Could China outpace US in retail transformation?

China is expected to match or surpass the United States in retail sales for the first time in 2018, according to a report by Japanese bank Mizuho.

As Internet giants in both countries are redrawing the landscape of the retail industry, Chinese firms need to put more focus on technology if they want to lead the game, experts say.

Retail resurgence

After years of stagnation, retailers in China, especially physical stores, have bounced back with impressive sales figures.

Official data shows that China's retail sales increased by 10.2 percent in 2017, reaching nearly $6 trillion.

Physical stores made a substantial recovery from woes caused by online shopping, with annual sales expanding 4.6 percent. Online retail reached a new high with $1.14 trillion in sales, which was a 32.2 percent increase compared to the previous year.

The efforts to dismantle the division between online shopping and physical stores fueled China's retail industry growth last year, China's Ministry of Commerce explained. The trend is expected to continue in 2018.

As conventional retailers are embracing the Internet, China's tech- and money-savvy Internet companies are reshaping the industry by building their own physical stores and buying assets.

Path to 'new retail'

In 2016, Alibaba's founder Jack Ma coined the concept of "new retail" as he mapped out a new strategy to redouble the company's market share in retail.

From Ma's perspective, pure e-commerce will be reduced to a traditional business and replaced by the concept of new retail, which integrates online, offline, logistics and data across a single value-chain.

In Hema, Alibaba's fresh food supermarket, consumers can experience what new retail looks like in real life.

Through a dedicated app, shoppers can check product information, make payments in-store by scanning a bar code, or even place an order for home delivery. Hema also promises a 30-minute delivery time as long as the customer lives within a three kilometers radius of a store.

Hema announced in March that it will be expanding its hours of home delivery in Beijing and Shanghai to 24 hours a day. This change was made after Alibaba's big data system analyzed the shopping behaviors of millions of its customers.

Alibaba is hoping to capitalize on China's growing online shopping trend, which now stands at less than 20 percent of the country's retail market.

Alibaba is not the only active player in the new retail game and the competition is getting fierce.

In 2018, JD.com, China's second largest e-commerce company, launched its first offline high-tech supermarket in Beijing, called 7Fresh. Tech giant Tencent has also invested in several supermarkets and department stores while also opening its first unmanned shop.

Upgrading is crucial to growth

A similar story is also unfolding in the US.

In January, Amazon opened its first cashier-less store to the public in Seattle. Supported by an array of cameras and hi-tech sensors, Amazon Go allows customers to take what they want off the shelves and leave the store without taking out their wallets.

Amazon is starting to make large investments in physical stores. The company bought the high-end supermarket chain Whole Foods, opened a dozen bookstores across the US and restructured its fresh grocery service.

Lyv Haoze, an assistant analyst with Hangzhou-based China E-commerce Research Center, commented that Chinese firms are different from their US rivals. Lyv said the US is focusing on automated shops while China's community-based firms prefer to provide goods through online and offline channels.

While it's too early to judge who will become the new retail leader, Lyv said that Amazon and Chinese-based retailers will use different practices to secure their markets.

If Chinese companies want a better retail transformation, more advanced technologies are required to fill the gaps in areas like logistics and warehouses – which are crucial for providing goods to its customers.

The good news is, China is more open to online consumption. According to an analysis by market research firm Kantar TNS, roughly 75 percent of Chinese grocery shoppers have used online shopping.

Some promising results have been yielded. Alibaba said among users who open the Hema app, the conversion rate for making a purchase is as high as 35 percent. Store sales per unit area are three to five times those of other supermarkets.