14 ★ FINANCIAL TIMES Friday6 September 2019
COMPANIES
TO M H A N C O C K— SHANGHAI
Freshippo s an unconventional super-i
market. Conveyor belts whisk bags of
groceries along the ceiling above shop-
pers’ heads, facial recognition units scan
customers at checkouts, and algorith-
mically determined prices change
dynamically depending on the time of
day.
The chain’s 150 stores in China are the
flagship of what ownerAlibaba allsc
“new retail” — merging bricks and mor-
tar stores with ecommerce, data collec-
tion and artificial intelligence. It has
promoted the concept as a way to boost
low profit margins at conventional
supermarkets, which are under threat
from online shopping.
Retail analysts have been enthusias-
tic. “The battle between bricks and
clicks, waged over 20 years, is over,” said
Michael Zakkour, an Asia strategist at
consultancy Tompkins International.
“And the winner is new retail.”
China’s technology groups have bet
heavily on the idea. Since 2015 Alibaba
has spent $10bn on stakes in offline
retailers ranging from supermarket
chains to furniture stores. In 2017 main
rivalTencent ought a 5 per cent stakeb
in supermarket chainYonghui orf
$636m.
Some analysts saw those investments
as blazing a trail ahead ofAmazon’s
$13.7bn purchase of US retailerWhole
Foods n 2017. The move by the USi
online group, known for upending sec-
tors from bookstores to cloud comput-
ing, rattled the supermarkets.
But industry executives say there has
been little improvement so far to store
operating margins, which are about 3
per cent for supermarket chains world-
wide, according to consultancy Oliver
Wyman.
Freshippo is still lossmaking due to
heavy investment in new outlets,
according to people familiar with the
matter, but the hope is that the new for-
mat could change that dynamic.
Yonghui, too, has found immediate
profits elusive. Last year it divested its
retail innovation unit following total
losses of Rmb1.3bn ($182m) over three
years. “[Even] if sales continue to
increase, so will the losses,” the super-
market chain said.
Nevertheless, Yonghui — China’s fast-
est-growing supermarket chain over the
past decade, with a market capitalisa-
tion of $13bn on Shenzhen’s stock
exchange — said there were benefits
from its tie-up with Tencent, which
owns the country’s top social media
service WeChat.
“Tencent’s data analysis on people is
very strong,” said Hu Luhui, chief tech-
nology officer for Yonghui’s cloud com-
puting unit. “Our retail and their social
networks can be combined.”
Analysts said applying AI to super-
markets’ data could eventually boost
profits by allowing them to track which
products offer the highest margins and
more specifically target their promo-
tions.
The use of AI could also reduce the
time it takes retailers to restock by 25
per cent, said Jacques Penhirin, China
retail and consumer head at Oliver
Wyman, who estimates that would takethe average retailer “to a strong 9 per
cent margin”.
Online sales account for barely 3 per
cent of the Rmb5tn market for fresh
produce, according to Euromonitor, in
contrast with 20 per cent of retail sales
overall, suggesting robust potential for
growth.
By converting physical stores into dis-
patch locations, retailers could increase
margins by saving space and reducing
spending on display. For Freshippo, the
“real cash is coming from the delivery
side”, said Larry Zhu, a partner at con-
sultancy Bain.Freshippo stores include warehouses
for ecommerce delivery, and use AI to
pare down the products they offer as
well as enable “just in time” restocking.
But the outlets’ use of novelties to draw
consumers, such as in-store restaurants
to cook shoppers’ freshly bought lob-
ster, require considerable investment.
“It’s about getting back the traffic. On
the top line side it makes a lot of sense
but in terms of how it will improve the
margins, I have doubt about that, espe-
cially in the short term,” said Mr Zhu.
Overseas retailers, also struggling
with top-line growth in China, have tiedup with tech partners too, but have
found that this often requires ceding
control to Alibaba and Tencent.
Retailers, both foreign and domestic,
must face the large costs of building up
delivery and data collection capacity
themselves, or else ally with one of the
two companies. “In order to do that you
must be willing to give a share to your
partner within your existing margins,”
said Mr Zhu.
Walmart ash spent more than $320m
to buy a 10 per cent stake inDada-JD
Daojia, which handles the US company’s
delivery business in China. But the ven-
ture is majority owned by online retailer
JD.com, in which Tencent has a 20 per
cent stake.
