Not commonly prevalent in the news, Rocket Internet’s venture Jumia (formerly known as Africa Internet Group) has managed to stay under the radar while slowly dominating one of the largest developing internet markets in the world.

Only after speaking with a team of Jumia Vendor Success Senior Managers was I able to realize the massive potential of the continent’s top ecommerce player, and how it is not so different from Southeast Asia.

“Like every other region, Africa has its own challenges but the internet users [in Africa] are more than that of the US, UK and actually, both of them combined,” said Gaurav Jain, Head of Vendor Success, Jumia Group. “The number is behind only India and China.”

ecommerceIQ

Source: Statista, Africa has over 360 million internet users

During a knowledge sharing session held at aCommerce fulfillment center in Bangkok, ecommerceIQ spoke with the Jumia team to understand the unique properties of their ecommerce ecosystem, and uncover why the company was more similar to Go-Jek than the commonly perceived Lazada of Africa.

Africa’s ecommerce behemoth: The sum of all parts

To understand the extent and ambition of Jumia’s business goals in Africa, it’s important to know that Africa is a continent broken up into 54 countries and according to the company, consists of 1.3 billion consumers and 17 million SMEs/merchants.

ecommerceIQ

Jumia, started in 2012, was initially an e-tailer selling only electronics and fashion items when it moved into a marketplace model in 2015. It has since become the largest internet player in Africa and first unicorn leading in six regions: Egypt, Ivory Coast, Nigeria, Kenya, South Africa, and Morocco.

The company not only operates in 23 countries, but has effectively squeezed out the ecommerce players that came before them, namely Kilimall and Konga.

It’s safe to say that Jumia Group is no longer a simple, horizontal marketplace and is responsible for pumping out ventures Rocket Internet is famous for copying and pasting in developing markets: Jumia Food (foodpanda), Jumia House (Lamudi), Jumia Car (Carmudi), Jumia Jobs, Jumia Deals, etc.

But launching online services in a region where ecommerce is only 0.5% of total retail sales is not cheap.

The company posted a Sh14.9 billion ($148 million) loss before tax and other costs in December 2017 compared to Sh11.3 billion the year before.

While it doesn’t paint the entire picture, severe losses was one of multiple factors that spurred the company to create the Jumia One app combining its top services in one place. The app launched in Nigeria earlier in March and allows customers to shop online, order food, buy airline tickets and pay cable and electricity bills.

ecommerceiq

“People like to shop on the mobile app. They prefer to have ecommerce handy so they can place an order on the go. The Jumia One app is growing, 42% to 56% in terms of mobile share.”

Other factors for launching Jumia One included:

  • It makes more sense to invest heavily into a single platform versus managing and marketing multiple brands
  • Consumers don’t have enough storage on their mobile phones to download multiple apps as mentioned by a user
  • Mobile penetration in Africa is expected to reach 50 percent in leading countries over the next five years – meaning over 300 million smartphones will be added to the market
  • The app is another revenue stream as Jumia marketplace merchants can buy advertising space for their products
  • It also allows the company to cement themselves as a strong payments player, vital for mass adoption as demonstrated by Alibaba’s Alipay

The company will dabble in micro-financing to merchants given its rich data. A win-win to give merchants more capital to invest in their online businesses and drive more traffic back to its platform.

“We know the patterns, the revenue, the number of orders. We lend out money so they can manage their shops,” comments Gaurav. “It’s a growth opportunity to accelerate their growth as fast as possible.”

“They can use mobile money, not only cash.”

The all-in-one app draws parallel to one of Southeast Asia’s unicorns. Jumia is becoming the superapp in Africa – a Go-Jek for 1.3 billion customers.

ecommerceiq

What are then the challenges holding back Africa’s enormous potential? The typical it turns out.

Challenges in Africa mirror Southeast Asia’s own struggles

Africa’s obstacles preventing exponential growth of ecommerce are the same that plague Southeast Asia’s internet economy.

  1. People still want to visit offline stores for the look and feel to buy products
  2. Lack of trust by both customer and merchants who don’t believe in digital transactions
  3. Fragmented markets, different languages, customs
  4. Cash based society
  5. Underdeveloped infrastructure
  6. Shortage of digital talent and training/education

“They need to know that ecommerce is not a Ponzi scheme. Trust is a large issue. We show them how their products will sell, we show them the importance of visibility and assortment until they have confidence in us and they grow their business so it’s mutually beneficial,” says Gaurav.

“Sellers with offline shops aren’t used to waiting for payment. Cash flow is a problem with our vendors,” says Damola Ajayi, Head of Vendor Success, Jumia (Nigeria), when asked about his challenges. “We guarantee a 7 day payment cycle from day of shipment and even daily for our gold vendors.”

The company paved the way for other ecommerce players to come in, but currently there is no standout competitor apart from the expansion efforts of Chinese companies and the country’s predisposition for offline retail.

Creating the next 500 millionaires in Africa

What was most impressive about Jumia wasn’t its ‘superapp’ or the sheer size of the African market, it was the dedication and enthusiasm exuberated by each Jumia employee I met.

ecommerceIQ, Jumia

They understood the massive challenges ahead and were candid about how to tackle them.

Lack of vendor trust, digital skills or education?

