This week’s podcast is about online-merge-offline (OMO) platforms. A business model that is just emerging in China. I talk about Sun Art Retail and Beike / Lianjia as examples.
Here is the BCG article I mentioned.
- Lianjia and Beike’s Big Platform Play in Chinese Real Estate (Asia Tech Strategy – Daily Update)
- Alibaba Takes Over Sun Art Retail. Is It Going to Take Off? Or Is It Infrastructure? (pt 1 of 2) (Asia Tech Strategy – Daily Update)
From the Concept Library, concepts for this article are:
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Welcome welcome everybody. My name is Jeff Towson and this is Tech Strategy and the topic for today China’s new Omo platforms I’m gonna talk a bit about Alibaba and Sun Art retail as well as Baicu Lianjia and I’ve written a lot about these in the last week or so for those of you who are subscribers Actually kind of a lot and There is a lot there and I know it was kind of going down the rabbit hole in terms of theory for a lot of that. So I wanted to kind of bubble that up to the top and say, look, what’s important here? Because it’s actually kind of a big important idea, this OMO, which is online merge offline platforms. So these are platform business models, whether they’re marketplaces or audience builders or whatever, but they are inherently a mixture, a merger of online and offline assets. And it’s kind of a new thing. And these two companies are both good examples of that. I think it could be a, maybe, a very powerful competitive structure. That’s kind of where it is in my brain, that this is sort of top of the pyramid, winner take all, winner take most, competitive positioning if you can build an OMO platform. And I’ll talk a little bit about these companies and how I see it. Now, for those of you who are subscribers, I did send you kind of a… a decent amount of material on these two companies. I’m gonna boil that up, sort of a high level, what are the big takeaways. Also, because I think this is one these companies are important to understand. They don’t get nearly as much coverage as the famous ones, and I think the ideas that they present are very, very important. But I also don’t think you can get it in one pass. I think this is one of those ones we’re talking about at several times helps to sort of take it apart and get it familiar. I definitely, one pass, it’s too much. So if you’re feeling a little bit overwhelmed with those long emails, Don’t. That was just the first pass. We’ll keep doing it and it’ll be but it’s a lot. I mean this this there’s a lot going on here Two other companies that I was gonna send you stuff about and I think I’m not gonna it’s Ping on and then Kingsoft Kingsoft is Software company Wei Jun the founder of Xiaomi, you know That was sort of how he trained and he was CEO of that for many years and he’s I believe he’s still technically chairman of Kingsoft I couldn’t get a lot of great data on that. Once you move to the B2B side of China, away from B2C, often it is hard to get real good information on what’s going on because so much of B2B is just contracts between company A and company B and you don’t really know what’s in those contracts. I mean you can kind of guess and you can see the cumulative revenue, but you don’t really know what’s kind of baked into that. So Kingsoft, I couldn’t really get close enough to it. but if that’s in your wheelhouse, I would encourage you to take a look at it. The other one, Ping An, also, really, Ping An is a major tech company. You know, it started as a major insurance company in the 1990s, Peter Ma, really interesting founder in China. Then it became basically the largest trust company, so a lot of wealth management products, and then it kind of sidestepped its way into being a bank, which it did very cleverly by a couple sort of M&A routes. But really, for about the last six, seven years, I mean, they’re a tech company. That is what they’re doing. They are building ecosystems, they’re doing digital. There’s a lot going on there. I think when you talk about like the big five or 10 tech companies of China, you gotta put Ping An on that list. So I was digging into that, I was gonna write about it, but it’s too complicated for me. Too much of financial services, too many regulations, I don’t understand, insurance, banking, wealth management, all of that. And also it’s just a really big complication. There’s basically four big complicated companies all sort of smushed together. So I’m not probably gonna do that, but I would encourage you if that’s in your strike zone that you feel that’s really one we should be talking about. So I’d encourage you to look at it. And if you’re not a subscriber, feel free to go over to jefftowson.com and sign up there. There’s a free 30 day trial. Don’t miss out, you never know. Might find a… good investment opportunity you didn’t know about, you might find a problem with something you have been investing in that you didn’t know about. So maybe go over and try that out. And my standard disclaimer, as always, that nothing in this podcast or in my writing or on the website is investment advice. The numbers and information from me and any guests may be incorrect. The views and opinions may be wrong or no longer relevant or accurate. Overall, investing is risky. This is not investment advice. Do your own research. Okay, let’s get into the content. Now the two lessons for today, the two concepts, and I’m gonna try and go through concepts a little more systematically because I know it’s easy to get lost in all of this. So, you know, each episode I’m gonna sort of point out two main ideas and all of these can be found on the webpage on the concept library. But the two I want you to think about today is this idea of online merge offline, which when it’s applied to retail