France’sAuchan, the second-largest
foreign chain in China, sold a 36 per cent
stake in a joint venture with Taiwan’s
Sun Art, which operates more than 400
supermarkets, to Alibaba in 2017 for
$2.9bn. Sun Art’s French chief execu-
tive, Ludovic Holinier, stepped down
this year in a move company insiders
said was aimed at enabling Alibaba to
install its own top management.
“Delivery and tailored promotions
are the good parts of new retail,” said a
Sun Art xecutive. “The weakness ise
that it concentrates market power in the
hands of Alibaba and JD.com.”
Additional reporting by Wang XueqiaoRetail. rtificial intelligenceA
Chinese stores bet on bricks with clicks
Chains link ecommerce and
data collection with physical
shops in push to lift margins
Alibaba’s Hema Fresh is among the ‘new retail’ ventures that combine ecommerce with the real-world shopping experience— Imaginechina/AlamyEcommerce takes a growing
share of Chinese retail
Total retail sales (Rmb tn)Sources: Fung Business Intelligence; China national bureau of statistics; China Chain Store and Franchise Association OnlineElectronics Supermarket Oline
Supermarket/department storeDepartment store
Furniture store
Suning
(
stake)
Sanjiang
Shopping
Club (
stake)
Lianhua
Supermarket
( stake) Sun Art
(
stake)
InTime
Retail Group
( stake)
Easyhome
(
stake)
Alibaba has spent billions on Chinese
oline retail
Selected deals (Rmb bn)Brick and mortar retailers
in China have struggled
Annual sales growth of top
retail chains, year on year ()- - - - TA B BY K I N D E RThe global chief executive ofEY aids
the Big Four firm had done “zero” con-
tingency planning for how a forced
break-up of its UK business could affect
itsUS work, despite fears of regulatory
contagion to otherbig economies.Carmine Di Sibio aids EY, whichyester-
day posted record global revenues of
$36.4bn, did not accept that the quality
of its audits would be improved byan
operational split of its UK business.
His comments come in response to
pressure in Europe and Australia for
government intervention in the audit
market amid concerns that it is domi-
nated by an “oligopoly” of EY, KPMG,
PwC nda Deloitte.
A forced split in Britain could make it
harder for firms to manage global audit
contracts as they have required teams of
partners from audit, consulting and tax
divisions to share information across
borders. Fears have also been raised
that a stricter regulatory regime in the
UK could lead to contagion in other
major economies as regulators look to
adopt a similar structure.
The remarkcomes ahead of the clo-
sure of a consultation by the UK govern-
ment next week on proposed reforms by
thewatchdog. The Competition and
Markets Authority recommended in
April that the largestfirms be forced to
splitaudit and consultingto end con-
flicts of interest and increase choice.
The CMA investigated the audit mar-
ket following criticism of the severe lack
of competition and scrutiny on the larg-
est firms after a string of accounting
scandals and corporate collapses.
In the US he Big Four audit 99 pert
cent of members of the S&P 500, and 97
per cent of the UK’s FTSE 350.
Each of the Big Four firms in the UK
has drawn up contingency plans for a
break-up of their businesses.
Mr Di Sibio, who took over as global
head of EY in July, hit back at calls for
the firms to be broken up. He saidEY
maintained that the quality of its audits
depended onits remaining a multidisci-
plinary firm.
EY’s results showed that its audit
practice remained its most important
division in the financial year ending in
June, accounting for nearly 35 per cent
of global turnover. However, the audit
practice’s 4.4 per cent year-on-year
growth was the slowest of its four divi-
sions. EY’s advisory business, its sec-
ond-largest unit, increased revenues by
9.2 per cent last year to $10.2bn, and
transaction advisory services registered
a 15.5 per cent increase in revenues to
$4bn. The tax practice increased 8.6 per
cent to $9.5bn.Financial services
EY’s global
boss hits at
call for British
break-up
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UK: +44 20 7873 4000 | Email: [email protected]SEPTEMBER 6 2019 Section:Companies Time: 9/20195/ - 17:29 User:cathy.pryor Page Name:CONEWS3, Part,Page,Edition:USA , 14, 1