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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

Recently in the news, Starbucks opened a new Roastery outlet on Nanjing Road in Shanghai last week begging the question, so what?

There’s nothing surprising about a new Starbucks in China, except this is now the world’s largest one at 30,000 sqm, twice the size of its counterparts in the US and will be the first-ever to incorporate in-store augmented reality (AR), thanks to China’s most influential internet company – Alibaba.

What can consumers do in this store powered by Alibaba’s technology and Mobile Taobao app?

  • Access a detailed map of the floors and menu with Alibaba’s location-based technology
  • Save favorite Starbucks products to their Mobile Taobao account
  • Scan key features around the Roastery to get information on coffee bars, brewing methods via animations
  • Earn a customized photo filter for sharing on social media
  • Ultimately, appeal to the digitally savvy Chinese audience

Sure, China is an attractive market to invest in but what is Starbucks planning with its“most ambitious project ever”?

An augmented reality app is used in the new Starbucks Roastery in Shanghai, China. Photographed on Friday, December 1, 2017. (Joshua Trujillo, Starbucks)

Slow Growth Around the World

Starbucks second quarterly earnings reported $5.29 billion, short $120 million of the expected $5.41 billion. While the coffee giant has found great success in its 46 years because of its consistent and convenient services and products, the company has felt the squeeze of rising competition from convenience stores and fast-food chains like McDonalds aggressively improving the quality and pricing of its beverages and menu.

And so, to capitalize on a blue ocean, the company decided to focus on a region where coffee culture is only emerging

Revenue from Asia Pacific makes up almost 15% of Starbucks’ annual revenue, a 5.5% increase from five years ago.

It’s obvious to us that the holding power of China for Starbucks is going to be much more significant than the holding power of the US,” — Starbucks’ founder and Chairman Howard Schultz.

As the Chinese economy grows, Starbucks’ success does as well in a country where disposable incomes increase and the younger generation is attracted to quality-driven and unique brands that speak to who they are.

“For coffee, there’s a certain kind of ‘in-the-know’ from consumers who seek out these good boutique shops,” said Jack Chuang, partner at OC&C Strategy Consultants who studied the Chinese coffee market.

Although still predominantly a tea-drinking nation, China is rapidly developing a taste for coffee, an activity previously thought was for the affluent or Westerners.

Jack Ma’s New Retail Vision Reinforced Through Coffee

What does Alibaba get out of it?

It was as recent as Single’s Day when Jack Ma announced the ‘New Retail’ concept that aims to blur the line between conventional brick-and-mortar retail and ecommerce with the help of technology and data.

In the coming years, we anticipate the birth of a re-imagined retail industry driven by the integration of online, offline, logistics and data across a single value chain,” — Jack Ma.

Alibaba’s HEMA Supermarkets already blur the line where consumers can shop for groceries online via the HEMA app and receive them within half an hour, or scan barcodes at the store, pay via the app, and set up delivery.

A shopper can easily scan barcodes in the store and pay for the products through the HEMA app before having them shipped home. Source: Alizila

Partnering with a highly influential brand like Starbucks and providing them with the right technology is Ma’s push for even faster digital adoption..

A survey has shown that 40% of consumers are willing to pay more for a product if they could experience it through AR, and 71% claim that they would shop at a retailer more often if they offered AR.

Seems like Starbucks and Alibaba will be brewing some heavy money in China.

Outside of the world’s tech ecosystems, the digitization of retail hasn’t always been met with positive reviews. There is a fear of automation taking jobs away from humans, and that fear swells as brick and mortar stores go out of business. Are they warranted?

Research by the Bureau of Labor Statistics in the US and reporting by The New York Times show that ecommerce actually has added more retail jobs than traditional models over the last 14 years.

The large change in percentage of ecommerce related jobs in the US over 14 years. Source: The New York Times

During his meeting with the President of the United States, Alibaba founder and Executive Chairman Jack Ma shared his goal to create jobs in the US over five years to focus trade between the US and Southeast Asia.

“Alibaba will create 1 million U.S. jobs by enabling 1 million American small businesses and farmers to sell American goods to China and Asian consumers on the Alibaba platform,” the company said in a statement.