is called new retail, but it’s really a bigger idea. It’s… the idea that we’re gonna merge online and offline assets into one integrated consumer or customer experience. And then the other idea, so we’ll call that new retailer OMO. And the other idea is digital physical hybrids, which I’ve talked about in the past that I like digital companies, software companies, platform companies that are a mix of digital and physical assets, like you have a marketplace model, like a Taobao or a Shopee or whatever. And that’s a digital creature on the demand side. It’s a platform. But underneath that, you have a lot of physical assets like warehouses, things like that. The combination tends to be quite nice. The digital stuff has better economics, generally speaking, because software has very attractive economics. But it’s much harder to be defensible as a purely software digital entity, unless you have network effects or something. So when you add a lot of physical assets, that creates a nice barrier to entry. And it does take away your economics a little bit, but that’s one of the reasons I like companies like Taobao so much, because they’re a nice mix of digital and physical. And I call that sort of the digital physical hybrid. And it was, we’ll talk about OMO as a different type of digital physical hybrid than I’ve talked about before. Okay, now. You know, the way e-commerce and all of this has evolved, just digital, is online versus offline, right? That was the story for a long time. Physical stores versus online stores, physical travel agencies versus online travel agencies, and we saw that for a long time. And within that, we saw this sort of digital-physical hybrid thing emerge in some sectors, but not in others. There’s not a physical component to YouTube. That’s a purely digital creature. But in marketplaces, like I mentioned Taobao, we see that the warehouses are the physical side and then the online, the app is the digital side. And we can kinda see something in the middle ground between those two, like Ctrip or Expedia. It’s like, okay, it’s mostly a digital creature. You go on your app, you book your hotel, you prepare it, and you don’t have warehouses, but you do have lots and lots of customer service reps. because you have to handle calls from people with travel problems, and you have to have, it’s a pretty big capability. But again, I’d kind of put that in the middle. It’s not as defensible, it’s not as much of a barrier as say having to build 800 warehouses across China. And we could also put in there in that muddy middle, we could look at something like a Go-Jek or a Grab. Yeah, it’s mostly an online creature, but you do have this. army of people on scooters and that’s not that hard to replicate, not like the warehouses, but it’s significant. I mean, it counts a bit. Those companies kind of have the worst of both is that you don’t really get an awesome defensibility and it does hurt your economics pretty well because unlike a warehouse, which is more of a fixed cost and so you get operating leverage, you know, those rider costs, the delivery people costs, that’s a variable cost. hit your gross margin on every single activity so you don’t get the operating leverage. So you can kind of break it up that way, but okay. Now, as we kind of evolve, mostly out of China, then we get to O2O, which is really about WeChat. I mean, that’s really the point when people stopped doing stuff on their laptops and they started doing stuff on their phones as they walked around all day long, which was a massive increase in activity levels by people. And when they did WeChat pay and Alipay, suddenly everyone walking around the streets with a phone in their pocket could buy things. And you could start to sort of have this O2O, online to offline activity. And the two that everyone talked about, this is like five years ago, you know, people talked about Uber and DD, and they talked about food delivery and these things that were, you know, kind of a mix of the online world and the physical world. But it had a lot to do with the fact that people could just pay for things walking down the street. And you saw a mo bike. or a Hello Bike on the street, and you could scan it with your phone and unlock it and pay for it right there. Or it could be these crazy vending machines we’re seeing all over China. All of that is kind of O2O. Now I think that term is going to fade away and we get to Omo which was a Kaifuli term, the AI guru of China. I think he came up with it and he talked about it and I think that’s how people started citing it. Omo which is online merge offline where we’re going to take all the physical assets, all the digital assets, we’re going to integrate them, merge them and from the consumer perspective it’s going to turn into one seamless data-driven experience. You’re just not gonna know the difference. You’re just gonna walk through the supermarket and you’re gonna be looking at items on the shelf and maybe scanning them with your phone to get information on the items and using augmented reality and learning their history. Talking to your phone’s AI assistant as you walk around and they’ll deliver it or you can take it with you or they’ll cook it for you. And it’s just all gonna be mixed together in the consumer experience in lots of ways. And… That’s just what people are experimenting right now. And retail is going first. So OMO in retail, we call it new retail. But we’re also gonna see it in healthcare. We’re gonna see it in education. We’re gonna see it in a lot of interesting sectors. And it’s just that retail is going first. Supermarkets were really the first. But we also see department stores. Fashion turns out to be pretty impressive. Lucky and Coffee kinda tried to do this. They kind of position themselves as