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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

Emerging markets continue to drive the global sales of smartphones as its citizens discover the internet for the first time.

Southeast Asia’s smartphone shipments grew by 6.5% last year, recording nearly 28 million devices. Its largest market, Indonesia, is projected to be the four largest market for smartphones by 2020, reaching almost $10 billion in sales.

One of the global household names eyeing the region is Apple.

The company has been attempting to grab market share from dominant Chinese brands selling at much cheaper prices such as Oppo and Huawei in the sector. Apple’s global sales took a slight drop in Q2 2017 and 400,000 less iPhones were sold compared to the same period last year.

Apple market share Indonesia

Apple and Samsung struggle to grab market share against Chinese brands. Source: Frontera

Apple recently opened its first official store, a “Town Square”, in Singapore last May.

Apple market share Indonesia

Singapore’s first official Apple Town Square. Source: 9to5mac

This followed a commitment to invest more than $44 million in R&D in Indonesia after the company couldn’t release the iPhone 6s and 7 in the country for failing to meet the requirement of having at least 30% local components.

Indonesia not breaking the bank

Recent data from International Data Corporation (IDC) shows only 1% of 7.9 million smartphones shipped in Indonesia during Q2 2017 cost more than $600 or fell into the “ultra high-end” category.

Apple market share Indonesia

Devices from the “low-end” category costing $100 – $200 are still the most popular among Indonesians as they prefer a more affordable option.

In nascent markets like Indonesia, Chinese and local players like Huawei, Oppo, and Advan will continue to occupy the top five smartphone brands in the country.

And given Apple’s newest price tags – the iPhone X initial pricing exceeding $1,000 – its share will unlikely exceed more than 1% of Indonesia’s total shipment anytime soon, unlike the US market where Apple has 31.3% market share.

But it’s not all doom and gloom for Apple. Indonesia’s consumer smartphone affinity is heading towards the higher end as purchasing power increases.

Mid-range devices costing between $200 – $400 grew to 28% from 13% in the same period last year and with the lowered iPhone SE price to the “midrange” category, it’s not impossible to see more iPhones in the hands of Indonesians.

THE BACKGROUND

Chinese brand Huawei started as a producer of phone switches in 1987 before becoming the Information and Communications Technology (ICT) giant it is today.

The company builds products along the entire wireless communications chain: chipsets, network connectors, and handsets.

As Fortune puts it, “it’s as if General Motors had paved the Interstate Highway System, then started selling cars.”

Huawei recorded more than $42 billion in revenue for the first half of 2017 across its three main business units: Carrier, Enterprise, and Consumer Business.

Under its Consumer Business division, Huawei entered the smartphone market in 2010 and quickly rose to No. 1 in homeland China until Oppo took the title in 2016.

Nonetheless, the brand shipped 139 million smartphones in 2016 and controls 9.8% of global smartphone market share and around the world, the brand trails only behind Samsung and Apple as the No. 3 mobile phone vendor.

huawei premium strategy

Global market share by phone vendor, 2016. Source: IDC

THE CHALLENGE

Huawei’s rise to the top three was achieved in a very short time — less than five years – but the brand is struggling to catch up to its biggest rivals, especially in overseas markets.

Despite being a household name in China, the brand isn’t well known in Europe and the US.

A few issues have plagued the brand’s reputation: a general consensus that Chinese companies produce ‘cheap and copycat products, allegations of national cybersecurity breaching, and a investigation from the US government.

These issues have hampered the brand’s efforts to gain footing in the world’s biggest premium consumer market — the United States.

Huawei’s US sales totaled $1.3 billion last year, only a fraction of its worldwide sales of $32.4 billion.

In addition, the company has also faced difficulties winning emerging markets like India and Indonesia as most consumers favored devices below Huawei’s price tag where its budget phone handsets start from $170.

The company does not have the equivalent of Apple’s die hard fans nor Samsung’s superior phone features – they have “better value for money” as its differentiator.  

Without a customer niche, Huawei will find it difficult to boost sales and stay competitive. Although revenue growth was impressive in the first half of this year, it was the company’s slowest in four years.  

