Does my virtual bum look big in this? The new side of Chinese e-commerce

AACS will be visiting Alibaba in Hangzhou as part of our September Study Tour – something not to be missed…..

Michael Smith
June 7, 2018
AFR

A crowd of shoppers have gathered in front of a “magic mirror” on the second floor of a department store in the Chinese high-tech megalopolis of Hangzhou.

With a virtual wave of her hand, a woman is trying on dozens of different dresses without having a remove a stitch of clothing or queue for a changing room. The head-height screen, which resembles a giant free-standing iPhone, is a virtual dressing room which allows shoppers to see what hundreds of different clothing styles look like from every angle.

Artificial Intelligence fashion mirrors are not unique to China but they offer a glimpse into what the future of shopping will look like in Australia and other countries in coming years. This is a cashless world of facial recognition and elaborate networks of sensors that mean you can walk out of a store laden down with purchases without having to lift a finger – let alone a smartphone. There are delivery drones, staffless restaurants and supermarkets that transport bags laden with Penfolds wine and Australian Angus beef via in-store conveyor belts.

This is the new China where the country’s e-commerce giants are branching out into bricks and mortar in a reversal of the trend seen in established retail markets such as Australia and the United States.

A shopper uses the smart checkouts at an Alibaba run Smart supermarket in Hangzhou. Chris Crerar

“Retail used to be divided into two streams. You either embraced online shopping or traditional shopping in physical stores. What we are seeing here combines the two,” says Lin Jingxiang, whose business partner is trying on dresses in the virtual dressing room. Lin is the president of Proea Knitwear Company, an underwear manufacturer based in the southern Chinese city of Guangzhou. He has travelled across the country to see how he can utilise technology as part of his company’s push into retail.

The Australian Financial Review meets Lin in the shopping precinct at Chinese tech giant Alibaba’s global headquarters in Hangzhou. This huge city about 170 kilometres from Shanghai is at the heart of China’s explosive e-commerce market, which recorded ¥7.2 trillion ($1.5 trillion) in transactions last year. This was a five-fold increase in five years and accounts for 50 per cent of the world’s total internet sales.

Alibaba, founded by entrepreneur Jack Ma, has a market cap of more than $US500 billion ($652.6 billion) and competes with Amazon for the status of the world’s largest retailer. A visit to its corporate headquarters is an education of where things are heading to next. Alibaba, along with Chinese rivals Tencent and JD.com are increasingly turning their attention to bricks and mortar retailing – with a twist.

The company’s headquarters is not unlike Google or Apple’s hubs on the outskirts of San Francisco. A university campus “feel” surrounded by parkland, statues of mascots, collaborative work spaces and a cultish corporate culture that idolises Ma. The 30,000 staff working here are given a unique nickname by the company, and are encouraged to take up handstanding “to see the world from a different point of view”. They can even live on campus. The week before we visit, more than 100 staff, including several Australians, tied the knot at a mass wedding ceremony on site.

‘E-commerce will never supplant bricks and mortar retail’

Australian Abalone for sale at an Alibaba run Smart supermarket in Hangzhou. Chris Crerar

While e-commerce has been Alibaba’s bread and butter, its headquarters includes a Tmall smart store and a Hema supermarket that offer a glimpse into where it is heading next. A short taxi ride into town, and Alibaba’s technology is featured in “self-service” smart restaurants where diners order dishes online and then pick it up from an unmanned vending machine operating 24/7.

“Alibaba may have historically been an e-commerce company, but it has realised that e-commerce will never supplant bricks and mortar retail. People still need immediate convenience, and the experience of social interaction, touching, smelling and feeling which doesn’t quite get there with screens or VR,” said Mark Tanner, who runs Shanghai-based digital consultancy China Skinny.

Alibaba has been investing in a chain of supermarkets called Hema, which Tanner says makes about four times more revenue per square metre than a conventional supermarket. It has also invested in other grocery chains including RT Mart, Suning Fresh and Auchan. Rival Tencent has JD’s 7Fresh stores, Carrefour, Yonghui and is working closely with Walmart. Tanner says there are also investments in furniture chains, department stores, auto manufacturing and shopping malls. One big advantage Chinese retailers have over their Australian counterparts is the access to customer data.

