Consumer retail and consumption startups are trending among investment firms. Along with the rise of “new retail,” both online and brick-and-mortar consumer retail companies are exploring self-service retail. There are more startups focusing on self-service retail than ever before, and tens of millions have already been invested in early stage self-service retail projects. In just a few months, a wide variety of self-service retail ventures such as convenience stores, shelves, and vending machines have successfully raised capital; however, investors are wary whether this sector will be a bust like the overheated bike-sharing sector not too long ago.
New Retail Think Tank recently interviewed Xu Bindong (Eric), a managing partner at GGV, who led GGV’s investments in the self-service convenience store BingoBox and vending machine CITYBOX. Though Xu is optimistic about the future of self-service retail, he noted that it isn’t particularly difficult to distinguish the good companies from the bad ones. Key criteria include business development, supply chain management, operations, and technology.
When evaluating potential investments, Xu’s top consideration is neither the expansion rate nor the short-term profitability. Overemphasizing business development while simultaneously underemphasizing other factors, such as supply chain management, can be a fatal mistake, Xu argues. Teams with the right balance of technology, supply chain management and operating skills easily stand out from the crowd. Meanwhile, traditional supermarket businesses that lack advanced technology will have trouble entering the self-service industry, even with large amounts of capital to support them.
Full Interview with GGV’s Xu Bindong (Eric)
New Retail Think Tank: In an interview two months ago, you mentioned that it was unclear where this new retail business was going; as time goes by, investors might determine that the new retail business is entirely different from what it was at the beginning. Since you entered the self-service retail business, has any of your previous understanding of this business changed?
Xu: It's only been half a year since [GGV] entered the self-service retail business, but we've already developed a deep understanding from some micro-level perspectives. The minute we saw BingoBox, we knew that it represented the future of new retail, which we still believe to this day. Recently, some people have asked us whether the self-servicing retail industry reached its peak, or if it has been over-focused. Is it a hype that will dissipate in the next three to six months? From my point of view, the self-service business revolution has just begun.
The public is easily attracted by appearances and mass phenomena. Why has BingoBox received so much attention? It's because the media focuses too much on the term "self-servicing". As a matter of fact, "self-servicing" is merely the surface of this phenomenon.
"Self-service" businesses combine advanced technology, supply chain management, operations and business development. The term "self-service" represents merely the user’s experience. Self-service businesses build upon previous business models; no matter whether it is a major leap in RFID, image recognition technology, or personalized service based on customer profiling, the self-service industry will undergo major changes hardly perceptible by consumers.
We are witnessing increasing enthusiasm for self-service entrepreneurship, which will revolutionize the traditional retail industry with more advanced technology and a more competitive business environment.
New Retail Think Tank: What do you mean by “increasing enthusiasm”? Are you receiving lots of funding proposals or is there lots of competition to fund the most promising projects? What are the backgrounds of these founding teams and what is their general direction?
Xu: Self-service startups are currently focused in two areas: first, self-service retail stores, and second, vending machines, particularly in office buildings.
The former has greater barriers to entry, while the latter is more competitive. [GGV] has met with almost all the entrepreneurs who want to enter the vending machine field, and we’re finding that many of them are from internet companies. Putting smart devices and operational systems aside, vending machines have relatively lower barriers to entry. Especially in the early stage when supply chain and operations are less of a problem, it’s relatively easy for vending machine startups to scale up.
Over the last two months, many entrepreneurs have entered the vending machine space. The status quo will change over the next three months as companies with excellent operational capabilities, supply chain management, and other technological advantages begin to separate themselves from the pack. To scale up, startups will have to overcome two major obstacles.
One is the supply chain. Due to the nature of retail, it’s relatively easy to increase efficiency when you scale up from dozens to hundreds of vending machines. But when you scale up to tens of thousands of vending machines, things get a lot harder and it's tough to maintain supply chain efficiency.
Another challenge is operations. Simply creating a vending machine with goods is not “New Retail.” You need to know who your customer is, what their needs and preferences are. You need to develop the products and vending machines accordingly and give customized recommendations and discounts to your target customers. I think in the next three months or so, tier one players in this space will stand out, while others will face more barriers to entry.
Successful self-service retail stores must skillfully integrate resources. Other than business development and funding, supply chain management, operations and technologies all need to be integrated, which makes this a high barrier to entry.
New Retail Think Tank: So for you, the speed of expansion is a secondary factor?
Xu: I think so. There are two kinds of businesses combining online and offline retail: one requires a supply chain while the other does not. Supply chain management takes up nearly 70% of the workload for offline retail. Speed is not the only determining factor since rapid expansion means being more likely to run out of resources. Therefore, no matter the speed of expansion, supply chain management and operations should be the immediate concern for almost all self-service entrepreneurs.
