Since the mid-2000s, I have made the argument that retailers must stop thinking in terms of their stores and instead, embrace the concept of an ecosystem. I first wrote about the concept in this 2013 research paper. Fast-forward to 2016, and Jack Ma, chairman of Alibaba, coined the term “the New Retail” to express how he and ALIBABA (BABA) CEO Daniel Zhang and his team, would build the Alibaba Group ecosystem by first integrating online and offline through technology. In the three years since coining the term, Alibaba has expanded the scope and meaning of New Retail exponentially to encompass a way of living, communicating, sharing, building, teaching, consuming and making it easy to do business anywhere. New Retail is the new reality whether a company wants to accept it or not. (Make sure to watch the video clip from the movie Moneyball at the end of this article as the scene accurately describes conversations I’ve had with executives regarding the impact of New Retail on their companies.)
Amazon and Walmart have certainly had a tremendous impact on the retail industry, as have retailers like Tesco, X5 Retail Group, Lazada and Target to name a few. However, Alibaba was the first company to define and aggressively move forward with the complete integration of online, offline, technology and logistics and the first to take all of the assets of their ecosystem: digital payments; logistics; B2C, B2B, D2C, B2B2C; cloud computing and data science; a marketing arm; and investments in brick and mortar environments to to create a legitimate “New Retail” model of how to make, move, sell, buy and deliver products. (I’ve seen first-hand how effective Alibaba operates as a company. It’s technology, ability to innovate and logistics are second to none.)
What makes Alibaba unique is that it began as an online player that quickly recognized the importance of physical footprints and experiences; the rapid digitization of the physical; and the demolition, once and for all, of the false prophet of omni-channel as a model and viable concept. Omni-channel is a ‘zombie’ idea that has been bypassed by the uni-channel model; more on this later in the article. (To contrast Amazon (AMZN) and Alibaba, Amazon has also learned the value of physical retail stores hence the acquisition of Whole Foods. I estimate that Amazon will build/lease/buy additional stores over the next several years; as many as 2,150 grocery stores and between 3,000 to 5,000 Amazon Go stores. You can read about it here.)
A kindred spirit on the topic of retail is Michael Zakkour, vice president of Asia strategy, new retail and global digital at Tompkins International. Zakkour and I have collaborated over the years, and we are frequently quoted together on the topic of retail in the press. Zakkour, with co-author Ashley Galina Dudarenok, is about to publish his latest book The New Retail: Born in China, Going Global. I present some of the ideas from Zakkour in this article, along with my own recommendations and opinions on the topic of New Retail.
The Four C’s
A challenge often encountered by executives is that it is very challenging to learn enough about a new concept to make the information actionable. Zakkour has solved the issue by diligently presenting details to help executives (and others) gain a much better understanding of the topic. According to Zakkour:
If New Retail was a battery, it would have four charging portals powered by:
1. Commerce—This is focused on creating and integrating as many online, offline and virtual retail touch-points as possible to create convenience and choice, including 020, B2C, C2C, social commerce and more.
2. Digital—This is the glue that connects and directs everything in the ecosystem and includes data science, cloud computing, AI, mobile technology, fintech and virtual payments.
3. Logistics and Supply Chains—This includes automated fulfillment, cloud-based logistics technology, cross-border and last-mile solutions, distributed logistics, predictive planning, inventory visibility and next day, same day, same hour fulfillment solutions.
4. Media and Entertainment—Content is king, and New Retail requires a constant flow of it. Content is critical to creating the ‘retailtainment’ that makes shopping part of a lifestyle.
These four power sources are what make New Retail different from traditional digital commerce. They’re all equal in importance and fully integrated. Online commerce, offline commerce, technology, data, logistics, services and entertainment work together to create an entirely new commercial reality and fundamentally change the value stream for brands, retailers, consumers, service providers, entertainers and marketers.
“The store is dead, long live the store,” said Zakkour, reflecting his view that another major hallmark of New Retail is the rediscovery that physical environments (AKA stores) matter. He noted that “the battle between the clicks and bricks is over and the unexpected winner is New Retail. The clicks have discovered the that smart, connected and reimagined store purpose is a strategic advantage, and the bricks have discovered that static, non-ecosystem stores are not only a disadvantage, but a path to Chapter 11.”
