Looking for the Future of Retail in Chinese Malls
What U.S. retailers and brands can learn from a retail experience transformed by mobile payments and that embraced omnichannel
For the past two weeks, I’ve been home in Hangzhou, China to visit family and friends, and a big part of that is going to the various malls scattered around in this prosperous coastal city to shop, eat, see movies, sing karaoke, or simply have a coffee and hang out. Somehow, going to the mall now seems to be everyone’s first choice for going out here, which was definitely not the case the last time I was home in 2015.
After living in New York City for almost six years, I couldn’t help but be surprised about and intrigued by the various differences in retail technology and shopper behavior that I’ve come to notice between the Chinese consumers and their U.S. counterparts. While the two countries obviously have vastly different socio-economic realities and tech ecosystems, I do see some interesting points from which U.S.-based retailers and brand marketers could perhaps learn a thing or two about retail innovation.
The Multi-functional Mall
As I mentioned, I’ve been spending a lot of time in various malls (and department stores so huge that they might as well be malls) since I got back. And it’s not hard to see why — the malls here, especially the new crop that opened in the last five years, seem to have everything. And I mean everything. From movie theaters to karaoke lounges, from boisterous gaming arcades to serene beauty spas, from chilly ice rinks to the hottest restaurants in town, the malls in Hangzhou usually have them all in addition to the stores and cafes that are part and parcel at the American malls. It’s hard to say no to going to malls when they’ve got pretty much every indoor leisure activities one can think of under one giant roof, not to mention they are usually centrally located and easy to get to¹.
Out of everything, the restaurants are undeniably the main draw for most people. Sure, most U.S. malls also have dining options, but they typically consist of fast food options and restaurant chains. In a typical mall in Hangzhou, however, there are no less than a dozen of full-service restaurants to choose from, some of them among the best and most popular in the city. And it is hard to understate just how important a couple of good restaurants can do to drive foot traffic In China. The Chinese social scene is very much centered around eating out in groups instead of going to bars and clubs (we prefer to get drunk at dinner), and by housing some of the most popular restaurants in town, the malls here give many people a good reason to visit on a regular basis. Of course, once they step into the door, there are plenty of opportunities to sell them on the other services and lure them into the shops, one of the most common one being when they wander around as they wait for a table at one of the hip restaurants.
By contrast, the malls seem to be far less popular nowadays in the U.S., with mall foot traffic on a downward spiral and analysts predicting one in four malls in America to be gone by 2022. Once a popular place to hang out for suburban families and bored high-schoolers, many malls now have to rely on Apple Stores to drive foot traffic. Many have blamed the decline of the American malls on the rise of ecommerce, inferring that there is no reason anymore to go to the mall when one can simply buy everything online. Such reasoning might have a sliver of truth to it, but given the fact that the Chinese malls seemingly have no problem attracting consumers even with ecommerce now accounting for over 33% of the total retail sales in China (that number is about 10% in the U.S. for comparison), it does seem rather illogical to point to online shopping as the sole culprit for the death of American malls. If anything, the over-expansion of U.S. retail and the resulting debts seems like much more likely causes. If Chinese malls can thrive with about one third of retail sales in China happening online, what to make of the much reported “retail apocalypse” in the U.S.?
The lesson here for American malls and brick-and-mortar retailers is that selling goods alone is no longer enough to get customers into your stores. In this age of abundance and infinite options, consumers have multiple channels to discover products and buy what they want without ever setting foot in a store. Therefore, additive services and experience-driven store design are the necessary tools that retailers must use to stay competitive for consumer attention. Most Chinese mall operators were well aware of that when they developed and opened the new malls in the past few years, and deliberately sought to diversify what people can do in a mall.
Brick-and-mortar retail in the US needs to diversify its offering and rethink the physical store’s position in the value chain and marketing funnel. A store in the 21st century can rarely thrive by simply being the transactional end point of the consumer journey. Instead, they will need to act more like brand experience centers where the consumer journey starts or even passes through on a consumer’s way to purchase, in store or elsewhere. U.S. malls are going through a break in product-market fit, and they should look to Chinese malls for inspiration if they want to survive. And to their credit, some are already starting to take note and implement changes.
