PUSHING THE FINAL FRONTIER - CHINA RETAIL DIGITAL TRANSFORMATION WHITEPAPER - Oliver Wyman
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
PUSHING THE FINAL FRONTIER CHINA RETAIL DIGITAL TRANSFORMATION WHITEPAPER
CONTENTS Executive summary 2 The final frontier of retail digitalization 3 The Golden Decade of eRTM in China 7 The “New Normal” of traditional trade 14 Brands 14 Mom-and-pop stores 20 Distributors 25 4P digital transformation index in traditional trade 28 Conclusion 30 Copyright © 2019 Oliver Wyman 1
EXECUTIVE
SUMMARY
As the world continues to rapidly These electronic Route-to-Market
undergo digitalization, brands and (eRTM) solutions in China are about to
retailers are pushing ahead with digital enter a Golden Decade and reach an
innovations to meet evolving consumer estimated worth of RMB 1.1 trillion by
needs. The strides being made in the 2028, where about 80% of the market
world of e-commerce are highly evident will be covered by the leading players
and indicate to the opportunities that are Alibaba LingShouTong (LST) and JD.com
being unlocked when digital capabilities XinTongLu (XTL).
do meet ever-changing consumer
behaviors. There is however one “blind eRTM could very well become the
spot” in this world of digitalization. It “New Normal” for the traditional trade
exists in retail, and specifically in the sector in China. Brands will cooperate
traditional off-trade sector. with eRTM to improve their ability to
serve distributors and retailers. Mom-
Traditional off-trade largely consists of and-pop stores will evolve into modern
independently run mom-and-pop stores convenience stores that shoulder
that are still very much a dominant community responsibilities and serve
channel in developing countries, community needs. Distributors will
including China. The complexities that maintain their core function and
are built into this value chain – lots transform into being partners offering
of individual retail storefronts, poor eRTM solutions.
infrastructure, and served by a highly
traditional multi-level distribution system In this joint report from Oliver Wyman
that is hard to decipher – inherently make and AliResearch, we would like to share
it incredibly difficult to digitalize. our views on the latest trends and
developments in this area.
Nevertheless, it is in this particular arena
where there have been very interesting
developments in China. Armed with one
of the leading digital ecosystems in the
world and a very digital-savvy population,
China is well-positioned to be the first
country in the world to provide digital
solutions for traditional trade at scale.
Copyright © 2019 Oliver Wyman 2THE FINAL FRONTIER
OF RETAIL DIGITALIZATION
The world of retail has of offline versus online disappears and
been rapidly digitized becomes more integrated, the ability
to harness data and provide a better
The world around us is rapidly digitizing – proposition to consumers is becoming
advancements in technology, including increasingly invaluable.
e-commerce solutions, cloud computing,
and mobile payments, have changed Digitalization is a broad term – some
how consumers behave, interact, shop, may consider going from a paper-based
and share. In many ways, the retail sector medium to a digital medium for a single
has been at the forefront of this digital process as “going digital”. However,
revolution – the traditional brick & mortar when taking the position of creating value
business model has been disrupted with differentiation to a business model, there
the rise of e-commerce. As the notion are three core elements. (See Exhibit 1.)
Exhibit 1: The three I’s of digitalization
Information
Digitalization starts from digitizing the information flow as the first step. The key is
to convert all available records of data, ranging from sales data to inventory data to
consumer data into a digital format as the underlying foundation.
Integration
Digital data from various parties then needs to be integrated to form a closed data
loop, which allows synchronicity across the entire value chain with a single view of
the situation and so a clearer understanding of what actions need to be taken.
Intelligence
If an integrated digital information warehouse is the bedrock of digitalization,
advanced analytics and big data (e.g. machine learning, AI) are the enablers that
provide insight and inform better business decision-making to each of the actors
along the value chain.
Source Oliver Wyman analysis
Copyright © 2019 Oliver Wyman 3Traditional off-trade Going from the online channel to the
offline channels, it is clear that the
is the final frontier to
modern off-trade channel is progressing
be digitized well on its digitalization journey. The
Digging beneath the surface, the pace at channel’s chain stores, hypermarkets
which digitalization has occurred in the and supermarkets, and convenience
retail sector has differed widely. Naturally, stores are supported by a mature and
with online retail models the fundamental integrated value chain. Moreover, with
proposition is digitally based, and leading the value chain exhibiting a willingness to
platforms have made massive strides in invest in upgrading its digital capabilities
harnessing data, analyzing it, and making in areas such as logistics, warehouse
more intelligent decisions for their lines management and customer transaction
of business. analysis, there is a clear roadmap ahead.
Exhibit 2: The degrees of digitalization by channel
100% • Inherently digital throughout its
operation from stock, sales and
inventory, to entire supply chain,
Online channel and all integrated under one roof
e.g. E-commerce • Uses data analytics to provide
AI-driven, decision-making
recommendations
• Modern on-trade systems are
relatively well-integrated and mature
• Leading retailers have made
Degree of Offline channel: significant progress in building data
digitalization modern trade systems and layer analytics on top
e.g. Chain stores, hyper/ to make better business decisions
supermarkets, CVS
• Remains the lowest degree of
digitalization due to complexity,
tiered hierarchies and challenges
Offline channel: in control
traditional trade • Digital records of data for inventory
0% e.g. Mom-and-pop stores and sale are not widespread
Source Oliver Wyman analysis
Copyright © 2019 Oliver Wyman 4As a matter of fact, many of the top products from a vast multi-layered
grocers in China have sought to network of distributors, the existing
accelerate their position on this curve complexities have made this arena
through strategic partnerships with the last frontier in the retail sector
leading digital players over the past for digitalization.
several years.
However, it is often forgotten how
This leads us to the remaining important traditional trade channels
traditional off-trade channel, which is are, especially in developing countries.
still massively behind the digitalization In China, offline traditional trade still
curve. With many highly fragmented accounts for about 40% of the country’s
and independent mom-and-pop stores total retail sales value, and in India it still
operating without POS in a primarily accounts for over 80%.