the new retail of coffee shops. It turns out there wasn’t a lot there. But that was kind of the story over the last couple years. Anyway, so what I’m sort of teeing up is this idea of, okay, I think there’s a level beyond that, which is what I’m calling OMO platforms. You know, when you have a platform business model, a marketplace, you’re on your phone, you’re shopping on Lazada or Taobao or whatever, and… The consumer experience is mostly digital, and then the physical assets are mostly about the supporting infrastructure, the warehouses, things like that. Okay, but the engagements are mostly through your phone. That’s kind of all of these digital physical hybrids we’ve seen so far. The engagements of the consumer, platform business models, as I’ve kind of said many times, are built on four assets, four, mostly intangible assets, users, engagement, data. and then cash flow liquidity from the interactions. That’s what you accumulate to build a platform business model. But that engagement bit, that participation bit has mostly been people tapping on their smartphones. So what I’m calling, and then the physical side. has mostly been supporting that activity on your phone. So it’s like the engagement has been, yes, the company’s been a digital physical hybrid, but the engagement that creates the platform has been 100% digital. OMO platform is when the engagement on the platform is suddenly a mix of physical and digital, where the engagement the consumer’s doing is not just tapping on their phone, it’s walking around the store and doing things. So it’s like a big broadening of the consumer experience that creates that engagement. And that’s gonna make these platforms very, very different than the platforms we’ve seen before where I’m just scrolling in a newsfeed to buy something or to watch a video. No, suddenly my engagement with the platform is going to be a mix of digital and physical experiences. Let’s call it real world experiences. So another way to call OMO platforms. we could call that experience-based platforms, where it’s about sort of experiences in life that are real and digital together, and that’s what’s creating the platform. And if you look at my pyramid, my sort of competition strength and defensibility pyramid, you know, it’s the bottom of the pyramid, which is operating speed, and then the top of the pyramid is structural advantages. And you wanna try and build structural advantages as much as you can, even though they are probably transitory. And, you know, I talked about moats barriers, but at the very top, there’s a red pyramid, which I sort of top of the pyramid, which is the best, you know, the higher you go up on the pyramid, the better life gets. The greater your competitive strength and defensibility at the top of the pyramid is winner take all winner take most. And that’s kind of where I’m putting OMO platforms because imagine you have a platform business model where It’s about two user groups, merchants, consumers, let’s say if it’s a marketplace. Those are the user groups. There’s a lot of interactions between those user groups and the engagement and the participation is not just people tapping on their phones, it’s real world experiences plus digital interactions altogether. Now, how hard would it be to replicate that? Suddenly, if you wanna replicate, hey, that’s a really good grocery store marketplace where you can… buy on your phone or walk through all their stores and do it in person. If I wanna replicate that, I don’t just have to make the app and then some warehouses, which is hard enough. I have to make the app, all the physical stores, all the integration of the physical stores and the digital stuff and the warehouses. It’s a very, very big barrier. That’s kinda why I’m thinking about it. Okay, that’s the theory. Let me talk about the company. So we’ll start with SunArt Retail. Now this company is public. This was recommended by a subscriber, which thank you very much. That was really a good recommendation. And I mean, it’s a big hypermarket, right? And hypermarkets are a pretty interesting business model. I mean, it’s a bit of a sliding scale. Supermarkets, we all know it’s supermarkets. Hypermarkets are bigger, greater selection, although there tends to be a lot of sort of grocery, dairy, fast moving consumer goods. And then it can sort of expand into non-grocery items as well. They get bigger. And then I guess you could consider even bigger would be, you know, super stores like Walmart ish, and then you could probably even go further to Costco and these, you know, membership clubs. But, you know, it’s, it’s a hypermarket is a pretty well-known term. And, you know, we’ve seen this business model for quite some time. It’s one of the few traditional retail business models that I like. I mean, most retail is pretty tough. not a lot of defensibility, not a lot of strengths. It’s a hard business most of it, but there are a couple business models that are pretty impressive and obviously Walmart’s one of them. I mean, there’s a reason why the whole Walmart family is so ridiculously wealthy is because it was a very powerful business model coming out of Walmart. And that’s kind of between a hypermarket and a superstore depending on where you are and how you’re defining that. But it’s basically in that category. And their pitch is pretty simple. it’s, you know, we have, if you’re going to, if you’re a consumer, the pitch is basically, look, we have everything you might need for most of your purchases in life. So we have the biggest selection and the lowest prices. So there’s no reason to go anywhere else. And that’s by and large true. I mean, that’s kind of their thing. And they’re all about economies of scale. I’m not gonna go into that, but you know, SunArt was, you know, hypermarket