New Retail is driven by a perpetual feedback loop of consumer-generated data that, when analyzed, offers shoppers hyper-personalized recommendations for the products they want and the products they don’t yet know they want. It creates a new consumer journey, new expectations and new behaviors. It blurs the lines between media, entertainment and retail. It’s changing how we do business, how we interact with each other and how we fill our homes and lives.
According to Zakkour, “Everything that makes up the ecosystem is focused on creating a network effect and delivering the four C’s. Something that most retailers can’t deliver.” Specifically, Zakkour and I agree that the Four C’s are focused on the following:
Consumer centricity is about putting the needs, wants, desires, aspirations, unmet needs and unimagined experiences of consumers at the center of everything you do. The big shift is from being a company-centric organization to a consumer-centric organization. If you’re still putting shareholders, products, legacy systems and turf wars ahead of consumers, you won’t last long in the New Retail world.
All the traditional pillars of retail—price, selection, convenience and experience—are critical to New Retail, but one of them, convenience, has risen above the others in importance. Convenience extends to all aspects of the consumer journey in China, so when you enter this market, you’re serving a consumer that has been conditioned to expect convenience in all they do.
Consumer centric companies take customization seriously and make it central to their strategy. New Retail demands customization of products, services, experiences and journeys.
Pinpointing what customization is can be difficult, but this explanation may help. It doesn’t mean catering to the passing whims and fleeting demands of every consumer. It means that the consumer wants products and the touch-points on their journey to look and feel like they were made for them. Some product categories that are well-suited for customization are food and beverage, apparel, health and wellness, cosmetics and body care.
Allowing consumers, using technology, feedback loops, content generation and social media to contribute to the growth and profitability of a brand, product, service, habitat (physical store experience) or ecosystem is what contribution is all about. The network effect of ecosystems is the most prominent example of how consumers contribute to exponential growth. Amazon and Alibaba are who they are today because of the sheer number of users they have and their ability to collect information from them. Both companies are the first place many consumers go to conduct a search on a product because of the sheer number of products they carry. Both companies rely on consumer ratings, feedback and reviews to shape offerings. The big players in New Retail have nearly perfected the art of allowing the consumer to shape their futures.
Uni-Channel, Not Omni-Channel
In discussions with Zakkour, it became clear that a distinguishing feature of New Retail is the focus on uni-channel rather than omni-channel. “Uni-channel is defined as the complete integration of all channels into a single channel. Stated another way, the focus is not on retail stores, e-commerce or cross-border commerce. Instead, focus is placed only on commerce, being better at commerce,” Zakkour explained.
As a consultant, I frequently make the argument to clients that being good at one form of commerce, stores for example, at the expense of another form of commerce like online, is a recipe for disaster. Consumers expect retailers and brands to be “omni-present,” so that when a customer has a need, it can be fulfilled by the brand or retailer 24/7, 365 days per year. Uni-channel is an ecosystem with an obsessive focus on the growing desire of convenience and immediate gratification by consumers. (Convenience equals inventory as close to the customer as possible or instant gratification is an impossibility.)
Zakkour has researched this topic exhaustively and believes “omni-channel (which was supposedly the evolution of multi-channel) was a great concept five years ago, before New Retail started to manifest from theory to reality. The idea behind omni-channel was to accept that companies needed to consider a mix of online/offline, retail/wholesale, direct to consumer/distributor-based operations and sales, and to ensure they were all running at peak performance. The problem with omni-channel is that the distinct channels are never truly integrated.”
The Four U’s of Uni-Channel
New Retail, particularly as practiced by Alibaba, JD.com, Tencent, and several other big players like Walmart and Amazon, hinges on the company-wide and ecosystem-wide application of the four U’s. They bring together all of the elements necessary for successful execution of a New Retail strategy. In fact, I argue that investing in the four U’s will determine the winners and losers of retail well into the future.
What are the 4 U’s? Zakkour believes the following content best describes the purpose and necessity of the 4 U’s to achieving a true uni-channel ecosystem:
If there’s one thing that New Retail focuses on, it’s the merging of online and offline into a unified, consistent, convenient experience for the consumer. This also means the merging of various online and various offline funnels and channels into a seamless encounter. It’s no small challenge and requires unified data. Your company must have a unified data model. This may mean huge overhauls, such as the one Carrefour has undertaken to centralize information in an estimated 50+ databases. (I can’t stress this enough—companies should not struggle with their IT platforms. Don’t waste valuable capital trying to keep IT systems in-house that can’t meet the needs of the company or consumers. Embrace outsourcing and cloud strategies to accelerate leveraging technology to create a competitive advantage.)
