China Internet Sector - Who will be the winners in new retail? - Bank DBS
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72
SECTOR BRIEFING
number
DBS Asian Insights
DBS Group Research • February 2019
China Internet Sector
Who will be the winners in new retail?
DBS Asian Insights SECTOR BRIEFING 72 02 China Internet Sector Who will be the winners in new retail? Susanna CHUI Equity Research Analyst DBS Bank (Hong Kong) Limited susanna_chui@dbs.com Tsz Wang TAM CFA Equity Research Analyst DBS Bank (Hong Kong) Limited tszwangtam@dbs.com Produced by: Asian Insights Office • DBS Group Research go.dbs.com/research @dbsinsights asianinsights@dbs.com Goh Chien Yen Editor-in-Chief Wen Nan Tan Editor Martin Tacchi Art Editor
DBS Asian Insights
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04 Who will be the winners in new retail?
06 Investment summary
09 Industry overview
What is new retail?
Example of new retail
Why new retail?
18 New retail’s economic benefit
Retailers: Improving operating efficiency
Internet companies: Sharing potential operating expense
savings from offering new retail solutions
43 “Alibaba’s” and “Tencent + JD’s” market share in
next three years
Two camps in new retail - “Alibaba” and “Tencent + JD”
From “non-exclusive partnerships” to “exclusive partnerships”
Analysing five key capabilities that Internet companies need to
succeed in new retail
Which Internet companies - “Alibaba” or “Tencent + JD” - will
outperform in terms of GMV?
How about other players?
76 Appendix: How Internet companies can
outperform in the long term?
Offline presence: from Hema to other supermarkets, other
products categories with low online penetration rates, and
lower tier cities
Mobile payment: cashier-free mobile payment technology
Customer relationship management: consumer behaviour
tracking technology
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Who will be the winners in
new retail?
• New retail revenue could hit Rmb62bn in 2020F, which is c.13% of Alibaba’s and
Tencent’s combined FY17 revenue
• Our research shows that retailers are placing more emphasis on using Internet companies
as partners to attract users, with less focus on supply chain capabilities
• “Alibaba” to be the dominant player; Alibaba brings its online presence (i.e. users) from
e-commerce to new retail
• “Tencent + JD” to be a smaller player; JD’s logistical advantage over Alibaba is
diminishing
New retail revenue in 2020F could potentially be c.13% of Alibaba’s and Tencent’s
combined FY17 revenue. Alibaba and Tencent have invested more than Rmb100bn in
offline retailers since 2014 to develop new retail initiatives. There are concerns that offline
investments will drag down margins, however we believe Internet companies will in fact
help retailers to improve operating efficiency and monetise through high margin service
fees. We estimate that new retail revenue could potentially hit Rmb62bn in 2020F, which is
c.13% of Alibaba’s and Tencent’s combined revenue in FY17.
“Alibaba” the dominant player; Alibaba brings its online presence (i.e. users) from
e-commerce to new retail. We interviewed several industry experts and concluded that
retailers attach great importance on whether Internet companies as partners can attract
users, which is “Alibaba’s” advantage over “Tencent + JD”. We expect “Alibaba’s” market
share in terms of GMV to grow from 75% in 2017 to 78% in 2020F.
“Tencent + JD” a smaller player; JD’s logistical advantage over Alibaba diminishes.
Retailers are placing less emphasis on Internet companies’ supply chain capabilities in the
new retail era versus e-commerce era, which is “Tencent + JD’s” advantage over “Alibaba”.
We expect “Tencent + JD’s” market share to drop from 16% in 2017 to 15% in 2020F.
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Market shares of China’s e-commerce platforms in terms of GMV
Source: iResearch, Company, DBS Bank (Hong Kong) Limited (“DBS HK”), Thomson Reuters
Note: Our proprietary research is based on interviews with China’s retailers, Internet companies, and industry experts
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Investment summary
N
ew retail encompasses the best of both online and offline worlds. Jack
Ma, Alibaba’s founder, was the first to propose a new retail concept in 2016.
He said new retail takes the best of both online and offline channels to enhance
users’ experience and retailers’ operating efficiency. New retail takes advantage
of Internet companies’ online resources (i.e. users & merchants, payment technologies,
customer relationship management capabilities, and supply chain management capabilities),
and retailers’ offline resources (i.e. offline stores as experience zones and warehouses).
New retail might not expand China’s retail sales market, but will raise online
penetration and retailers’ operating efficiency. We believe new retail initiatives
might not expand the size of China’s retail sales market, but increases retail sales’ online
penetration. iResearch forecasts that online penetration of retail sales will grow from 16%
in 2017 to 22% in 2020F. Increasing online penetration can increase retailers’ sales per
square metre (sqm) with constant operating costs per sqm to improve operating efficiency
from operating leverage.
Potential savings of operating expenses from new retail initiatives will be
Rmb123bn in 2020F. Analysing operating data of Alibaba’s Hema Supermarket chain
and JD’s 7FRESH Supermarket, we estimate ”new retail supermarkets’” and “new retail
department stores’” to have 3-6ppt higher OPM. Based on an estimate of China’s retail
market size of Rmb49,315bn in 2020F and new retail penetration of 5% in 2020F, a 5.0ppt
improvement in OPM will translate into potential operating expense savings of Rmb123bn
in 2020F.
“Alibaba’s” and “Tencent + JD’s” incremental revenue in 2020F equivalent to 13%
of Alibaba’s and Tencent’s combined revenue in 2017. As retailers’ partners, “Alibaba”
and “Tencent + JD” (two major Internet camps in new retail) should be able to share the
potential operating expense savings of Rmb123bn in 2020F by offering new retail solutions
and monetising through commission or advertising fees, logistic fees, and payment fees.
Assuming “Alibaba” and “Tencent + JD” will share half of potential savings in operating
expenses of Rmb123bn in 2020F, their incremental revenue could hit Rmb62bn in 2020F,
which is c.13% of Alibaba’s and Tencent’s combined FY17 revenue
“Alibaba’s” and “Tencent + JD’s” estimated market share in terms of GMV in next
three years. Alibaba and JD (of “Tencent + JD” camp) are China’s largest and second
largest e-commerce platforms, with 75% and 16% market share in terms of gross
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merchandise value (GMV) in 2017 respectively. We interviewed industry experts to analyse
the five key capabilities that “Alibaba” and “Tencent + JD” would require to succeed in
new retail, and make an assessment as to which camp will gain market share in terms of
GMV in next three years:
1. Online presence (i.e. e-commerce platforms’ user resources): Internet companies
with a large e-commerce platform can attract traffic to retailers’ online and office
stores. “Alibaba” is China’s largest e-commerce platform, with 75% market share in
terms of GMV.