  • Launch training 2 to 3 times a month to advise on marketing, pricing, and inventory management
  • Maintain a ‘fair’ playing field by enabling local businesses to offer COD (cash on delivery), whereas cross-border merchants don’t have this option
  • Spend heavily on marketing for its high performing vendors
  • Share insightful data with vendors on a weekly basis about top selling products across multiple categories, propose assortment and price forecasts

Lack of talent?

  • “The company brought in expats who managed senior roles and groomed locals to move up,” says Damola. “This was necessary for our early growth.”

Lack of cashless adoption?

  • Add convenience through JumiaPay allowing payment by debit card or bank accounts
  • Offering cash on delivery

ecommerceIQ

“We are able to cover the entire vendor journey,” comments Gaurav. “We offer services at every point the customer needs.”

So how are these band-aid solutions working out? At the knowledge sharing session, top performing Jumia vendors shared their experiences with me:

“If you dedicate yourself to Jumia in top product categories, mobile phones, there is no need for you to go offline. You can grow 70% [in sales] if you know what you’re doing.”

“Target the demands of the market and Jumia helps you focus. They will give you foresight.”

“We started with Jumia since 2013, we were selling a small number of products. During Black Friday, we sold 1,000 phones but for “Mobile Week” in March, we sold 15,000 Xiaomi phones, and broke the record for the Middle East.”

The company, while struggling with the perils of other companies prioritizing high growth over all else, is taking baby steps to expose its merchants to the world’s possibilities.

“We [Jumia] want to enable African customers to enjoy best products from the world at their doorstep,” shares Gaurav.

What can I say? The more the merrier.

 

Editorial comment: a quote was adjusted April 22 8:51am

In 2015, Thailand’s insurance sector was valued as the 8th largest in Asia, with an annual growth rate of 4.5%. Thai residents spent approximately $334 on insurance every year, accounting for an overall penetration rate of 5.5%.

Life insurance accounts for the largest segment within the insurance industry in Thailand. These are annualized premiums paid out in the event of death or permanent disability; or after reaching a certain age. If you subtract life insurance from the overall industry pie, premiums decline considerably to $100/capita.

Photo credit: Thaire.

And this is where the largest potential for growth lies.

Thailand is already considered to be an upper-middle income country by the World Bank, with a GDP per capita of $6,033. When you combine that with a rosy economic outlook, it’s straightforward to predict that the size of motor and travel insurance will rise, too. Higher disposable incomes will lead to a greater outlay on cars and vacations – and the insurance industry is bound to benefit.

But one of the problems currently plaguing Thailand’s insurance sector is that distribution channels are antiquated and riddled with inefficiencies. To purchase an insurance plan, you normally have to arrange for a broker to meet you, prepare an unwieldy amount of paperwork, and wait for the bureaucratic red tape to churn its wheels.

The entire process is frustrating from a consumer standpoint and expensive for insurance companies too; broker commissions can eat into premiums and the process is only scalable by hiring a greater number of agents.

In 2016, a total of $5.1 billion in non-life insurance premiums were solicited via brokers, agents, and bancassurance channels. Precise figures for online distribution aren’t available, but the channel did grow by 25% as compared to 2015.

One of the startups that’s trying to simplify the insurance acquisition process is Frank. It offers motorcycle, car, and travel insurance direct to consumers in Thailand via its website. Consumers apply for their insurance product of choice, receive an instant quote, and for certain products, can have the policy in a few seconds. It’s fairly hassle-free.

Frank’s co-founder Harprem Doowa admits they’re still a small player in a very “traditional industry” but he affirms their product is largely positioned towards millennials and future Thai generations who are far more comfortable transacting online and will continue to carry these preferences along with them.

“This will take time,” he adds, referring to overall adoption of Frank’s product.

Harprem ecommerceIQ

Harprem Doowa, Co-founder and MD of frank.co.th

Innovating the insurance value chain

Another key challenge for Frank is ensuring that all parties involved in the transaction are equally adept and comfortable with technology. At the end of the day, it’s another distribution channel and isn’t inherently marketing its own product.

Frank’s policies are underwritten by companies like Bangkok Insurance and AXA – large, unwieldy, and geriatric organizations resistant to systemic change and constant reinvention.

“Insurance companies themselves are still not ready with the backend to underwrite policies immediately. Most still require manual approvals,” explains Harprem.

Another problem is that many potential customers opt out of the process because they’re unfamiliar and uncomfortable with scanning and uploading documents. They require the support of an agent or customer support advisor to complete the transaction – driving up costs and somewhat negating Frank’s value proposition in the first place.

The third aspect hampering progress in insurtech are Thai regulations: Harprem explains that while they protect consumers, there’s a real bottleneck towards online conversions because of the multiple in-person verifications required.

Value-add Partnerships

The fledgling insurtech company has experimented with a number of ways to make it more visible and enticing to customers. One of these is partnerships with popular ecommerce players like Lazada, Grab, honestbee, and foodpanda.

ecommerceIQThis may seem like a contrasting list of partners – how does quick food delivery equate to online insurance? – but Harprem is upbeat about the benefits its brought to the table.

“Doing partnerships with many companies increases our exposure 30X and when [consumers] go and search online for insurance, they see Frank. It wouldn’t be the first time and therefore they are more likely to buy from us,” he explains.

That’s a critical takeaway – startups aren’t flush with the kind of cash that large organizations have, they have to stay lean. By leveraging relationships with online companies, even something unsexy like insurtech can be galvanized into a winning brand.