THE INNOVATION

In October 2014, Huawei launched a new brand of mobile phones that they called Honor and was sold direct to consumer through online channels to keep prices in the mid-range and targeted digital natives – young hipsters.

Huawei premium strategy

Huawei’s Honor flagship store in Germany

Launching a sub-brand is also a part the company’s efforts to emphasize the brand’s focus on quality.

The company also spent a large portion of its marketing budget on overseas promotion, including plastering major cities in Europe with advertisements.

Huawei premium strategy

Billboard of Huawei phone in Poland. Credit: Wade Shepard

To further familiarize Europeans with its brand, Huawei drew on the popularity of major sports clubs like Arsenal and AC Milan and reached the masses with several sponsorships.

Huawei premium strategy

The brand became the official sponsor of English football Arsenal to raise its brand awareness.

In 2016, Huawei struck a partnership with German-company Leica to develop a dual-lens camera system that resulted in the Huawei P9 smartphone, touting an innovative camera as one of its selling points. Apple rolled out the same feature shortly after.

Andreas Kaufman, Chairman of the Supervisory Board of Leica Camera, saw the potential to become the second leg of digital revolution in the photography space where smartphones were the new amateur camera.

Huawei was also chosen by Google to build its flagship Android device Nexus in 2015. The partnership is strategically important for both companies as they are leveraging one another’s credentials for a leg up in an oligopoly market.

To crack the US market and simultaneously beat Apple for market share, Huawei is collaborating with Amazon and Google in the launch of its updated premium flagship device, the Mate.

The device is the first of Huawei’s smartphone to come with voice-interactive app, Amazon Alexa, and is available for purchase in US through Amazon. The Mate 9 is also the first Google Daydream-ready device for users to explore immersive virtual reality (VR) content and experience.

With so many enticing features jam-packed into one device, the soon-to-be launch Huawei Mate 10 is expected to surpass the performance of Apple’s highly anticipated iPhone 8.

THE STRATEGY

A few years ago, Red Zhengfei, founder of Huawei, laid out the company’s strategy: Huawei must make progress in the mid and high-end range with high quality products and turn a profit.

In order to do this, the Chinese company has continued to sacrifice margins to spend on R&D, investing $11 billion (76.4 billion yuan) to further its business.

Huawei further announced that it will focus on the mid-high segment for higher profits.

“We are giving up the very low-end devices because of the margin in this is extremely low, and it’s not making enough profit for us,” said Richard Yu, CEO of Huawei Consumer Business Group.

Huawei premium strategy

CEO of Huawei’s Consumer Business Group, Richard Yu

“The priority is Europe, China, and Japan, where the economy is healthy and people are able to consume them.”

THE FUTURE

The company continues to works towards becoming the No. 1 smartphone supplier in the world within four or five years and seizing  20%-25% global market share by introducing visionary innovation to its products in order to charge a premium.

“In the past for the smartphone you could see Apple leading innovation,” said Richard Yu. “But in the future, you will see innovation led not by them but by Huawei.”

Here’s what you should know today.

1. Alibaba to launch data center in Indonesia and India

Alibaba Cloud, the cloud computing arm of Alibaba Group, announced that it plans to establish a new data center in Jakarta, Indonesia.

“Alibaba Cloud will significantly increase its computing resources in Asia, allowing greater support for small and medium enterprises,” the company said in a statement.

In Indonesia, international giants like Alibaba Cloud are answering the growing demand for reliable, scalable data storage. The entire industry is experiencing a boom.

However, a government regulation (PDF) has recently been tightened – especially in the fintech sector. Indonesia’s Financial Services Authority at the end of last year introduced its own sub-regulation that says Indonesian’s financial data must not be stored outside the country without prior approval. This could encourage companies and startups to consider working with Indonesia-based servers.

Read the rest of the story here.

 

2. Apple unveils ‘business chat’ feature

Apple just unveiled Business Chat, its bid to turn iMessage into a communication platform that can compete with Facebook Messenger.

Business Chat will be part of iOS 11, allowing individuals to open an iMessage window from Safari, Maps, Spotlight, or Siri, and start a conversation with a business. Those conversations will include basic text chats, but Apple is also offering support and structure for more complex interactions, like scheduling an appointment.

