separate entities. They remain in a relationship marked by mutual competition. In the seller’s market, the retail brand’s upstream supply chain leverages its professional capabilities in order to launch consumer-friendly products. The responsibility of retail channels is to efficiently sell branded products, and therefore, sales agents play a vital role. Nevertheless, as the consumer industry moves towards the buyer’s market, retail channels will convert from sales agent-oriented methods to purchase agent-oriented methods.

The distance between retail and consumer channels is narrowing with the influence of user data. User data makes it easier to understand the needs of consumers. Furthermore, with the steady increase of concentration, the overall power of retail channels will begin to increase. In return, retail channels will start to have influence and control over the upstream supply chain.

By adopting this kind of in-depth supply chain integration, one can manage consumer fluctuation with greater flexibility, while effectively reducing markup rates and enhancing the overall efficiency of the commodity value chain.

To date, the fastest growing Japanese retailers in this decade include 7-Eleven, Uniqlo and Muji, amongst others. The commonality between these companies is the application of the in-depth integration model of retail channels with supply chains.

With regards to manufacturing, China houses the world’s most comprehensive system and capacity. The abundance and depth of data in the Chinese retail sector has surpassed its foreign counterparts. We believe that in China, this integration model of retail channels, when combined with supply chains, will continue to strengthen the local consumer retail sector and bring new vitality to the industry.