The June 16 announcement that Amazon was buying Whole Foods was the e-commerce shot across the bow that everyone has anticipated for years. Still, the $13.7 billion deal came as a huge shock in the United States; it represented the next stage of the digital disruption that has upended all of retail. But it didn’t in China, where this revolution is well underway. Our work there shows that there are many relevant lessons that others need to learn—and learn fast.

In late 2012, two of China’s most successful entrepreneurs made a very public bet on the country’s retail future. In front of a TV audience, Wang Jianlin, the real-estate maven who built his fortune in shopping malls, wagered Jack Ma, president of ascendant e-commerce giant Alibaba, that online shopping would never replace physical stores. Putting up 100 million RMB (about $16 million at the time) of his own cash, Wang bet that in 10 years online consumption would still account for less than half of all retail.

Five years out, it seems the good money is still on Wang. Yes, China’s big three digital titans—Baidu, Alibaba and Tencent (BAT for short)—have eroded brick-and-mortar market share. Protected behind the Great Firewall from outside competition, these tech disruptors— Alibaba and Tencent focus primarily on e-commerce, while Baidu dominates search—have rocketed over the last decade from obscurity to dominance. They now rank among China’s top 5 most valuable brands, with a collective brand value approaching $200 billion.

Yet, online sales in China still account for just 15% of all retail, a significant bump from 2012 but hardly a sea change. Despite doomsday warnings, retail in China is not dying. Shoppers continue to demand physical stores—to touch and feel, socialize, ask questions, and have an experience that can’t be replicated online. Is it time for retailers and real estate players to breathe a sigh of relief?

No, it turns out—and for reasons that few insiders see coming.

The true threat to retail in China may not be online shopping. It’s the increasing likelihood that the country’s e-commerce giants will turn their attention to doing bricks-and-mortar—better.

Armed with capital reserves, government protections and growing troves of consumer data , Alibaba and Tencent have both the means and the motive to redefine traditional in-store shopping. And when they do, existing players in the retail ecosystem—from big box retailers to malls, real estate agencies and developers—may face unprecedented disruption.

This was the primary conclusion from extended interviews Egon Zehnder conducted with leading retail real estate executives and industry insiders over the past four months. Our takeaway: the impact of the online-to-offline (or “O2O”) revolution is being highly underestimated and stands to take legacy retailers almost completely by surprise.

To overcome this blinkered thinking, retailers and developers must immediately change gears—strategically, but also, critically, from a talent perspective. Urgently needed are managers and executives with a strong digital skill set—an understanding of the scope and scale of transformation that’s sorely lacking among today’s retail giants. Without these key people, traditional players will find it challenging to thrive in the years ahead. Some may not survive at all.

Starting in 2016, Alibaba’s Jack Ma advocated the concept of “New Retail”—in his words, “the integration of online, offline, logistics and data across a single value chain.” Considering that Alibaba already accounts for more than one-tenth of China’s total retail sales (including 75% of online sales), with revenues surging at an astounding 50% annual clip, the implications of this overture are hard to overstate.

Already, the company is moving fast: In little over a year , Alibaba has gone from opening its first physical store to acquiring a major department store chain, Intime Retail, for $2.6 billion. Yet this is just the beginning.

In February, Alibaba announced a strategic alliance with Bailian Group, the state-owned supermarket, mall and department store chain, which boasts massive amounts of underused retail space in Shanghai and on the eastern seaboard. The new partners will share offline retail branches, merchandising capability, logistics and technology. They are already designing new retail outlets together and developing retail technologies incorporating big data and artificial intelligence.

Executed properly, Alibaba’s “New Retail” vision promises not just to remake shopping inside the country, but to leapfrog China ahead of the U.S. and Europe in terms of retail innovation. China is already at the vanguard when it comes to blurring lines between social media, search and e-commerce, with social platforms like Tencent integrating seamless payment and shopping functions, all inside one walled garden.

If Alibaba turns its attention to real estate—and is able to gain access to prime assets and design its own unique physical shopping experience using a data-centered approach—traditional developers will be displaced. As it and Tencent harness their own algorithms to identify the perfect blend of stores for their target demographic, commercial real estate agencies could quickly find themselves marginalized. With online players applying big data and machine learning to make in-store experiences more personalized and more convenient, legacy retailers may quickly hemorrhage shoppers. (Source: Fortune)

Comments are closed.