And while much of the discussion around Facebook Messenger has centered on chatbots, LivePerson’s Rurik Bradbury, a partner  of business chat argued that Apple is “focused on trying to create a human experience.” There’s the simple fact that the customer, not the business, has to initiate the conversation.

Read the rest of the story here.

 

3. Thailand’s Siam Cement Group launches VC fund

Thailand-based industrial conglomerate Siam Cement Group (SCG) has launched a new industrial-focused regional VC fund called AddVentures.

SCG will pump in between $8.82 – $14.7 million into the fund each year. AddVentures will target B2B, industrial and enterprise startups

For the first 3 to 5 years, AddVentures plans to invest between $1 – 5 million per deal. Besides covering the ASEAN region, AddVentures will explore technologies coming from China, Israel and the US.

The launch of this VC fund aligns with the Thai government’s “Thailand 4.0” roadmap, which is designed to advance the research and development of smart tech across various industries.

Read the rest of the story here.

 

4. Recommended Reading: Why Nordstrom may benefit from going private

Nordstrom has announced the possibility of the department store going private.

Some analysts argue the move makes sense for a retailer that has faltered in recent quarters, but isn’t piled with a lot of debt and has operations with value buried deep within the wider company. A private restructuring would likely take Nordstrom three to five years.

Going private, assuming it did not entail taking on a crushing level of debt, may very well be the best thing that could happen to Nordstrom

Nordstrom is particularly well suited to this move, with members of the founding family still in its executive ranks, a flagship department store fleet that hasn’t over-expanded the way Macy’s has, and ecommerce and off-price operations that lend the company added value.

It’s a viable option for a company with funds available and light at the end of the tunnel, Michael Brown, a partner in the retail practice of global strategy and management consulting firm A.T. Kearney said.

Read the rest of the story here.

Here are the key headlines you should know today.

1. Nike, Apple and Playboy amongst the most popular US brands during 11.11

“Alibaba is using this year’s Singles Day to showcase the number of international brands participating, everyone from Apple, Victoria’s Secret, Burberry, Gap, [and] Nike, acting as the gateway to China for these brands and fulfilling Chinese consumers’ insatiable demand for Western products,” said Danielle Bailey, head of Asia-Pacific research for L2 Inc.

Read the rest of the story here

 

2. Malaysia takes serious steps to obtain digital economy goals

“The e-commerce ecosystem will continue to evolve in the future with the maturity of services, and the consumption patterns of the citizens. Two key areas worthy of future attention are figuring out how to retain more revenues from e-commerce sector within Malaysia, as well as encouraging global e-commerce platforms to increase investment in the country,” said Vijay Sundararaman, IDC Malaysia Country Manager.

Read the rest of the story here

 

3. South Korean beauty startup, Althea, moves into Southeast Asia

One of Althea’s co-founders and CFO, Jae Kim, told CNBC the decision to move into the region was a “no-brainer” because of a pent-up demand for Korean beauty products that was being unmet by other companies.

Kim added various payment preferences added to the uniqueness of southeast Asia. When asked if Althea had plans to introduce its own line of South Korean beauty products, he said, “We are thinking about it but no concrete plans yet.”

Read the rest of the story here.

Winding down from a busy day? Here’s what you know today.

 

1. Amazon Poised to Enter Southeast Asia With Singapore Launch in Q1 2017

Amazon is likely to offer its Prime delivery service alongside its AmazonFresh grocery service. It may potentially use Singapore as an obvious entry point into a fragmented new market, and also as a hub for the region.

Read the rest of the story  here

 

2. Lazada Confirms Acquisition Of Singaporean Grocery Startup, RedMart

Lazada is spending $30-40 million to buy Singapore-based RedMart. Officially the deal is undisclosed and scheduled to be completed before the end of this year.

Read the rest of the story here

 

3.Goldman Strongly Suggests Subscription Service For Apple

Goldman Sachs is recommended that Apple do: Offer an Apple subscription service that includes premium content, certain services and iPhone products. All in the name of growth and loyalty.

Read the rest of the story here