Author and Scholar Barbara Kahn on Retail Innovation in China

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Author and Scholar Barbara Kahn on Retail Innovation in China

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Welcome to Alicast, I’m Liyan Chen from Alizila. Technology has completely disrupted the way we shop in the 21st century. So how can retail leaders navigate these massive changes – especially after the experiences of the Covid lockdowns? To answer these questions and more, we turn to one of the most influential scholars and thought leaders in retail. Barbara Kahn is the Patty and Jay H. Baker Professor of Marketing at the Wharton School of the University of Pennsylvania.  

Kahn has conducted decades of research and held extensive conversations with CEOs of some of the world’s largest retailers for her book, The Shopping Revolution, where she offered a framework to examine how innovative companies can stay on top of the fast-changing retail landscape. Recently, she added a new chapter to her book, focusing specifically on the innovations in China – and exploring ways that the global retail industry can learn from these innovations.

Below is a transcript of this Alicast, edited for clarity and brevity

Liyan Chen: 

Thank you for joining us, Barbara. 

Barbara Kahn: 

It’s my pleasure to be here.

Liyan Chen: 

I want to start by talking about your book, The Shopping Revolution. It was first published in 2018. Even though it’s only been a few years, so much has evolved. What do you think are the biggest changes faced by the retail industry in the last few years?  

Barbara Kahn: 

Yes, it’s very interesting. I started writing my book in 2017, which in the United States was dubbed “the year of the retail apocalypse”. At the time, so many physical stores were closing. And the purpose of my book which, as you said, I published in 2018 was to say, no, retail is not dead. Just bad retail is dead. There are still a lot of very successful retailers, let’s look at what their strategies are. So the book featured retailers who were doing well before Covid. What’s interesting, of course, is if they thought the year of 2017 was the year of the retail apocalypse, they hadn’t seen anything until 2020, during which non-essential retailers were closed for three months in the United States and all over the world. Covid seriously affected the retail environment. 

But what I found was that the retailers who were doing well and who were successful prior to Covid flourished during Covid. So it wasn’t that Covid rewrote the rules, it was that Covid accelerated trends we already knew were happening. 

And we knew for a long time that there was going to be a growth in e-commerce retailing. We had seen that trend, not everybody was shopping online, of course, and not all retailers were directed towards e-commerce, but it was a trend that started pre-Covid. When the first Covid hit [the U.S.] during March through May, 2020, people were staying at home. We saw an incredible acceleration to digital and to e-commerce. And those retailers who were already understanding the role of that were in a much, much better place compared to retailers who hadn’t embraced digital commerce before. 

Liyan Chen:

So clearly, we’ve seen so many changes in our last few years and we really need a framework to understand it all. You’re known for the retailing success matrix, which is a simple but effective framework to understand why some retailers are more successful than others. 

Can you walk us through this framework? What was missing from the more traditional analysis?

Barbara Kahn: 

I’ve been a marketing professor for many years, and of course, I have an office full of books on retailing and marketing. And so you’d say, why do we need another one? Well, when I go back and look at all these books about retailing, basically what you see are all sorts of suggestions about products and about operations. 

Typically, people define retailing as being a good merchant. The best retailers were the best merchants and they understood the product. And I’m not saying that isn’t important — it’s vital for good retailers. But what my book focuses on is now the new value of the customer of looking at the world through the customer’s eyes.

And I think what we’ve seen as changes in marketing in the last decade is this focus on customer-focused retailing. So what does that mean? My framework is based on two principles of customer-based marketing. The first principle is very simple. If you believe that the customer has a choice and they’re going to decide what they want to buy, then the most important thing is to provide customer value. 

And this became even more important during Covid, I would argue. They want to buy products from someone they trust. That means that in addition to the product, the customer experience, the interaction with the retailer, other values over and above what the product delivers also matter.

The other principle is the principle of differential advantage. If you’re in a very competitive industry, then you’ve got to do something that’s better than the competition. Otherwise, the customers will buy from someone else.

In retailing, how does the competitor compete against other retailers and do something better? Again, I’m going to make it really simple. They either make it more fun, more pleasurable, more trustworthy, or they take away the pain. So these principles of differential advantage form the rows of my matrix. I have a two by two matrix and the argument is, if you want to be a winner, you have to be a leader in one of those four boxes. 

You see leaders like Zara, Nike. Luxury was really good at taking away the pain of the product. You see retailers who were winning like Walmart, Costco and Target in increasing the experience. You see retailers like Sephora or Ulta that provide an amazing customer experience. And when you take away the pain you see online, e-commerce giants in the U.S. like Amazon. 

Now what my research showed is that initially, being the best in one of these four quadrants is enough. Over time, as the marketplace gets more competitive, I found retailers needed what I call the two-quadrant strategy. That means they need to lean in on their leadership value on the first quadrant to find a second quadrant to win on. And then the other two quadrants where they weren’t exercising leadership’s value, they needed to be good enough. They needed to stay up with changing customer experiences. 