The QR Code Revolution
Home to the Alibaba headquarters, Hangzhou is now truly a cashless city that runs on the Chinese duopoly of mobile payments — Alibaba’s Alipay and Tencent’s WeChat Pay. According to one estimate, 90% of all consumer transactions in Hangzhou are now done via mobile. Tencent CEO Pony Ma famously boasted in 2015 that even the beggars on the streets of China have started accepting money via peer-to-peer mobile payments, and he was not exaggerating.
For the past two weeks, every store I’ve been to in Hangzhou, from high-end luxury shops by the West Lake to the street vendors selling snacks by a bus stop, all accept both Alipay and WeChat Pay. Mobile is hands down the primary payment method for anyone under age 60 in Hangzhou. While Hangzhou is admittedly ahead of the national average of mobile payment usage, the wide adoption of mobile payments in China overall (now at 77.5% of all smartphone users in China) is indisputably miles ahead of all other countries, including the U.S., where mobile payment adoption hovers around 20% of all smartphone users. According to a February 2018 survey by CivicScience, only 1% of US internet users use mobile payments as their primary payment method.
This is not news to anyone who has paid attention to Chinese shoppers or mobile payments in recent years. However, a key characteristic that many foreign analysts and payment experts often miss about the ubiquity of mobile payments in China is that it mostly runs on QR codes rather than NFC, which often leads to a substitution of POS transactions with peer-to-peer transfers.
The reality is that the small and medium businesses don’t have the resources or the incentives to purchase the kind of advanced POS terminals that support mobile payments. Many of those businesses in China were cash-only to begin with. Instead, they now accept Alipay and WeChat Pay purely on a peer-to-peer transfer model. Many retailers would simply print out a QR code, stick it to the counter, and ask customers to scan it and manually put in the amount of total in order to complete the transactions. Most of the small businesses I encountered don’t even bother setting up a business account to collect payment, opting instead to use the owner’s personal WeChat or Alipay account. This substitution fosters a certain air of casual intimacy that makes transactions somehow feel less transactional and more like two neighbors reaching an agreement to help each other out².
A deeper consequence of such widespread adoption of QR code-based mobile payments is a remarkable shift in consumer behavior and call-to-action design in marketing. Thanks to mobile payments, Chinese consumers now know exactly what to do whenever they see a QR code. As a result, those black-and-white square mosaics are omnipresent in Hangzhou, sometimes in rather unexpected places. They are on the arm of your seat at local cinemas for you to scan and pay so you can turn on the massage chair functions. They are on all the out-of-home ads in the city, prompting you to visit the advertising brand’s online store or follow its WeChat account with one simple scan. I even came across a poster in the men’s room in a mall that asks people to offer feedback on the cleanliness and upkeep of the facility by, you guessed it, scanning a QR code.
New technologies can be innovative, but true innovations only happen when they manage to change user behavior. Compared to the cutting-edge retail technologies employed by Amazon Go stores, the adoption of mobile payments has yet to really change how it feels to shop in China beyond streamlining the actual payment experience and facilitate more online-to-offline (O2O) opportunities.
What has significantly changed, however, is how Chinese consumers respond to call-to-actions and microtransactions. The other day, my 54-year-old mom complained to me about the countless tabs she had opened in the Safari browser on her iPhone, for she did not know how to close those windows. Instead, she just kept on scanning and opening more tabs. She also confessed to committing many more impulse purchases, especially on cheap, small items from street vendors, and blamed it all on the ease and convenience of mobile payments.
Outside malls, Alibaba and Tencent have been able to add all kinds of other services ranging from food delivery to paying home utility bills atop their respective apps via mini-apps (typically web-based applets) that benefit greatly from integrated payment solutions. Such near-universal support no doubt further propelled mobile payment adoption in China and led more Chinese consumers to change their behavior.
