Li & Fung

From retail experiments to start-up incubation - how Victor Fung’s Explorium is playing a role in his trading firm’s long term survival

PUBLISHED : Saturday, 07 October, 2017, 12:02pm
UPDATED : Sunday, 08 October, 2017, 11:22am

Off the main road about half an hour’s drive from Shanghai’s Hongqiao airport, Hong Kong trading, supply chain management and retailing major Fung Group conducts experiments on new retail business ideas and technology.

Aptly named Explorium and billed as “the world’s first retail business model testing platform”, the complex – located in its mainland Chinese headquarters – looks like a members only shopping club.

In operation for two years, some 2,000 visitors a week browse through its dozens of shops and make purchases using mobile devices, while wearing data recording wrist bands that track their movements.

“It is our omnichannel retail laboratory for the China market ... nobody quite knows how the market will evolve,” said Susanna Chiu Lai-kuen, group chief representative of eastern China at Shanghai-based Li & Fung Development China, the mainland business development unit of Fung Group.

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Omnichannel refers to the combination of online and offline operations by retailers, so that customers’ needs are met seamlessly whether they shop by desktop or mobile device, telephone, or bricks and mortar store visit.

“Many brands have been getting on the bandwagon of e-commerce, affecting sales at shopping malls,” Chiu said. “Malls increasingly have to attract visitors with unique experiences ... a good example is the free Ferris wheel rides at the Joy City mall in Shanghai.”

Privately held Fung Group comprises listed global merchandise sourcing and supply chain manager Li & Fung, branded fashion and accessories design and distribution firm Global Brand Group, premium menswear retailer Trinity and convenience stores operator Convenience Retail Asia.

It also includes unlisted units such as the Asia operation of retailer Toys R Us, children’s clothing and accessories retailer Fung’s Kids, and Asia fashion retailer Branded Lifestyle which carries both foreign and in-house brands.

The Explorium’s around 40,000 members, mostly the group’s employees and their relatives and friends, can browse for products ranging from new offerings of international brands to heavily discounted off-season fashion.

Fung Group and its business partners operate temporary “pop-up stores” of a few dozen international and in-house brands in the Explorium.

Through in-store sensors, they collect data on Chinese consumer behaviour to better plan their market entry or expansion.

Some of the brands include French children’s clothing brand Petit Bateau, the ubiquitous Japanese Hello Kitty brand, American toy retailer Toys R Us and US department store Macy’s with which Fung Group has an e-commerce joint venture in China.

The sensors and data analytic tools help brand and store owners more accurately measure and better understand store traffic, how shoppers navigate the aisles and capture their response to promotion campaigns, so that they can better forecast demand and adjust their marketing strategies.

More importantly, they can attempt to find out why certain products are selling well while others are not – before it is too late.

But the Explorium, the brainchild of group chairman Victor Fung Kwok-king of the 111 year old company founded by his grandfather, is more than a retail laboratory.

A planned relaunch mid this month will see part of the revamped “Exploriuim 2.0”, occupying 250,000 square feet on two floors, provide space dedicated for the incubation of technology start-ups.

“Explorium 1.0 focuses on front end retailing, where we experimented with various business models and new technology applications,” Chiu told the South China Morning Post.

“Explorium 2.0 extends from front-end distribution back up the supply chain, to foster the adoption of technologies that will enhance our product delivery speed and flexibility, through innovation and digitalisation of our sourcing and logistics operations.”

These carefully picked young companies – some of them Hong Kong or overseas ventures seeking to crack the mainland China market – have the technologies that may help Fung Group better adapt to the fast changing retail environment.

“Many overseas Chinese artificial intelligence experts have come back to China to start their own businesses. We can tap into their expertise and innovation to help transform our traditional businesses,” said Paul Wong, vice president of innovation at the Explorium.

These companies have yet to prove their business case by commercialising the technology in a real or scaled-up business environment, which can be provided by Fung Group and its network of partners.

“Here, we aim to foster a globally connected ecosystem covering both the manufacturing supply chain and retail operations,” Wong said. He added that four to six start-ups are expected to establish operations there over the next six to 12 months.

The creation of Explorium epitomises how traditional merchandise producers and distributors around the world are adapting to quickly shifting customer needs and retail business models in the digital age.

“One of the difficulties experienced by our [brand and store owner] customers is not knowing what consumers want amid fast changing fashion trends,” Wong said.

“Through digitisation of the supply chain we can better understand the end customers and upgrade the factories that we work with to deliver what is in demand.”

Wong said it is not the first time Fung Group has cooperated with start-ups.

“We had an Israeli start-up that designs games for retailers to better engage with their customers ... after conducting experiments at our retail lab and obtaining our endorsement, they succeeded in opening markets in China and elsewhere,” he said.

Li & Fung, the group’s flagship firm, has grown from a small Chinese porcelain and handicraft exporter in the early 1900s to a multinational with 22,000 employees in over 40 markets in the Americas, Europe, Africa and Asia, primarily on growth of traditional big box retailers serving middle class consumers in western markets.

But the rise of online shopping platforms dominated by a few giants has eaten into the market share of traditional retailers which have been shuttering stores at an alarming rate, denting the turnover and profits of Li & Fung.

The entire supply chain, from factories to logistics firms, has been under pressure to reduce new product delivery lead times and increase order quantity flexibility, so that retailers can cut inventory logistics costs.

“In the past, it would take nine months to develop a new season of fashion. Now several products are expected to turnaround in one season by some clients,” Wong said.

At the Explorium, Fung Group explores and implements technology such as rapid product prototyping that cuts product development time from months to days, virtual 3D stitching of garment samples, “smart studios” that enable sample photos be used online with 3D effects in eight seconds from taking the photo, and autonomous warehouse robots that slash labour costs.

Wong said besides direct adoption of some of the technology from the start-ups, Fung Group will also act as an accelerator in technology innovation, including making potential investments in the start-ups.

By working with external incubators, which select and finance the most promising technology start-ups, the company hopes to have first hand access to innovative ideas that can help it navigate China’s competitive retail market, where the fast growing middle class is its prime target for growth.