“cash based” business, and ordering
Exhibit 3: Traditional trade’s share of total retail sales value, by country, 2018
Cambodia 85%
India 83%
Indonesia 75%
Philippines 68%
Malaysia 66%
Thailand 53%
China 40%
Russia 32%
Japan 31%
USA 25%
France 19%
South Korea 19%
Germany 13% Developing countries
Britain 10% Developed countries
Source Euromoniter, Oliver Wyman analysis
Copyright © 2019 Oliver Wyman 5With the rise of the digital wave in China, and touch points with consumers and
China is now standing on the verge of enhancing their capability to quickly
a unique opportunity to break through scale up their business through
in this sector. This is because it has all digital initiatives.
the right building blocks to drive this •• Highly efficient logistics network:
change and truly separate itself from Established by market leaders such
as SF Express, JD and Cainiao, an
other markets.
extensive logistics network in China
•• Everyone is a mobile-first consumer has been well-established over
with a digital wallet: The number the past decade via the growth of
of mobile Internet users in China e-commerce. The network effectively
has exceeded 800 million by the covers the entire country down to
end 2018. Furthermore, users of a lower-tier cities and the countryside,
similar scale have adopted Tenpay at a world-leading delivery
(WeChat Pay and QQ wallet), while efficiency level.
more than 700 million users have
actively used Alipay in daily life. One As a matter of fact, many players in China
can easily top the digital wallet up have been actively experimenting on a
or withdraw money from it, and with range of digital solutions to modernize
simple clicks and QR-code scans on a and digitalize the traditional trade
smartphone, complete a transaction channel over the past few years. Among
within seconds.1 which, we believe eRTM (electronic
•• Strong digital ecosystems: Almost Route-To-Market) is the one that has
every aspect of a consumer’s daily shown the most promise in its ability
life in China is linked to the digital
to address all stakeholders in the value
platforms that have been incubated
chain and create a truly integrated digital
by the country’s Internet giants,
facilitating shopping, dining, footprint across the whole chain to build a
transportation, entertainment, and sustainable business model.
socializing. Under such a unique
scenario, brands and retailers are
proactively establishing connection
1 CINIC (2019), The 44th China Statistical Report on Internet Development; Ipsos (2018), Third-party Payment User Study Report; Alibaba Group (2018) , Financial
Statement 2019Q2
Copyright © 2019 Oliver Wyman 6THE GOLDEN DECADE OF
eRTM IN CHINA
eRTM holds the key to If required, the platform can also provide
digitizing traditional a warehousing and distribution network
to enhance and complement the
trade in China value chain, as well as store operation
The eRTM model operates by providing management to improve efficiency along
a digital platform that links up the three the chain and further boost sales.
key parties in the value chain: brands,
distributors, and owners of mom-and- Such a scenario allows each stakeholder
pop stores. It aims to provide better flow to make better decisions, allocate
and clarity to everyone by digitizing the resources more effectively, and ultimately
relevant processes and information so serve the customer better.
that they are more readily accessible.
Exhibit 4: Illustration of the eRTM mechanism
1 Provides end-to-end supply
chain that connects brands
and small retail stores
2 Integrates all value
chain data to improve
industry efficiency
3 Multi-channel and
comprehensive
services system
eRTM
Brands Mom-and-pop Distributors
stores
• Track sales data in real • Launch online channel • Track real-time orders
time to gain transparency • Enrich merchandise and billing periods
• Identify target consumers, • Diversify • Import best sellers to
and provide basis for payment solutions enrich supply chain
business decision • Share logistics service
Source Oliver Wyman analysis
Copyright © 2019 Oliver Wyman 7•• Brands: Brands today have poor the help of eRTM and its many tools,
visibility of what happens after distributors can not only increase
products are sold to their Tier-1 the transparency and efficiency
distributors. Through the multiple of their daily operation, but also
layers, each brand usually needs enhance their capabilities to serve
to rely on third-party databases their retailers.
and sample monitoring to ensure •• Retailers (mom-and-pop stores):
that their products are properly For the independent small stores
distributed and sold in an effective that are the heart of the traditional
manner in terms of inventory and trade sector, eRTM will become an
turnaround time. With eRTM, brands important source of information to
can monitor their products’ real-time make better buying decisions and
sales performance, even by SKU, optimize the overall business. It will
down to both distributor and retailer provide clarity with regard to pricing,
level. The consistent and perpetual as well as the availability of products
“black hole” within the traditional by distributors that are serving in the
trade channel will no longer exist for region. eRTM will also help optimize
brands. eRTM will allow them to make product assortment as there will be
more effective business decisions, a clearer understanding of the target
and be more agile and flexible for consumers nearby, and improve store
their supply chain and service. operation (e.g. digitalized payment
•• Distributors: Distributors have methods, guidance about shelf
played a critical role in ensuring that management) to better satisfy China’s
physical products flow through the increasingly digitalized consumers.
system. However, the multi-layered eRTM may even bring additional
distribution network system and its revenue streams for mom-and-pop
large fragmentation in terms of the stores if they are able to integrate
number of distributors have caused successfully with the online channels
a certain level of inefficiency and behind the eRTM ecosystem.
fogginess in terms of coverage. With
Exhibit 5: Painpoints and eRTM solutions by stakeholder
Major pain points eRTM solutions
Brand •• Low sales efficiency with high trade expenses •• Direct distribution to end-retailers
•• Low effectiveness in reaching target consumers •• Identify target consumers with integrated data,
•• Lack of transparency on the sales performance and provide basis for business decision
and operation of end-retailers •• Track sales data in real time to gain transparency
down to store level by SKU
Distributor •• Difficulty in increasing scale of supply chain •• Sharing logistics service between alliance of
•• Lack of transparency and tracking of distributors on the platform
inventory movement •• Track real-time orders and billing periods
•• Inevitable channel conflicts and failure to •• Import best sellers to enrich merchandise and
breakthrough channel boundaries manage pricing, provide value-added services
Retailer •• Stagnant sales and gross margin •• Launch online channel as additional source
(mom-and- •• High sell-in price due to limited bargaining •• Minimize price by making more suppliers
pop store) power as small-sized business available and by optimizing assortment
•• Poor store operation without guidance •• Improve store operation with guidance and
support from distributors and the platform
Source Oliver Wyman analysis
Copyright © 2019 Oliver Wyman 8eRTM will enter its intensifying competition. The
Internet giants also began entering
“Golden Decade” the market with their respective
in China, led by two offerings, such as LST from Alibaba
leading players and XTL from JD. The market rapidly
grew to over 70 platforms covering
Despite being a relatively young business 1.1 million mom-and-pop stores.