2. Mobile payment (i.e. mobile payment market share): Retailers prefer large mobile
payment platforms that are generally more accepted by users. Tencent (of “Tencent +
JD”) is China’s largest mobile payment platform among offline merchants, with 50%+
market share.
3. Customer relationship management (i.e. possessing user data for analytics
to improve sales): As China’s largest e-commerce and mobile payment platform,
“Alibaba” offers customer relationship management services using users’ online and
offline shopping data and has a longer history.
4. Supply chain management (i.e. [i] express delivery and [ii] instant delivery
capabilities): For (i) express delivery, JD’s JD Logistics (products delivered from its
regional warehouses within 0.5-1 days) has an advantage over Alibaba’s Cainiao
Logistics (products delivered from merchants’ warehouses within 2-3 days). Cainiao
Logistics is catching up by expanding its warehouse network. As for (ii) instant delivery
(products delivered from merchants’ stores within 30-60 minutes), Tencent’s Meituan
has a market share of 56% in terms of GMV in 2017, not far above the 41% combined
market share of Alibaba’s Ele.me and Baidu Deliveries.
5. Offline presence (i.e. more offline retailer partners and track record to
improve sales productivity): “Alibaba” is the first mover in new retail upgrades of
supermarket and department stores. Its Hema Supermarket chain is a well-known new
retail showcase in improving sales productivity. “Tencent + JD’s” upgraded stores are
more or less the same as the new retail model of Hema Supermarket, except for Scan-
To-Buy service offered by Tencent.
“Alibaba” the dominant player; Alibaba brings its online presence (i.e. users) from
e-commerce to new retail. Our research shows that retailers attach great importance
on the ability of an Internet company as a partner to attract users, which is “Alibaba’s”
advantage over “Tencent + JD”. We expect Alibaba’s market share to grow from 75% in
2017 to 78% in 2020F.
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“Tencent + JD” a smaller player; JD’s logistical advantage over Alibaba is diminishing.
Retailers are placing less emphasis on an Internet company’s supply chain capabilities
during new retail era versus e-commerce era, which is “Tencent + JD’s” advantage over
“Alibaba”. We expect JD’s (of “Tencent + JD”) market share to go down from 16% in
2017 to 15% in 2020F.
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Industry overview
What is new retail?
Alibaba (BABA US) was the first to propose a new retail (新零售) concept in 2016. New retail
as described by Alibaba is a seamless integration of online and offline resources, by leveraging
on cloud, supply chain management, and payment technology.
Similar to Alibaba’s new retail initiative, Tencent (700 HK) and JD (JD US) launched smart
retail (智慧零售) and non-boundary retail (無界零售) respectively in 2017, which seamlessly
integrates online and offline resources to enhance user experience and offline retailers’
operating efficiency.
Market shares of China’s e-commerce platforms in terms New retail / non-boundary retail - definition of GMV
Online e-commerce Partner offline retailers’ New retail
platforms’ online resources offline resources
#1 Users and merchants
#1 Offline stores as
experience zones #1 Users’ experience
#2 Customer relationship
management
#3 Supply chain
management
#2 Offline stores as #2 Offline retailers’
warehouses operating efficiency
#4 Payment technology
Integration of Internet companies’ online resources (i.e. #1 users To enhance #1 users’
& merchants, #2 customer relationship management, #3 supply experience and #2 offline
chain management, and #4 payment technology), and offline retailers’ operating
retailers’ offline resources (i.e. offline stores as #1 as experience efficiency
zones and #2 warehouses)
Source: DBS HK
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In simple terms, new retail takes the best of both online and offline channels. New retail takes
advantage of Internet companies’ online resources (i.e. #1 users & merchants, #2 customer
relationship management, #3 supply chain management, and #4 payment technology),
and partners retailers’ offline resources (i.e. offline stores as #1 experience zones and #2
warehouses). This would enhance users’ experience (i.e. increasing user involvement and
shortening delivery time, with targeted products and services) and offline retailers’ operating
efficiency (increasing retailers’ sales per sqm with fairly constant operating costs per sqm [of
most cost components including rental costs, staff costs and depreciation costs]).
Example of new retail
We take Alibaba’s Hema Supermarket chain (盒馬鮮生), a well-known new retail showcase,
as an example.
Offline resource #1: Offline stores as experience zones.
Hema Supermarket outlets draw traffic to shop in offline stores close by, and serve as
experience zones to offer higher involvement shopping experiences versus pure e-commerce
platforms. Users can touch and feel products in offline stores and scan codes on smart labels
for detailed information like on online e-commerce platforms.
Offline resources #1: offline stores as experience zones
Users can feel products
in offline stores and
scan codes on smart
labels for detailed
information like on
online platforms
Source: DBS HKDBS Asian Insights
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The proportion of fresh food (i.e. seafood, fruit, and vegetables) on display in Hema
Supermarkets is larger than traditional retailers’. This is because fresh food is not standardised.
When users order through online platforms, they are subject to risks of receiving fresh food
items which are not as described or short weight. Hema Supermarkets thus provides in
person experiences to let users touch the products, feel them, and even have them cooked
in restaurant area, instead of looking at their pictures/ videos and information on online
e-commerce platforms. After the experience in offline stores, users will be confident to
increase fresh food orders as well as other products via online platforms. Alibaba disclosed
that Hema Supermarkets’ online orders as a percentage of total orders is 60%+ for mature
stores that have been in operation for more than 1.5 years.
Offline resources #1: offline stores as experience zones
The proportion of
“new retailers’” fresh
food (i.e. seafood, fruit,
and vegetable) on sale
is larger than traditional
retailers’
Source: DBS HK
Offline resource #2: Offline stores as warehouses.
