Forget Alibaba and the tantalising prospect of its IPO, it’s time to take a hard look at China’s eCommerce and brick and mortar retail sectors as whole.
That’s what Bank of America did this week in an exhaustive report called “eCommerce vs. retail: A power shift to consumer sovereignty,” What the bank determined is that both eCommerce and brick and mortar retailers have serious game of catch up to play. Consumers are getting sophisticated about shopping than they are, and that could mean trouble ahead for their businesses.
In other words, there are going to be clear winners and losers in this game, and the crazy growth you’re seeing now is going to level off soon.
Bank of America writes: “…technology now creates a new generation of eConsumers, featuring diminishing info asymmetry, social connectivity, fragmented retail touch-points, quest for superior experience and sense of participation. For the first time, consumers are in command, and the rules of the game have changed. Forget about market share battles among online and offline channels. Those who can adapt to consumer sovereignty will survive and thrive.”
Brick and mortar retailers and eCommerce retailers have different challenges, but both need to be confronted soon.
Brick and mortar retailers are confronting a “competency gap,” according to the bank. Instead of getting to know their customers, merchandising, and curating an experience for them — something the sophisticated Chinese shopper would leave their house for — they still use a marketplace model like eCommerce businesses.
They also haven’t mastered supply chain or logistics to cut costs.
To these retailers, it’s all about location location location, not customer customer customer. They don’t control price or merchandising, but rather rely on marketplace income to boost profits.
“…merchandise differentiation, supply chain efficiency and consumer service are not the priorities,” says the report. “Most of them do not control what they sell, do not differentiate what they sell, do not control pricing, do not know their consumers, and do not understand how to service consumers.”
The challenge in eCommerce is different — companies are all trying to undercut each other on price (it’s why 50% of online shoppers in China choose eCommerce) and that has some serious consequences.
“Today’s China eCommerce is reminiscent of the US tech bubble in the late 1990s. Boosted by PE/VC money, many eCommerce players are willing to sacrifice short-term profitability to gain market share. They may offer such compelling pricing and free shipping that much bigger overseas peers may not match.”
The eCommerce retailers that survive this and gain market share will eventually increase their prices, Bank of America argues. This should happen in the next three years.
The bank also says that if brick and mortar retailers are able to become more sophisticated and efficient, both kinds of retailers should level off.
“We believe eCommerce will end its hyper-growth and enter a steady-growth stage within three years. Increasing online costs and other factors could narrow the price gap, while eCommerce also has its competency gap to fill, partly as a result of its own marketplace model. In the end, the two worlds could converge and leverage each other to better service eConsumers. In face of a bumpy road towards equilibrium, we prefer early-movers who proactively adapt to consumer sovereignty, and Intime remains our preferred retail name in the context of paradigm shift.”
This should be fun to watch.
Business Insider Emails & Alerts
Site highlights each day to your inbox.