In 2017-2018, online-merge-offline (OMO) emerged as the next big digital upgrade for retail. It began in China in groceries and it had the boring title of “new retail”.
It began with Freshippo / Hema by Alibaba. And then 7Fresh (and other projects) by JD. These were the first glimpse of what new retail come become in supermarkets. Everyone started getting excited.
Shortly after, convenience stores and mom-and-pop stores began to get digital upgrades. And in a bit of a surprise, retail coffee also entered the story with Starbucks partnering with Alibaba and Luckin Coffee rising rapidly (and then crashing).
This all raised the interesting question of: What is the next big winner in new retail?
This article is about a winner I didn’t see coming. Which was in furniture stores.
First, a comment on terminology. Alibaba, per Jack Ma, named all this “new retail”. JD originally called it “boundaryless retail” (which didn’t take). It is sometimes lumped in with O2O (online-to-offline), which is what people call delivery services. But Kai-Fu Lee called it OMO (online-merge-offline), which is the best description.
This is getting kind of annoying. I’m just going to use new retail. Alibaba got there first so I guess 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.
And 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 a few years ago I got an invite from 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 stores. And indirectly furniture manufacturing. It’s really a great example of new retail making a big difference. And I didn’t see this one coming.
My Visit to JD-Qumei in Beijing
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 and peddled the rest of the way. Riding bikes in Chinese cities is actually kind of pleasant. Or at least, more pleasant than riding the crowded subways.
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 customers come to find it. Being a “destination” as a retailer is a pretty great consumer dynamic if you can get it. Especially if you need large retail spaces, which are expensive in high traffic downtown locations. Companies like Walmart and Costco really benefit from this effect.
Another point is that higher-end furniture sales are different in China.
Qumei, founded in 1987, designs, manufactures, and markets furniture. They are vertically integrated. And they focus on families who are buying all the furniture needed 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 such big purchases are nice but it’s not a great customer dynamic. You don’t want customers only coming in every 3-5 years. It means you have little ongoing relationships with your customers.
Given these two customer dynamics, Qumei’s offering is a big selection of furniture (you can view in a big retail space) with design services (for furnishing your entire house). That’s important.
So their big destination store has lots of furniture to see. Lots of sofas you can sit on.
But it also has furniture design staff, lighting design staff, bathroom design staff, and other design 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 2nd Floor: Where You See the Furniture, Chat With Design Staff and Make the Profits
The business I just described is what Qumei 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 (see below). Seeing the rooms in person is important – and this 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 designs for their entire homes. According to Qumei, the typical design and sales process takes about 3-6 weeks for a home.
Outside of the low visit frequency, this is the type of consumer businesses I like.
- Consumers are not too rational in this situation. Qumei’s customers aren’t all about getting the best deal on one item. Or the package. It’s an emotional purchase. It’s aspirational. It’s not that rational. 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 are involved. You want to make it nice. You can’t really give your fiancé a discount wedding ring. It’s somewhat the same with furnishing a family house.
- There is a 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 customers over weeks. You are less likely to then just walk away and buy elsewhere. A personal or at least professional relationship is created. And there is the psych effect of reciprocity happening. These are relational switching costs.
Generally, I like businesses with lots of psychology and emotion. It’s much easier to get a nice margin than in a purely rational purchase (like buying a lawnmower).
On the competition-side, things are also pretty good.
Qumei is a furniture retailer and 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 offer a bigger selection with lower per unit costs than most smaller competitors. It’s hard for smaller competitors to match them on both selection and price. There’s a reason Warren Buffett bought the biggest furniture retailer in Omaha.
In theory, this can get disrupted by online sales. But that doesn’t seem to be the case for Qumei (yet). 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 on weekends. And they end up on the second floor looking at furniture and talking with staff.
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. This means they have to re-acquire customers over and over. It also means they get very little data on customer behavior. Which is the key ingredient for digital businesses.
- The company sells furniture, but that is only one part of what people buy when they create a home. It is part of the solution. Customers buy lots of other things that fill up a home – such as 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 has little data about 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 them to physically show up in the store.
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Ok. That is a bit of theory about Qumei and furniture retail in China. 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.
Cheers, jeff
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- A Strategy Breakdown of Arm Holdings (1 of 3) (Tech Strategy – Daily Article)
- 3 Digital Concepts Powering ARM Holdings (2 of 4) (Tech Strategy – Daily Article)
From the Concept Library, concepts for this article are:
- New Retail
- Digital Superpower: Dramatically Improved User Experience
From the Company Library, companies for this article are:
- JD
- Qumei
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I write, speak and consult about how to win (and not lose) in digital strategy and transformation.
I am the founder of TechMoat Consulting, a boutique consulting firm that helps retailers, brands, and technology companies exploit digital change to grow faster, innovate better and build digital moats. Get in touch here.
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