What is New Retail?

By Hans Tung and Zara Zhang

Recently, one buzzword that has dominated China’s tech scene is “xin ling shou“, which translates into “New Retail.” It has become a popular startup genre, an investor’s favorite, and a subject of speeches, studies, and debates.

So, what is New Retail? Many think of it as “online going offline.” The world’s e-commerce giants, Amazon and Alibaba, have both been making aggressive purchases of offline supermarkets like Whole Foods and Intime. Amazon is also experimenting with an unmanned convenience store Amazon Go, and Alibaba has been developing its own futuristic offline grocery store Hema. This is certainly one aspect of New Retail: using technology to digitize and automate offline stores, where the vast majority of commercial activities still take place (e-commerce only takes up around 8% of all commercial transaction volume in the US and 15% in China).

But in our opinion, moving e-commerce offline is only half of the story of New Retail. The other more important half is about selling beautifully designed, quickly manufactured, and frequently iterated products at the lowest prices possible, making customers pleasantly surprised. Creating such an easy and intuitive customer experience requires a lot of painstaking effort. Costs must be cut. Manufacturing and delivery must be streamlined. Customer feedback must be collected rapidly and acted on instantly. This is where New Retail can revolutionize traditional retail.

To understand New Retail, we should look to Japan – home to wildly popular brands throughout Asia like Uniqlo and Muji and malls like Takashimaya.

Many in the US are familiar with the fate of traditional American retail chains like Macy’s and Sears – their market caps have plunged in the last few years while Amazon’s have skyrocketed (see the chart below). Similarly, offline retailers in China have been hard hit by the onslaught of Alibaba. But Japan shows a very different picture: Traditional retailer brands like Takashimaya, Isetan and Hankyu are alive and kicking, while e-commerce penetration has lagged behind, as shown in the chart below. Hans went to Japan for the first time in 2008, and has been asking himself: How do Japanese retailers do it?

Hans concluded that they do it by embodying the spirit of New Retail: a relentless focus on customer experience, and extreme attention to details. Anyone who has visited Japan may be impressed by the Shokunin Kishitsu (職人気質, “craftsman spirit”, or 匠人精神 in Chinese) demonstrated by its shops and restaurants. In Japan, small eateries spend generations perfecting a single food item. Bakeries give you an ice pack so that your cake is kept cold and fresh. Toilets can produce pleasant music if you would like to cover indiscreet sounds. New Retail is about standing in the shoes of the customers and asking: What else can we do to make their lives more pleasant and convenient?

One entrepreneur who has taken Japan’s lessons to heart is Ye Guofu, who co-founded Miniso with a Japanese designer. Many Chinese people think of Miniso as a lower-end version of Muji – both sell household, everyday goods with a minimalist design, and both seem to be ubiquitous these days. Founded in 2013, Miniso says it now has over 1,000 stores with a business turnover of $1.5 billion last year. It tries hard to be Japanese, calling itself a “Japan-based brand” even though almost all of its stores are in China.

Most Minoso products are priced between $1.5 and $30.

In a recent speech on New Retail, Ye said he prioritizes superior design and high quality over anything else. Why? Because Chinese people are now discerning enough to appreciate it. Today’s expanding urban middle class are increasingly willing to pay a premium for quality, reliability, and authenticity. The cheap Louis Vuitton knockoffs that used to populate China’s roadside stalls and e-commerce sites no longer have wide appeal. Hans and our colleague Jeff Richards first wrote about this trend – known as the “Great Consumer Upgrade” in China – last fall.

One buzzword in China that has entered its national vocabulary is “yan zhi” (which literally means “beauty level”). Chinese people now live in a society where yan zhirules – In Ye Guofu’s words, “In today’s China, beautiful is right.” Ye says he invested close to $100 million in design last year, and defines his business strategy as “three highs and three lows”: High yan zhi, high quality, high efficiency; low cost, low gross profit, low price.

Another brand that exemplifies New Retail is Xiaomi, which has established popular offline stores called “Xiaomi’s Homes.” Shopping at Xiaomi’s Home is fun. You can browse, touch, and try everything from laptops to umbrellas, from air purifiers to Segways – all at extremely attractable prices (a typical Xiaomi phone costs less than $300). Lei Jun, Xiaomi’s founder and CEO, says his company “has evolved from e-commerce to New Retail.” Part of the reason it can produce high-quality goods so cheaply is that Xiaomi does not spend much on marketing – instead, it relies on an army of “Mi fans” who are customers-turned-marketers for Xiaomi. The brand has over 16 million followers on Weibo.

Xiaomi’s bustling offline stores and its Weibo page

Just this April, Xiaomi rolled out “You Pin” (which translates into “has taste”), a mobile e-commerce platform that sells everything from home electronics to stationery. It hand-picks a very small number of products with quality so high that customers should be able to “buy blindly” and still be satisfied. Similarly, Netease has been running the popular site “Yan Xuan,” which literally means “strictly selected.” Their slogan? “Good life is not that expensive.” The site curates well-designed, high-quality goods that reminds one of Muji but are more affordable. In fact, Netease specifically goes after the same China-based suppliers that Muji uses.

The best-selling electric toothbrush on Amazon costs about 7 times more than its counterpart on Netease Yan Xuan (the numbers are the same but the currencies are different; 1 USD equals roughly 7 RMB).

The popularity of such sites testifies to the enthusiastic adoption of the New Retail approach by Chinese consumers. For those living in the US and Europe, “the Chinese consumer” may conjure up the image of wealthy tourists scooping up entire stores of luxury items. Indeed, in 2014, Chinese tourists spent $106 billion on global luxury products. But this is only part of the picture. Domestically, instead of splurging on luxury items, Chinese people are increasingly won over by high-quality, low-cost and well-designed items. And this market will only grow larger as much of the trillion-dollar e-commerce market and $6 trillion offline retail market “goes New Retail.”

“How in the world do they sell something so beautiful and high-quality so cheaply?”

If you make the customers ask this question to themselves, and then tell their friends and followers about it, you have mastered the essence of New Retail.

Hans Tung is a Managing Partner at GGV Capital. A five-time Forbes Midas Lister, he has been a US/China investor for more than a decade. He was among the first Silicon Valley VCs to move to China full time, betting on the rise of the Chinese consumer internet market with companies like Xiaomi where he was an early investor and board member. His portfolio includes 3 of the top 5 shopping apps in the App Store – Wish, Poshmark and OfferUp – with Ibotta growing fast at #12. Other companies in his geographically diverse portfolio include: Airbnb, Bowery Farming, Bustle, Dirty Lemon, Function of Beauty, Giphy, Lively, musical.ly, Peloton, Slack, Smartmi, Xiaohongshu (aka Red), Yamibuy, and more.

Zara Zhang is an analyst at GGV Capital. She has written for The Information, The Harvard Crimson, Harvard Magazine, among other publications.

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