model, eRTM has already undergone •• Stage 3 – Consolidation
several stages of development since its (2017-present): After intense
genesis in 2013. (See Exhibit 6.) competition over the past two
years, some smaller players, such as
•• Stage 1 – Incubation (2013-2014): Huixiadan and Dianshang Interaction,
The first generation of eRTM was have already exited the market. Now
launched to ride the wave upon two dominant players, namely LST
which C2C and B2C e-commerce and XTL, are consolidating their
opportunities were quickly emerging. market share. Coverage has also
The market was sub-scale with about further increased, with over half of
30 platforms covering 130,000 mom- the six million mom-and-pop stores
and-pop stores. Notable examples across China having already adopted
include Huimin and Zhanghe tianxia. eRTM to varying extents.
•• Stage 2 – Booming (2015-2016):
The eRTM market began growing
exponentially in number with
Exhibit 6: Trajectory of eRTM platforms
Stage 3: Consolidation
(2017-present)
Stage 2: Booming
(2015-2016)
Stage 1: Incubation Leading eRTM account for
(2013-2014) about 40% market share
>70 eRTMs
Covering
3 million stores
Covering
~30 eRTMs • Lingshoutong (LST)
1.1 million stores
• Xintonglu (XTL)
• Lingshoutong (LST)
Covering • Xintonglu (XTL)
130,000 stores Some companies are falling behind
• Yijiupi.com
leading to defunct platforms:
• Zhanghe Tianxia • Huixiadan • Huixiadan
• Huimin • Dianshang Interaction • Dianshang Interaction
Source Literature research, Oliver Wyman analysis
Copyright © 2019 Oliver Wyman 9Since 2013, the eRTM players have and holds stock. Its revenue
primarily adopted three variations in model therefore mimics those of
terms of their approach. (See Exhibit 7.) distributors, profiting from the price
difference between the end-retail
•• Integrated platform: The integrated price and the sell-in price. It also
platform as a model does not controls the inventory in its own
purchase products from distributors warehouse and makes deliveries
or brands outright. Instead, it relies through its own logistics team.
on value-added services, such as If required, it can also provide
commissions and advertisements, store operation guidance (e.g. by
as its main sources of income. Such helping with the in-store marketing
a model allows for no inventory for brands) and influence brands’
within the platform and a much lower control in terms of store coverage.
liquidity requirement. However, if Notable examples of integrated
required, such platforms can hold self-operations include JD XTL and
inventory for brands or distributors Eternal Asia.
in their central warehousing facilities
•• Vertical niche eRTM: Focusing on
to get it to mom-and-pop stores
their own specialized industries
more effectively. In addition, an
and depending on their own needs,
integrated platform can leverage its
vertical niche eRTMs work as either
own team to directly improve store
one of the two models mentioned
management and master integrated
above. These players provide a
data along the value chain. Under this
one-stop, industry-specific solution
situation, distributors join and work
that caters to all retailers’ needs,
together with the platform instead
e.g. customized products, supply
of competing against it. Notable
chain financing, after-sales support,
examples of integrated platforms
product knowledge training,
include Ali LST and Zhanghe tianxia.
etc. Notable examples of vertical
•• Integrated self-operation: The niche eRTMs include ule.com
integrated self-operation purchases and yijiupi.com.
products from brands outright
Exhibit 7: The three eRTM business models
Mainstream models
Type of Integrated Integrated Vertical
platform platform self-operation niche eRTM
Operation Doesn’t purchase Purchases Focuses on specialized
model products, and only products outright, industries, either as an
offers a platform for and unifies storage integrated platform
brands/distributors and delivery or integrated
to join and sell to self-operation
retailers
Notable • Lingshoutong (LST) • Xintonglu (XTL) • ule.com
examples • Zhanghe Tianxia • Eternal Asia • yijiupi.com
Source Industry interview, Oliver Wyman analysis
Copyright © 2019 Oliver Wyman 10Through market consolidation, solution providers, which are further
essentially Ali LST’s integrated platform enabled by strong operation capabilities.
and JD XTL’s integrated self-operation Specifically, LST and XTL can both provide
have pulled ahead of the pack. logistics, warehousing and distribution
services. Moreover, each one has its own
Ali LST and JD XTL have both evolved advantages to stand out, but both will
from digital ordering systems that need to tackle some key challenges as
storeowners can operate on their they continue to grow. (See Exhibit 8.)
smartphones to comprehensive digital
Exhibit 8: The competitive advantages and key challenges to future growth for Ali LST
and JD XTL
LingShouTong (LST) XinTongLu (XTL)
Competitive •• Efficient digital operation •• Efficient self-operated
advantages reaching end-retailers logistics network
−− Provides various −− Fast delivery speed bred and
marketing tools to improve endorsed by JD
operational efficiency −− Wide geographical coverage
−− Entrusts the operation right enabled by regional
back to brands joint warehouse
•• Cooperative support from •• Dynamic optimization enabled
distributors to operate and by closed data loop along the
manage the terminal point value chain
of sales
Challenges •• How to reduce cost in operating •• How to enhance control of
to tackle its own logistics services? brands over pricing?
•• How to improve •• How to provide brands
geographical coverage down to with more control over the
town/village level? terminal point of sales with
•• How to enable brands to less dependency on the
manage distributors and platform’s openness?
avoid channel conflict? •• How to alleviate the inevitable
competition with the Tier-1 or
mid-tier distributors of brands?