China has the unique conditions for mobile payments to take off the way it has. A robust smartphone user base plus an underbanked consumer base means easy-to-use mobile payment solutions were quickly embraced by hundreds of millions of Chinese consumers, helping them leapfrog credit cards and personal checks and move straight from cash to mobile. But more importantly, it grew out of Alibaba’s ecommerce ecosystem and Tencent’s WeChat, the must-have app for all smartphone users in China.
This stands in stark contrast to how mobile payments developed in the U.S. In China, they started as a digital solution on the most popular social platform and the biggest ecommerce platform, before quickly moved to become a payments facilitator in the offline world. In the U.S., however, services like Apple Pay and Android Pay starts with in-store payments and works backwards to integrate social and ecommerce features. And because Apple Pay and Android Pay are OS-specific payment solutions, they lack the kind of cross-platform compatibility that Alipay and WeChat Pay enjoy when it comes to P2P payments. PayPal and its subsidiary Venmo arguably fulfills those needs for the U.S. market, but neither seems to have the capital and drive to push their services into the offline world in a significant way like Alibaba and Tencent did any time soon.
By all accounts, most Americans are still happy with swiping credit cards rather than tapping smartphones at the register, so U.S. brands should not be wasting their collective breath hoping for mobile payments to drastically alter the shopping experience and user behavior here as they have in China any time soon. After all, user behavior change doesn’t happen in a vacuum, and when plastic cards are still, by and large, adequately fulfilling their duty as the payment method of choice, U.S. consumers lack strong incentives to make the leap to mobile payments as the Chinese did. And without widespread user adoption, smaller businesses lack the incentives to upgrade their POS terminals.
What U.S. brands do need to pay attention to instead is the kind of invisible payments that are gaining momentum thanks to Amazon Go and auto-replenishment services. Already opened in three locations, this kind of cashier-less, ‘grab-and-go” store concept that Amazon is championing with Go stores (and several startups are bringing to other retailers) has big potential to drastically change U.S. shopper behavior and reshape the shopping experience. Similarly, IoT-powered auto-replenishment services, such as Amazon’s Dash Replenishment Service, are also redefining the home shopping experience. If they can be successfully scaled — and Amazon is looking to open many, many more Go stores in the next few years and already reportedly working to apply the Go technologies to bigger stores — they will make payment a total afterthought and perhaps help U.S. consumers leapfrog mobile payments altogether.
The Hema Experience
The great online-to-offline (O2O) opportunities that mobile payments have unlocked for Chinese businesses are also reshaping shopper behavior in China. Nowhere is that more evident than the Hema grocery stores that Alibaba has opened across the country over the past two years. Ever since this New York Times piece on the various technologies that Hema stores supposedly employ, I’ve been dying to visit one in person. And last week, my wish came true as I took my mom to the biggest Hema store in Hangzhou for lunch. The experience is much more mixed than I expected.
Unsurprisingly, the store is located in the basement level of an InTime mall, taking up the entire floor. As expected, signage for scanning the QR code to download the Hema app is everywhere. In fact, the entire store is basically a giant ad for the Hema app. The entire experience is designed to drive you to download the app, which is mostly for ordering groceries from their stores. This offline-to-online positioning is starting to get trendy in the U.S. too, as evidenced by Amazon and many D2C brands’ expansion into brick-and-mortar in recent years.
The store is divided into three areas: a seafood market, a supermarket for CPG goods with an emphasis on snacks (lots of Hema’s private label stuff was there), and a food hall on the periphery filled with 3rd party vendors that help round out the dine-in experience. Needless to say, all payments inside the store have to be done via Alipay through the Hema app. Fresh seafood is obviously the main draw of the store with lots of imported items here. You are welcome to pick one and bag it yourself to go or to get it cooked. Pricing was reasonable but not exactly low.