“The more customers see your brand, the more likely they are to buy insurance from you at a later stage,” exhorts Harprem.

Where do the opportunities and threats lie?

Of course, it’s possible that large insurance companies eventually sidestep players like Frank and start selling direct to consumers via web channels but this will involve channel conflict.

Specifically, it will alienate the vast number of brokers who currently provide the bulk of insurance revenues. Another complication is the sheer time insurance companies take to make decisions, hampered by bureaucracy and lengthy internal approvals processes.

Harprem says the team is completely aware of this but isn’t overly worried. Frank’s nimbleness means it can continue innovating and pivoting as and when the need arises.

“It took one of our partners two years to update their home page.”

There are two additional areas which, if done right, could provide considerable value in the coming years. One is ‘microinsurance’, or insurance for low-income households that provides protection for health risks, property damage, or other specific perils.

Harprem says there’s definitely a business case for it in Thailand but adds that it’s not a priority for Frank right now.

The other opportunity is changing fintech from just another distribution channel to overhauling the entire product in itself. That’s where technologies like blockchain have the greatest potential.

In Singapore, this is already becoming a reality. Electrify, which allows users to buy electricity on the blockchain, closed a $30 million ICO yesterday. Insurtech company PolicyPal, which is powered by blockchain technology, allows underbanked consumers to purchase products like agriculture, property, life, and personal insurance.

“This, in my humble opinion is true fintech,” says Harprem.

Most parents will buy rattles and dolls for their children from a very young age up until the child hits his/her mid-teens – with just the types of toys purchased changing as the child grows older.

The potential of the global toys & games industry is heavily influenced by demographic trends such as the number of households and birth rate. There’s also a seasonal variation in the types of toys & games currently popular around the world; depending on blockbuster action flicks, emerging WWE stars, and fashion trends.

Thailand’s demographics in particular hint at a widening market for the toys & games industry. The natural birth rate in 2017 was about 240,000 – this refers to the number of births in a year subtracted from the number of deaths – representing a population growth rate of about 0.4%.

Population growth rates peaked in the 1970s at about 3% but aggressive public awareness campaigns by Thai authorities have brought this figure down substantially.

At the same time, annual household income more than doubled from $1,089 in 1999 to $3,276 in 2015. Thai families might not be growing as quickly as before but they definitely have more to spend.

Source: Ceicdata

Higher disposable income also means the sale of toys & games isn’t restricted to children only. Older consumers are forecasted to impact sales too, especially in categories like action figures and accessories.

According to Euromonitor, the value of Thailand’s toys & games industry was estimated to be worth US$376 million in terms of sales volume in 2015. The same report forecasts sales to increase to US$541 million by 2020, or by an average of 9% a year.

That’s a sizeable chunk that brands like Hasbro and Mattel should be eyeing carefully, especially as internet retail is predicted to grab a larger piece of the pie in the coming years, making it critical to double down on mobile/web acquisition channels.

Where do Thai consumers buy toys?

ecommerceIQ initiated a survey to understand online consumer purchase habits for toys & games in Thailand. There were over 300 participants spread across the country.

What was interesting to find was the availability of offline retail wasn’t a bottleneck to transacting online. Only 2.9% of respondents said they ignore online channels because of malls or shopping centers.

The largest inhibiting factor for online purchases is the prevalent lack of trust.

Thai people feel either the pictures online are either heavily photoshopped or they’re usually disappointed when receiving the product after purchasing.

Top reasons why customers don’t shop online for toys in Thailand. Source: ecommerceIQ

But not all is lost. Survey respondents in the 18-24 & 25-34 age category were, on average, 43% likely to indulge in online purchases for toys and games. Those were the two youngest tiers surveyed and it is likely as they grow older they’ll carry these preferences with them.

If online channels optimize the overall buying experience, it’s plausible that the proclivity towards web shopping will increase when it comes time for them to buy toys for their children.

Another encouraging trend that forecasts enhanced ecommerce market share in the future is the amount that users spend online. People with higher basket sizes are more likely to shop online. The largest segment actually spends north of $100/order.

And what toys are people in Thailand purchasing exactly? The survey shows Nerf guns are wildly popular for online purchases along with board games like Monopoly and Transformers action figures.

The overall survey results are consistent with Euromonitor’s analysis of the toys & games industry in Thailand that says the popularity of internet shopping is expected to continue its trajectory of rapid growth, fueled by younger shoppers.

40.1% of this category were secured by web channels in 2015, as compared to 13% in 2010 (although this does include video games, which our survey results excluded).

Euromonitor also makes another prediction: traditional toys and games distributors are expected to expand their internet retailing options over the coming years as more users flock towards this medium.

How can toy brands take advantage?

It’s not enough to list your products on a marketplace and engage in paid campaigns every now and then. Users don’t trust online advertisements; they’re eager to purchase but the one thing holding them back is the nagging uncertainty that the product won’t match expectations.

Often they’ll visit an offline store to see the product up close and personal before purchasing. Little wonder why influencer marketing is becoming so important in a brands’ marketing mix.

Influencer marketing platform MuseFind says 92% of consumers trust an influencer more than an advertisement. And with adblockers flooding browsers, it’s likely that your target consumer simply won’t even view your advertisement, no matter how much money you pour into the campaign.

