With its $13.7 billion acquisition of Whole Foods and subsequent price adjustments, Amazon has set its sights on disrupting America’s entire retail landscape. But retailers looking for clues to the future shouldn’t just watch Amazon. In fact, it is not the U.S., but China, that presents the biggest opportunity for new ways of shopping, analysts said.

While Amazon is busy weaving together online and offline worlds by digitizing grocery offerings and opening concept bookstores, a more bold experiment is under way in the Middle Kingdom.

In a bid to search for fresh growth, China’s largest e-commerce sites Alibaba and JD.com are planning to use advanced technologies to upgrade the country’s $4.9 trillion retail sector, where more than 80% of purchases still happen at physical locations. The companies are installing e-payment services inside shopping malls, designing more flexible supply chains and collecting consumer data to market products more efficiently.

And they have the tech prowess for that. Alibaba, for example, announced on Wednesday that it will more than double research and development spending to over $15 billion in the next three years, establishing labs worldwide and recruiting advisers from Massachusetts Institute of Technology, Princeton University and Peking University to focus on areas such as data analytics, quantum computing and machine learning.

In the meantime, demo projects are sprouting up all over the country. Shortly after Amazon acquired Whole Foods, Alibaba’s first pilot Hema Xiansheng grocery store was up and running in Shanghai, delivering consumers’ online orders within 30 minutes. And JD.com, which is also partnering with Tencent to analyze membership and purchase data, will open its first concept supermarket 7Fresh in Beijing by end of this year. Details aren’t out yet, but the company said it will blend online and offline shopping, and have in-store dining spots.

“Over the last decade, we have used up benefits provided by China’s rapid e-commerce growth,” Chang Bin, vice president of strategy and investment at JD.com, said during a Tuesday conference organized by investment firm GGV Capital. “No matter how we look for growth opportunities, we are limited to that 15% of China’s retail business.”

“Now we want to bring our online tools to the entire retail sector, and this is a huge leap for us,” he added

After Amazon announced in December its Amazon Go autonomous store, Chinese startups went ahead to launch their own versions. Beijing-based Bingobox, for example, opened its latest cashier-less convenience store in the city’s avant-garde 798 art park. Consumers can buy beverages, snacks and hand creams there by scanning products at auto checkout counters. Failure to pay will result in a permanent ban from the company’s services.

To them, China’s retail scene is ripe for disruption. Compared with the U.S., the country’s retail infrastructure is underdeveloped, dragged down by inefficient logistics operations and extremely fragmented shopping mall supplies. This creates plenty of opportunities for big companies and startups alike to test different shopping formats that can reach undeserved consumers.

Add onto that is the rapid adoption of smartphone payments. This, coupled with China’s not-so-stringent privacy regulations, allows companies to collect unprecedented amounts of data on consumption habits, which are then used to perfect their analytics algorithms. According to Beijing-based consultancy iResearch, 42% of China’s 34.5 trillion yuan ($5.2 trillion) in total offline purchases were settled through digital wallets in 2016. This compares with just $28 billion in the U.S., according to eMarketer.

“China has the right environment for different retail experiments,” said Matthew Crabbe, director of research at Mintel Group. “The opportunity is bigger in China.”

These opportunities, however, don’t come without challenges.

One issue is although the opportunity is bigger, China’s fragmented retail landscape won’t yield immediate results. For now, most of the country’s regional retail brands are taking a wait-and-see attitude towards Alibaba and JD.com’s new services, trusting instead their old supply chain partners, who are developing their own data analytics abilities.

“The rebuild of China’s retail infrastructure will take some five to eight years,” said Ken Xu, a partner at venture firm Gobi Partners. “And we will see new consumption behaviors afterwards.”

Another issue is technology costs are still high. It takes about 0.4 yuan ($0.06) to track each tagged products with radio-frequency identification technology, which uses electromagnetic fields to identify objects. For big retailers with large inventories, this definitely adds to their operational costs, said Eric Xu, a managing partner at GGV Capital.

But Xu thinks one aspect of China’s retail experiments will take off faster than the others. Unmanned stores, he said, will replace more and more of the country’s mom-and-pop shops over the next three years, as labor and rental costs surge.

In an interview with Forbes, Bingobox founder Chen Zilin said rental is where the startup saves big. The company, which still counts on humans for maintenance and filling up store shelves, doesn’t need to lease prime locations. It can put the mini stores in previously underutilized spaces such as roadsides or squeeze them in-between apartment complexes. According to the company, rental for each store costs just 500 yuan ($76) per month.

Bingobox, however, isn’t profitable yet because it doesn’t have the scale to recoup the manufacturing cost, which stands at 80,000 yuan ($12,000) for each store. Chen said he is working on getting Bingobox’s devices installed in 100,000 communities over the next three years.

“In China, there will be more diversified ways of shopping,” he said. “There will definitely be more smart devices entering communities, giving people more choices.”-Y.Wang (ForbesAsia)

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