Besides buyers taking the goods themselves from offline stores, Hema Supermarkets serve
as warehouses to offer faster delivery compared to pure e-commerce platforms. Hema
Supermarkets can provide instant delivery to users’ homes or offices within a certain distance
(i.e. 3km radius) from offline stores nearby (i.e. within 30 minutes) instead of express delivery
from warehouses elsewhere in cities (i.e. 1-3 days). Delivery time is critical for fresh food,
which are perishable items.DBS Asian Insights
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Offline resources #2: offline stores as warehouses
Staff pick up products
that users have ordered
in shopping bags and
put them on conveyor
belts which carry them
to delivery centres
Source: DBS HKDBS Asian Insights
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Online resource #1: Users & merchants.
Alibaba’s users can search Hema Supermarkets and partner supermarkets on Taobao (淘寶) apps.
Alibaba is able to draw users to shop online or offline in a Hema Supermarket located close by.
Online resource #1: Users & merchants
Alibaba’s users can
search nearby for Hema
Supermarkets and
partner supermarkets
on the Taobao app
Source: DBS HK
Online resource #2: Mobile payment.
Users can check out via offline stores’ cashiers or order online through Hema apps that is
linked with Alipay (支付寶).
Online resource #2: Mobile payment
Users can check out in
offline stores’ cashiers
or order online
through Hema apps
linked with Alipay
Source: DBS HKDBS Asian Insights
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Online resource #3: Customer relationship management.
As users check out or order online through mobile apps, “new retailers” can collect users’
purchasing behaviour through universal accounts across their mobile apps. “New retailers”
can analyse user data and provide targeted marketing (i.e. targeted products and promotion)
versus pure offline stores. Internet companies can help retailers to offer users to purchase
with targeted products to achieve large order volumes per SKU on lower number of SKUs in
their online stores and offline stores, which would result in higher sales per sqm and higher
operating efficiency.
Online resource #4: Supply chain management.
As mentioned above, Hema Supermarkets can serve as warehouses to offer a 30-minute
instant delivery service. In addition to Hema Supermarkets’ own delivery team, Alibaba’s
Ele.me (餓了麼), China’s second largest online food delivery platform, has started to deliver
orders for Hema Supermarkets and partner supermarkets. Both Hema Supermarkets and
Ele.me have intelligence dispatch systems, which can optimise order-rider matching and
delivery route planning, based on real time locations of users and delivery riders, to speed
up delivery of online orders. Furthermore, digitalised supply chain management enables
Hema Supermarkets to collect users’ real-time order data and plan their inventories instantly.
Inventory levels can be minimised and thus less food is wasted during supply chain process
versus pure offline stores.
Why new retail?
“Alibaba” and “Tencent + JD” have invested more than Rmb100bn in offline retailers since
2014, to develop new retail initiatives. Investors are questioning why Internet companies are
investing in offline retailers that have a low-margin business model (i.e. procuring products
from suppliers and selling products to customers on cost-plus basis), versus Internet companies’
high-margin monetisation model (i.e. online advertising and value-added service fees for
online games and other digital content).
However, Internet companies’ goal is not to go offline, but to help retailers, especially those
product categories with low online penetration, to improve online sales through new retail
solutions, and monetise through high-margin service fees.
3C and appeal products’ online penetration is high, while food and beverage is low.
China’s e-commerce retail gross merchandise volume (GMV) as percentage of retail sales
grew from 8.0% in 2013 to 16.4% in 2017, which is high relative to most developed and
developing countries.DBS Asian Insights
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Global retail e-commerce penetration (2017)
Source: iResearch, eMarketer, DBS HK
As a percentage of retail sales, computer, communication & consumer electronics (3C)
products, and apparel & shoes, recorded high online penetration rates of 29-36% in 2017.
China’s e-commerce platforms, such as Alibaba and JD, are expanding into product categories
with low online penetration rates of 9-25%, such as homewares and home furnishings, food
and drink, consumer health, beauty & personal care, and upscale products & services.
China’s e-commerce retail GMV
Source: iResearch, DBS HKDBS Asian Insights
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Online penetration of key product categories in China (2017)
Source: Euromonitor, DBS HK
Hurdles for certain product categories to go online. Consumers prefer to buy homewares
and home furnishings, food and drink, consumer health, beauty & personal care, and upscale
products & services in brick-and-mortar stores. This is because food and beverage products are
largely perishable items, and may go off with the 1-3 day delivery services. Home furnishing,
consumer health and upscale products & services, which have long life, safety issues, and high
tickets respectively, may need more consumer involvement (i.e. consumers need or want to
touch and feel the products in person). Therefore, consumers prefer buying product categories
which are perishable, have high delivery cost, and need more consumer involvement via brick-
and-mortar outlets.
Product qualities for online sales versus sales via bricks-and-mortar outlets
Low perishability High perishability
Low logistics cost High logistics cost
Low involvement High involvement
Buy online Buy in store
Source: DBS HKDBS Asian Insights
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New retail initiatives help retailers of product categories with low online penetration
to go online. New retail which takes the best of both online and offline worlds is emerging
to address perishability, logistics and involvement issues of certain products.
Offline stores nearby can serve as warehouses and offer 30-60-minute instant delivery service
from stores nearby to solve perishability and logistic issues, in addition to express delivery (i.e.
1-3 days from warehouses elsewhere in cities). Offline stores can serve as experience zones
to solve involvement issues (i.e. touching and feeling products in offline stores and scanning
code for detailed information like on online e-commerce platforms), versus pure e-commerce
platforms’ relatively low involvement (i.e. looking at pictures/ videos and information of
products on online e-commerce platforms).
Online platforms can offer digitalised customer relationship management (i.e. universal
accounts for different merchants for user data analytics and targeted marketing) and supply
chain management (i.e. better inventory planning and express/ instant delivery).
The objective of Internet companies investing in retailers is to create new retail
showcases to improve online sales, and monetise through high-margin service fees
by offering new retail solutions to other retailers. After initial investments in retailers
and creating new retail showcases to improve online sales, Internet companies are able to
offer new retail solutions to other retailers, especially for product categories with low online
penetration. Internet companies would be able to monetise through high-margin service fees
(i.e. commission or advertising fees, logistic fees, and payment fees), instead of relying on the
low-margin direct sales (IP) business model (i.e. procuring products from suppliers and selling
products to customers on cost-plus basis).