In Southeast Asia, brands can take a cue from China’s bold forays into live streaming. Quartz predicts this is now a U$5 billion industry with once ordinary citizens catapulted into superstardom simply by broadcasting their lives for the world to see. Such online influencers routinely recommend products they use and their audiences follow suit. Evocative marketing is becoming the new normal.

Other than live streaming, product reviews by YouTube stars is another channel that potential shoppers gravitate towards. An unboxing video can help lower the trust barrier significantly as users know what to expect inside the package.

Some juvenile YouTube stars have racked up millions of subscribers on their page with their videos routinely garnering 10 million+ views.

Children need to feel they’re on the same wavelength as their peers, so if it’s ‘cool’ to buy a new toy then they’ll pester their parents until they get their hands on it.

And what’s cool is what’s trending on the internet.

What’s Pinduoduo?

Pinduoduo, or PDD, is a social commerce app founded by Colin Huang, an ex-Google engineer, in September 2015. Only a couple of years old, PDD has become the fastest growing ecommerce company in China. It raised $100 million in 2017, is backed by China’s Banyan Capital and Tencent, and valued at a whopping $1.5 billion.

Source: Crunchbase

As of Feb 21, 2018, PDD ranks #3 overall in the Chinese iTunes app store ranking for free apps, after popular apps like Tik Tok (Douyin) and WeChat, and ahead of other shopping apps like Taobao. PDD went from 100 million yuan ($16 million) GMV a month in early 2016 to 4 billion yuan ($630 million) GMV a month by 2017, putting it in fourth place behind Alibaba, JD and Vipshop.

How does Pinduoduo work?

Users can download the PDD app or access it within WeChat. Like any ecommerce platform, PDD offers products across a wide range of categories from food to fashion. However, unlike Tmall and JD, PDD incentivizes users with discounts to invite friends to buy in groups.

 

For example, one container of Similac Advance Infant Formula Powder costs 59 yuan if you buy alone but only 35.5 yuan if you can get one other person to buy it too. In the screenshot below, a total of 1,822 pairs have “group-purchased” this item already.

 

 

In addition to group discounts, PDD also incentivizes customer acquisition. Getting users to follow the PDD WeChat Official Account, install the app, and sign up via WeChat login will earn them free products.

PDD also offers cash red envelopes worth 5-20 yuan to users for each friend they get to download the app and register. The entire system is then gamified through a public leaderboard.

Wait, is this new? Didn’t Groupon invent social commerce?

Groupon did arguably pioneer the group buying concept. In its early days, a certain number of users had to sign up for the same deal in order for everyone to receive the voucher. But unlike PDD, there wasn’t a direct incentive; users had to sit back and wait for anonymous users to tip the scale.

This mechanism was quickly abandoned to scale faster with minimum thresholds that acted more like gimmicks.

Groupon was labeled “social commerce” at first but in its later years, lost its social aspect.

Source: wiredtech on Flickr.com

Let’s take a step back and look at the definition of social commerce, according to ConversionXl:

“Social commerce is defined as the ability to make a product purchase from a third-party company within the native social media experience.”

Groupon emerged in the pre-mobile age of 2008 when most consumers still transacted via desktop, especially in the company’s US home market. Back then, less than 1% of ecommerce transactions were via mobile acquisition channels.

In addition, the company’s main distribution channel was email newsletters, a slow and high-friction medium and payments weren’t seamless either as users relied on a credit card or PayPal.

Now looking at 2016 in China – PDD’s first full year in operation – WeChat is the country’s dominant “super app” and leading medium to socialize online with 889 million Monthly Active Users (MAUs) by year end.

71% of ecommerce now takes place on mobile, creating a flattering backdrop for the rapid rise of PDD, which started out as an app on WeChat.

Paying for products on PDD is also remarkably easy because the app makes it automatic. After the first payment, users can opt for one-click payment via WeChat Pay that don’t require passwords.

Desktop usage, clunky email newsletters, and credit card payments limited Groupon’s true social commerce potential. Where Groupon failed, PDD is succeeding because of an ecosystem of mobile-first users and WeChat’s features that make it a super app.

Will PDD come to Southeast Asia?

Why not? Southeast Asia ecommerce is already being carved up by Alibaba and Tencent. Lazada and Tokopedia, two companies owned and invested in by Alibaba, dominate the B2C and C2C space on one end and Tencent-invested JD, Shopee, and Go-Jek are on the other end.

With Southeast Asia’s horizontal ecommerce market being consolidated into a few properties like Lazada, Tokopedia, JD and Shopee, there isn’t as much opportunity in the space as before.

New ecommerce players have to focus on dominating a specific, vertical category or provide a competitive advantage through means other than outspending peers in advertising and/or coupon subsidies.

This is where a model like PDD fits snuggly.

It also helps that one of PDD’s biggest investors is Tencent, which already has its eyes set on the rapidly growing Southeast Asian market.

Will the PDD business model work in Southeast Asia?

To determine if the PDD model would work in the region, we need to identify the criteria that were conducive to its success in China:

1. Lack of distribution channels / expensive distribution channels

If you strip away all the hype, PDD’s competitive advantage is in its customer acquisition strategy. Instead of relying on expensive channels like display advertising or paid search (e.g. Baidu ads), PDD is paying its users to get more users. For example, CPCs alone on Baidu can range from 5 to 25 yuan. Note these are clicks, not even users acquired.

