I have been arguing that new retail is much bigger than the supermarkets, delivery guys and convenience stores everyone has been talking about. And it is not about all the cool new tools like magic mirrors, robot waiters, and payment by facial recognition. Although, those are pretty fun.
New retail is really about a quantum increase in users, participation, data and supply-side scale. That’s my main point. And it only took me three articles to get to it.
In Part 1, I laid out the evolution of Alibaba’s retail platform in seven charts. In Part 2, I argued this has given them four superpowers (at least). It ended with the below chart, which is pretty much how Alibaba looked pre-new retail.
Yes, it’s kind of complication. But the engine at the center of all of it is 1-2 core interactions on the platform. This is their marketplace (Tmall, Taobao) that connects online merchants and brands with Chinese consumers. That core interaction dropped the transaction costs (search, coordination, negotiation, and information asymmetry) between these groups such that small and medium enterprises were able to do transactions.
With these transactions, they brought users (consumers, online merchants), participation (buying, selling, writing reviews, etc.) and data onto the platform. And these are the main intangible assets that enable everything else. They are also what also get you demand-side scale, which is Alibaba’s main power.
From this position of strength, Alibaba was then able to build additional advantages, add more user groups (content creators, advertisers, etc.), build supply side scale (warehouses, server farms), innovate new use cases, and build out in multiple directions. I went through all this in detail in Part 1.
However… (you knew it was coming)
All of this evolution has been about core interactions that are happening online. Online consumers are interacting with online merchants and brands. On the supply-side, there are some tangible fixed assets (warehouses, delivery people, etc.). And these fixed assets can actually be a real source of competitive protection. But it’s mostly an online phenomenon.
New retail expands this to the physical world – and is a quantum increase in users, data and participation
What new retail is really doing is bringing a massive new user group onto the platform: literally millions of physical retailers.
This is stunning to think about. These are the millions of restaurants, mom-and-pop shops, convenience stores, department stores, hotels, pharmacies, grocery stores and other physical retailers across China (to begin with). This is a huge new group of users onto the platform.
And just think about how much data they are bringing with them.
- Sales information from physical retailers is being combined with online sales data. Note: Alipay already gives the sales amounts but this is item by item sales data.
- These merchants are also digitizing their operations. So their inventory management and purchasing data is also being added.
- It will also add a wealth of new types of data as stores continue to upgrade their operations with new digital tools. Retailers are adding computer vision, facial recognition, natural language processing and other digital tools. The store will know who came in the store, what they did, what they looked at, what items they picked up, how they made their choices and so on. Physical stores are going to be able to capture all sorts of fascinating data that you can’t get online. And this is coming into the platform.
New retail is also a big increase in supply-side scale.
Now other user groups have been added to Alibaba before. Content creators are a big group on Youku. Advertisers are important. We even have user groups like Influencers through Bilibili and others. But none of these user groups brought real estate with them.
Physical retailers are bringing physical assets with them. Suddenly Alibaba can extend itself into local supermarkets. Suddenly they can offer on-demand delivery from local convenience stores. And so on. See the below chart.
The tangible assets of new retail are a combination of retail space, logistics nodes and service centers. That is why Freshippo can sell you pasta (physical retail), cook your dinner (a local service) and deliver your packages and food (logistics / delivery) in 30 minutes from the same location.
It’s clear Alibaba wants a retail footprint that gets them close to people’s homes. The more inventory you can put closer to people the faster your delivery (which is hugely important in China).
However, it’s not clear to me how much of this real estate will be owned, operated, partnered or franchised. It is beginning to look like Alibaba will own a basic operational skeleton (RT-Mart plus Hema). And from this operational skeleton, I suspect they will franchise their business model and digital / data tools (like Cainiao). But I’m just guessing.
New retail creates new network effects and competitive advantages.
So new retail adds a new user group, lots of participation and data, and lots of physical locations (serving as retail, logistics, and service centers). And all this creates lots of new advantages.
I’m not going to go through all the details about digital competition. It’s a lot of theory, which I teach a whole course on. And I did lay some of it out in Part 2. But you can see in the chart, I’ve noted where you can create switching costs, a dramatically improved consumer experience, network effects and complements.
For example, you get even more economies of scale on the supply side. It is a classic competitive advantage. If you are a new entrant to this business, you no longer have to just replicate an online marketplace (already very hard). You also have to replicate a national footprint of physical stores and warehouses. Good luck with that.
There are lots of switching costs for the physical merchants. Mom-and-pop stores are getting digital upgrades and getting lots of inventory and supply chain management. That’s awesome. But it’s also hard to swap out for another system. B2B software is famous for creating billionaires because of these switching costs (just try switching out Windows on your computer).
But the most interesting advantage is the dramatically improved consumer experience new retail is creating (one of my 4 digital superpowers. See Part 2.). If you are a traditional supermarket, how do you compete with Freshippo and the amazing service it is creating? How do you compete with its ability to take 60% of orders from phones outside the store? With its integration with the entire Taobao marketplace of products and services?
New retail is going to make a lot of non-digitized businesses obsolete. If you want to know what that looks like, ask a traditional bike rental business how they are doing in China today.
New retail will enable an explosion of creativity, use cases and business models.
This is my last point – and my favorite part of new retail.
In Part 1, I talked about how online platforms often have a powerful ability to exploit their data and launch new services for their users. When you have the users, data and participation, you have an amazing ability to see opportunities, create new things and roll them out quickly. Alibaba is really great at this. It is how they are always jumping into new businesses like banking, hotels and entertainment.
Now imagine, you also have a massive new user group (like physical retailers), their participation and their data. And you have the physical retail, the logistics network and the growing local services capabilities as well. How many businesses can you create or re-imagine?
And that is what is happening right now. You can see Alibaba experimenting with lots of new use cases and business models. Their supermarkets have added restaurants with robot waiters. They have opened a mostly automated hotel in Hangzhou. They are partnering with Starbucks on delivery. They have partnered with Intersport to re-imagine sports apparel. And so on. There is so much creativity happening right now. It’s really amazing.
That’s it. Thanks for reading. Especially if you got through all three articles. Cheers, jeff
- The Rise of Alibaba and China’s Super-Platforms in 7 Slides (Pt 1 of 3)
- The 4 Superpowers Of China’s Digital Giants (Pt 2 of 3)
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