Source Oliver Wyman analysis
Copyright © 2019 Oliver Wyman 11We believe that as LST and XTL further about 24% of China’s total retail market
strengthen their capabilities and by 2028, eRTM could grow to represent
gradually turn challenges into potential about half of the entire traditional
opportunities, the eRTM market in China trade channel.
will enter a “Golden Decade” of robust
growth. Quantitatively, we foresee that
the total sales value contributed by eRTM
Completion of the
in China will reach RMB 1.1 trillion by
digital data loop in
2028, representing a CAGR of 27%, with traditional off-trade
Ali LST and JD XTL occupying more than
As eRTM players seek to proactively
80% of the market share.
digitize the traditional trade channel,
This estimate further indicates that we believe the end game will turn out
eRTM will represent about 12% of the to be full digitalization along the value
entire China retail sector. With offline chain, which in turn will be enabled by a
traditional trade estimated to represent closed data loop.
Exhibit 9: Market size of eRTM in China
2018-2028
RMB billions
~1,100
~10-20%
+27%
~80-90%3
~300
~30-40%
~100
~60-70% ~60-70%
~30-40%
2018 2021E 2028E
Size of retail
~5,000 ~6,000 ~9,200
in China1
eRTM% ~2% ~5% ~12%2
Lingshoutong (LST) Other eRTM
and Xintonglu (XTL) platforms
1 Excluding cigarette and fresh food
2 Accounts for ~50% of the offline traditional trade market
3 LST and XTL or 2~3 platforms will account for ~80-90% of the market share
Source Industry interview, The National Bureau of Statistics, analyst reports, Oliver Wyman analysis
Copyright © 2019 Oliver Wyman 12Taking Alibaba’s LST, for example, LST will Brands will be able to leverage this data
continue to build its B2B ecosystem and as well to drive more precise marketing
equip itself with a full suite of capabilities, and business decisions via reporting
such as cloud-driven warehousing, to dashboards and data analytics provided
provide a series of comprehensive digital by LST. No longer will the traditional trade
solutions for traditional trade. (See channel be a “black hole”.
Exhibit 10.)
Distributors will have a better
LST will provide mom-and-pop understanding of who and where their
storeowners with apps and a Smart existing and potential customers are, and
POS that will track not only the ordering consequently be able to provide more
of products but also the sales and tailored offerings and packages on the
depletion at store level. Combined with platform and so enable a smarter supply
the information provided by brands and chain that caters better to market needs.
distributors in terms of pricing, stock
availability, and estimated delivery times,
all aspects of the category’s management
and supply can be synchronized
and improved.
Exhibit 10: The comprehensive digital solution of eRTM (using LST as an example)
DIGITALIZATION
Sales Supply
Products Marketing Retail stores
workforce chain
Enablers to end-retailers Enablers to stores
Category mgmt. CRM LST
e.g. Tianyan e.g. Lingxiaobao app app
Smart Precise marketing Smart
supply chain e.g. Rulai POS
Data services
Business advice based on Comprehensive CEO vision
strong data analytics supported by solid analysis
Opens up and links with the digital ecosystem
Corporate Cloud warehouse Cloud Cloud-driven X
communication solution driven SFA (CRM, ERP)
Source LST
Copyright © 2019 Oliver Wyman 13THE “NEW NORMAL” OF
TRADITIONAL TRADE
Catering to the eRTM model alongside However, brands historically have not
the traditional model in the value chain been well-equipped to win in this space
will become the “New Normal” of as they face a multitude of pain points:
traditional trade. Each of the stakeholders
•• Retailer coverage: China is vast
will need to understand their positioning and due to the complex distribution
in the market, and how they can best system, most brands only have access
leverage the advantages of eRTM for their to about 500,000 mom-and-pop
own benefit and to complement their stores out of the 6.3 million such
overall strategy and business. stores in China. This represents a
significant blind spot in terms of both
•• Brands will need to choose from distribution and information flow.
multiple cooperation models with
•• Distribution cost: To penetrate
eRTM based on their capabilities.
deeply into the traditional space
•• Mom-and-pop stores will need to take would require working with a
advantage of new eRTM capabilities network of distributors that may have
to modernize their operations and so overlapping coverage and costs.
remain competitive.
•• End-retailer control: End-retailers
•• Distributors will need to adapt usually lack resources for promotions
the range of services they provide and marketing, so brands would need
to retailers to complement eRTM to invest in a sales team to provide
offerings and grow. these resources at a significant cost.
The lack of visibility also means that
counterfeit product regulation,
Brands will need to quality control, and pricing control
choose from multiple are less than ideal.
cooperation models
The ways and capabilities that brands
with eRTM based on have built up to tackle these pain
their capabilities points today vary greatly depending
Although declining in market share, on the sector and price point in which
traditional trade will continue to remain they operate. Depending on these
a key channel for retail in China over the considerations, for each brand, one of the
next decade. eRTM cooperation models would likely be
more suitable than the others.
Copyright © 2019 Oliver Wyman 14We believe the primary axis and deciding •• Brands with Low-Medium degree
factor of the most beneficial cooperation of penetration: These brands have
model is the extent of distribution and already built their own distribution
entrenchment that the brand has today network in China to a smaller extent,
penetrating and entering key
in the traditional trade channel. (See
regions and/or city tiers, but not fully
Exhibit 11.) nationwide. More likely than not they
have decided against building their
We have categorized this into own sales force on top as the ROI is
three types of brands based on its poor, and have chosen instead to rely
distribution capabilities: solely on distributors.
•• Brands with in-depth distribution: •• Online brands: The root and origin
Such brands have a long-established of online brands has been via
distribution network in China. They e-commerce. The idea of building
have a large distributor network recognition and seeking further
allowing them to penetrate deeply growth in offline channels would
for a physical product perspective, be a completely new and different
but still face difficulties in really experience for them. Having no
optimizing the merchandizing and existing capabilities in traditional
store operations. Typically, these trade, eRTM would offer them by
brands have built up their own sales far the best option for entering
force to partially cover these areas, as this space.
it is still not possible to cover them all.