Uni-Marketing doesn’t mean there’s only one way to market, only one message that fits or only one way to listen and talk to consumers. Unified marketing is creating the ability to collect data from the consumer across an ecosystem and use data science and predictive analytics to ensure that the right products are in the right places in front of the right people at the right time. It’s about ensuring peak performance in terms of information flow, inventory flow, money flow and messaging flow.
It’s worth noting that some of the biggest and most successful companies in the world have made supply chains and logistics a competitive advantage, not just a function. To do this, many developed new internal systems and addressed their supply chains globally, regionally, nationally, provincially, municipally, locally and hyper-locally.
Thus far, JD.com has set the gold standard for logistics and fulfillment excellence in China. Consumers, brands and partners all rate JD as providing the best and most complete fulfillment services. Logistics is a major competitive advantage for the company. It has unmanned warehouses where robots do all the work, and it is at an advanced stage in terms of making drone and robot deliveries a reality. Alibaba is quickly closing the gap with major investments in improving their Cainiao Logistics Network.
(To be fair, most retailers and brands cannot duplicate what Alibaba, Amazon or Walmart have created. Instead, I recommend that companies leverage a distributed logistics provider with an already established ecosystem of technology, logistics, marketing, cloud computing and e-commerce/digital expertise to achieve the goals of New Retail.)
Uni-technology doesn’t mean there will be one technology to rule them all. It’s about harnessing a variety of technologies for the single, unified purpose of consumer centricity.
Unified technology solutions shouldn’t be too capital, time or resource intensive, and it’s important that they are also modular. This way, they can be built up, taken down and adjusted easily. Companies in China must understand clearly which elements to outsource and which to build and operate internally.
Distributed Logistics: The Next Big Thing
A major topic of discussion between Zakkour and me for this article was that fact that China is also far ahead of the rest of the world in getting products closer to the consumer. This requires multiple forward-operating logistics and fulfillment bases deployed in dense urban areas. Next day, same day, same hour delivery on-demand is possible in China because of the commitment that big operators have made in hyper-local logistics. According to Zakkour, “New Retail is a world where consumer expectations are of the ‘spoil me or else’ variety. An integrated supply chain and logistics strategy is a must. Consumers globally now expect instant gratification. Companies that can’t meet their needs will be replaced by a company that can.”
The challenge for most retailers and many brands is that their supply chains have been designed to ship pallets from distribution centers to stores or retail distribution centers versus pulling and shipping cases to marketplaces (B2B) like Amazon, or pulling units of products from cartons and shipping the units directly to consumers (DTC). The supply chain is the Achilles’ heel of many companies but especially for consumer packaged goods (CPG) and food companies wanting to ship products directly to customers. (Kraft Heinz, Mondelez, General Mills, P&G, Conagra, Unilever and many other companies all have the potential to design and implement DTC strategies, but their supply chains and systems aren’t capable of DTC. In addition, the companies I listed don’t have expertise in DTC; they have expertise in shipping pallets, a big difference.)
A real-world example of a company that must embrace and adopt the reality of New Retail is the Kellogg Company, which I researched in 2018 and early 2019 as part of a global review of CPG and food companies, and their lack of e-commerce and DTC capabilities. Kellogg has a desire to increase its revenue/market share, and e-commerce is a strategic imperative. However, in researching Kellogg, I discovered that the company claims revenue generated from the sale of its products on marketplaces (Amazon, Alibaba) as e-commerce revenue. I disagree. I believe revenue can only be claimed as e-commerce revenue if consumers purchase products directly from Kellogg, and in turn, Kellogg ships the product directly to the customer. Using this interpretation, Kellogg has generated virtually no revenue from e-commerce. In the opinion of a consultant working for Kellogg who I spoke with, “It will be years before Kellogg can ship packages direct to consumers as the company lacks the required supply chain and systems.” I agree.