model. And there’s others, obviously, Carrefour and things like that. But, you know, This has been around in China for 20 years, founded in 2000. It was actually two separate retailers that were both doing hypermarkets, and then they merged up in 2001-ish. And they just started opening these big retail stores, 6,000 to 10,000 square meters, maybe 20,000 SKUs per store. And it’s just a gradual expansion over time because they’re physical assets. It takes a long time. And over 20 years, they… Depending how you rank these things, they’re either number one two or three in China for hypermarkets. They got about 480 of these stores across 230 cities in China. I mean, it’s a massive retail business and There were others like this Walmart China, obviously and then Cara for although they sold their stores to a Suning year or two ago but you know that that’s the business and You know, their big problem is the same as Walmart’s. It’s not that you’re getting eaten by other retailers because they’re kind of the biggest animal in the jungle. It’s the online, right? It’s Walmart versus Amazon. So, you know, the shift from offline to online has been a problem from them. And the response by most of these companies has been, we’ve got to build out our e-commerce online game. And in our physical store, we are going to shift the mix. away from basic goods that can be bought online without any need to see it in person, without any need to get it immediately. We’ll shift to things that require sort of in-person selection, frequent visits, no waits, which is a lot of groceries, a lot of food items, dairy, fast moving consumer goods. So you see the physical stores have shifted their mix over to that. And the other stuff, you know, they try and build up an online presence. And SunArt did quite well. when they really did quite well. They built an online presence. They started shifting their mix in their stores more to produce basically things that are perishable and that you want to see in person and you don’t want to wait three days to get. Okay fine. And then in a stroke of either amazing planning or very good luck they began to partner with Alibaba in 2017. Now that’s pretty awesome. This is about the same time Alibaba was rolling out their new retail initiative, and when they started doing their new retail, which is OMO, they wanted to integrate the physical and the digital assets. Well, they needed a bunch of stores. And how many do they need ultimately? I don’t know, maybe 800 to cover all of China. And so they started opening their He Ma stores, which are now called Fresh Hippo, which are supermarkets. And then they also… it partnered with Sun Art which got them access to 430 stores. So today and then in the end of 2020 they basically bought majority control of Sun Art. So it’s now an Alibaba controlled company and between Sun Art and their Hema today they probably have about 650 retail stores focused on grocery. So you can see they’re putting the pieces together and at the same time over the last couple years Sun Art has been building out their e-commerce capabilities with the help of Alibaba. I mean if you’re going to build out e-commerce and your partner’s Alibaba, you got it made, right? You can build out some of your capabilities. You can just integrate some of theirs. But you can kind of see the pieces which are you need to have a great app that everyone uses. You need to have the physical stores that are close to people’s houses. And then you need on-demand rapid delivery. Those are kind of the building blocks of this and they have all three. And that makes it a really interesting company. And if we look at SunArts numbers, what is interesting is during the sort of COVID year in China, their numbers basically didn’t move. They had about 95 billion renminbi in revenue at about a 5% operating margin, 2019. In 2020 looked basically the same, didn’t move. And really their revenue has been flat for several years. So their economics appear stable. They look defensible to me. But what has happened underneath those top line numbers is they’ve had a shift from their sales in stores to their sales online. They’ve also had a shift over to fresh products and dairy. In 2020, their hypermarket revenue was about 57% fresh products and dairy. About 38% was fast moving consumer goods. So, you know, that turned out to be a pretty fantastic positioning. If you’re gonna get hit by COVID, which all the retailers got hit, well, it turns out the stuff that people kept buying was groceries, right? That didn’t decrease. And it turns out they shifted from physical purchases to online purchases, but this company already had both channels in place. So they just channel switched over to the other one and their numbers didn’t move, at least at the top level. And then you can see them building out their mobile app, their delivery services, all the pieces are basically there and you can see them in Alibaba sort of experimenting and digitizing and trying new business formats. They’re opening some smaller stores and they’re opening some warehouse type locations. So you can see they’re kind of experimenting with their business model now that they have all the main pieces in place. And I would put all of this as sort of version one of an OMO platform. This is, you can see the e-commerce piece. I mean, ultimately Alibaba is a platform building company. That’s what they do. They only build platforms. Okay, and in this case, they have the physical assets and they have the digital assets. They’re building a platform and unlike traditional or unlike other digital physical hybrids, where the online, the user experience and engagement is all digital and then the physical side is the supporting infrastructure, in this case, the user engagement is going to