In 2017-2018, “new retail” began in Chinese groceries. There was Freshippo / Hema, 7Fresh and other projects. It was a first glimpse of what new retail come become.
Shortly after, convenience stores and mom-and-pop stores also began to get digital upgrades. And in a bit of a surprise, retail coffee also entered the story – with Starbucks-Alibaba vs. Luckin Coffee-Wechat.
This raises the question of what is next in “new retail”? This series of articles is my attempt to answer that question.
First, a comment on terminology. Alibaba, per Jack Ma, named it “new retail”. JD calls it “boundaryless retail”. It gets lumped in with O2O (online-to-offline). And Kai-Fu Lee is now calling it OMO (online-merge-offline).
This is getting kind of annoying. So I’m just going to use new retail. Alibaba got there first so they get to name it.
Plus, it’s all the same thing. What we are seeing is the integration of online and physical retail assets into one seamless, data-driven consumer experience. And it has fantastically, big implications.
- It is completely transforming the consumer retail experience.
- It is fundamentally changing business models as physical retailers are combining with platform business models.
- There is an explosion of creativity in business models and use cases.
- It is rocking the world of merchants and brands, which are scrambling to adapt.
In some cases (groceries, fashion, healthcare / pharmacies), new retail is creating a whole new world . In other cases (retail coffee), it is not really that big a deal. And in lots of other cases (convenience stores, mom-and-pop stores), it is a bit of a mix.
As for what’s next? I’ve been keeping an eye on department stores, sports retailers, hotels, banks and auto dealerships. That was my short list.
And then I got an invite from Ella Kidron of JD to visit their new project with furniture retailer Qumei Home Furnishings. And it really opened my eyes to how digital is transforming furniture retail (and indirectly furniture manufacturing). It’s really great.
Here’s What Happened on My Visit
Mid-morning, I took the subway from Peking University (northwest part of Beijing) to the new JD-Qumei flagship store. And as it wasn’t near a subway stop, I grabbed a Mobike.
That’s probably the first thing to point out. Unlike retail coffee and fashion stores, Qumei doesn’t depend on being in high traffic or high visibility locations. Its customer come to find it. Being a “destination” is a pretty great consumer dynamic if you can get it. Companies like Walmart and Costco really benefit from this.
Another important point is that higher-end furniture sales are different in China. Qumei, founded in 1987, designs, manufactures, and markets furniture. And they focus on families who are buying all the furniture for a new house in one big purchase. So sales follow mostly from new home purchases, not from people buying one sofa or other piece at a time. According to the Qumei staff I spoke with, their customers tend to come back about every 3-5 years (about the time they buy a new or second home).
So the big purchase is nice but it’s not a great customer dynamic when you have little ongoing relationship with your customers.
Given these two customer dynamics, Qumei combines a big selection of furniture (you can view) with design services. That’s important.
Their big destination store has lots of furniture to see but also has furniture design staff, lighting design staff, bathroom design staff, and other specialists. This means families can plan out their whole house during their visits. Combining a big product selection with specialized services creates a lot of interesting competitive dynamics.
The Second Floor: See the Furniture and Chat With Design Staff.
The business I just introduced is what Qumei has built and refined over 20 years in China. And at the JD-Qumei store I visited, this is what happens on the second floor. There are lots of furniture types and you can wander around lots of nicely designed rooms. Seeing the rooms in person is important – and their business is almost entirely offline.
Families come to the second floor, especially on weekends, and wander around. They meet with furniture design specialists, have a cup of tea and work on the interior design for their new home. According to Qumei, the typical design and sales process takes about 3-6 weeks for a home.
Overall, this is the type of consumer businesses I really like. For a couple of reasons:
- Consumers are not terribly rational in this situation. Qumei’s customers aren’t all about getting the best deal. It’s an emotional purchase. It’s aspirational. It’s a situation where customers tend to think with their hearts – and to splurge.
- There is a lot of social pressure and psychology involved in how your home looks. Homes are a way to display wealth and status. There are also often expectations and pressure between spouses and family members about making it nice. You can’t really giveyour fiancé a discount wedding ring. It’s somewhat the same with furnishing a family house.
- There is a nice psychological anchoring effect. When you have just spent $300-500k on a home, another $50k on furniture doesn’t feel that expensive.
- There is an ongoing sales relationship that gets created. The designers work with the customer over weeks. You are less likely to then just walk away and buy elsewhere. It’s personal. And there is the psych effect of reciprocity happening.
Generally, I like businesses with lots of psychology and emotion. It’s much easier to get a nice margin than in a purely rational purchases (like buying a lawnmower).
On the competition-side, things are also pretty good. Qumei is a retailer and a manufacturer. They have a big manufacturing base in southern China which supplies their +200 retail stores. They probably have some economies of scale in manufacturing as well as in retail.
Big manufacturing plus big, destination retail stores means they can probably offer a bigger selection with lower per unit costs than smaller competitors. It’s hard for the smaller competitors to match them on both selection and price. There’s a reason Warren Buffett bought the biggest furniture retailer in Omaha.
This can get disrupted by online sales. But that doesn’t seem to be the case for Qumei. I asked how much of their furniture business is done online and they said basically none. It’s all in person. Families walk into the store and then end up on the second floor.
However, Qumei does have some problems:
- As mentioned, they have little ongoing connection with their customers. They come in once every 3-5 years (maybe) and then they go away.
- The company sells furniture, but that is only part of what people buy when they create a home. They buy lots of other things that fill up a home like art, appliances, lighting, bedding, smart devices and so on. You really don’t want your customers going to another store to complete their furnishings.
- The company probably has little data of its individual customers (outside of their purchase).
- As it’s mostly an offline business, it is hard to identify and reach new customers. You advertise and wait for the to physically show up in the store (and go to the second floor).
Ok. That was a big of theory on Qumei and furniture retail. But I wanted to lay out a framework before showing how the partnership with JD is changing this. And it’s very cool. That’s in Part 2.
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