Although ambitious, it’s also quite possible for a company that had more than 10 million active sellers in 2015, and estimates its China retail marketplaces “contributed to the creation of over 15 million job opportunities.”

“Machines should only do what humans cannot,” said Jack Ma. “Only in this way can we have the opportunities to keep machines as working partners with humans, rather than as replacements.”

Not only has there been an increase in ecommerce related jobs in the last ten years, these jobs on average also come with a better pay check – roughly 30% more than traditional retail jobs as averaged by one economist (all based on US figures).

Taking into account only Alibaba stock given to in-house employees, Fortune reports each person was paid roughly $11,134 in the latest quarter, a 6% bump in bonus pay per head compared to the previous year – more than double the average American’s raise last year.

Comparison of jobs created by traditional retail models and ecommerce. Source: The New York Times

While ecommerce is growing, its labor force still represents a relatively small chunk compared to traditional stores but given how interconnected multi-channel retail has become,

How do you categorize a sales clerk that assists a shopper ordering online through an iPad?

And so, where do we stand?

Unsurprisingly, all of these conclusions have been met with skeptics but recent news reporting Amazon’s aim to hire 50,000 workers in one day is a positive sign that ecommerce will always have room for a human workforce.

To put this figure in relative terms, the US Labour Department reported that 220,000 jobs were added to the US economy in June. Amazon will fulfil a quarter of this total in a single recruitment event.

This Quartz headline puts it best,


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Here’s what you should know today:

1. Indonesia’s Fabelio is seeking investors for series B

Online furniture markeplace Fabelio is reportedly in talks with potential investors to finalise its Series B funding, the company is likely to raise more than $5 million with participations from existing investors.

Previously, the Jakarta-based company has raised $2 million in series A round led by Venturra Capital. Its seed round investors 500 Startups and IMJ Investment Partners also participated.

Founded in 2014, the company has grown 11x in the last 18 months and reached 1 million page views for the first time last Ramadan. The company is planning the expansion to other Southeast Asia markets.

Read the full story here

2. Amazon Launches Shoppable Feed Stories on Its App 

Never a day goes by without something new from Amazon! Today the company is launching a new feature aimed at improving product discovery, and seemingly inspired by Instagram, called Amazon Spark.

The goal with the new program is to shift some of the social activity around products taking place off-site back to Amazon.

In addition to lifestyle imagery, Spark posts can also contain product photos, text, links or polls. The ability to shop the photos on Amazon’s site is also seemly to be a much more seamless experience than on Instagram.

Amazon Spark is currently only available on Amazon iOS app for its customer in the US.

Read the full story here

3. Jack Ma praises Malaysia on its digital projects implementation

Jack Ma has praised Malaysia’s strength, tenacity and speed in implementing digital projects. The Alibaba Group founder said what he thought was “impossible” for Malaysia to do, Malaysia came through.

The project in question is to make the country the first e-WTP (World Trade Platform) hub in the region, something that Malaysian Prime Minister Datuk Seri Najib Tun Razak promised to do in three months.

“We thought it was almost impossible to make that happen in three months. It was a huge project, but they made it on time. They set up a great, strong team to follow up on the project. They opened up a customs office, inspection offices and made available the land that was required.” said Ma.

Read the full story here

Here’s what you should know today.

1. Alibaba spending $1b to boost Lazada stake to 83%

Jack Ma’s Alibaba is hiking its stake in prominent Southeast Asian online retailer Lazada to 83% for roughly $1 billion.

The fresh infusion comes a little more than a year after the Chinese ecommerce behemoth snapped up a controlling 51 percent stake in Lazada for the same amount, bringing its total investment so far to over $2 billion.

Lazada will continue to operate under the same brand following the investment.

Lazada gives Alibaba a door into a nascent but populous market amid slowing growth and increasing competition, largely from JD, in China.

Ma previously gave a tall order of generating at least 50% of the group’s revenue from overseas. Lazada’s acquisition was a big step in that direction.

“The ecommerce markets in the region are still relatively untapped, and we see a very positive upward trajectory ahead of us,” Alibaba Group CEO Daniel Zhang said in today’s press statement on the additional purchase.

Read the rest of the story here.