be a mix of online and offline at the same time. You’ll walk into the store, you’ll use the app, all of that will create engagement and data. So I mean, on my short list of OMO platforms, this looks like the first real one where all the pieces are in place. And when I try and place this on my pyramid, I go right to the top, because imagine you’re competing with this. Imagine you’re a regular hypermarket down the street without all that e-commerce stuff. How do you compete with this thing? Or imagine you’re an e-commerce site and you don’t have the physical 600, 800 stores that are central to the user experience. How do you compete with that? I mean, just think of all the advantages a company like SunArt is getting now from let’s say Alibaba’s ecosystem. Lot more customers, a lot of online traffic, their marketing and customer acquisition costs. have dropped dramatically. They’re not putting ads up around town anymore. They’re part of Alibaba. They can just direct traffic. They have arguably the world’s most advanced e-commerce technology now, which other supermarkets absolutely do not have. They’re starting to get data about their consumers. 360 degree behavioral data, not just about consumers that come into their store, but pretty much anyone who lives within a two kilometer radius of the store. they will know a lot about them because Alibaba knows a lot about them. The IT resources they can access now, Alibaba Cloud is a huge initiative. The financial, the accounting software, I mean, how many software engineers do you think the typical hypermarket company has? Right, they outgun everybody in that regard. And then they’ve got the logistics infrastructure behind them, Tynow. And then at the end of the day, Alibaba’s a cash machine and they can fund them with money They could make, you know, they could let this company run at negative cash low forever if they think it’s a good strategic move and just create these amazing user experiences by this is how you now engage with the Alibaba platform as you come into our stores, which are these new business models that no one’s ever seen offering user experiences we’ve never seen before. How do you compete with any of that? If you’re a regular supermarket or you’re a regular e-commerce company without all these supermarkets. So that’s kind of why I put it at the top of the pyramid and just sort of, you know, I call this version 1.0 of a true OMO platform. Now the question I did raise on this was, okay, does that mean it’s a good investment or a bad investment? Well, I think the issue is not the relationship, the competitive relationship between this and other hypermarkets. The key question is sort of internal to Alibaba. You know, does Alibaba view this as a profit center, a growth engine? like they do for Alibaba Cloud? Or do they view this as infrastructure to support their other initiatives like say Taobao? And that’s where the profits are gonna go. This is just gonna be infrastructure. How do they view it? I don’t know. But that would be kind of a, it’s kind of the internal management and questions that are gonna be interesting about this. But I think the competitive picture versus everyone else is daunting. Okay, that’s the first one. And let me go into the second one now, which is Beika Lianjia, which is again, this one is earlier stage in terms of an OMO platform where the pieces are being put together. They haven’t quite put all the pieces together on this one yet, but it looks to me like they’re trying. So that’s the next company, which is RE Holdings. That’s the name it is trading under, but the brand names it has are Lianjia and Beika. Now, Baika, I’m not gonna use all their names, I’ll just keep calling it Baika, but it’s, you know, this is a traditional residential real estate broker. So this is, you know, you walk down literally any street in China, and you know, there’s gonna, what’s gonna be on a regular street? There’s gonna be a supermarket, you know, bunch of people selling cans of Coke and maybe cigarettes, and then there’s gonna, there’ll also probably be a little educational after school. tutorial center. They are literally like on every street. And then you’ll probably see a small residential brokerage office. You know there’ll be listings pasted on the wall. Here’s all the apartments we’re renting or selling. Look inside there’ll be you know three, five people sitting behind computers. I mean you see these companies absolutely everywhere. And some of them are standalone companies and some of them you know just offices. And some of them are brands where they have multiple offices. And some of them are national brands like Lianjia, which is, I believe it’s the biggest, it kind of depends how you measure those things. But 2019, they had basically 6,000 locations across China. 120,000 real estate brokers were working under that particular banner. And they completed 2.2 million transactions during that period. And this was like old school, physical. You know, you walk into the office, you do the deal, and that’s if you’re buying a house, or an apartment usually. But it’s also, it’s the sellers. I mean, here’s the interesting thing about this. This is, you know, I’ve been talking about digital platforms, but platform business models have been around forever, and they’ve been in a couple varieties. The one I generally cite is a physical platform. So that’s a shopping center. We bring user group one consumer together with user group two, which is merchants and brands. And how do we bring them together? Well, we have a building and we just stick everyone in the building and the physical platform is what enables that to work. Or a night market or a bazaar or a downtown marketplace, those are all physical platforms. In this case, to do marketplaces type