The overall strategy of the matrix is to find your leadership quadrant, build on that leadership quadrant to find a second quadrant. That’s the two-quadrant advantage. And then in the other two quadrants, monitor what customer expectations are and keep up, because people are constantly demanding more and more.

Liyan Chen:

There are a lot of insightful additions in this updated and expanded version of your book, but the most fascinating part is the new chapter on China. Why did you decide to dedicate an entire chapter to the innovations that you saw in China? 

Barbara Kahn: 

A lot of people have said this and I certainly believe that China is way ahead of the rest of the world in retail. And that there is a lot of innovation that was going on in China, and the rest of the world didn’t know about it. 

I was lucky enough in terms of timing to go to China in November 2019. And I spoke to a lot of my contacts that I had there through the Wharton School. We talked about the different ideas that are innovations in China, and I was really impressed. And so when I came back and then started revising the book, I had this experience of thinking through what is it that makes China retail just so far ahead of the U.S. That’s what I tried to discuss in that new chapter in the book.

And I talked about some of it comes from there’s a different culture in China in the U.S. — the idea of social consumer behavior or sharing things is more pronounced in China than in the U.S. E-commerce seems to be further along in China. The dependence on the mobile phone also seems to be further along, with the presence of these super apps like Alipay. That concept of a super payment app, where you can use social media and buy directly online through the payment process, etc. All the things that you can do in those apps. That concept of a super app doesn’t exist anywhere outside of China. 

The other thing that I was really impressed with was Alibaba’s model of New Retail and the idea of really incorporating e-commerce with physical stores. To me, China is way ahead of other retailers, anywhere else in that concept of the New Retail.

I do think what’s happened during Covid is that a lot of other people have recognized the benefit of that. And we are seeing a lot more movement towards that in the U.S. Amazon is definitely moving in that direction. You’re seeing Walmart move in that direction. Target is moving in that direction, the combination of seamless integration between what you see online with what people will experience when they go through the physical store. And that connection is made through the app. I think Alibaba was way ahead of anybody else on that, and the rest of the world is trying to catch up.

Wharton Online Coursera Barbara Kahn
Barbara Kahn, Patty and Jay H. Baker Professor of Marketing at the Wharton School of the University of Pennsylvania. Photo Credit: Barbara Kahn

Liyan Chen:

So that’s a great segue into your observation on Alibaba. What are some of the innovations of Alibaba that you think have the most impact on global retail?

Barbara Kahn: 

A lot of people think Alibaba is Amazon, but to me, Alibaba and Amazon are very different. They have very different philosophies and they operate differently. 

Alibaba is strictly a marketplace. It doesn’t do first-party sales. Amazon has first-party and third-party sales. So that makes it in a very different position. Amazon facilitates third-party sales. It provides services for its marketplace partners, but it also competes with the brands and sellers and resellers that sell on the marketplace, because Amazon also has first-party sales. 

Alibaba does what it can to make sure brands and sellers are on their marketplace. Particularly in Tmall, they support the brands [on the platform]. American brands that have gone on Tmall to sell to China choose Alibaba to do that because they believe Alibaba will support their brands. Whether or not these brands have the same faith, if they go on the Amazon platform, that is not the same because Amazon also competes with some of these brands.

Taobao is a completely different thing. In our universe, that is closer to something like eBay, which is a customer-to-customer, peer-to-peer platform. It’s not a B-to-C model in the same way Tmall is. And the advantage of Taobao is its large assortment. Anything you could possibly want is available on that. So the assortment is tremendous and the customer experience is a lot of fun. It’s like a treasure hunt, searching for what you want or search for. 

In general, I put Alibaba in my matrix on the top row, offering an endless assortment and a fun, pleasurable customer experience. Because Alibaba is so big, they can also offer incredible convenience and low prices. But in my mind where they differentiate is an incredible product assortment and an incredible treasure hunt, fun customer experience.

Whereas I put Amazon in my matrix on the bottom row, they facilitate frictionlessly. They want it to be as easy as possible. Search on Amazon is very different. Amazon is about efficiency, spending as little time as possible on the site, whereas typically customers on Alibaba spend way much more time on the site because it’s fun. 

So, I would think of Amazon as a marketplace and retailer in e-commerce, as someone who takes away the pain and Alibaba is somebody who increases the pleasure. 

Liyan Chen:

It’s very interesting to see from your perspective how Alibaba is plotted on your success matrix and what we’re doing right on your quadrants. 

I want to go back a little to the two markets. You talked about the consumer differences in China versus the U.S. In your book, you specifically talked about the two areas of retail, where China is ahead of the US, there’s social commerce and physical retail. What’s really giving the China market an edge in these two areas?