Southeast Asia (excl. Singapore and Malaysia) is very similar to China in terms of lack of channels, due to a similar “no-tail” ecosystem. Whereas entrepreneurs in China had to pick their poison between Baidu, Sina and Sohu back in the day, startups in emerging Southeast Asia are limited to Facebook Ads, Google Search, and portals like Detik in Indonesia and Sanook in Thailand.

Early entrants like Lazada took advantage of low cost-per-clicks (CPCs) back in 2013 but given the raging ecommerce “bloodbath”, online ad CPCs have gone through the roof.

Having saturated online channels, Lazada started exploring offline advertising channels like TV and out-of-home media.

Others like Pomelo Fashion tapped into physical stores as a more cost-efficient way to acquire users and simplify last-mile logistics.

PDD social and viral customer acquisition strategies could work quite well.

2. High mobile commerce penetration

The majority of ecommerce transactions in China now take place on mobile. In 2016, 71% of ecommerce GMV was on mobile. In the US, this number was only 20% in 2016.

In Southeast Asia, companies like Lazada and Shopee today see over 65% of their orders coming from mobile (with 21.6% using both mobile and desktop to shop), according to a recent survey by ecommerceIQ.

Needless to say, high mobile penetration in Southeast Asia along with high mobile ecommerce usage will provide a fertile ground for a business model like PDD to gain traction here.

3. Frictionless mobile payments

One of the drivers of PDD’s success is its seamless payments through WeChat Pay.

This will be a challenge for PDD in Southeast Asia as only Singapore and Malaysia are credit card dominated whereas the rest of the region is mainly a cash-on-delivery market.

Source: ecommerceIQ

Despite efforts to come up with a universal mobile payment standard, no one has succeeded as of today. Efforts like Sea’s AirPay, Ascend’s True Pay, and LINE Pay have hit a wall due to lack of distribution, lack of use case, and a plethora of other issues.

Right now, most eyes are on Go-Jek’s Go-Pay, which has a massive distribution channel by leveraging Go-Jek’s 40 million install base and 10 million Weekly Active Users (WAUs). In addition, and more importantly, Go-Jek addresses emerging Southeast Asia’s unique lack of both credit card and bank account penetration — users are able to top up their Go-Pay accounts by handing cash to Go-Jek drivers that essentially act like mobile ATM deposit machines.

While still a poor-man’s WeChat Pay, Go-Pay offers hope for business models like that of PDD to thrive in Southeast Asia.

4. Attachment to popular social platform

Without the WeChat ecosystem, PDD wouldn’t have been the company it is today. Being embedded in WeChat, PDD was able to quickly get massive distribution by tapping into the potential 889 million MAUs of WeChat.

In Southeast Asia, Facebook, Instagram, WhatsApp, and LINE are highly popular, however, none are considered super apps that offer seamless integration.

The closest to WeChat in Southeast Asia would probably be Indonesia’s Go-Jek.

While Go-Jek hasn’t entered ecommerce yet (it’s positioned only as a services marketplace and offers delivery for partners through its GO-MART product), it wouldn’t be surprising if PDD decided to leverage the Go-Jek platform, given the similarities to WeChat in China. Like PDD, Go-Jek also counts Tencent as an investor.

With an estimated third of ecommerce in markets like Thailand happening on Facebook, Instagram and LINE, the user behavior of buying through social channels already exists.

5. Access to cheap product sourcing

If you browse through PDD, you’ll notice that most of the products sold bear similarities to many of those sold on Taobao. In other words, a lot of “mass” and non-branded products. PDD thrives in China because of easy access to a supply of these products manufactured locally.

However, in Southeast Asia, these kind of products (typically sold on social media and C2C platforms) are imported from China, which leaves less margin for PDD to play with in terms of discounts and customer acquisition.

To sum up, emerging Southeast Asia meets several of the criteria behind PDD’s success in China but poses some unique challenges:
ecommerceIQ

What will happen next?

In the analysis, we’ve identified some of the drivers of PDD’s rapid rise in China and also their presence in emerging Southeast Asian markets at an earlier stage.

Given this opportunity, we can expect the following scenarios to play out over the next few months and years:

1. Local and Chinese entrepreneurs will launch PDD clones across the region

Ever since opening up to the world in the 80s, we can describe China having gone through the following three stages, with the third one still progressing as we speak:

1. Made-in-China (1980-2000)

China perceived as manufacturing base for (often cheap, low-quality) export products

2. Copy-to-China (2000-2015)

Chinese entrepreneurs, some foreign educated, bring back models that worked in the US, e.g. Search (Google -> Baidu), Portals (Yahoo -> Sina, Sohu)

3. Copy-from-China (2015-2030)

Birth of unique Chinese Internet business models (e.g. bike-sharing, payments, live streaming, social commerce, O2O). Increasing media focus on Chinese tech innovation and locals outside of China looking for Chinese models to copy

We are witnessing stage 3 happening right here in Southeast Asia. Below is a Thai post on Facebook looking to recruit staff to work on what looks like a PDD clone:

It doesn’t have to be local talent copying PDD from China to Southeast Asia. With the influx of Alibaba, Tencent and JD into the region, there are plenty of Chinese employees who’ll be noticing the similarities between Southeast Asia today and China, and jump on new opportunities.

2. PDD will enter Indonesia through Go-Jek (helped by common investor Tencent)

If PDD were to follow Alibaba and Tencent’s steps and enter Southeast Asia, we expect them to join forces with Go-Jek. By embedding itself inside Go-Jek, PDD is executing the same game plan that led to its rapid initial growth within the WeChat ecosystem. Fostered by a shared investor — Tencent — Go-Jek would be the perfect launch partner for PDD in Southeast Asia.