transactions. You could argue that the local bars are physical platforms as well. If you know, it’s 50% men and women, and that’s kind of a big purpose for the structure. If it’s a place where people go to meet each other, well, okay. It’s, it’s, it’s about the interactions predominantly, and it’s the physical location that enables that. Um, but those are all physical platforms which have been around forever, but there’s other types that are people based platforms, which have also been around forever. You know, this is matchmakers in villages, you know, hundreds, thousands of years ago. You know, how would men and women marry or find each other, whatever? Well, there’d be a local matchmaker. And he or she, her job would be to help two different user groups interact with each other. So user group one, the men, user group two, the women, the job is to help them interact. Investment bankers are platform, are people-based platforms. with people who companies that want money. And then we have people who want to invest in companies. And the goal of the investment banker is to help those two parties find each other, do the transaction, enable the interaction, all of those things. And real estate brokers are the same. They’re serving people who want to sell their houses and people who are buying houses. That’s kind of their job. And traditionally, what this has looked like when you have a people-based platform is it looks like this series of offices. Right, when you have lots of little offices, you have lots of agents or brokers. Maybe the brokers have come together to work together as a team. Hey, there’s six of us together in the team, or maybe they’re operating independently. Hey, I’m an independent deal guy. I know these people that want money, and I know these people that are looking to place money. And maybe they go multiple offices together, and we call that a brand. So you can see this kind of thing steps up. in scale. And the problem with all of this is, you know, the physical location of a shopping center is the enabling capability. Without the enabling capability, the building, the interactions can’t take place. You know, you have to get everyone in the same location and then you start to get the network effects. Because if I go to the shopping center, I then have access to all the stores at once. I don’t want 10% of the stores, I don’t want 20% of the stores, I want all of the stores in the mall. That’s the network effect. The more stores that are in the mall, the more value there is to me as a consumer. But that only works if I’m accessing them all at the same time, which requires a physical location. Well, that doesn’t, and vice versa for the merchants, but that network effect doesn’t work with a people-based platform. Because if I go to one broker and I’m looking for an apartment and they only have a limited listing, let’s say they have 10 apartments they know, I’m not getting the full effect and then I have to go to another broker to get another 10 and I have to get another broker and another 10. There’s no enabling capability that brings all of it together such that you get these big payoffs. So what is the enabling capability? Well in the US it’s the multiple listing service. It’s the US MLS. which basically in 1908, all the real estate brokers, in some city, maybe New York, somewhere in the US, they basically decided, look, we’re all gonna share our listings. And by sharing all of our listings, a consumer can then come back to one of us and see everything and get the full benefit of the network effect and vice versa. You know, you get that, but you don’t get that if it’s fragmented. So the enabling technology, the enabling capability, in a physical platform is the building. But the enabling technology of this type of business, whether it’s investment banker or real estate broker, is the sharing of information. And the coordination between the agents. Look, I’ll put my listings together with your listings, but if you’re the one who found the listing, you’re the primary broker and I’m the secondary. So you get most of the money and I get some of the money. You have to agree on the sort of terms of coordination and you have to share the listings and information. When you do that, then bam, you get a major network effect and a major platform that can be built on this. And what Lianjia or Beika is trying to do is all that coordination, all that sharing of information, that doesn’t happen in China. That’s the problem. The brokers kind of work independently, either individually or small offices or maybe small franchises. This creates all sorts of problems. If you want to list your home, you’ve got to list it with multiple brokers to make sure that consumers can find it. If you are looking for a home, you have to go to multiple different brokers because they each have different listings. There’s little to no sharing of information. There’s no comprehensive database for all the listings as well as being accurate, authentic, and up to date. There’s a lot of fake stuff. There’s a lot of… listings they use to bring you into the office and then it turns out it’s fake. Because there is this constant fight, there’s really vicious competition to get customers both on the buy and the sell side. There’s about 2 million real estate brokers in China, 250,000 plus brokerage stores. It’s just chaos and it’s very inefficient. And what Becca is trying to do is basically create the enabling capability and then launch a major platform. And if they do this, it would be an OMO platform because it would be a combination of digital assets as well as all the physical stores. So you could walk into stores, you could use your app, it would all be the same. So it’s an OMO platform for real estate transactions, basically. A bit