New Retail Think Tank: Many startups stress their operational and data analysis capabilities, but for now, these two capabilities are intangible and not directly assessable. How do you normally evaluate them?
Xu: Simply put, we look at the team itself and their experience with entrepreneurship. We also evaluate the supply chain. Many teams coming out of business development tend to downplay supply chain issues. For example, we asked some teams about their solutions for the supply chain issues, only to be told that “there’s no problem as we have solved this issue” or “we’ll just build a few front warehouses such that we guarantee a daily single or double delivery.” I think they understate and underestimate the difficulties of tackling supply chain issues.
When we talked with some high-level executives in traditional retail industries, we learned that supply chain issues have not been perfectly resolved, even by many successful enterprises, let alone the startup companies. Supply chain issues are considerably underestimated and possibly concealed from proper attention. It is wrong only emphasize the speed of business development.
Specific Players in the Market
New Retail Think Tank: What do you think is so special about BingoBox and CityBox that you are willing to invest in them?
Xu: The thought process behind investing in these two startups is different. The CEO and founder of CITYBOX, Wang Qiang, is a serial entrepreneur. He was the co-founder of Fruitday, has e-commerce experience and at the same time is a major stakeholder in CityShop. His company stands out in terms of operations and supply chain management.
Furthermore, Citybox is an intelligent terminal with a comprehensive internet operating system which can keep track of inventory and make orders in real time when inventory runs low. At the same time, Citybox has the ability for customer profiling and dynamic pricing and can enter places like hotels, residential areas and working spaces. We believe that this is the future of “New Retail.”
The environment for BingoBox is more complicated. The boxes have to be placed in semi-public places since they are larger (compared with CityBox, which is of the size of a vending machine), and thus have a larger amount of SKUs [Stock Keeping Unit, or different products]. BingoBox currently only has a few competitors, which indicates a high barrier to entry. The quality of the founding team at BingoBox is the reason why we invested in them.
We decided to invest in BingoBox this March, and we publicly disclosed the investment to the media in July. Since the first BingoBox launched in Shanghai, the company has improved all aspects of its business development, supply chain management, operations and technology practices.
BingoBox has already signed contracts for tens of thousands of locations across the country; thus, a low production capacity is a bottleneck to its further expansion. BingoBox launched its supply chain team a few months ago; in Southeast China, BingoBox is self-operated, while in other regions they are dependent on their partners like Auchan RT-Mart and Century Mart. Notably, theft rate is low, and daily sales from new boxes could reach from 1000 to 2000 RMB, which is far higher than the breakeven point. BingoBox also just announced improvements in its image recognition capabilities and other technological solutions.
New Retail Think Tank: Traditional supermarkets are trying to create their own self-service retail; companies with certain backgrounds such as Miss Fresh and Bianlifeng have also entered the market. How should entrepreneurs determine their entry point?
Xu: Given the current technological capabilities of traditional supermarket companies, I’m quite skeptical that they will succeed.
The first reason is immature technology. It is very challenging for a developing company that relies on teamwork to use capital and resources to compete in the market.
The second reason is top entrepreneurs do not choose to create internal start-ups for large supermarkets. Given the status quo, entrepreneurs’ capabilities and qualities are what determine whether a project can be successful. However, due to enterprise risk, entrepreneurs demand greater shares of profit. Thus, top entrepreneurs choose to start businesses individually – not with an existing company.
Regarding some tech companies such as Bianlifeng and Miss Fresh, they do have certain advantages, but generally speaking, they are still on the same level as other competitors.
New Retail Think Tank: Some insiders think that self-service convenience stores are unlikely to take off because they can only supplement convenience stores, food delivery services and online/offline internet supermarkets. What do you think?
Xu: I don’t agree. New retail has advantages in terminal intercepts, lower costs of acquiring customers, improved performance efficiency, and diminished labor/rent costs. Obviously, companies with structured approaches are more likely to dominate and integrate retail resources.
New Retail Think Tank: Entrepreneurship has been a hot topic in recent years. However, in comparison with bike sharing and travel startups, some self-service retailers have already started discussing profitability. Why?
Xu: I think this is a common misunderstanding. Being profitable is not the same as going in the right direction or scaling successfully. Even if profits are substantial at the moment, this situation can change quickly once competition grows. In the beginning stages of a business, successful strategies are not determined by how quickly they generate profits. This is shortsighted.
Profit in traditional retail is driven by commodity price arbitrage. But in “new retail,” there are many ways to make a profit, such as targeted advertising. Also, as a potential monopoly, the branding is a potential profit stream. In summary, the “new retail” business model has yet to be formed. Don’t use old frameworks to evaluate new business models because you will come up with fallacious conclusions. It is meaningless to think about profit this early in the process.
This article was originally published by Chen Zhang via New Retail Think Tank's Wechat public account on September 29, 2017.