Comparison of e-commerce, new retail, and bricks-and-mortar formats
E-commerce New retail Bricks-and mortar
- Relatively low involvement + High involvement + High involvement
- Express delivery is relatively slow + More delivery options: - Self pickup
(1-3 days from warehouses) express delivery (1-3 days from
warehouses), instant delivery (30
mins from stores), or self pickup
+ Targeted products & services (i.e. + Targeted products & services (i.e. - No targeted products & services
universal accounts for user data universal accounts for user data (i.e. no universal accounts for user
analytics) analytics) data analytics)
Buy online New retail takes best of both online and offline worlds Buy in store
Source: DBS HKDBS Asian Insights
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New retail’s economic benefit
N
ew retail initiatives might not increase the size of China’s retail sales market (which
will instead grow with per capita household income), but will raise retail sales’
online penetration. iResearch forecasts that online penetration of retail sales will
expand from 16.4% in 2017 to 21.9% in 2020F. Increasing online penetration can
increase retailers’ sales per square meter (sqm; i.e. increasing online sales in addition to offline
sales) with fairly constant operating costs per sqm (i.e. rental and staff costs) to improve their
operating efficiency on operating leverage, versus traditional retailers.
Operating expense savings can be realised by offline retailers from Internet companies’ new
retail solutions that include customer relationship management, supply chain management,
and payment services, while Internet companies can monetise through service fees (i.e.
commission or advertising fees, logistic fees and payment fees).
China’s offline retail sales and e-commerce retail sales
Source: iResearch, DBS HKDBS Asian Insights
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Retailers: Improving operating efficiency
New retail initiatives would lead to (1) higher sales per sqm (i.e. increasing online sales in
addition to offline sales) versus traditional retailers (i.e. supermarkets / hypermarkets,
convenience stores, department stores). Increasing sales per sqm, with (2) fairly constant
operating costs per sqm (of most cost components including rental costs, staff costs and
depreciation costs), will lead to higher operating profit margin (OPM).
Hema Supermarket chain as an example
We take Alibaba’s Hema Supermarket chain (盒馬鮮生), which is a new retail showcase that
is seeing significant progress in improving online sales and operating efficiency, as an example.
1. Higher sales per sqm. Higher sales per sqm is a result of (i) higher same store sales (i.e.
increasing online sales in addition to offline sales) and (ii) smaller store area required.
(i) Higher same store sales: With offline stores functioning as warehouses and
experience zones to shorten delivery time and increase user involvement, more users will
lead to an increase in online orders. Hence, “new retail supermarkets’” online sales are
higher than that of traditional supermarkets, and together with offline sales, this will lead
to higher overall same store sales. For example, according to operating data of Alibaba’s
Hema Supermarket chain, Hema Supermarkets’ online orders as a percentage of total
orders is 68% as at end July 2018, for mature stores (i.e. in operation >1.5 years). Its
online basket size (Rmb80) is 62% of offline basket size (Rmb129) as at end July 2018.
(ii) Smaller store area: The store area of a “new retail supermarket” can be smaller than
that of a traditional supermarket. This is because Internet companies are able to analyse
user data and provide targeted products with less stock-keeping units (SKUs) overall,
and thus the area of a single store will be smaller while still maintaining similar sales
level. As at end July 2018, Alibaba’s Hema Supermarket chain has 64 branches in first
tier cities, with each store occupying 5,000 sqm of space on average versus traditional
supermarkets’ 6,000-8,000 sqm and hypermarkets’ 10,000-20,000 sqm. JD’s 7FRESH
Supermarket chain has two stores in first tier cities, with each store occupying 5,000 sqm
on average.
Hema Supermarket chain’s number of annual offline per sqm is 167% of traditional
retailers’ as at end July 2018, for mature stores (i.e. in operation >1.5 years), and this is on
a smaller area of a single store with a similar sales level. Its offline basket size has ramped
up to 2x traditional retailers’ as at end July 2018, given its premium positioning.
With higher sales and smaller store area, “new retail supermarkets’” sales per sqm is thus
higher than that of traditional supermarkets / hypermarkets. Alibaba disclosed that for
Hema Supermarkets, the average sales per sqm per year for mature stores (i.e. in operationDBS Asian Insights
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>1.5 years) is Rmb50,000+, which is >5x that of traditional supermarkets’/hypermarkets’
Rmb8,838 on average, according to operating data of listed supermarkets/hypermarkets
ranked among the top 20 in China. JD also disclosed that 7FRESH Supermarkets’ sales
per sqm is 3-4x that of a traditional supermarket.
“New retail supermarkets” have higher sales productivity
Sales
(increasing online sales in
additional to offline sales)
Sales per sqm
(i.e. 3-5x traditional
supermarkets’)
Single store area
(i.e. 5,000 sqm versus traditional
supermarkets’ 6,000-8,000 sqm and
hypermarkets’ 10,000-20,000 sqm)
Source: Company (Alibaba’s Hema Supermarket, JD’s
7FRESH Supermarkets), DBS HK
2. Similar gross profit margin, and operating cost (of most cost components) per sqm
We expect ”new retail supermarkets” to have similar gross profit margin (GPM), and
operating cost per sqm (of most cost components including rental costs, staff costs, and
other operating costs [i.e. depreciation costs per sqm]) versus traditional supermarkets.
(i) Gross profit margin: We expect ”new retail supermarkets” to have lower gross profit
margin (GPM) of 15.0% versus traditional supermarkets’ 22.0% on average, based on
operating data of listed supermarkets / hypermarkets that are among the top 20 in China
(Sun Art [6808 HK], Yonghui [601933 CH], Hualian [600361 CH], Jiajiayue [603708 CH]).
This is because a larger proportion of fresh foods is sold (GPM of 12-15% versus package
foods’ 18%).
Wastage is one of key factors to affect supermarkets’ GPM. Internet companies have
introduced the following initiatives to solve wastage issues.
• Traditional retailers are more experienced in dealing with fresh products, which leads
to low wastage. Therefore, Internet companies are partnering with retailers such as
Sun Art, Walmart, Yonghui, and Carrefour.DBS Asian Insights
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• Delivery to customers can raise wastage issues. But these issues have largely been
addressed by 30-minute instant delivery services from a store nearby, which is shorter
than the 1-3 day express delivery services from warehouses.
• Digital supply chain management enables ”new retail supermarkets” to gather and
analyse real time order data, and plan their inventories instantly. Inventory levels can
be minimised and less food is wasted during the supply chain process.
• Catering can help ”new retail supermarkets” to handle fresh food products which
are about to expire soon.