Exhibit 11: Evaluation on brands’ offline distribution capabilities
Distribution depth Logistics Distribution Merchandise Store operation
and relevant •• Cash flow and pricing •• Display
categories •• Product
•• Distribution •• Marketing
•• Pricing •• CER1
In-depth Has enormous and deep
distribution distribution network and
Dairy, general food, sales teams, and control of
instant food certain stores
Low-medium level
Has set up partial
of distribution
distribution network
Confectionary and
but with limited depth;
healthy snack,
Differs across regions, and
personal care,
lacks competitiveness
home hygiene
Has emerged from online
Online
channel with negligible
brands
offline channel presence
1 CER: Consumer Emotional Relationship
Source Industry interview, Oliver Wyman analysis In place Partially in place Not yet in place
Copyright © 2019 Oliver Wyman 15In many ways, the more time and energy From our observations, a brand’s
that brands have spent to build up willingness to cooperate with LST or
their traditional trade capabilities, the XTL and the route that they would want
more concerns they would have with to adopt can be categorized into the
eRTM. For example, they would worry following three models. (See Exhibit 12.)
about damaging existing relationships,
losing direct-channel control, and
how to unwind their existing assets
and resources.
Exhibit 12: Cooperation models between brands and eRTM
High level
distribution Maintain channel
Big advantages and realize
brands with closed data loop
in-depth
distribution Uni-President
Cut distribution cost, seek for new growth channels
Small
brands with
in-depth Hengan Sofy
distribution
Strategic
purpose
Optimize the original supply chain, supplement
and deepen the network
Low-mid
level of
distribution Bluemoon, Heineken Perfetti Van Melle
Simplify distribution
processes, rapidly
Online expand offline
brands channels
Low level Three Squirrels, Bestore
distribution
Ordering Operation/Logistics Full
platforms cooperation partnership
• Only leverage eRTM • Keep own • Brands leverage
to trade, retaining capabilities while eRTM for all
own logistics and using eRTM’s trading activities
operational operation/logistics
capabilities as appropriate
Limited Cooperation Deep
cooperation model cooperation
Source Industry interview, Oliver Wyman analysis
Copyright © 2019 Oliver Wyman 16Model 1 – Ordering platform
Brands who have already invested into an transaction is confirmed, they would
extensive distribution network in China continue to use their own established
just want to leverage eRTM as a platform logistics and sales force to fulfill the order.
to take orders from retailers. Once a
Exhibit 13: Case studies of ordering platform model
Case study 1: LingShouTong (LST) Case study 2: XinTongLu (XTL)
and Hengan and Uni-President
Challenges to tackle Challenges to tackle
• Difficulty to improve sales team’s • Difficulty in tracing goods after
efficiency, with poor store they have been sent to distributors’
operation capabilities warehouses due to fragmented
and inaccurate info
Leverage LST as ordering platform
• 30 salesmen in one province were
connected to LST, using it as a Leverage XTL as ordering platform
prime ordering platform • Unify the inventory, digitize the
• Identified stores that had recently offline order fulfillment process
browsed Hengan’s products and to realize transparency along
improved the conversion rate the whole value chain
Monthly sales in the province Reduced logistics cost, improved
reached RMB 10 million with GMV turnover rate of the warehouses,
increasing by 280% and sales per thanks to support from fully
store rose 2.5 times integrated data
Source LST, Literature research, Oliver Wyman analysis
Copyright © 2019 Oliver Wyman 17Model 2 – Operational and logistical cooperation
This is a more extensive partnership, their existing supply chain, and deepen
where brands leverage not only the their penetration into more mom-and-
eRTM platform for order placements but pop stores.
also the eRTM provider’s distribution
capabilities to cover either just new As a result, brands are able to quickly
geographical regions or existing ones enhance their distribution network
as well (if doing so proves to be more without the capital requirement and cost
cost-effective and efficient). Through this intensiveness that the traditional route-
partnership, brands can also strengthen to-market approach otherwise needs.
their end-retailer management, optimize
Exhibit 14: Case studies of operation/logistics model
Case study 1: Xintonglu (XTL) Case study 2: Xintonglu (XTL)
and Heineken and Bluemoon
Challenges to tackle Challenges to tackle
• Distribution network was mainly • Difficult to extend its marketing
deployed in certain provinces, campaigns to offline traditional
and its distribution capabilities trade due to weak execution
were relatively weak capabilities
Logistical cooperation Operational cooperation
• Leveraged XTL’s strong • Promotional tasks and offline
self-operated logistics to quickly promotional campaigns were
penetrate to lower-tier cities and launched online, and the
strengthened its own distribution intermediate links were
capabilities through learning greatly shortened
from JD
Extended distribution network to Volume of imported goods rose by
445 cities and 2,700 counties; a factor of 10. Daily sales per store
the province which had the increased by 150% on average,
poorest sales performance now with the highest reaching 300%
ranks in the top 5
Source LST, Literature research, Oliver Wyman analysis
Copyright © 2019 Oliver Wyman 18Model 3 – Full partnership
This model is most beneficial for that were previously unable to enter into
those with no existing capabilities this channel to gain a solid foothold in
in traditional trade, such as online the market.
brands. These brands can essentially
use eRTM as a one-stop shop to cover One such example is Three Squirrels,
the entire channel’s requirements, e.g. the first food brand in China to be sold
transactions, distribution, logistics, store purely online. It has since grown to be
operations, etc. The model allows brands nationally recognized.