In addition, like most CPG and food companies, Kellogg’s products can be found on the shelves of over 38,511 grocery stores, 5,000+ Walmart stores, on multiple marketplaces and in more than 155,000 convenience stores. A logical question to ask is this: Does e-commerce make sense for Kellogg? Yes, it does, but for the company to succeed, some difficult questions will have to be answered. For example:
- How do we sell more of our products? How do we become better at commerce? Period. Full stop.
- How do our customers want to engage with us? What is the optimal platform for managing all commerce?
- Based on the availability of our products in retail stores, what is the optimal e-commerce strategy to generate value to customers? Since we don’t have the systems in-house, what is our optimal outsourcing strategy? These are important questions for Kellogg and other companies with products easily available in retail stores to ask. Customers of Kellogg may not want to buy cereal or salty snacks online as individual products but a monthly subscription service whereby customers can personalize the selection of products delivered in e-commerce specific package sizes may work well for Kellogg. Kellogg should assess making an acquisition of a company like SnackNation, Byte Foods, Icon Meals and/or Factor 75 to help Kellogg’s increase its direct-to-consumer value proposition and enter new categories like prepared meal delivery for breakfast, lunch and dinner. Kellogg must also get better at making acquisitions. I recommended to Kellogg to acquire Quest Nutrition and/or CytoSport, the maker of Muscle Milk, in 2017. Instead, Kellogg overpaid to acquire RxBar, a company that makes a protein bar but is extremely limited in entering new categories or coming up with new products. (In a focus group I conducted for nutrition products, many of the participants mistakenly believed RxBar was a bar of soap based on the appearance of the wrapper.)
- What is the optimal supply chain and logistics strategy to meet demand? Our supply chain is focused on shipping pallets. We don’t have the ability to ship individual units. Should we outsource our supply chain and logistics?
- If we outsource our supply chain and logistics, how much cost and complexity can we reduce? How much can we accelerate our ability to maximize sales? What is the most strategic option for Kellogg?
(I am not picking on Kellogg. Kraft Heinz, Mondelez, Conagra, General Mills, Unilever, P&G and many other companies are in a similar position. I am on the record as stating that Kellogg has tremendous potential. You can read more about what I recommend Kellogg should do in this article.)
In defense of Kellogg, the company understands it needs to improve across many areas of the enterprise. The company is going through a turnaround strategy referred to as ‘Deploy for Growth‘. However, based on my review of the program, I’m concerned that not enough focus is being placed on the importance of creating an ecosystem of integrated channels. Multiple sources have confirmed to me that Kellogg does lack certain supply chain capabilities regarding e-commerce, and the supply chain is focused primarily on shipping pallets, not cases and individual units. In addition, Kellogg lacks many IT capabilities that are necessary for e-commerce. Cash flow is also a challenge for the company.
Taken altogether, my recommendation is that Kellogg should rethink investing capital into IT and supply chain projects and instead, place focus on outsourcing as much of the supply chain, logistics, transportation and IT to a distributed logistics provider as possible. Kellogg must have a laser focus on improving its level of working capital. Without better cash flow, Kellogg is in serious trouble as it won’t have the cash to fund its transformation. Outsourcing aspects of the supply chain and IT should be a priority. If done correctly, Kellogg’s can still grow but with less capital requirements.
In the case of Kellogg (and many other companies), a distributed logistics strategy whereby a network of forward stocking points pushes inventory closer to the customer, is recommended. Kellogg can contract a distributed logistics provider with a network of distribution centers (DCs) and fulfillment centers (FCs), as well as expertise in all aspects of commerce and logistics, to help accelerate a New Retail ecosystem. Distributed logistics providers also have the platforms necessary for supply chain and logistics, transportation, retail, e-commerce and going directly to consumers. The strategy will allow Kellogg to focus on the two areas most critical to its needs—manufacturing and capacity planning. (Based on research, Tompkins is a resource companies can contact to discuss distributed logistics.)
The Future of New Retail
In many ways, New Retail reminds me of the Brad Pitt movie Moneyball, which presents the true story of how the application of science changed the game of baseball forever. The dialog in the above scene from the movie is an excellent analogy of what’s happening in retail. The moral of the story is that for a company to survive (especially retailers), it must break down all the old ways of doing things and adapt to the new reality of business. Companies that can’t let go of the past will die. It’s just that simple.