Besides, ”new retail supermarkets” can adopt self-procurement for certain dedicated
products, plus centralised procurement with Internet companies’ partner supermarkets
for mass products to enjoy economies of scale.
(ii) Rental costs per sqm: We expect ”new retail supermarkets” to have similar annual
rental costs per sqm versus traditional supermarkets’ Rmb273 per sqm on average, based
on operating data of listed supermarkets / hypermarkets that are among the top 20 in
China. While there are concerns that higher sales per sqm will lead to higher rents, ”new
retail supermarkets” are in a strong position to negotiate with landlords as they are able
to attract traffic from their online stores to their offline platforms.
(iii) Staff costs per sqm: We expect ”new retail supermarkets” to have slightly higher
staff costs per sqm of Rmb937 on an annualised basis as at end July 2018, versus
traditional supermarkets’ Rmb746 on average, due to similar offline staff costs per sqm
but higher online staff costs per sqm.
(a) Offline staff costs per sqm: We expect offline staff costs per sqm to be similar
versus traditional supermarkets’ Rmb746 per sqm on average, according to operating
data of listed supermarkets / hypermarkets that are among the top 20 in China. This is
because offline staff numbers per sqm (i.e. store managers and storekeepers) are similar.
(b) Online staff costs per sqm: There are additional online staff required for customer
services and training artificial intelligence (AI) powered customer service chatbots.
Based on Hema Supermarkets’ data for mature stores in operation for >1.5 years, there
were 521 online orders per sqm on an annualised basis as at end July 2018. Assuming
one enquiry per order, there were 521 enquiries per sqm.
Alibaba disclosed that Alibaba’s Xiaomi (小蜜, Alibaba’s AI powered customer service
chatbots) is able to handle 60% of total enquiries, that are more standardised and less
complicated, and a live agent is able to handle 250 enquiries per day on average. ThisDBS Asian Insights
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implies 0.00258 manual customer service staff per sqm, and the annualised online staff
costs per sqm of Rmb192 on an annualised basis as at end July 2018, based on average
annualised salary of Rmb74,318 (according to National Bureau of Statistics of China).
Only a trainer is required for a merchant to train AI powered customer service chatbots on
average. Costs are not substantial, using Internet companies’ application programming
interface (API) of AI powered customer service chatbots, rather than doing it from scratch.
(iv) Other operating costs per sqm (i.e. depreciation costs per sqm): We expect
”new retail supermarkets” to have similar capex, and other operating costs per sqm
(i.e. depreciation costs per sqm) versus traditional supermarkets’ Rmb688 on average.
Capex and depreciation costs per sqm will increase, when cashier-free mobile payment
and consumer behaviour tracking systems, using artificial intelligence (AI) technology
with cameras and cloud computing, are adopted. However, industry experts expect new
retail’s increasing operating efficiency to come from increasing sales per sqm through
higher online sales and smaller store area initially, and saving staff costs through AI
technology later (which will be discussed in “Appendix: How Internet companies can
outperform in the long term?”).
(v) Logistics costs per sqm: We expect ”new retail supermarkets” to have higher
logistics costs per sqm of Rmb5,072 on an annualised basis as at end July 2018, versus
traditional supermarkets’ Rmb44 on average, due to growing costs for distribution
centers and trucks with increasing sales per sqm, and additional instant delivery costs.
(a) Costs for distribution centers and trucks. We expect ”new retail supermarkets”
to have similar costs for distribution centers and trucks as a percentage of sales versus
traditional supermarkets’ 0.5%.
(b) Instant delivery costs. The major additional costs are instant delivery costs (i.e.
30 mins from stores) in addition to traditional supermarkets’ self-pickup services. Based
on 521 annual online orders per sqm (based on Hema Supermarkets’ data for mature
stores in operation for >1.5 years) and instant delivery cost per order of Rmb8 (based on
Meituan Dianping’s prospectus), total instant delivery costs would be Rmb4,704 per sqm
on an annualised basis as at end July 2018.
Higher sales per sqm + Constant operating costs (of most components) per sqm =
Higher operating profit margin. Increasing sales per sqm, with similar operating costs
per sqm (of most cost components including rental costs, staff costs and depreciation
costs), will lead to higher operating profit margin (OPM). Based on the above assumptions,
we estimate “Hema Supermarket mature stores’” OPM (before service fees to Internet
companies) to be 5.5% on an annualised basis as at end July 2018, which is 2x higher
than traditional supermarkets’ 2.6%, based on operating data of listed supermarkets.DBS Asian Insights
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23
Hema Supermarkets improving operating efficiency versus traditional supermarkets
(1) (i) Sales
(increasing online sales in addition
to offline sales, online order
contribution of 60%+)
Sales per sqm (2) (i) Gross profit margin
(3-5x traditional We expect Hema Supermarkets to
supermarkets’) have lower GPM of 15.0% versus
traditional supermarkets’ 22.0%,
(ii) Single store area because of larger proportion of
(5,000 sqm versus traditional fresh foods sold
supermarkets’ 6,000-8,000 sqm and
hypermarkets’ 10,000-20,000 sqm)
Operating profit Sales Gross profit Operating costs
per sqm per sqm margin per sqm
(2) (ii) Rental costs + (2) (iii) Staff costs + (2) (iv) Depreciation + (2) (v) Logistics
per sqm per sqm per sqm costs per sqm
New retail Similar number of There is similar capex, Growing costs for
supermarkets are offline staff per sqm unless cashier-free distribution centers and
in a strong position (i.e. store managers and mobile payment and trucks with increasing
to negotiate with storekeepers), but extra consumer behaviour sales per sqm, and
landlords as they are number of online staff tracking, using additional instant
able to attract traffic (i.e. customer services). artificial intelligence delivery costs
from their online (AI) technology
stores to their offline with cameras and
platforms cloud computing are
adopted.