Exhibit 15: Case study of full partnership model
Case study: LingShouTong (LST) and Three Squirrels
Before
Distribution Product and packaging Marketing
• No offline distribution • No specific product for • No offline marketing
offline channel capabilities
• Packaging not suitable
for display in store
Partnership with LST
• Nine months online • Based on real-time • Tailored marketing
feedback from store tactics by eRTM
After
Distribution Product and packaging Marketing
• Coverage reached • Launched specialized • The precise marketing
more than 350,000 packages for different of Three Squirrels
stores holidays and festivals Red Packet helped
• 50 specialized packages gain 1.5 million traffic
for small stores from offline to online
• Achieved • Sales volume • Repurchase rate
rapid growth has exceeded exceeding 60%
RMB 300 million
Source LST, Oliver Wyman analysis
Copyright © 2019 Oliver Wyman 19Mom-and-pop stores will •• Rising operating costs: Rental costs
and staff salaries are continuing to
need to take advantage rise year after year.
of new eRTM capabilities •• Intensifying competition:
to modernize their E-commerce and convenience stores
operations and so are eroding market share and taking
away foot traffic.
remain competitive
•• Unattractive merchandise/poor
Today there are roughly 6.3 million store management: These stores
mom-and-pop stores in China that form usually exhibit a lack of proper
the traditional trade market, and over merchandise assortment leading to
a confusing and visually unattractive
75% of them are concentrated in Tier 3
product mix. Moreover, the poor store
cities or below. management often leads to a lack of
new product availability in a timely
The number of stores has declined from manner to attract customers.
6.8 million to 6.3 million from 2017 to
•• Outdated consumer proposition:
2019, as retail competition becomes Consumers are demanding more
even fiercer, and online and modern from retailers than ever before.
offline trade continue to slowly erode this Successful modern convenience
channel’s market share. (See Exhibit 16.) stores have fulfilled this gap by
offering a range of services to make
Already operating under thin profit consumers’ everyday lives easier.
margins, these independent storeowners Following the convenience stores’
face four major hurdles going forward lead will be a vital component for
mom-and-pop stores to future-proof
that will only increase the pressure on
themselves as well.
them to continue to succeed.
Exhibit 16: The number of mom-and-pop stores in China
2017 6.8
2018 6.6 -4%
2019 6.3
Source LST, Literature research, Oliver Wyman analysis
Copyright © 2019 Oliver Wyman 20To improve their proposition, mom- For example, based on its latest advanced
and-pop stores need to start by analytics, LST is now able to separate
understanding the customers within the stores into 96 segments, based on
their retail sphere better and catering to shopping scenarios, levels of spending,
their needs with the right assortment and and city tiers. More importantly, each of
offerings. With the growth of eRTM, LST these segments has proven to serve a
and XTL finally have enough data from certain profile of customers and shopping
mom-and-pop stores to generate useful missions. (See Exhibit 17.)
insights for success.
Exhibit 17: The 96 types of mom-and-pop stores, according to LST
Top 16 types of shopping scenarios 6 levels of cities
High-end consumption level
• Colleges • Luxurious Tier 1
• Office building residential properties
• Hotels/apartments • Mid-level
residential properties
• Shopping streets Tier 2
• Short-haul transportation
• Tourist destinations
• Long-distance 16 x 6
transportation Tier 3
Travel and
entertainment Living
scenarios scenarios
• Elementary and • Hospitals
middle schools Tier 4
• Industrial areas 96 types
of retail
• Suburbs/villages stores
within urban district
• Wet markets Tier 5
• Low-end
residential properties
• Rural areas Tier 6
Low-end consumption level
Source Oliver Wyman analysis
Copyright © 2019 Oliver Wyman 21Understanding these distinctions will In effect, an eRTM provider’s advanced
be vital for storeowners to achieve more and focused analytics can directly help
refined management through stocking mom-and-pop storeowners make better
up their own particular store with the decisions for their stores. The analytics
most suitable products and categories. will drive recommended assortments,
Take mom-and-pop stores located in as well as help brands better identify
Tier-2 office versus Tier-3 school areas, target stores for their marketing and sales
for example: activities, all of which will connect well
together in a virtual cycle that improves
•• Tier 2 office buildings: A mom-and-
pop store in this kind of location not only customer value but also the
would mainly serve white-collar profitability of both brands and mom-
professionals aged around 25-35. and-pop storeowners.
Moreover, the professionals would
likely have mid-to-high levels of The journey ahead, though, is still long
income and would therefore be with several barriers that need to be
less sensitive to price. This group of addressed. Also, eRTM providers need
consumers would also be willing to to keep adapting their business models
try out new, high-quality products
to better serve their customers. For
if they found them to be attractive.
Thus, stocking the store with new and example, unlike traditional route-to-
premium products having attractive market distributors, eRTM solutions
packaging would be key to the today do not offer credit to mom-
store’s success. and-pop stores. Rather, only upfront
•• Tier 3 elementary and middle payments are currently accepted for
schools: A mom-and-pop store in products. However, under tight operating
this kind of location would mainly constraints, offering 60 to 90-day credit
serve primary and secondary school lines can often be critical to sustaining
students who are more likely to cash flow.
make purchases impulsively but
who are also more conscious about
value-for-money due to their limited
purchasing power. Thus, having
colorful products with relatively
cheaper prices for sale would be
key to the store standing out from
the competition.
Copyright © 2019 Oliver Wyman 22From the digitalization perspective, An appropriate way to take this to the
the roadmap is clear and significant next level would be the introduction of a
progress has already been made on this smart POS that would then also connect
front. It starts with building the proper the actual data of sales being made at
digitalization foundation via an easy- store-level to consumers. In essence,
to-use eRTM app. Such an app would doing this would create an end-to-end
offer storeowners immediate access to a data loop that would facilitate even better
platform that allows them to clearly track decision-making. The AI-driven solutions
the flow of goods, product availability would be able to inform storeowners
and pricing, and delivery times. The app regarding inventory levels and customer
could also provide recommendations behavior (by utilizing knowledge gained
regarding good promotion deals, really from the broader digital ecosystem),
low prices, and hot-selling products and also suggest detailed store-level
to equip owners with better insight. decisions for better effectiveness
(See Exhibit 18.) and efficiency.