We chose to order some seafood dishes for dining-in via the Hema app, and they were cooked and ready within 20 minutes. The pick-up process was unexpectedly frustrating, because even though you already have a code via the app’s notification for picking up your orders at a “prep center” counter, you can’t pick up your order with that directly. Instead, you have queue up and scan the code at a self-service kiosk by the counter to get a paper slip printed out first, then hand over the paper slip to actually get your cooked dish. Presumably, this rather unnecessary step is added to help minimize the training that counter workers have to go through, but it really negatively impacted the otherwise rather seamless experience.
After finishing some tasty and fresh seafood dishes, we decided to check out the packaged snacks and groceries. As if taking a page of Amazon’s playbook, the retail section of the Hema store featured a lot of Hema’s private label goods, especially in snacks and frozen packaged foods. Of course, they are also prominently featured in the Hema app when you browse for online orders.
Check-out is of course done via a self-help kiosk that only accepts Alipay. No WeChat pay allowed here. And because everything here is designed to push you to download the app in hopes that you may start using it to get your grocery online, just using the Alipay app wouldn’t work here. You actually have to use it through the Hema app to check out. Surprisingly, there was somehow a cash-only register by the side, but no one was using it from what I saw.
Sadly, I don’t live within the two mile-radius delivery range of one of the four Hema stores currently open in Hangzhou, but I do hear from friends and family that they almost always deliver on the “1 hour or less” promise for online grocery orders. And I did get to try it out myself last week when visiting a cousin who lives inside the delivery range of a Hema store, and the order we placed arrived after about 45 minutes despite terrible weather that day. This remarkable feat is largely powered by the cheap delivery labor that abounds in China³, which means it would be hard to replicate in developed markets without the deployment of self-driving vehicles and delivery drones in on-demand delivery.
Surprisingly, the whole Hema experience is actually pretty low-tech. Save for the blanket Alipay integration and mobile ordering, which at this point are simply table stakes in Hangzhou, there’s actually not much sophisticated retail tech in place as far as I can see. I saw no crazy overhead conveyor belt that lifts online orders across the store for delivery nor using facial recognition for payment, and maybe those things do exist in some other Hema stores. What I saw instead are simply a lot of QR codes and a determined push to leverage an overall great and comprehensive retail and dining experience to drive people to give online grocery shopping a try. Everything was designed to run through the app, and it made the whole experience feel seamless and customer-centric.
Therein lies the ultimate takeaway for the U.S. malls and brands with retail footprints. Thanks to the widespread adoption of mobile payments, Chinese malls and stores are now keenly aware of the fact that today’s consumers are connected to various shopping channels via their smartphone, and it is not a zero-sum game for brick-and-mortar. It would be silly to keep dividing experiences into either online or offline when your customers are nimbly existing in both worlds at once. They could be checking your social channels when they are in your store, just as they could be sitting at home but ordering something to pick up at a nearby store later. We’ve been talking about embracing omnichannel retail for a while now, and I truly felt that fluidity with the way Alibaba designed the Hema store experience with the app in mind.
Again, some U.S. retailers such as Target and Walmart are starting to catch up on that concept, but there’s still a lot to do for many others. Reflecting the aforementioned cultural difference in preferred context for socializing, U.S. grocers like Kroger and Wegmans are adding bars to their stores, in hope of turning the chore of grocery shopping into an enjoyable social experience that could not be replicated online. Whatever the specific tactics, the guiding strategy in this search for the future of retail is fundamentally the same — to evolve with your customers.
 Unlike the major malls in the U.S. that are typically located on the outskirts of the city centers due to rent, the malls in Hangzhou (and, from what I know, the rest of China) are typically built near major transportation hubs in the city, for most urban dwellers in China still rely on public transportation.
 This sense of casual intimacy is also incredibly well replicated in social commerce on WeChat, where influencers (or Wei-Shang, i.e. micro-merchants) leverage their real-world contacts to build an online following, frequently get personal with their shoppable content and recommendations, and interact with their followers in real time to hawk goods. But that’s an article for another day.
 High population density in urban China also makes such efforts much more viable than elsewhere.