Source: DBS HKDBS Asian Insights
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Financial forecast of a Hema Supermarket mature store (i.e. in operation >1.5 years)
Annual amount per sqm (Rmb) Jan 16 Jan 17 Jan 18 Jul 18 Assumptions
Sales 5,022 16,247 49,435 73,533 (1) Annual number of orders per
sqm x (2) Basket size = Annual
sales per sqm, which will be >8x
traditional supermarkets' as at end
July 2018
Cost of goods sold (COGS) -4,269 -13,810 -42,020 -62,503 We expect ”new retail
supermarkets” to have lower gross
profit margin (GPM) of 15.0% versus
traditional supermarkets' 22.0%,
because of larger proportion of
fresh foods sold (based on operating
data of listed supermarkets /
hypermarkets in the top 20 in China)
Rental costs -273 -273 -273 -273 We expect similar rental costs per
sqm as traditional supermarkets
(based on operating data of listed
supermarkets / hypermarkets in the
top 20 in China)
Staff costs -754 -786 -893 -937 We expect similar offline staff costs
per sqm of Rmb746 as traditional
supermarkets
There is additional online staff
costs per sqm incurred for customer
services, with less live agents and
more AI powered customer service
chatbots, using Alibaba’s application
programming interface (API) of AI
powered customer service chatbots,
rather than doing it from scratch
Other operating costs -688 -688 -688 -688 We expect other operating costs
per sqm to be similar to traditional
supermarkets (based on operating
data of listed supermarkets /
hypermarkets in the top 20 in China)
Logistics expenses -221 -1,061 -3,873 -5,072 We expect ”new retail
supermarkets” to have similar costs
for distribution centers and trucks
as a percentage of sales versus
traditional supermarkets' 0.5%
The major additional costs are
instant delivery services costs (= [1]
[ii] Annual online order number
per sqm x instant delivery costs
per order of Rmb8 [according to
Meituan Dianping])DBS Asian Insights
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Financial forecast of a Hema Supermarket mature store (i.e. in operation >1.5 years) cont.
Annual amount per sqm (Rmb) Jan 16 Jan 17 Jan 18 Jul 18 Assumptions
Operating profit (before service -1,183 -372 1,687 4,059
fees to Internet companies)
Operating profit margin (OPM, -23.6% -2.3% 3.4% 5.5% OPM is 2x traditional retailers’ as at
before service fees to Internet end July 2018
companies)
Breakdown
(1) New retailers - number of 61 164 469 769 (1) = (i) + (ii)
orders
(i) New retailers - number of 36 91 182 248 Based on operating data of
offline orders Alibaba’s Hema Supermarket chain
(a) Traditional retailers - number 149 149 149 149 Based on China Chain Store Almanac
of offline orders 2016, China Chain Store & Franchise
Association
(b) New retailers' offline orders 24.4% 61.1% 122.2% 167.0% Annual offline numbers p.a. per
/ traditional retailers' offline sqm has ramped up from 24%
orders of traditional retailers' as at end
January 2017 to 167% of traditional
retailers' as at end July 2018, given
smaller area of a single store with
similar sales level
(ii) New retailers - number of 25 74 288 521 Based on operating data of
online orders Alibaba’s Hema Supermarket chain
(a) Online penetration 40.3% 44.7% 61.3% 67.7% Online orders as a percentage of
total orders has ramped up from
40% as at end January 2016 to
68% as at end July 2018, which
is above the level enjoyed by
product categories with high online
penetration
(2) Basket size (Rmb) 83 99 105 96 (2) = Weighted average of (i) and (ii)
(i) Offline basket size (Rmb) 113 137 153 129 Based on operating data of
Alibaba’s Hema Supermarket chain
(a) Traditional retailers' offline 59 59 59 59 Based on China Chain Store Almanac
basket size 2016, China Chain Store & Franchise
Association
(b) New retailers' offline basket 189.9% 230.6% 257.8% 217.1% Offline basket size has ramped up
size / offline basket size to 2x traditional retailers' as at end
July 2018, because of the premium
positioning
(ii) Online basket size (Rmb) 38 52 75 80 Based on operating data of
Alibaba’s Hema Supermarket chain
(a) Online basket size / Offline 33.2% 37.6% 48.9% 61.7% Online basket size has ramped up
basket size from 33% of offline basket size as at
end January 2016 to 62% of offline
basket size as at end July 2018
Source: Company, China Chain Store & Franchise Association, DBS HKDBS Asian Insights
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Comparing OPM of traditional supermarkets/hypermarkets and Hema Supermarkets (FY17*)
Traditional supermarkets / hypermarkets “New retail supermarkets”
(Sun Art, Yonghui, Hualian, Jiajiayue) (Hema Supermarkets [mature stores in operation >1.5 years ])
Annual % of sales Assumptions Annual % of sales Assumptions
amount amount
per sqm per sqm
(Rmb) (Rmb)
Sales 8,838 100.0% Based on Sales 73,533 100.0% (1) Annual order
(Rmb m) operating (Rmb m) number per sqm x (2)
data of listed Basket size = Annual
supermarkets / sales per sqm, which
hypermarkets will be >5x traditional
in the top 20 in supermarkets'
China (Sun Art,
Yonghui, Hualian,
Jiajiayue)
Cost of -6,898 -78.1% Based on Cost of -62,503 -85.0% We expect ”new retail
goods sold operating goods sold supermarkets” to have
(COGS) data of listed (COGS) lower GPM of 15.0%
supermarkets / versus traditional
hypermarkets supermarkets' 22.0%,
because of larger
proportion of fresh
foods sold
Rental costs -273 -3.1% Based on Rental costs -273 -0.4% We expect similar
operating rental costs per
data of listed sqm as traditional
supermarkets / supermarkets
hypermarkets
Staff costs -746 -8.4% Based on Staff costs -937 -1.3% We expect similar
operating offline staff costs
data of listed per sqm of Rmb746
supermarkets / as traditional
hypermarkets supermarkets
There is additional
online staff costs per
sqm of Rmb148 for
customer services,
with less live agents
and more AI powered
customer service
chatbots, using
Alibaba’s application
programming interface
(API) of AI powered
customer service
chatbots, rather than
doing it from scratchDBS Asian Insights
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Comparing OPM of traditional supermarkets/hypermarkets and Hema Supermarkets (FY17*) cont.
Traditional supermarkets / hypermarkets “New retail supermarkets”
(Sun Art, Yonghui, Hualian, Jiajiayue) (Hema Supermarkets [mature stores in operation >1.5 years ])
Annual % of sales Assumptions Annual % of sales Assumptions
amount amount
per sqm per sqm
(Rmb) (Rmb)
Other -644 -7.3% Based on Other -688 -0.9% We expect similar other
operating operating operating operating costs per sqm
costs data of listed costs (i.e. depreciation) of
supermarkets / Rmb688 as traditional
hypermarkets supermarkets, unless
cashier-free mobile
payment and consumer
behaviour tracking
systems, are adopted
Logistics -44 -0.5% Based on Logistics -5,072 -6.9% We expect ”new
expenses operating expenses retail supermarkets”
data of listed to have similar costs
supermarkets / for distribution
hypermarkets centers and trucks as
a percentage of sales
versus traditional
supermarkets' 0.5%.