 

2. Alibaba-supported logistic firm files for IPO in the US

Chinese delivery firm Best Inc, backed by ecommerce giant Alibaba Group Holding Ltd, has filed for an initial public offering in the US.

Best’s biggest business line by revenue is its express-delivery unit, followed by its freight-delivery division and supply-chain management services.

Alibaba, whose 23% stake makes it the biggest existing shareholder, accounted for about 70%  of Best’s express deliveries in the three months through March.

Best posted a net loss of US$198.1 million on revenue of US$1.28 billion last year. The company warned that it expects costs to continue to increase, extending its trend of net losses. Best plans to use the proceeds from the offering for general corporate purposes.

Read the rest of the story here.

 

3. Recommended Reading: Net-a-Porter owner opens tech hub in London

The owner of the Net-a-Porter luxury fashion website is to hire at least 100 more IT experts over the next two years as it shrugs off the impact of the Brexit vote to open a tech hub in the UK.

Yoox Net-a-Porter, the Milan-listed parent group, plans to invest more than €500m (£440m) in technology, warehouses and delivery systems in London and elsewhere to double the size of the business by 2020.

With a turnover of nearly €2bn, about half from orders made via mobile phones, YNAP is the world’s biggest online luxury fashion retailer. Shares in the group jumped more than 8% on Monday amid rumours that Alibaba, the giant Chinese internet marketplace, was considering buying a stake.

The two companies had merged their different cultures well and had shown they were able to sell $130,000 (£100,000)-plus watches via Whatsapp or a £35,000 Valentino dress via a mobile phone.

Read the rest of the story here.

 

 

 

Here’s what you should know today.

1. Airfrov raises funding to let consumers buy stuff from overseas travelers

Singapore-based Airfrov has raised a pre-series A round of funding worth $500,000.

Airfrov is an online marketplace for people who like to shop stuff from overseas but don’t want to deal with cross-border shipping and international payments. The startup uses an escrow account to hold payment until the item has been delivered. It receives a commission on every transaction.

CEO Cai Li says the team will use the funding to enhance the product and boost the startup’s dev team, hiring iOS and full stack developers.

Airfrov claims to have 45,000 monthly active users on its marketplace. 3,500 travelers use the platform every month. Li says users’ annual spending has grown 6.3 times from 2015 to 2016.

Read the rest of the story here.

 

2. Singaporean based Luxury marketplace Reebonz is eyeing a $150m fundraise

Reebonz models around the idea of accessible luxury that allows users to purchase new and pre-owned luxury merchandise on web or mobile. Targeting customers in the Asia-Pacific region with business operations, it is now looking to raise $150 million to boost its business and focus on expansion in China, Japan, and South Korea.

Reebonz has been working with investment banks including Credit Suisse Group AG and Goldman Sachs since May to engage potential investors, Chief Executive Officer Samuel Lim said. Reebonz is open to various options, he added, including funding from internet or luxury fashion companies that the company can tap to access their networks and accelerate growth.

“Luxury is a growing market and Reebonz doesn’t have many competitors,” said Ajay Sunder, vice president of digital transformation at Frost & Sullivan in Singapore. “They are the first portal people in cities like Singapore go to for luxury.”

Reebonz opened a $29 million, eight-story headquarters in Singapore last month as it gears up for the next phase of growth.

Read the rest of the story here

 

3.  Recommended Reading: Alibaba in America? Don’t count on it

Expanding to the US, much less creating 1 million jobs there, as Ma has pledged,will present some daunting challenges. In fact, the effort seems quite likely to fail.

One problem is the company’s business model. Alibaba is often referred to as the “Amazon of China,” but this ignores some important differences. Where Amazon.com Inc. has built world-class logistics operations to speed and standardize delivery, Alibaba has opted for an asset-light approach, in which customers ship directly to other customers through third-party logistics operators with warehouses throughout China. Alibaba just provides the platform.

If Ma wants to open the Chinese market to small U.S. businesses, he’ll need to expand this operation, while surmounting some serious legal and practical hurdles. Most large American companies already have operations in China, or established routes to ship goods there. Small ones won’t have the skills necessary to navigate Chinese paperwork, and shipping individual products will likely prove too costly to be worth the effort.

Read the rest of the story here.