3. Existing players will adopt the PDD business model to compete against horizontal ecommerce plays

Local ecommerce players like MatahariMall, Konvy, and Orami could pre-empt PDD by adopting its customer acquisition strategies to compete with regional giants like Lazada and Shopee.

For Konvy and Orami, two female-focused ecommerce platforms, this move could make a lot of sense since the majority of PDD’s users in China are female, over 40 year old, and living in smaller cities.

Play on players.

You might recognize a signature Burberry trench coat because of its distinctive check pattern.

When Burberry first came to life in London in 1856, CEO & founder Thomas Burberry was, at the time, only 21 years of age. The brand focused solely on outdoor attire in its early days but quickly established a reputation for quality and longevity.

In 1879, Burberry received a patent for its ‘gabardine’ fabric – a water-resistant, breathable material that it would use for trench coats. The company went from strength to strength, opening a store in the upscale Haymarket area of London in 1891, designing its signature equestrian knight logo in 1901, and supplying outdoor attire to South Pole expeditioners in 1911.

Burberry’s popularity skyrocketed after its trench coats were used by British infantry forces during the First World War. An outpour of patriotism boosted its brand identity with members of the public clamoring to buy the products after the end of the war.

Further validation came in the form of high profile celebrity endorsements by movie stars such as Humphrey Bogart in Casablanca, Audrey Hepburn in Breakfast at Tiffany’s, and Peter Sellers in Pink Panther.

The UK luxury brand is best known for its sharp coats and jackets but has also ventured out in designing shoes, scarves, bags, & other accessories. By the mid-1980s as a result of spreading itself too thin and chasing short-term profitability goals, the brand started to stagnate. What happened?

The makings of a crisis

The 70s and 80s were rewarding for Burberry in terms of its bottom line. It signed licensing agreements with many global manufacturers to design suits, trousers, shirts, and accessories and distributed them via independent retailers as well as its own stores. The effect of this expansion i.e. higher operating profits was felt well into the 1990s.

But the licensing partnerships also had an unintended effect: counterfeit products flooded markets across the world, particularly in Asia, causing price disparities that existed even in original products.

Western countries were subjected to higher rates and items were often rerouted back to markets; for example, cheaper bags in Asia were exported back to Europe resulting in a blow to its image.

Burberry had severely diluted the power of its brand by adopting a mass-market route. Once associated with list-A celebrities and daring thrill seekers, Burberry had rapidly lost its aura of glitz and glam.

Shockingly, the elitist brand was now equated with thuggery, chicanery, and hooliganism; adopted en-masse by ‘Chavs’ – a pejorative British term used to describe degenerates and lowlifes. Bouncers would turn away people wearing Burberry outfits as it was assumed they would cause trouble once inside.

Shudder.

Turnaround

“Burberry was not able to identify its target group of consumers because of its uneven distribution and licensing policies in different countries of operation,” says Arittra Basu, business development manager at Westin Hotels.

The long road to redemption started in the late 1990s after Burberry hired Rosie Marie Bravo to steer the ship. She immediately tried to stem the decline by reducing the company’s footprint in Asia, ending price disparities, and appointing a new creative head to reestablish the brand’s core values.

In 2006, Angela Ahrendts was appointed the new CEO and began a journey leading the company to reemerge as a force to be reckoned with.

Initially, there were subtle design changes. The check pattern was scaled back and started to appear less and less on merchandise. Stringent measures were adopted to crackdown on counterfeit items and the licensing agreements were gradually rescinded to centralize design and operations under one roof.

But the most important decision made by Ahrendts, along with Chief Creative Officer Christopher Bailey was the declaration of their vision to see Burberry as the world’s first fully digital luxury company.

The brand had, in their opinion, appealed to an older clientele for far too long. It was time to catch the attention of suave and fashionable millennials.

Digital would be central to the brand’s way of thinking and customers would be treated to the same experience whether online or in-store.

One of the most popular campaigns Burberry launched was the ‘Art of the Trench’, a unique play on user-generated content to bring consumers at the forefront.

Art of the Trench. Photo credit: Creativity Online

This was a standalone website where customers were encouraged to upload photos of themselves wearing their trench coats. They were featured on the main page for 15 minutes and customers could share these photos on social media feeds. There was also an option to click on a product and be redirected to Burberry’s main site to purchase it.

The campaign was a resounding success. In 2015, it was reported to have gained almost 25 million pageviews since launch.

Another hugely popular campaign was initiated to promote Burberry Kisses, a lipstick brand launched by the company. For this, it partnered with Google to enable users to send personal messages, sealed with a virtual kiss.

Users from 13,000 cities sent these virtual kisses within the first 10 days of launch.

In 2012, Burberry tried to bridge the gap between the online and offline shopping experience via its Regent Street London store. The store featured huge screens where catwalk shows around the world could be viewed live and the individual products were available for instant purchase.

“Burberry Regent Street brings our digital world to life in a physical space for the first time, where customers can experience every facet of the brand through immersive multimedia content exactly as they do online,” said Burberry CEO Angela Ahrendts. “Walking through the doors is just like walking into our website.”