“There is not a single company in the West who comes close to tracking consumers’ daily lives like Alibaba and Tencent, and with China’s lax attitudes to privacy and equally liberal laws it makes that data even more valuable. Cambridge Analytica is a caveman with a club compared to China’s laser gun-wielding tech behemoths,” Tanner says.

The sprawling Alibaba Campus in Hangzhou actually feels more like a university campus than a business HQ.Chris Crerar

Alibaba owns 46 Hema supermarket stores in China, including one at its headquarters, which is filled with Australian beef, oysters, milk, wine and other products. Customers are circling a large display of Penfolds wine, which they order with their smartphones. Staff then pack the wine and other purchases into bags, which are whisked away via a conveyor belt disappearing into the ceiling. Live seafood, such as enormous Russian king crabs, thrash around in tanks, waiting to be eaten on the spot or taken home. Depending on where they live or what they are doing, customers can collect their shopping on the way home or have it delivered. The entire operation is digitised with customers ordering and paying for items on their mobile phones.

“In the future, commerce is not only an online business. In the future online and offline will combine together. That is the new retail,” Maggie Zhou, Alibaba’s head of Australia and New Zealand, says in an interview with the Financial Review.

“In China, it is still just the beginning. We will extend more stores in different cities for those new retail formats. cosmetics, magic mirrors to check lipstick on the screen. For Australia is is also a great opportunity for local retailers,” says Zhou, who visited Shanghai last month for a series of business events promoting Australian products. Alibaba wants to be the world’s fifth-largest “economy” by 2036. Zhou says the aim is to have 1 billion customers in China and 1 billion from the rest of the world.

Ma’s empire has been expanding into cloud computing, entertainment and logistics as well as physical retailing. Last year it acquired logistics firm Cainia, a food delivery network and a $US2.9 billion stake in hypermarket operator Sun Art. Unlike Amazon, Alibaba’s low-cost business model means it does not traditionally own the logistics networks. This is slowly changing.

Employees use various transport modes to get around the sprawling Alibaba Campus in Hangzhou – where 30,000 people work. Chris Crerar

Winning the technology race

Zhou says there are huge opportunities for Australian fresh produce exporters from the company’s investments in supermarkets and other chains. Alibaba sells 2000 Australian brands to Chinese consumers via its Tmall platform. Zhou says Chinese consumers are increasingly turning to Australia for fashion, pointing to the Lorna Jane active wear brand and swimwear. “We can see Australian fresh products are also selling quite well. Beef from Australia is number one on our platform.”

Alibaba also wants to sell its technology to Australian retailers via its clouding computing offerings to make shopping more attractive in their stores.

Another example of what this might look like is the company headquarter’s souvenir shop. Facial recognition identifies shoppers when they enter, scan the products they are carrying when they leave and deducts the purchases from their account. No staff necessary.

The sprawling Alibaba Campus in Hangzhou actually feels more like a university campus than a business HQ.Chris Crerar

It is a similar set-up downtown at the Wu Fang Zhai Smart Restaurant. An office worker orders lunch on her smartphone, 10 minutes later she gets a message to say it is ready. She walks to the restaurant, uses her smartphone to open a locker and bowl of noodles is ready. She can also buy drinks and groceries from a 24-hour smart fridge in an adjacent room.

Technology like this is not uncommon in Hangzhou, which has become one of China’s high-tech laboratories. Alibaba has even deployed a traffic management system called “City Brain” into the city which incorporates traffic cameras with its cloud tecnology. Alibaba says traffic flow has improved by 15 per cent as a result.

If all this sound a bit Big Brother-ish and impersonal, it probably is. But the improved efficiency and ability for retailers to lower costs means the technology is being eyed off by retailers in Australia and the rest of the world. US President Donald Trump is concerned about China’s increasing ability to dominate the world’s technology sector, but in Alibaba’s world the race is already won.

Lin Jingxiang, Chairman of Proea Knitwear (Guandong), uses new clothing retail technology for possible adoption in his business, at an Alibaba-run clothing retailer in Hangzhou. Chris Crerar