In this four part series, I look at how “new retail” impacts the strategies of e-commerce market leaders Alibaba and JD. My take is basically five points:
Point 1: China is ground zero for the digital transformation of retail.
Explained in Part 1 here.
Point 2: But “new retail” is not just supermarkets and convenience stores. It’s much bigger and more sweeping than this.
Also in Part 1 here.
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”.
Explained in Part 2 here.
Point 4: “New retail” is a dramatic expansion of Alibaba’s strategy of pure digital competition into the physical world. And it hinges on the strange “economics of participation”.
Discussed in Part 3 here.
Point 5: Alibaba’s “new retail” strategy is going to increasingly challenge and complicate JD’s strategy.
In this last part, I discuss the last point that that Alibaba’s “new retail” strategy is going to increasingly challenge and complicate JD’s strategy.
Both JD and Amazon frequently talk about how they are fundamentally customer-focused companies. That their primary mission is to improve the consumer experience. Amazon’s Jeff Bezos has long talked about his desire to create the world’s most consumer-centric company. And JD famously got its start by rejecting consumer-unfriendly practices in China, such as negotiating prices and dealing in inauthentic goods. JD also later brought logistics and delivery in-house to better serve their customers.
Direct online retail is about focusing 100% on the consumer. And JD has been remarkably consistent in this over the past 17 years.
But I’m a competition guy. And I don’t think you can separate customer-focus from competitive dynamics. They are two sides of the same coin. Yes, people may like Pepsi versus Coke for various reasons, but it is the competitive dynamics that limits the choice to 2-3 types of cola in every store.
This is why JD’s response to “new retail” is so interesting. Because while the consumer experience in retail is converging to a seamless mix of physical and online touchpoints, the two fronts JD is straddling still have very different competitive dynamics. Just because the consumer experience is converging does not mean that the competitive dynamics of direct retail and marketplace retail are.
And that is the big strategy question here. Can JD continue to win in both direct and marketplace under new retail?
New retail is changing both the Western and Eastern fronts at the same time. We are seeing:
- Physical merchants and retail sites brought onto marketplace platforms (i.e., a new user group starting to participate)
- Offline sales data starting to be accessed and integrated into the consumer experience.
- Online consumers being steered to physical locations, disrupting the old rule of “location, location, location”.
- New types of complementary products being created online (especially in entertainment, finance and consumer credit). Note: Combining a clinic and a shopping mall is difficult in the real world. It is easy to do online.
- New business models being created. Supermarkets and convenience stores are the first to get digitally transformed.
- New types of linked business models being introduced. The Orlando-type complete online consumer destinations are the most sweeping versions of this (see Part 3).
As “new retail” starts to change the dynamics of both fronts, the situation with Alibaba is relatively clear. I think they are going to remain a purely digital business. I think they will focus on building more data and digital tools into their platforms. And I think they are going to keep bringing more users onto their platforms and get them to increase their participation.
For Alibaba, watch for offline retailers and offline sales data to move onto their platform in 2018. Also, keep an eye on their “uni-marketing” initiative. I have an article coming out of that shortly. And for everything else (logistics, delivery, physical sites, etc.), I think they will do partnerships and external companies. I don’t think they are going to own a lot of tangible assets directly.
For Alibaba, my main “new retail” questions are:
- How much physical retail do they need to win in each category? Do they need to own entire supermarkets to win in e-commerce for groceries? How many of them do they need?
- How much of the physical retail assets do you need to have in-house versus via franchise or partnership?
- Which products and services are enough to create an Orlando model, an all purpose online consumer destination? Which services are they going to say no to?
For JD, I think “new retail” is a much more complicated question.
On the Western front, JD’s ability to outspend their rivals on technology, logistics, delivery and now offline retail sites (such as their Wal-Mart deal) makes them very difficult to copy. So in that sense, new retail is just a new set of tangible assets to build or buy, something they are good at.
But adding physical retail assets is also a more complicated strategy than their current strategy of “profitless growth”, mostly in consumer products, computers, and appliances (50%) and general merchandise, books and other (50%). See Part 2 for more on that. A lot of their success on the Western front has been from their ability to use their tangible assets (warehouses, trucks, delivery) for multiple product categories.
But once you increase the complexity of your product categories and you add more and more physical retail assets, you lose a lot of this ability to standardize. You simply can’t use the same automated warehouse to ship both books and seafood. As they try to add new types of physical retail assets and business models, everything is going to become exponentially more complicated on the Western front. What physical assets and new business models they do and don’t do will be an important question.
However, on the Eastern front, their partnership with Tencent makes things more clear. This partnership is outstanding (and critical). It enables them to be part of an Orlando-like destination, that is far richer than just a pure digital e-commerce site. Plus Tencent is much stronger in social media than Alibaba and that is becoming more and more important in e-commerce deal (You can also note the increasing market share of Tencent Wallet vs. Alipay this past year. Social media is a big part of that.).
For JD, my main “new retail” questions are:
- Which product categories are they going to say no to on the direct retail side? Each new product category creates complexity for the logistics and delivery.
- Which “new retail” business models are they going to say no to on the direct retail side? Again, this will create lot of complexities.
- How much of the physical retail are they going to own themselves in their direct and marketplace businesses? How much will they own vs. control? In theory, physical retail is a dramatically bigger asset base than their logistics and delivery businesses. So what are they say no to in “new retail”?
- How much of the Orlando model do they need to do themselves versus via Tencent?
That’s it. Thanks for reading. It’s going to be fascinating to watch how this plays out over the next year.
Thanks for reading, jeff
Part 1 is here.
Part 2 is here.
Part 3 is here.
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