Not only can shoppers buy online from Burberry’s digital properties, they can also choose to pick up in-store or have a sales associate order from the website for them while visiting an outlet. Burberry’s also experimented with flash commerce features via Twitter as well as allowing users in China to order via WeChat.

In China Burberry took the unusual route of opening a store on Tmall; a strategy consistently avoided by upscale brands. The move was meant to counter the growing grey market for its goods as well as embrace the Chinese penchant for online shopping.

Its savvy use of social media has also engendered the growth of a loyal community. The brand has embraced Snapchat to provide peeks into upcoming lines and fashion shows. Burberry’s YouTube channel has over 300,000 subscribers and hundreds of videos that not only showcase trench coats, but also includes makeup tutorials, music jams, and other engaging content.

And the result of all of this? In 2011 Business Insider placed Burberry in the top 10 brands of the world with a growth percentage of 86% as judged by an estimate of its brand value. That far outstripped any other company on the list.

Burberry shares, which languished in the $200 range in 2002 now trade at $1,539.

Of course, challenges persist. Weakening demand for luxury brands hurt Burberry’s profitability last year with the CEO saying that the product range “needs to be refreshed”.

But if it continues with its sharp focus on digital and out-of-the-box thinking, it should be able to weather the relative storm.

“Burberry’s digital strategy […] has so far not only put it at the top of the fashion luxury category but among top players across industries,” wrote Digiday.

This is Part 2 of an article by Jeffrey Towson about the aspects of Alibaba’s “new retail” strategy.

In Part 1, I discussed uni-marketing and how the view of new retail for merchants and brands is very different than the view for consumers. A quick summary:

  • For consumers, the view is great. They are going to get what they want, where they want it and when they want it. New retail is a purification of demand.
  • For Alibaba, the view is spectacular. Their huge online marketplace is going to be merged with parts of the physical marketplace. The number of users and the amount of activity on their platform is going to increase dramatically.
  • But the view for merchants, brands, and retailers is more confusing. New retail upends many of their businesses, strategies, customer relationships and maybe even their brands.

In this part, I take an asset and resource view of all this, which I think is a much easier way to understand it.

Point 1: Digital competition is a lot about key resources, which are usually intangible assets.

You can look at competition with various frameworks.

  • Michael Porter famously described five economic forces, which tend to play out over the longer term in more stable industries.
  • Columbia Business School Professor Bruce Greenwald argued that one force, competition, is actually far more important than the other four.
  • Warren Buffett focuses mostly on competitive advantages and their durability.
  • Wharton’s George Day writes about dynamic competition and the constant move and counter-move of many businesses.

I focus mostly on digital competition (note: China is the global epicenter for this). This is a lot about how new digital tools and data are changing the competitive dynamics of traditional industries. For example, retailers traditionally compete on fixed costs and fixed assets (lots of stores, get bigger than your competitor). But ecommerce has a different dynamic. There is a lot more focus on the degree of participation of consumers, merchants and other users.

It can get confusing. And a useful approach is just to take a resource and asset view. Stop looking at the economic forces and competitive advantages, and just look at the assets used to compete. One company has 10 factories and the other only 5. One company has a famous brand that everyone knows and the other is unknown outside of one region. In digital competition, this usually means comparing intangible assets like technology, IP, captured customers, business linkages, and data.

If you take an asset view of competition in ecommerce and new retail, I think there are three big things that jump out as particularly important in a marketplace platform. Note: Alibaba is a marketplace and a pure digital competitor. JD is more of a hybrid of a marketplace (enable transactions but don’t take inventory or be the seller of record) and a direct retailer (buy and sell the goods yourself). For marketplace platforms (like Alibaba and VIP.com), the resources that matter are:

  • Captured online consumers. Their number, time spent, money spent and their participation on the site. And your degree of capture.
  • Captured online merchants and brands. Their number, their percent of business on the site, the integration of their operations into the site and their marketing activity on the site.
  • Content creators. Although this can be done as another type of retail (like Amazon’s digital media) or as an audience-building platform (like Youku)
  • Data from ecommerce, entertainment, social media and other sources.

These assets (both the users and the degree of activity) on the platform enable virtually everything else.

  • You can add new services and products.
  • You can add new types of revenue streams (transaction fees, marketing services, operational services, gifting, advertising, etc.).
  • And hopefully, you can use these assets to build competitive barriers. Network effects are the most desired. But there are also data network effects, MSP advantages, softer data advantages and linked businesses.

I view Alibaba as a particularly powerful version of this with three interconnected platforms: a marketplace platform, an audience-building content platform, and a payment platform.

These core assets cost a certain amount of money to acquire (plus time and difficulty). It’s a useful way to look at a company. But it’s also important to remember that these asset costs are different from the value they can then create. Similarly, the cost of a factory is different that the market value of the products it creates. And the cost of a college degree is different than how much you will make from it.

If you take an asset view, the sequence for marketplace platforms is usually:

  • Get an initial critical mass of users, merchants and data. There is usually a chicken-and-egg problem to get started (to get the consumers you need merchants, but to get merchants you need consumers).
  • Grow the number of users and their activity, mostly by data and digital tools. In marketplaces, personalization and curation are two of the big guns for this. Ancillary moves into new products and services or into new geographies (cross-border ecommerce) also really work.
  • Try to protect the platform with network effects, linked businesses, softer advantages and assets that are difficult to replicate.

Point 2: How these assets change over time is really important.

