Opportunities for offline retailers have arrived in China, but don’t rush

Anyone who has been to a tier-1 Chinese city will probably have come across the long queues in front of stores throughout the city. People call them “wanghong” (网红) stores, borrowing the Chinese term for internet celebrities to illustrate the businesses’ offline virality.

“There’s not much innovation coming out of the online retail space anymore,” Partner at Sequoia Wang Cen says at Iyiou‘s Global Industry Innovation Summit (GIIS) in Shenzhen. “Expect to see some excellent offline products and experiences that are grabbing traffic from online.”

While most venture capitalists are fixated on cyberspace, Wang has been slowly but surely making returns from traditional brick-and-mortar businesses. He describes his portfolio as those for the hicks—the opposite to sexy, trendy internet startups. His picks span from a laundry service and beauty hospital to snack chains like Zhou Heiya (周黑鸭) whose famous braised duck-necks have made it into a Hollywood blockbuster and the Hong Kong Stock Exchange.

When e-commerce first shook up the consumer space, offline businesses became wary of losing customers to online channels. And they did… until increasing online customer acquisition costs put the brakes on e-commerce growth. For the first time in five years, the growth rate of online retail in China dropped below 30% (in Chinese). Jack Ma has responded swiftly by introducing his “new retail” brainchild that will seamlessly integrate the online and offline shopping experience.

“China’s young entrepreneurs are increasingly willing to get their hands dirty for some heavy work, like food and beverage,” he says, citing the example of the 1991-born founder of Heytea. An embodiment of what a “wanghong” store can be, Heytea is a tea shop that started in a small coastal city in the southern province of Guangdong. While Starbucks announced in July it would close down all of its 379 Teavana shops in the US, Heytea secured over RMB 100 million (around $15 million) from IDG Capital and angel investor He Boquan, founder of bottled water maker Robust Group, last August.

“What’s special about the brand is that it leverages the network effect of social media. The brand is famous on social media because of the long waiting time to get its product. It uses a controversial technique—scarcity marketing,” says WalkTheChat, a marketing agency that helps foreign brands leverage WeChat. Like most retailers today, Heytea is riding the content marketing wave, hiring social media bloggers to “soft sell” its brightly hued fruit tea topped with cream cheese that is allegedly imported from Australia.

In other words, Heytea has been a beneficiary of China’s relatively developed internet infrastructure at this stage, especially when it comes to mobile internet. The old generation of offline retailers lost to online players because the former lagged behind in technological infrastructure, data capability, marketing, and even team management, Wang reckons.

“But we are increasingly finding traditional offline businesses run by well-educated individuals with an overseas education or from a top Chinese university,” Wang says. “To be honest, they are much faster learners than the old generation of crude, grassroots entrepreneurs.”

Nonetheless, the offline battle is as brutal as, if not more than, the online one. Online retailers who had rushed to jump on the “new retail” bandwagon ended up in a bloodbath. Fruit Day (天天果园), one of China’s top fresh fruit e-commerce sites, shut down most of its physical stores after a few months’ of hasty expansion in 2016.

“Fundamentally there’s nothing wrong with opening a storefront, but our DNA rules against us doing so. To run a physical store, there’s a lot of paperwork to be handled, but none of us know how to do so,” Fruit Day’s founder told local media in retrospect (in Chinese).

Wang would agree. “I found that the [offline retail] brands who are growing really fast usually have been preparing for seven or eight years,” Wang says in a calm but stern tone. “So don’t bother showing me your numbers during the first three years of operation. Instead, work on improving quality of your product, your storefront, and your backend system. Don’t rush.”