Exhibit 18: Digitalization roadmap for mom-and-pop stores
Status quo Stage 1 Stage 2
Squeezed profit, Build foundation Full digitalization
shrinking volume for digitalization upgrade in-store
• Multiple pain points • Start to use eRTM to • Become a member
and challenges such order, sort, and stock of the ecosystem via
as bad operation, • e.g. LST, XTL introducing smart POS
increasing cost, • e.g. JD convenience
poor assortment, store, Tmall small store
fierce competition
Development progress
Ongoing progress for half Progress of some leading
mom-and-pop stores mom-and-pop stores
Source Industry interview, Oliver Wyman analysis
Copyright © 2019 Oliver Wyman 23Stage 1 – Building the foundation •• One-stop ordering: A storeowner
for digitalization by inviting can order replenishments through
storeowners to use an eRTM app the eRTM system and monitor their
to manage their stores real-time delivery status, just like
when a consumer makes an order
LST and XTL are actively reaching out to through Tmall or JD.
mom-and-pop storeowners throughout
•• Real-time inventory management:
China and teaching them how to use With the use of the smart POS,
eRTM to facilitate and improve their store inventory can be updated right
management. The storeowners can easily after a transaction has been logged.
make orders with simple clicks on their Therefore, the system can then
smartphones, and they can gain clear provide recommendations for
guidance on store operation from the inventory management, e.g. letting
platform or its staff. The app also tracks the owner know about expiring
or obsolete stock, or the need for
the store’s data, which can inspire the
replenishment orders.
owner to make more rational business
•• Precise consumer profile: Based
decisions on when to import goods, etc.
on analyzing transactional and
Presently, most stores are taking this first, consumer behaviors, the AI-driven
important step towards full digitalization system is able to generate precise
within the ecosystem. pictures of each store’s main
consumers. As such, storeowners
From a sample of 4,000 mom-and- are able to clearly understand the
pop stores that have recently started consumers’ shopping preferences,
using LST, its eRTM solutions have sensitivity towards promotions and
already helped each store generate an price changes, delivery-time needs,
brand loyalty, purchasing power, etc.
additional RMB 4,000 in sales per month
on average. •• Intelligent recommendations:
By consolidating sales data and
interpreting consumer profiles,
Stage 2 – Achieving full the eRTM system is able to provide
digitalization by installing a smart intelligent recommendations on
POS in-store and linking it with what products and other assortments
the eRTM’s overall digital system the storeowner should prioritize,
eRTM players are now beginning to de-list or newly add during the next
replenishment cycle.
introduce a smart POS in each store as
the next step in the evolutionary process As mom-and-pop stores rapidly improve
towards full digitalization. The smart POS the strength of their core offerings by
is a platform that automatically tracks tapping into these digital ecosystems,
the store’s import, sales and inventory they will eventually be able to branch out
data, and is linked to the eRTM’s overall and offer a fuller variety of services, and
digital system.Enabled by the smart over time, become the neighborhood
POS, the storeowner can enjoy the retail center that serves their nearby
following benefits. consumers’ every need.
Copyright © 2019 Oliver Wyman 24Distributors will need and integrated solution for several key
functions in the traditional trade value
to adapt the range of
chain. For example, they will be able
services they provide to to better leverage their nationwide
retailers to complement warehousing and distribution networks.
eRTM offerings and grow •• Customer sell-in/sell-out: Taking
As eRTM enters into its golden decade, and tracking orders can be done via
we estimate that roughly 50% of China’s the eRTM platform in a much more
effective manner. No longer is there a
traditional trade will be part of this
need to place individual orders across
ecosystem by 2028. With this dramatic the value chain, as all of these can
shift towards a true mix of eRTM and now be synchronized.
traditional route-to-market, distributors •• Bulk logistics: With customer orders
will need to stay proactive and adapt their in place on the digital platform,
business accordingly, as the requirements actions can be automated to direct
for them to succeed and the services that the most optimal logistics and
they will be asked to provide changes distribution of goods. Moreover, they
over time. (See Exhibit 19.) can be executed directly from the
warehouses of LST and XTL.
From the eRTM perspective, LST and
XTL will offer a more cost-effective
Exhibit 19: Functions of different level of distributors
Function/ Tier-1 Mid-tier Local distributors/
level distributors distributors wholesalers
Logistics and warehouse
Bulk logistics
Last-mile delivery
Distribution
Account period settlement
Inventory management
Sell-in and sell-out
Mom-and-pop store operation
Customer relationship
management/store operation
In-store marketing guidance
Brand
Brand relationship management
Source Oliver Wyman analysis Keep major functions Keep minor functions Functions to be replaced Not in the scope
Copyright © 2019 Oliver Wyman 25As eRTM development matures and •• Local distributors: Local distributors
solves the pain points of both brands and can either choose route 2 or
millions of end-retailers, distributors can route 3. On the one hand, through
focus and invest more of their time and partnership with the eRTM, they
can spend more of their sales
effort on providing more value-added
team’s efforts to improve store
services. At the same time, they should level operations instead of taking
think about how to further adapt their orders. On the other, they can also
business models so as to create unique join the eRTM platform to become a
value propositions for growth. In the dedicated last-mile eRTM wholesaler,
future, three major eRTM distribution thereby both expanding their access
routes will likely emerge, giving to more under-served regions and
distributors the choice of path that suits maximizing their advantages.
their own particular needs the most. •• Mid-tier distributors: Mid-tier
(See Exhibit 20.) distributors will need to pivot more
strongly than their counterparts
•• Tier-1 distributors: As a critical because there will be less middle-
point of contact with brands, tier-1 man functionality. They will need to
distributors need to double down on carve out a proper role within the
brand relationship management to ecosystem and adjust their business
emphasize their proposition along model accordingly by following
the value chain. As demonstrated either route 1 or route 3. On the one
in route 1, they can focus more on hand, they can evolve into a tier-1
expanding and deepening their distributor and grow in scale, as
connection with brands, and leverage they help more effectively pool and
the eRTM’s logistical and operational integrate resources and expertise
capabilities to serve the brands. across local distribution networks.
For example, tier-1 distributors can On the other, they can become
convey the main message from integrated into the eRTM system
brand to eRTM and then leverage the and so become part of the digital
eRTM to realize precise and effective ecosystem. By doing so, they can shift
in-store marketing. However, they their focus to provide more value-
need to make sure that they are fully added services in terms of training
invested in the route 1 option, so that and managing local distributors, and
the core functions that they carry out providing proper coordination to
cannot be easily replaced. drive in-store efforts.