Alibaba is a virtual marketplace (so far). There are lots of supporting and complementary services (entertainment, payments, logistics / delivery, credit, etc.) but the core business remains connecting consumers with merchants and brands. And then making money from their transactions – and also from the marketing and other spending by merchants and brands on the platform. It’s a virtual shopping mall (Tmall) and a virtual trading bazaar (Taobao).

So what is the big difference between the intangible assets that create virtual marketplaces and the tangible assets that create real shopping malls? One of the most important differences is how these assets change of time.

If we were looking at a real shopping mall or bazaar, we would depreciate the PP&E over time. There would ongoing capex to maintain and maybe additional to grow. And in times of higher inflation, these assets can be a big problem as they really increase the cost structure. Plus there is also the real estate and land price aspects, which can be particularly important in downtown locations and in places like China.

But a marketplace made of intangible assets doesn’t necessarily decay over time. It certainly doesn’t straight-line depreciate. You may have to spend to keep it running (a type of maintenance capex, operating cost and customer retention cost) and for required upgrades – but the economic goodwill (not accounting goodwill, which is nonsense) should increase over time. And it doesn’t get hit by inflation (although labor costs can be a problem).

The same process can be true for other businesses that rely on intangible assets. Share of consumer mind (a Buffett term) is a big deal for Coca-Cola. Intellectual property and data / claims history can be important in technology and insurance. And so on.

But two differences I think about for intangible assets versus physical assets are:

  • Intangible assets can increase in real economic value over time – and often quite powerfully. This is good news.
  • Intangible assets are easier to replicate and often do not offer the types of competitive protection you get with physical assets. This is bad news (and why network effects and soft advantages can be critical).

Here’s how this can play out in marketplace platforms:

  • The more customers that come, the more valuable (and necessary) it is for merchants and brands to participate and compete with each other through marketing.
  • The more stores that arrive the more options consumers have and the richer their experience.
  • The more transactions and data from transactions, browsing and others sources (entertainment, etc) the more personalized and engaging the experience. This can enable more spending and engagement.
  • The more this ecosystem grows, the more difficult it is for a new competitor to replicate the entire ecosystem. The assets grow organically and become harder and harder to replicate.

Note: Parts of this can be described as a network effect. But it’s more about the degree of participation. Most MSPs do not have network effects and derive their value from their intangible assets.

Additionally, you get some competitive protection from an ability to cross-subsidize different parts of the platform (girls get free drinks at bars, men pay more). You can create complementary networks (Taobao helps Alipay and vice-versa). Yu can get linked businesses (Amazon’s cloud business subsidizes its logistics). And so on.

Question 1: How does “new retail” change a resource view of ecommerce?

This is the question I have been thinking about a lot. And a lot of this article is me thinking out loud.

But new retail is clearly a massive jump in the assets on the marketplace platform. And while all the talk is about physical retail, is Alibaba actually adding physical assets to their platform? I don’t think so. I think they are just leveraging in the intangibles of the tangible assets.

To me, new retail looks like it adds two big assets to the platform that Alibaba doesn’t have today. These are offline sales data and physical retailers, merchants and brands as users.

Take the “new retail” initiative in convenience stores. Alibaba is providing digital tools that transform mom-and-pop convenience stores in China. They plug in the tools and the stores gets three basic benefits.

  • Online customers can be driven into the stores from the local area (maybe). The merchant gets access to local online customers the same way an online merchant does. And they can market to them. Although in this case you are fighting for the customers in your neighborhood, not nationally. And you are fighting against other digitized local merchants, not every merchant in China.
  • They get digital tools that upgrade their payments, inventory, and supply chain. They get a bit of a store tech upgrade. Ideally, they get more efficient operations. Although adopting these tools also creates switching costs.
  • They get data that helps them choose their inventory for what people in that neighborhood actually want. This is hugely important and is part of Alibaba’s “uni-marketing” initiative.

And what does Alibaba get?

Well, the physical merchant just became as user in their marketplace platform. They add the transactions, the user and the data of the physical merchant without adding the physical assets. And they also probably got some new offline customers, but most everyone in China is already on Taobao.

So Alibaba is not going to own a lot of stores, such as Hema supermarkets or convenience stores. They are going to perfect the various business models and franchise out the system, the data and the technology tools. And for the hypermarkets, they will likely put that in a separate, associated and asset-heavy partner. And they will remain the data / tech partner for this, as they has done in logistics with Cainiao. The core marketplace, the engine of Alibaba, is going to remain tangible asset-lite and intangible asset-rich.

Now imagine they roll this out to 100,000 convenience stores in China? How many of those stores can be moved onto their ecosystem in this way? And then supermarkets? And then department stores? With a resource view, the size of the “new retail” opportunity is massive

Question 2: Who will own the customers in “new retail”?

This strikes me as a big question. Merchants are on Taobao and Tmall because they have to be. That’s where the customers are. They may also have their own branded website but they are also on Taobao and Tmall. And they can drive their customers to their stores and their own websites from here to a certain degree. But if they leave the Alibaba ecosystem customer retention is a problem. Famous companies like Zara and Apple have their own brands and customers. But most small merchants do not have this type of loyalty.

So this raises a question for new retail: if a physical merchant unplugs from the platform, do they take their customers with them? Or do those customers start getting directed to a different convenience store down the street? Who owns the customer in new retail?

WRITTEN BY: Jeffrey Towson