Chinese VC Funding in Cashierless Stores Demonstrates a Diverging Approach to Retail Innovation

Various market estimates suggest that between 20 to 50 Chinese startups have raised a total of over US$1.5 billion in Venture Capital (VC) within the cashierless retail sector. Since 2016, startups such as BingoBox, Bianlifeng, Xing Bian Li, Gump Come, Guoxiamei, Xiao Weidian, and more have each raised tens of millions of dollars’ worth of investment over several funding rounds. Venture capitalists are seemingly eager to throw money at this latest retail trend that is taking China by storm.

This money is flowing internationally, with (mainly) Asian, European, and American venture capitalists funding projects in China, with cash also returning to the West for other smart retail projects and technologies. VC firms and corporate investors supporting this new wave of smart retail in China include Google, Tencent, JD.com, Baidu Ventures, Ant Financial (Alibaba Group), China Walden, ZhongAn Online, Deutsche Telekom Capital Partners, GGV Capital, Qiming Venture Partners, and many more.

VC-backed startups are not the only ones which are betting on cashierless retail. Major retailers such as Alibaba, JD.com, Suning, and 7-Eleven are opening full-scale retail stores as part of their future plans.

With tens of thousands of these stores already in operation and over 200,000 deployments expected by the end of 2020, the growth rate of cashierless retail in China is astonishing.

However, for consumers familiar with Amazon Go’s “just walk out” model, many Chinese equivalents will be almost unrecognizable by comparison, largely due to the technologies and formats for which these startups are opting. The majority of these emerging retail stores in China resemble something between a smart vending machine and small convenience store. They rely on a combination of technologies such as facial recognition, Radio-Frequency Identification (RFID), sensors, computer vision, and Artificial Intelligence (AI) to match individuals with the items they select, charging them accordingly.

The rapid growth of cashierless retail in China is causing some surprising reports from both domestic and foreign media. Among the issues being reported include customers being trapped inside stores, customers being incorrectly charged, barcodes failing to scan, and stores only allowing one user at a time. These major complications are indicative of the speed at which investment has been secured and the speed at which the stores have been deployed, highlighting some potential long-term problems for the booming Chinese cashierless retail sector.

Many of these stores have prioritized technology above the core benefits and drivers of unmanned automated retail. Eliminating checkouts is supposed to make the shopping experience faster and smoother. If some of these retail stores have teething problems from the start, long-term consumer adoption can be threatened, impacting the return on the vast investments which have been made thus far.

The rapid pace of development, which can be a blessing and a curse for Chinese startup firms, has meant that long-term growth may be compromised. Many of the deployments rely on technologies (such as RFID) and barcodes that are not robust or cost-effective enough to facilitate a reliable and smooth cashierless shopping experience. For example, RFID has failed to take hold in markets outside of fashion and soft goods as it is cost prohibitive in those sectors. Some cashierless retail companies have therefore announced plans to phase out the RFID technology in favor of computer vision–enabled product detection. If stores are deployed at scale before the perfect solution is found, retrofitting an entire fleet of stores with updated technologies will be a major expense and waste of investment money. It is for this very reason that Amazon Go went through years of rigorous development and operational testing before being opened to the public. Within this time, several technologies, including RFID, were tested and abandoned during the search for the right combination of technologies. Now more U.S. startups and tech giants (such as Microsoft) are diligently exploring similar models.

However, there are some promising upsides to the growth rate of cashierless retail in China. These startups have shown that a clear abundance of talent is being attracted by the smart retail sector. The lower materials, manufacturing, and general business costs from which Chinese firms benefit is also manifesting itself in rapid Research and Development (R&D) rates. It demonstrates a different mentality to R&D and VC funding. With lots of small companies deploying rapidly in a busy market, a “fail fast” trial-and-error approach is favored over painstaking, expensive, drawn-out R&D phases.   

It would be too bold to say cashierless retail is simply a fad, but it hardly seems outrageous to suggest that half of these 20 to 50 startups could be out of business within five years. Instead of going by the old business mantra of “follow the money,” investors, retailers, and market professionals should be looking at the results each store achieves and the way technologies are deployed to determine long-term success.

With thousands of cashierless stores already operational in China, the ideal cashierless retail store which perfectly blends the right combination of cost-effective technologies is likely to exist somewhere. In reality, this means that there are hundreds of stores which will likely only be a runner up or even completely fail in the race to win at automated retail.

It is easy to get caught up in such a fast-growing, cash-injected industry, but there is a reason (besides higher development costs) why the United States and Europe have been cautious to roll out similar stores. For retailers and startups outside of Asia, the risks of failing to provide a complete service which customers will use again and again are higher. Attitudes to technology in the United States and Europe are in some sense more skeptical. Not only is there a greater prioritization of personal privacy (making facial recognition and biometrics a no-go area for retailers), but customers will also question any technology unless it adds serious value to the retail experience. Practical functionality will always win over novelty.

When looking at cashierless retail investment and deployments in the United States and Europe, a simple dollar for dollar (or yuan for yuan) comparison will paint a picture of a vastly more advanced Chinese market. Instead, analysts should highlight the two vastly different approaches to the same goal: transforming physical retail in to a frictionless, digitized experience.

This insight is part of ABI Research’s coverage of the Smart Retail sector. It precedes the publication of an upcoming report entitled Smart Vending Trends and Market Opportunities, to be released in August 2018.