about this company. When they describe themselves on their webpage, I mean, basically Lianjia is their traditional business, which is a bunch of stores, people-based transactions. Baike is the thing they’ve launched in the last two years, which is the online platform. And then they’re trying to merge them together. And here’s how they describe themselves on the webpage. KE Holdings is, quote, the leading integrated online and offline platform for housing transactions and services in China. We are a pioneer in building the industry infrastructure and standards in China to reinvent how service providers and housing customers efficiently navigate and consummate housing transactions. Okay, that’s a bit of a word salad, but the keywords are all there. Number one, integrated online and offline platform for housing transactions. That’s the sun art. That’s the same thing. The offices, the people we pull together. We are the pioneer in building the industry infrastructure and standards in China to reinvent how service providers, blah, blah. That’s them trying to solve the enabling capability problem. The multiple listing service doesn’t exist. Before they can build their platform, their own platform, you have to put that in place. You have to get the information sharing and the rules for collaboration and coordination such that you get one big system and then your platform business model. So unlike Alibaba, which was like, we’ve already got the ecosystem, the platform. Now we’re just adding the physical assets by buying SunArt. This is going the other direction. We’ve got the physical assets. We’ve got all the stores, but we’ve got to build the ecosystem and platform on the online side. And before we can even do that, we’ve got to build the enabling technology, which they call infrastructure and standards, which is basically the U.S. multiple listing service. And so the key thing they talk about is we’re doing the ACN. They call it the agent cooperation network, which is a pretty good term actually. We are helping the agents, the brokers, cooperate and create a network, agent cooperation network. I mean, that’s pretty great. That’s what they’re doing. And then the idea is they can go right to OMO platform for real estate transactions. Now are they gonna pull this off? I mean, this is difficult. This is, you know, in my smile marathon, S-M-I-L-E, you know, you sort of compete and you have to go fast on one or two of five dimensions, S-M-I-L-E, the E stands for ecosystem, orchestration, and participation. Which means, look, I’m a business, the key dimension I have to compete upon is dealing with an ecosystem. I’m selling on Alibaba. That’s where I’ve got to win. I’m an ecosystem participant. They own the platform, but I’m participating. If I do that, well, that’s a key aspect for me. Well, and usually when we’re talking about ecosystem orchestration and participation, we’re talking about dealing with these companies. You’re on Lazada, you’re on Shopee, whatever. In this case, they’re trying to do the orchestration bit. They’re trying to put together an ecosystem and get everyone to get involved in this. So they’re trying to do ecosystem orchestration, which is very, very difficult. And I sent you a, maybe a month or two ago, an update about why ecosystems tend to fail. And this was a BCG report. I’m gonna put this in the show notes, but it’s a pretty good summary by BCG of sort of the top seven reasons that ecosystems fail. So if you wanna be in the ecosystem orchestration business, this is kinda what tends to go wrong. And there’s a nice chart for that, but basically the two that I think Becca is facing is wrong ecosystem configuration and wrong governance choices. This is basically setting up the ecosystem roles, responsibilities, incentives, and rules such that people are comfortable participating. You know, some people have done this well. Apple and Android famously did ecosystem orchestration very well and they built out the Android and the iOS operating systems. Other companies like Nokia and RIM Blackberry, they tried to do the same thing and they failed at ecosystem orchestration and they exited the smartphone business. It’s pretty hard, but it’s about setting it up and setting the governance rules. Anyways, I’ll put the link in there if you’re curious about that. That’s a pretty good summary. But are they gonna succeed? I don’t know, if you look at their revenue, I mean, this is a big company. 2019 net revenue for RE Holdings, 46 billion rem NB, so seven billion US dollars more or less. That’s from mostly from transactions, either existing homes being sold or new homes, which is real estate developers selling their homes. Gross profit is 11 billion, so of the… Of the $46 billion in net revenue, $11 billion is gross profit. So there’s healthy profits in this. Their sales and marketing is kind of expensive here and there. This is like SunArt. The economics of the physical business on their own look okay. They’re not bleeding cash dramatically, unless they choose to, I suppose. But it looks reasonable in terms of the economics on this side of the business. It’s just a matter of whether they can put the whole thing together and get an OMO platform. Now, let’s say they were able to do this. They get the platform going. They’ve got the OMO platform. What’s the payoff? Well, for SunArt and Alibaba, I kind of explained the big payoff. One, this is a competitive juggernaut, and it could really create amazing experiences for consumers and merchants that others could not replicate. Well, it’s kind of the same thing here. If they can get this to go and you’ve got the ability to buy a house by using your phone, walking into any of these stores, talking with brokers, visiting the things. So it’s physical plus digital. You can