The Future of E-Commerce and Retail Will Be Written in China

China’s experiments in shopping have moved into high gear. The world needs to pay attention.

We believe China is ground zero for the future of retail and the West will learn from and adapt the experiments that are already moving to scale in the East.

Consider Alibaba, the Chinese Internet giant whose wide-ranging businesses span e-commerce, offline retail, fintech, online video, maps and browsers, and artificial intelligence. By end of its latest fiscal year (March 2019), Alibaba’s business model appeared to have reached peak fruition, as the company took pole position as the world’s largest e-commerce platform with a GMV (gross merchandise value) of over US$850 billion (a factor of well over 2x Amazon, which moved some $300 billion of goods in calendar year 2018), but was also third in digital advertising, just behind Google and Facebook. What could possibly change?

Experiments in retail

A lot has been changing at Alibaba in the past two years, above and beyond the headline GMV metric. Alibaba’s experiments in what it calls “new retail” have gained a scale and urgency scarcely imagined a year ago. Over 1.3 million of China’s 6 million mom and pop stores have signed up for the company’s Lingshoutong initiative.1 Lingshoutong refits the shops, supplies them directly using Alibaba’s logistics channel, aggregates offline and online data, and extracts a monthly commitment of throughput in return.

Additionally, Alibaba’s high-tech food/grocery retail store concept, known as Hema, is expanding quickly. Figure 1. These outlets serve as walk-in restaurants, food and grocery purchase points, and warehouses for online delivery (within 30 minutes in a three-kilometer radius)–all at the same time. There are now 170 Hema stores in operation (as of September 2019), with two being added each week. Already, Hemastores in operation for over 18 months are reporting revenues of 50,000 renminbi per square meter, up to five times what traditional offline stores can generate. Sixty percent of Hema’s sales are through the online delivery channel, making the stores far more productive, for far more hours of the day, than pure offline stores.2

Figure 1: Hema’s footprint is expanding rapidly

Sources: Alibaba quarterly disclosures.

Unsurprisingly, China seems uniquely ready to adopt the Hema concept. Organized channels for groceries are currently underdeveloped compared to those in the United States, where over 90% of groceries already pass through established super/hypermarkets. In China, wet markets, the Asian equivalent of farmers markets that sell fresh meat and produce, still account for more than 70% of the country’s grocery sector. This signifies the boundless potential for Hema as it keeps on driving the new retail experience involving online and offline integration.  Figure 2.

Figure 2: How China shops for food versus the United States

Source: Alibaba presentations, 2018 Investor Day, Sep 17-18, 2018.

There is more. Alibaba’s online shopping Taobao platform is no longer content with making ad-based recommendations, which were driven by keyword bidding by merchants. Recommendation feeds driven by consumer opinions have gained priority, as have sharing, short-form videos, and live streams. Taobao claims a 58% improvement in conversions when users view short-form videos. Additionally, gross merchandise value (GMV) driven by live streaming rose nearly four times in the past year.3

Ambitions are also rising at the recently acquired, an online food delivery platform. Not content with its over 200 million user base, is now eyeing the nearly 800 million e-commerce user base of Taobao and Tmall, another Alibaba e-commerce platform, and the 900 million users of Alipay, Alibaba’s digital payments platform, to substantially expand its reach.4

Retail space owned by Intime Retail–now a part of Alibaba–is being used for experimental “Tmall pop-up stores,” which allows consumers to walk in, sample inventory, access a large apparel collection on giant touchscreens within the store, pay with Alipay, and choose self-pickup or home delivery. Alibaba also has a furniture store that uses augmented and virtual reality to show consumers how an item will look in their homes. And retail stores owned by Sun Art Retail, in which Alibaba has a 31% stake, are dedicating space to products directly sourced from Tmall. These products can be sampled with an eye to the online purchasing habits of people in the immediate vicinity of the store–tastes the offline store may not have been aware of before, but known to Alibaba via its ecommerce operations. Greasing the wheels of this transformation is a planned logistics investment of $15 billion over five years.5

The need for a retail transformation

Is there a method to this cornucopia of initiatives? Alibaba’s new long-term target to transition from working with 10 million small and medium enterprises (SMEs) to 10 million profitable SMEs provides a clue.6 As e-commerce penetration rises to nearly 20% in China,7 the existing silos of offline and online retail raise vital questions: Are brands and merchants more profitable, or less, as e-commerce grows larger? Does Alibaba’s rising “take rate”–the percentage of GMV that flows into revenues–come at the expense of its merchants’ profitability, or is everyone truly better off–do merchants enjoy better profitability even as Alibaba raises its own monetization?

These questions create a fundamental need to transform the way retail works. Analysis suggests that between 2011 and 2016, when e-commerce grew dramatically in China, selling, general, and administrative (SG&A) costs rose significantly for several retail categories as they tried to keep up. Figure 3. Specifically, consumer appliances saw their SG&A costs rise 340 basis points, apparel saw a near 500 basis point rise, and personal care spent 80 basis points more.8 These rising costs reflect the parallel universes that exist today: offline retail channels, demand management, space planning, supply chains, and consumer analytics have little in common with e-commerce. Increasingly, brands and merchants seem to be running two businesses for the same product, which unsurprisingly leads to cost inflation.