The major additional
costs are instant
delivery services costs
of Rmb3,626 (= [1][ii]
Annual online order
number per sqm x
instant delivery costs
per order of Rmb8
[according to Meituan
Dianping])
Operating 232 2.6% Operating 4,059 5.5% OPM is 1.3x traditional
profit profit supermarkets' /
(before hypermarkets' in FY17*
service fees
to Internet
companies)DBS Asian Insights
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Comparing OPM of traditional supermarkets/hypermarkets and Hema Supermarkets (FY17*) cont.
Breakdown
(1) New retailers - number of 769 (1) = (i) + (ii)
orders
(i) New retailers - number of 248 Based on operating data of Alibaba’s Hema Supermarket chain
offline orders
(a) Traditional retailers - number 149 Based on China Chain Store Almanac 2016, China Chain Store & Franchise
of offline orders Association
(b) New retailers' offline orders 167.0% Annual offline numbers has ramped up to 122% of traditional retailers'
/ traditional retailers' offline as at end July 2018, given smaller area of a single store with similar sales
orders level
(ii) New retailers - number of 521 Based on operating data of Alibaba’s Hema Supermarket chain
online orders
(a) Online penetration 67.7% Online orders as a percentage of total orders has ramped up from 61%
as at end January 2018, which is above the level enjoyed by product
categories with high online penetration
(2) Basket size (Rmb) 96 (2) = Weighted average of (i) and (ii)
(i) Offline basket size (Rmb) 129 Based on operating data of Alibaba’s Hema Supermarket chain
(a) Traditional retailers' offline 59 Based on China Chain Store Almanac 2016, China Chain Store & Franchise
basket size Association
(b) New retailers' offline basket 217.1% Offline basket size has ramped up to 2x traditional retailers' as at end
size / offline basket size January 2018, because of the premium position
(ii) Online basket size (Rmb) 80 Based on operating data of Alibaba’s Hema Supermarket chain
(a) Online basket size / Offline 61.7% Online basket size has ramped up to 49% of offline basket size as at end
basket size January 2018
Source: Company, China Chain Store & Franchise Association, DBS HK
* Traditional supermarkets: based on data for 12 months ended December 2017; Hema Supermarkets: based on data for 12 months ended July 2018DBS Asian Insights
SECTOR BRIEFING 72
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Financial forecasts of a “new retail department store”, based on Hema
Supermarket chain’s performance
We expect other retailers (i.e. department stores such as “Alibaba’s” Intime) to follow Hema
Supermarkets, and adopt new retail solutions to improve sales per sqm and operating
efficiency. Financial forecasts of a newly setup “new retail department store”, based on Hema
Supermarket chain’s performance, are as follows.
(1) Sales per sqm: We expect sales per sqm for a newly setup “new retail department store”
to ramp up from 26% of traditional retailers’ in Year 0 to 2x traditional retailers’ in Year 3 (“new
retail store”: Rmb16,373 vs traditional department store: Rmb7,752 on average, according
to operating data of listed department stores [Wangfujing 600859 CH, Dashang 600694 CH,
Wushang 000501 CH, Silver Plaza 600858 CH, Wenfeng 601010 CH]), supported by higher
(i) online and (ii) offline orders per sqm.
(i) Online sales per sqm. We expect a newly setup “new retail department store’s” online
orders as a percentage of total orders to ramp up from 19% (average online penetration) in
Year 0 to 30% (a level enjoyed by product categories with high online penetration) in Year 3.
With offline stores functioning as warehouses and experience zones to shorten the delivery
time and increase user involvement, users will increase their online orders.
(ii) Offline sales per sqm. We expect the number of offline orders per sqm to ramp up
from 24% of traditional retailers’ in Year 0 to 167% of traditional retailers’ in Year 3, based
on Hema Supermarket chain’s performance. This is because Internet companies can analyse
user data and provide targeted products with less stock-keeping units (SKUs), thus requiring a
smaller single store area while achieving a similar sales level.
(2) Gross profit margin and operating costs per sqm: As discussed above, we expect a
newly setup “new retail department store” to have similar (i) gross profit margin versus
traditional department stores’ 20.9% on average, as commissions as a percentage of
concessionaire sales are comparable; (ii) rental costs per sqm of Rmb172 on average, and
(iii) other operating costs per sqm of Rmb478 (i.e. depreciation costs and utility costs
per sqm), versus traditional retailers. The operating costs of traditional retailers are based on
operating data of listed department stores.
We expect a newly setup “new retail department store” to have slightly higher (iv) staff costs
per sqm of Rmb483 in Year 3 versus traditional supermarkets’ Rmb478, due to similar offline
staff costs per sqm but higher online staff costs per sqm. We expect the annualised offline
staff costs per sqm to be close to traditional supermarkets’ Rmb478 per sqm on average. We
expect additional annualised online staff costs of Rmb6 per sqm to be incurred in Year 3. We
expect 17 online orders per sqm, and potentially 17 enquiries per sqm in Year 3, assuming one
enquiry per order. Based on Alibaba’s Xiaomi’s (小蜜, Alibaba’s AI powered customer service
chatbots) data, such as AI powered customer service chatbots being able to handle 60%DBS Asian Insights
SECTOR BRIEFING 72
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of total enquiries pertaining to those that are standardised and less complicated, and a live
agent being able to handle 250 enquiries per day on average, this implies 0.000076 manual
customer service staff per sqm in Year 3. Based on average annualised salary of Rmb74,318
(according to National Bureau of Statistics of China), the annualised online staff costs per sqm
will be Rmb6 in Year 3.