Barbara Kahn:

The real use of livestreaming. When I went to China in November in 2019, I started to see this. But I understand during 2020, this grew by leaps and bound. The idea of shoppertainment. That’s a completely new definition of what pleasant pleasurable shopping is a lot of the Chinese retailers leaned into this idea. And during 2020, it really took off. And so that you have some of these mega influencers who are live streaming three or four hours a day, every single day, they have legions and legions of dedicated followers who will do anything that these influencers say.

And the idea of these influencers is to maintain authenticity so that their followers will trust them. And so, you see the influence of KOL and KOCs, and the idea of shopping now as a pastime, as entertainment, not just about acquiring things, but also being entertained, learning all sorts of things. And along the way, making some purchases.

That idea is slowly coming to the U.S. but it’s definitely not here to the degree it was in China. And it’s only very recently that we’ve seen a move in the US in this direction. That again is one of the things that happened during Covid, particularly the youngest consumers, the Generation-Z consumers. A lot of the research was showing they spend a lot of time online on gaming platforms, in short video platforms. These ideas of these very, very short videos, providing content and entertainment that is coming to the United States. But it’s my understanding that that existed in China before it was here, and really, really grew exponentially during Covid.

Liyan Chen:

So finally, we all know that the pandemic has changed retelling forever as we know it. We have a lot of listeners who are retail leaders from around the world. What are your tips for them to stay competitive in this post-Covid world?

Barbara Kahn:

Well, I go back to the two principles of marketing, the principle of customer value and the principle of differential advantage, which are the two principles that underlie my matrix. Essentially, you’ve got to monitor what the customer wants, and we saw a rapid acceleration in customer demands during Covid any retailer, who couldn’t pivot to meet those demands, was going to be in trouble. And that’s just a rule forever. 

You have to understand what the customer wants. Customers having spent the last 18 months stuck in their kitchens like I am, are expecting better delivery, better e-commerce performance. They liked the idea that when they can go to the store, there’s an integration between what they’ve already been doing and what they see in the physical store. Those expectations aren’t going to go away. And so I think, in what I call my frictionless quadrant, almost every retailer has got a ramp-up there.

You gotta be sensitive to what people can afford and what they’re willing to spend. So prices are always a very important aspect. And then as life is changing, who knows what the new normal is going to be. There’s a lot of questions out there, but as that changing customer behavior happens, it’s gonna make people want to buy different things. We haven’t even talked about other, other trends that are happening like sustainability, climate change, the growth of resale. All of those trends also affect what kind of products people want. 

And this new trend of really prioritizing customer experience, making things as easy as possible. I want it when I want it and making things, if I go into a physical environment or I choose to spend more time on a website or on a platform, making it more fun and entertaining that whole idea of customer value, I don’t think that’s going to change in the future. I think you’re going to have to pay more and more attention. And as the market gets more competitive, you’re going to have to meet these customer needs and values better than the competition, or frankly, you’re not going to make it.

Liyan Chen:

That’s great. And what are some of the lessons that we can learn from some of the successes and innovations that you observed in the China market?

Barbara Kahn:

I think one of the things that are going shake out eventually here is this whole idea of this payment process. We’re already moving to that idea, so that you’re seeing more Apple Pay here, and less use of cash, more frictionless payment paying on your phone. Right now, the U.S. still has all these different apps. It’s not all connected. You don’t really have a marketplace linked with payment as easily as you do in China. So I think that move to those super apps. I think you’re going to eventually see a closer move to that in other parts of the world.

I do think this changing world of livestreaming and key opinion leaders. I think that we’re already seeing movement on that in the US, so I think we’re going to see a lot more there, especially the idea of gamification and how that can be used linked with shopping. 

The other thing I think that the U.S. can learn from China is they’re ahead of us on the seamless integration between online, offline and mobile commerce. And so the idea of omni-channel is just starting to grow here, but I think it has been in China for a while. And that’s another thing I think China’s been ahead of us on.

Liyan Chen:

Barbara, I really enjoyed reading your book. We have lived and briefed the industry. I have to say in the beginning, I thought your matrix is very theoretical. But once I read through the examples and how you put it so concisely, I feel like it really gives me that framework of understanding why some company is really more successful than others. 

Barbara Kahn:

I appreciate you saying that. I have found it to be incredibly useful myself. It’s deceptively simple. But once you have that matrix in your head, it’s so easy to organize everything else that you see. 

Liyan Chen:

Yeah. I learned a lot both from reading and recording this podcast today. Thank you, Barbara, for sharing all your insights.

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“Alicast” is a production of Alizila, the corporate newsroom of Alibaba. It’s produced by Monica Suk and edited by Alison Tudor-Ackroyd. If you’re in a podcast app already, please follow “Alicast”. If you’re listening on Alizila’s website and want each new episode of “Alicast” delivered to you as they’re published, download any podcast app, then search for “Alicast” to follow the show. Thank you for listening.

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