This is Part 2 of my diary of my weekend with Alibaba management during Singles’ Day 2017. In Part 1 (here), I talked about the initial meetings and going to the big gala on Friday night. If you’re looking for serious content, this is probably not your article.

Visit to Hema supermarket – and thoughts on the intangibles of physical retail

After a late night at the big gala, our influencer group boarded a bus around 10:30am Saturday morning – and headed to one of Alibaba’s 20 Hema supermarkets. Lots of folk have written about these prototype “new retail” grocery stores / fulfillment centers. They are a re-imaging of physical retail that combines the online, physical and data assets to create a new level of service and convenience for consumers.

I am going to skip over the basic stuff of the visit because it is repeated elsewhere. What jumps out at me is that this moves lots of valuable intangible assets of physical retail onto Alibaba’s platform.

More on that in a second. But first a short clip of our trip, mostly because I like the background music.

Ok. Back to the point about intangible assets in physical retail.

My worldview is almost entirely based on competition. And there are several different approaches to this. You can look at economic forces over the longer term (like Michael Porter at HBS). You can look at competitive advantages (like Bruce Greenwald at Columbia). You can look at dynamic competition (like George Day at Wharton).

But all these approaches tend to be somewhat difficult in software. An approach I find helpful is to take a resources view. Instead of trying to take apart the competitive strengths in rapidly changing situations, you can just compare the resources and assets used (which change slower). Instead of trying to figure out why and when a Four Seasons in Maui can charge a premium versus competitors, you can just compare its resources. Such as its beachfront property and its most loyal customers.

So while it’s fun to take apart Alibaba in terms of network effects, complementary networks, data advantages and all that, I often find it easier just to look at the company as a big collection of difficult to replicate assets, most of which are intangible.

A resources view is really helpful in this situation. Because we don’t know what the Hema supermarkets are going to end up being. Or what kind of revenue, profitability and ROIC they will one day have. But we do know they will bring valuable new assets onto Alibaba’s platform. And it won’t be the physical assets, because Alibaba is probably not going to buy or operate too many traditional retailers. But they are bringing over important intangible assets – such as online connections to physical merchants and retailers, offline retail purchases, and offline shopping data. These assets will move onto the platform to complement online consumers, online merchants and brands and online purchasing data. And there will be lots of opportunities for profit. You can buy the beachfront property before you 100% know what you are going to do with it.

And think about how many supermarkets there are in China? How many convenience stores? What happens when you bring these onto the platform and connect them to Alibaba’s 450M consumers? Think about the 85% of retail transactions that are offline? What happens when you bring any percentage of those onto the Alibaba marketplace? “New retail” is a potentially massive addition to Alibaba’s ecosystem.

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We got a nice tour of the supermarket. The food was fantastic. I really wanted to see the fulfilment center in the back but we weren’t allowed. Here are some factoids I jotted down along the way:

• All purchases (online and from within the store) run through an app, which syncs to accounts on Taobao. Sales have been about 50/50 from in the store and from online.
• They partner with other companies to add laundry, gym, nail salon and other services. So Alibaba brings the customers, location and technology and other companies bring services. Most of these are on one year contracts.
• There is a 3km radius for delivery for the store.
• Delivery is people with scooters. Delivery time can be as fast as 30 minutes. Delivery is done in-house with dedicated staff, for now.
• Everyone is excited about delivery. But I think “order and pick up” has the most compelling economics. The model is I like is “retail + services + fulfillment”.
• The fulfillment center in the back actually extends into the retail space. Staff pick items for orders, place them in bags and put them on conveyor belts that run along the ceiling.
• Most of the store operations are run by Alibaba at this point. The 200 employees in this store (most were in fulfilment) were Alibaba people. But this is for the development phase. They will end up being the technology partner and franchise, not the operator.
• Seafood is the most popular product.

A rare Jonathan Woetzel sighting

In a nice surprise, my long-time co-author and co-professor Jonathan Woetzel showed up at the supermarket. He is the McKinsey & Co guru for urbanization and co-head of the McKinsey Global Institute. This basically means he is in a different country every couple of days. So while we have taught together for 6 years, actually seeing him in person is a bit of a rarity. He had just flown in from Beijing, where he was teaching our strategy course (we tag team based on who is in town on a particular day).

We ended up chatting about retail stuff and the Hema business model. I later got him to record a quick summary of what he learned from the weekend. You can see his reply here (along with Martin Newman, Daniel Zipser and Kitty Fok).

Media Event with Alibaba CEO Daniel Zhang

After meetings with Alibaba President Michael Evans (here) and CMO Chris Tung (here), we stopped in to see Daniel Zhang taking questions from the international press. Here are a couple of take-aways from his answers:

• Alibaba is focused on Malaysia and Southeast Asia. He made an interesting comment about how they need a logistics hub in Malaysia. Having the right logistics infrastructure will be critical for serving the Malaysian SMEs.
• India is still a young market. The digital payment usage is growing rapidly right now. It will be important to localize.
• They are increasingly bringing the 11-11 festival to Malaysia. They did more promotions this year and are executing a “cross-border export growth strategy”. It helps that there are a lot of Chinese living in Malaysia.
• They are not planning on running lots of convenience stores themselves. They may or may not consolidate but Alibaba’s focus is to “leverage technology and data’ to help them go digital.” To help with “successful digital transformation.”

The conclusion of Singles’ Day 2017

We then went to the media center in Puxi, which was great fun. It’s a big room filled with reporters and all the information for Singles’ Day comes up on a huge screen. If you haven’t seen Chinese media in action, it’s pretty impressive. Hundreds of journalists all furiously typing away, posting on various platforms and doing interviews in the skyboxes.

At midnight, the festival officially ended and the grand total was $25.2B in GMV. It was a huge number as expected. That 90% of purchases were done on smartphones was a bit of a surprise. The amount of purchases made using credit was also a surprise.

Following the close, there were celebratory events on stage. Alibaba’s senior management (Joe Tsai, Daniel Zhang, Michael Evans, Chris Tung) all arrived, in some cases with their families. And then finally Jack Ma arrived. Note: it’s pretty cool how he always goes around without visible body guards (Mark Zuckerberg always seems to have like 8 big guys around him). You can see a short video of the media center and the final moments below.

That’s it for my notes.

A special thanks to Jennifer Kuperman and Erica Matthews of Alibaba, shown in the below picture with Nicole Kidman. It was an amazing experience and I greatly appreciated the invitation.

Thanks for reading. Back to more business-type writing next week, Jeff

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I write, speak and consult about how to win (and not lose) in digital strategy and transformation.

I am the founder of TechMoat Consulting, a boutique consulting firm that helps retailers, brands, and technology companies exploit digital change to grow faster, innovate better and build digital moats. Get in touch here.

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Photo courtesy of Alibaba