China is now ground zero for what Alibaba has called “new retail”, a sweeping digital transformation that merges physical and online retail into a seamless consumer experience. And this poses a fundamental strategic challenge to Alibaba’s primary competitor JD.

In this four part series, I make the following points about this situation:

Point 1: China is ground zero for the digital transformation of retail.

Point 2: But “new retail” is not just supermarkets and convenience stores. It’s much bigger and more sweeping than this.

Point 3: JD has been successfully following a strategy of “profitless growth”. But this is different than the pure digital competition seen in Alibaba and in “new retail”.

Point 4: “New retail” is a bold extension of Alibaba’s strategy of pure digital competition into the physical world. And it hinges on the strange “economics of participation”.

Point 5: Alibaba’s “new retail” strategy is going to increasingly challenge and complicate JD’s strategy.

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Point 1: China is ground zero for the digital transformation of retail.

The main reasons for this are:

• E-commerce in China is already the world’s largest by activity and revenue.
• Chinese consumers adopt new digital and mobile technologies faster and more enthusiastically than just about anywhere else.
• China is unique in that it has digital giants (Alibaba, Tencent, JD) that dominate the market, that can concentrate huge amounts of data and that can implement change in a sweeping fashion.
• Additionally, the offline retail world in China is far less developed, efficient and productive than in Western countries. So when it comes to retail transformation, China gives you get a much bigger bang for your digital buck.
• Finally, the impact of “new retail” in China is far beyond just retail. It is also driving changes in consumer credit and finance (including wealth management), in digital media and entertainment and in social media.

Basically, the digital transformation of Chinese retail, as described by Alibaba’s “new retail” initiative, is a really big deal.

And how this impacts JD.com is particularly important. Because Alibaba is a marketplace model and a pure digital competitor. But JD remains a creature with both direct retail and marketplace business models. So it competes with Alibaba’s digital marketplaces on one side. But it also competes with more traditional retailers like Gome and Suning on the other side. It is fighting a war on two fronts, each with different economics and competitive dynamics. And “new retail” is now changing both of these fronts. That’s what makes JD so interesting right now.

Point 2: But “new retail” is not just supermarkets and convenience stores. It’s much bigger and more sweeping than this.

You have probably seen a lot of news on supermarkets in the past months. Amazon bought Whole foods, Alibaba bought Sun Art and opened their Hema supermarkets. And JD continues to develop its partnership with Walmart China.

However, while these widely reported stories are supposed to be about “new retail”, they are mostly about the grocery business going online. It’s mostly a new category expansion in e-commerce.

And grocery e-commerce is definitely important. It is a unique sector and is one of, if not, the largest categories by sales (and still only about 2% online). Groceries also have lots of complexities in what consumers want (near their home, frequent purchases), in logistics (cold chain) and in the supply chain (cross-border supply of fresh food). So there are lots of interesting moves being made (such as buying physical supermarkets) to address these complexities. I think that is most of what he have been seeing.

You can see other category expansions by JD and Alibaba this year. For example, JD and Alibaba are both moving into fashion and luxury. JD recently bought Farfetch and launched Toplife. JD and Tencent just invested in VIP shop, which specializes in flash sales (mostly for apparel).

However, “new retail” is far more sweeping than either of these category expansions. It will impact shopping malls, supermarkets, hypermarkets, convenience stores and most physical merchants across China. It will include pop-up stores, new buying and delivery locations, auto dealerships, cashier-less stores, banks and finance retail locations and lots more. You really can’t use too much hyperbole when talking about what is happening with Chinese consumers and retail right now.

So my point is don’t get too caught up in talking about supermarkets. New retail is much more sweeping than this.

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That’s it for Part 1. In Part 2, I go into JD’s strategy and how it differs from Alibaba’s.

Cheers, jeff

Part 2 is here.

Part 3 is here.

Part 4 is here.

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