This is Part 2 of my questions for Alibaba on Singles’ Day 2019. I’m on my way to Hangzhou shortly and am gonna try and figure these out. Part 1 is located here.
Question 5: What is the next wave of hard-to-replicate physical assets?
Alibaba is a competitive fortress. This comes from multiple factors like network effects, consumer habits, economies of scale (particularly in logistics), complementary platforms (especially in financial services), data advantages and learning advantages. The list of their strengths is pretty long.
But I think we are seeing two new Alibaba strengths emerging:
- Bundling, membership programs and increased customer capture and spending (mentioned above).
- The deployment of hard-to-replicate physical assets (especially in new retail).
If you are going to offer a combination of physical goods, digital entertainment and local services, you need an interesting combination of digital and physical assets. Especially if you are trying to do this in groceries and other perishables.
- You need a national logistics infrastructure that can offer on-demand delivery anywhere in China within days, if not hours. That means building or having access to delivery people and warehouses across China. And you need this infrastructure to operate in an integrated fashion for millions and millions of SKUs (hello AI).
- You need a supply chain that connects your logistics infrastructure to suppliers around the world. This is also harder for perishables. Can your platform promise that a durian picked on Thursday in Thailand will be delivered to a home in Gansu on Sunday, just as it is becoming ripe?
- You need a growing suite of local service providers. This means hundreds of thousands of restaurants (including new pop-up kitchens). It could it means Starbucks, hotels, massage therapists and who knows what? This part is evolving quickly.
- You need a national footprint of physical retail locations that have been digitized and brought into the platform. Alibaba now has +170 Freshippo stores, 450(?) Sun Art hypermarkets and all the smaller physical retailers now joining the platform. These “new retail” physical locations will serve as retailers, logistics nodes and local service locations. And as these sites are frequently within 2-3 km of peoples’ homes, their role as a forward logistics hub is likely their most important. CEO Danial Zhang has referred to on-demand delivery as the “infrastructure of new retail”.
So if you are competing with Alibaba (hello Pinduoduo), how do you compete with these physical assets? How expensive and / or difficult would it be to replicate them?
Investors and entrepreneurs are drawn to e-commerce because it is a spectacular business in terms of unit economics. From the margins to the working capital, a business made mostly of software has an amazing ability to grow and generate high returns on capital. It’s not as good as casinos or cigarette but it’s close.
However, the competitive barriers of purely digital businesses in e-commerce aren’t as awesome. The product offering and pricing are actually not that hard to replicate. And while the network effects can be good, they are not as strong as those in other platforms. We regularly see new e-commerce sites jump in and take market share. We don’t see that with WeChat.
However, when you move from pure digital e-commerce to e-commerce plus entertainment plus local services with an increasing physical infrastructure, the competitive picture starts to look much, much better. You lose some of the great unit economics of a purely digital business, but you do much better in your competitive protection. Becoming a digital-physical hybrid is a common defensive move in hyper-competitive digital China.
So Alibaba is moving from e-commerce to the ultimate B2C marketplace. And this is resulting in an impressive combination of digital and physical assets, which create a seamless experience for their consumers and an impossible structure to replicate for their competitors.
So, one of my questions is where is the next wave of physical assets going to be built? The international supply chain? Cross-border logistics in Asia?
Question 6: What is going to break on Singles’ Day?
Every manager at Alibaba knows that in under 12 months they are going to face a tidal wave of demand on Singles’ Day. So if you are automating warehouses in Wuxi, you know your system must be able to handle the coming wave. If you are building out payment processing between China and SE Asia, you have a similar challenge. Singles’ Day is a big stress test for Alibaba’s very big, very complicated system.
And some things are going to break. You build in excess capacity. You run tests. But Alibaba is building too many new things and then hitting them with a wave of volume. And this is a good thing. I wish our banks did the same thing every year.
So, my question is what is going to break this year?
And this is actually a stress test for merchants and brands as well. For them, it is not just about supplying the necessary products for one big sales day. For them, Singles’ Day also shapes their strategies for the entire year. It is when they do new product launches. It is when they gather data about their products and customers. You really don’t want to mess that up or have a system crash. I suspect these is where we are going to see the problems.
Question 7: What are the most powerful new use cases in new retail?
My final question.
The new retail initiatives in supermarkets, convenience stores, Starbucks outlets, furniture stores and hotels are creating interesting new use cases and business models. Some are amazing. But new retail doesn’t transform everything. It turns out buying a cup of coffee at Starbucks is pretty much the same whether you have delivery or not.
I’m looking the new use cases in retail that are really powerful. The ones that make the previous services or business models obsolete. Here is my working list of the most powerful ones thus far:
- Supermarkets and hypermarkets
- Furniture stores
- Luxury – both products and increasingly services
- Fashion and apparel
- Advanced services – especially education
I’m going to be on the lookout for any really compelling new use cases in new retail.
Ok. That’s my take. Thanks for reading. Part 1 is here.
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