Exhibit 3: Across categories, SG&A costs have risen with sales

Source: Bernstein Research, as of 12/16. SG&A refers to sale, general, and administrative costs.

The true promise of omnichannel retail, or new retail, is a more profitable merchant. The future economics of giant e-commerce platforms will likely emerge from this promise, and the hope that these platforms will not simply maintain their share of a shrinking pie, but maintain or increase their share of an expanding one. Not content to be appropriators or gatekeepers of consumer demand, these platforms increasingly aim to help fundamentally change the way consumers shop.

Points of friction are likely

Not all will be smooth, of course. The real world possesses far more points of friction than online businesses traditionally encounter. Offline or omnichannel initiatives address a target market that is five times larger than online retail, but one-fifth as profitable, or even less so in the initial years after they’re introduced.9 Even as the strategic rationale for ongoing initiatives is inescapable, reported profitability is likely to head downward and stay volatile. Indeed, fundamental questions linger. What shall we consider GMV in an omnichannel world? Will walking into a Hema store be considered “offline,” while ordering the same food via the app be considered “online”?

Elsewhere, the expectations of consumers and merchants will remain fluid, exposing new threats and opportunities. Consider Pinduoduo (PDD). Founded in 2015, PDD has grown quickly to become China’s third largest e-commerce platform and has attracted 430 million annual active buyers to its unique model of social commerce, a group-buying model that weaponizes social networks such as Tencent’s WeChat to propagate offers. PDD’s rise offers inescapable proof that there are still unmet consumer needs, despite everything we have already seen in China. And merchants need more too–more analytics, higher returns on their ad spends, and more handholding with their supply chain and IT systems. There are companies seeking to address these needs: Meituan, for example, is not just China’s largest food delivery and restaurant booking platform, it also provides restaurant management software that is helping to cement its lead. Elsewhere, ByteDance–the owner of the vital Douyin short-video platform in China (known as Tik Tok internationally) does not seem contend with entertainment alone and the firm is rapidly moving into shopping. As of now, its short-video content synchronizes into shopping opportunities into Alibaba, JD and others, but it may expand its own marketplace too, if industry chatter is to be believed.

And thus, to the future of retail. What drives shopping? Needs, of course, but also habits, impulses and, increasingly, fun. Shoppers seek convenience, price, and experience, but also identity and social connection. In the future, will it really matter where we notice a product, where we try it, pay for it, or how it is delivered to us? These ideas are not new, but as e-commerce platforms and offline retail move into each other’s turf, they have acquired an immediacy not seen before. Theory is moving into financial forecasts, and extant silos of thought are beginning to be challenged–just earlier, and faster, in China.


  1. Source: Alibaba presentations, 2019 Investor Day, Sep, 2019.
  2. Source: Alibaba quarterly disclosures.
  3. Source: Alibaba company reports.
  4. Source: Alibaba company reports.
  5. Source: Alibaba company reports.
  6. Source: Alibaba company reports.
  7. Source: China’s National Bureau of Statistics, 2017 penetration had reached the high teens.
  8. Source: Bernstein analysis.
  9. Note: Assuming a 5% offline retail profitability at scale.

Important Information

Blog header image: d3sign / Getty

An investment in emerging market countries carries greater risks compared to more developed economies.

The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.

The mention of specific companies, industries, sectors or countries does not constitute a recommendation on behalf of Invesco.

Justin Leverenz is a Team Leader and Senior Portfolio Manager for the OFI Emerging Markets Equity team at Invesco.

Mr. Leverenz joined Invesco when the firm combined with OppenheimerFunds in 2019. He joined OppenheimerFunds in 2004 as a senior research analyst. Prior to joining OppenheimerFunds, Mr. Leverenz was the director of Pan-Asian technology research for Goldman Sachs in Asia, where he covered technology companies throughout the region. He also served as head of equity research in Taiwan for Barclays de Zoete Wedd (now Credit Suisse) and as a portfolio manager for Martin Currie Investment Managers in Scotland. He is fluent in Mandarin Chinese and worked for over 10 years in the greater China region.

Mr. Leverenz earned a BA degree in Chinese studies and political economy and an MA in international economics from the University of California. He is a Chartered Financial Analyst® (CFA) charterholder.


Bhavtosh Vajpayee is a Director of Equity Research for the OFI Emerging Markets Equity team at Invesco. In this role, he focuses on technology investments.

Mr. Vajpayee joined Invesco when the firm combined with OppenheimerFunds in 2019. Before joining OppenheimerFunds, he worked at Sanford C. Bernstein as an Asian internet analyst, at Barclays as head of equity research for Asia ex-Japan, and at CLSA as head of technology research, all based in Hong Kong. Mr. Vajpayee joined the financial services industry in 1999 and has researched various segments of the technology sector, based in Hong Kong, India, and New York.

Mr. Vajpayee earned an MBA from the Indian Institute of Management, Ahmedabad, India, and a B.Tech from the Indian Institute of Technology, Kanpur, India. He is a Chartered Financial Analyst® (CFA) charterholder.

|5 min readPosted inEquities
More in Equities
Ride hailing in emerging markets is more than transport

When Apple introduced the iPhone in 2007, only the most prescient of market observers would have prophesied that the smartphone would lead to a coming...