We expect a newly setup “new retail department store” to have higher (iv) logistics costs
per sqm of Rmb200 in Year 3 versus traditional supermarkets’ Rmb39, due to growing
costs for distribution centers and trucks with increasing sales per sqm, and additional instant
delivery costs. We expect ”new retail department stores” to have similar costs for distribution
centers and trucks as a percentage of sales versus traditional supermarkets’ 0.5%. The major
additional costs are instant delivery costs (i.e. 30 mins from stores) in addition to traditional
supermarkets’ self-pickup services. Based on 15 annual online orders per sqm and instant
delivery cost per order of Rmb8 (based on Meituan Dianping’s prospectus), total logistics costs
would be Rmb118 per sqm in Year 3.
A “new retail department store’s” operating profit margin could achieve break even
in Year 2 and reach 12.8% in Year 3. Based on above assumptions (increasing sales per
sqm, similar operating costs per sqm [of most cost components]), we estimate a “new retail
department store’s” operating profit margin (OPM) (before service fees to Internet companies)
to be -35.4% in Year 0, achieve break even in Year 2 and reach 12.8% in Year 3, which is a
6.0ppt improvement vs traditional department stores’ 7.3%, according to operating data of
listed department stores.DBS Asian Insights
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Financial forecast of a Hema Supermarket mature store (i.e. in operation >1.5 years)
Annual amount per sqm (Rmb) Year 0 Year 1 Year 2 Year 3 Assumptions
Sales 2,038 5,249 11,117 16,373 (1) Annual number of orders per
sqm x (2) Basket size = Annual sales
per sqm, which will be 2x traditional
department stores' in Year 3
Cost of goods sold (COGS) -1,612 -4,152 -8,792 -12,949 We expect similar cost of goods sold
as percentage of sales as traditional
department stores (based on data of
listed department stores in the top
20 in China
Rental costs -172 -172 -172 -172 We expect similar rental costs per
sqm as traditional department stores
(based on listed department stores)
Staff costs -478 -479 -481 -483 We expect similar offline staff costs
per sqm of Rmb408 as traditional
department stores
There is additional online staff
costs per sqm incurred for customer
services, with less live agents and
more AI powered customer service
chatbots (which are able to handle
60% of total enquiries), using
Alibaba’s application programming
interface (API) of AI powered
customer service chatbots, rather
than doing it from scratch
Other operating costs -478 -478 -478 -478 We expect similar other operating
costs per sqm as traditional
department stores (based on listed
department stores in the top 20 in
China)
Logistics expenses -19 -55 -127 -200 We expect ”new retail department
stores” to have similar costs for
distribution centers and trucks as a
percentage of sales versus traditional
department stores' 0.5%
The major additional costs are instant
delivery costs ( = [1][ii] Annual online
order number per sqm x Instant
delivery cost per order of Rmb8
[according to Meituan Dianping])
Operating profit -722 -87 1,067 2,091
Operating profit margin (OPM) -35.4% -1.7% 9.6% 12.8% OPM is 2x traditional department
stores’ in Year 3DBS Asian Insights
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32
Financial forecast of a Hema Supermarket mature store (i.e. in operation >1.5 years) cont.
Annual amount per sqm (Rmb) Year 0 Year 1 Year 2 Year 3 Assumptions
Breakdown
(1) New retailers - number of 6 16 34 49 (1) = (i) + (ii)
orders
(i) New retailers - number of 5 13 25 34 (i) = (a) x (b)
offline orders
(a) Traditional retailers - number 21 21 21 21 According to China Chain Store
of offline orders Almanac 2016, China Chain Store &
Franchise Association
(b) New retailers' offline orders 24.4% 61.1% 122.2% 167.0% We expect annual number of offline
/ traditional retailers' offline orders per sqm to ramp up from
orders 24% of traditional retailers' in Year
0 to 167% of traditional retailers' in
Year 3 (based on Hema Supermarket
chain’s performance)
(ii) New retailers - number of 1 4 9 15 (ii) = (1) x (a)
online orders
(a) Online penetration 18.5% 22.3% 26.2% 30.0% We expect online orders as a
percentage of total orders to ramp
up from 19% (average online
penetration) in Year 0 to 30%
(which is the level enjoyed by
product categories with high online
penetration) in Year 3
(2) Basket size (Rmb) 330 324 326 333 (2) = Weighted average of (i) and (ii)
(i) Offline basket size (Rmb) 377 377 377 377
(a) Traditional retailers - offline 377 377 377 377 According to China Chain Store
basket size Almanac 2016, China Chain Store &
Franchise Association
(b) New retailers' offline basket 100.0% 100.0% 100.0% 100.0% We expect similar offline basket size
size / offline basket size as traditional retailers'
(ii) Online basket size (Rmb) 125 142 184 232 (ii) = (i) x (a)
(a) Online basket size / Offline 33.2% 37.6% 48.9% 61.7% We expect online basket size to
basket size ramp up from 33% of offline
basket size in Year 0 to 62% of
offline basket size in Year 3 (based
on Hema Supermarket chain’s
performance)
Source: Company, China Chain Store & Franchise Association, DBS HKDBS Asian Insights
SECTOR BRIEFING 72
33
Comparing OPM of traditional department stores and “new retail department stores” (2017)
Traditional department stores A “new retail department store”
(Wangfujing, Dashang, Wushang, Silver Plaza,
Wenfeng)
Annual % of sales Assumptions Annual % of sales Assumptions
amount amount
per sqm per sqm
(Rmb) (Rmb)
Sales 7,752 100.0% Based on Sales 16,373 100.0% Based on financial
(Rmb m) operating data of (Rmb m) forecast of a
listed department newly setup "new
stores in the department store" in
top 20 in China Year 3
(Wangfujing,
Dashang,
Wushang, Silver
Plaza, Wenfeng)
Cost of -6,127 -79.0% Based on Cost of -12,949 -79.1% We expect similar cost
goods sold operating data of goods sold of goods sold as a
(COGS) listed department (COGS) percentage of sales as
stores in the top traditional department
20 in China stores
Rental costs -172 -4.7% Based on Rental costs -172 -1.1% We expect similar
operating data of rental costs per sqm as
listed department traditional department
stores in the top stores
20 in China
Staff costs -408 -5.0% Based on Staff costs -483 -2.9% We expect similar
operating data of offline staff costs per
listed department sqm of Rmb408 as
stores in the top traditional department
20 in China stores
There is additional
online staff costs per
sqm of Rmb148 for
customer services,
with less live agents
and more AI powered
customer service
chatbots, using
Alibaba’s application
programming interface
(API) of AI powered
customer service
chatbots, rather than
doing it from scratchYou can also read