Copyright © 2019 Oliver Wyman 26Exhibit 20: Development route for distributors with eRTM
After partnering with distributors, eRTMs will account for another 50% share
Route 1 Route 2 Route 3
Tier-1 distributors manage Local distributors cover All distributors become
brand relationship, eRTM store operation, eRTM part of the eRTM
covers all the rest covers all the rest ecosystem
Brand Brand Brand
Tier-1 distributor
eRTM
eRTM
eRTM
Local distributor
Mom-and-pop store Mom-and-pop store Mom-and-pop store
Source Oliver Wyman analysis
Copyright © 2019 Oliver Wyman 274P DIGITAL
TRANSFORMATION INDEX
IN TRADITIONAL TRADE
As part of this joint report with •• The confectionary and healthy
AliResearch, we have developed the 4P snacks brands are pioneers in the
digital transformation index to assess digital transformation, as they
aggressively compete with each
how far brands have progressed in this
other to win the early move from
area in traditional trade. Specifically, we wide coverage and well-known
assessed the degree of digitalization awareness. The high price elasticity
based on the following four dimensions. of the category also pushes these
(See Exhibit 21.) brands to launch extensive promotion
campaigns with substantial discount.
We carried out research on the Top Thus, the category has a relatively
10 brands in five different categories, more penetrated distribution
namely, dairy & beverage, confectionary network and higher level of
and healthy snacks, general food, promotion involvement.
personal care, and home hygiene. We •• While diary and beverage lag behind
found that the confectionary and healthy as the nature of liquid products
hinders these brands to distribute to
snacks category is leading the way, while
a larger scope with higher efficiency,
the general food and dairy & beverage and the low price elasticity and low
categories are the main laggards. (See ceiling of business leads to the limited
Exhibit 22.) promotion degree.
The following case study highlights
some notable examples of a few top
performers. (See Exhibit 23.)
Exhibit 21: 4P digital transformation index
30% 30% 20%
Penetration Participation Promotion
• Size of business: Retail • Whether the brand has • Frequency and level of investment
value enabled by eRTM dedicated resources for on joining eRTM platform promotional
• Distribution network: eRTM, which include events
Number of mom-and-pop sales, operation, supply
stores which are connected chain
through eRTM platforms • Maintenance of a flexible
and thorough working
relationship with eRTM
and its ecosystem 20%
Product
• Number of products on shelf
and on promotion
• Number of new products launched
through eRTM
Source Oliver Wyman analysis
Copyright © 2019 Oliver Wyman 28Exhibit 22: Average transformation index of the Top 10 brands by category
Category Penetration Product Promotion Participation Total score
Confectionary
and healthy 19.0 7.0 15.1 23.2 64.3
snacks
Personal
15.8 6.1 11.2 21.9 54.9
care
Home
15.6 8.7 8.4 21.1 53.7
hygiene
General
9.3 6.7 9.1 21.8 46.9
food
Dairy
14.9 5.1 2.2 22.0 44.3
& beverage
Source AliResearch
Exhibit 23: Case studies of the top brands in terms of digital transformation
Case study 1: Master Kong Case study 2: Hengan Case study 3: Mondelez
Penetration Participation Promotion and marketing
• The group’s cloud warehouse • Digitalized work team: • Stride increased 4% in
goods covered nearly 15,000 All internal salesmen in ND within single month and
streets and the number of mobile one province were connected greatly improved its penetration
points of sale accumulated to to LST in T2/T3 cities through digital
more than 500,000 — Salesmen screened out the not marketing and promotional
• The GMV of instant noodles yet digitized stores with the campaigns (i.e. rush to purchase
reached RMB 100 million, market information offered by of sampling)
accounting for 8% of the total LST, and utilized LST to digitize • Oreo launched marketing
GMV of the Group these stores campaigns, involving 440,000
• Realized the same level of — The sales value reached mom-and-pop stores in more
promotion for the same RMB 10 million, with GMV than 12,000 counties and cities
product portfolio in both virtual increasing by 280% and
and real warehouse personnel cost dropping by
50% per month
Source LST, Oliver Wyman analysis
Copyright © 2019 Oliver Wyman 29CONCLUSION
As eRTM enters its golden decade, difficult to enter in the past. Each brand
digitalization has brought and will will therefore need to evaluate its own
continue to bring new opportunities strengths and capabilities to find a
for traditional trade players in this winning path forwards, part of which
space: from brands, to distributors, to will require adjusting organizational
mom-and-pop stores. However, to truly structures and resource allocation.
succeed, each type of stakeholder will
need to rethink and reimagine not only
how this channel should be managed, Distributors
but also how their capabilities will need For distributors, although their traditional
to evolve to properly complement this route-to-market business will continue to
emerging trend. exist, the growth of eRTM will inevitably
mean the value of basic services that the
What aspects will each various levels of distributors currently
type of stakeholder provide will decline in importance
over time. As distribution becomes
need to consider? more effective and transparent, it is the
distributors’ other areas of service that
Brands will become increasingly important,
Brands will need to reassess and likely such as the ability to build long-term
overhaul their traditional trade route- relationships with brands and to also
to-market strategy, as the rise of eRTM act as their trusted conduit. On the
is causing the historical tried-and-true other side, distributors can also work on
approach to erode. With this in mind, providing better value-added services
brands should give serious consideration to shop owners to help them improve
with regard to how to strike the right their inventory management and store
balance between the old and the new. performance. However, implementing
For example, the value and advantage such changes will not be straightforward.
that brands gain from building a deep Distributors will need to either raise the
traditional distribution network in skills of their business personnel or shift
traditional trade will weaken. This is into and become entirely part of the
because both online and offline brands eRTM ecosystem.
will be able to leverage the benefits
of eRTM to gain distribution relatively
quickly into spaces where it has been
Copyright © 2019 Oliver Wyman 30You can also read