see the value to a home buyer would be pretty amazing. First thing is you get this complete massive database. Keep in mind the real estate market of China is absolutely massive. I mean it is stunning how big this market is and how many apartments are built and sold every year. It’s absolutely crazy. You get this massive database of large, you know, a large database with authentic and up-to-date housing listings. You can see those in the stores, you can see them on your phone. You get access to professionals all over the place who will now have rankings, the same way merchants on Alibaba will have a ranking. So you’ll, you know, the bad actors, which there’s a lot of, they will get weeded out very quickly, less predatory behavior. You should have better training by the agents too. You can start to be more data-driven, a lot more information, more convenience, easier to use. And once you sort of consolidate to this level, you’ll start to see a lot more investment in IT tools. Most of these real estate brokers, they’re not spending lots of money developing new tools to make the process better, not like a platform business would. So they can start to invest in things like augmented reality, virtual reality. training, communication, seamless signing, seamless closing services, legal, escrow, you could bake all of that in there and start to get real investment on the tech side. So you can see, the company that can put this together should pull away and be pretty amazing. And arguably the biggest benefit you’d get is network effects. If they can put together this major platform in this space, which has traditionally been fairly fragmented. Then the more people that use it, the better the service will get. You’ll get network effects, and that’s a big deal. So I mean, there’s a huge payoff if they can pull this off. OK, I think that’s pretty much what I wanted to cover. Sort of reiterate the main points, the main lessons, the takeaways for today. New retail and OMO, online merge offline, it’s a big idea. Asia, China is really at the forefront of this on the B2C side. It’s kind of a, you know. I’m paying a lot of attention to this right now for multiple reasons. One, the user experience is very interesting. But two, it also seems to create a really powerful sort of digital physical hybrid. You know, the digital, that’s sort of point number two, is digital physical hybrids. When I’ve been talking about this, this has traditionally been, okay, the user experience is all digital, but there’s some physical assets that support it. Well, this is different. This is a digital physical hybrid. where the user experience is both online and offline at the same time. So it’s kind of like digital physical hybrid 2.0. That’s kind of the second idea takeaway from today. Also ecosystem orchestration is important. Those are kind of the main ideas. The companies, RE Holdings and SunArt, I think they’re both worth paying attention to. If you’re an investor, I would put them on your watch list and start to think about them. They are more complicated than. the traditional platforms we’ve been talking about. So I think doing a couple passes of this is useful. So I probably will touch on them again, just to sort of read it and, you know, you can start to take them apart more and more. But I think this is what’s gonna happen to a lot of businesses. We’re gonna start to see this type of approach, these OMO platforms. Supermarkets went first. Looks like real estate brokerage is trying to do this. But we could see this same pattern all over the place. Hospitals, clinics, schools, shopping malls, department stores, fashion, retail. I mean, we really could see this. And I think the pattern will probably be similar. But that’s the main ideas for today. If you ever get confused, just go over to the Concept Library on my webpage, click there, you can find all of these listed below. Or go to the Company Library and you can click on any of these companies and you can pull up all the written stuff, if you’re a subscriber. As for me, I’m packing up here. I’m flying out to the US on Saturday, which I’m looking forward to. I’m not just the US, but I’m basically getting back on the road. I’ll be on the road for at least five weeks, if not longer. And I basically gave up on trying to get a vaccine here anyways, or delaying my travel until all of this was over because, you know, it’s just still going. I’m just gonna bite the bullet. Okay, I’m getting back on the road. And if it’s more difficult than it used to be in the past, and if there’s more quarantines here and there that I have to sit through, then I’m gonna, okay, that’s the way it is, but I’m basically done waiting. So yeah, I called in sort of a favor from a friend in the US who runs a hospital. So I’m gonna fly in there and I’ll get my vaccine shot while I’m there, and I’ll do all of that. And I’ll see the family and probably end up going to Mexico, maybe down to Brazil. Oh. I did try and get the vaccine in Serbia and I went into their website. I mentioned this a week or two ago. Yeah, that never worked out. I registered and I never heard from them. So I guess that’s either I didn’t do it right or it’s not doable, but it appears to be relatively doable in the United States now there seems to be a big supply. And everyone’s in California where my family is, I mean, if you’re over 20, you’re eligible now they’ve, they’ve taken away all the restrictions. So. Anyways, that’s gonna kind of be the plan. I’m thinking about writing a book. That’s what I’m thinking. I’ll maybe take two to three weeks off and hide out, probably somewhere on a beach in Mexico and sort of write up everything I’ve been talking about with all this. It’s a lot of content and I know people are getting lost in it. It’s kind of a lot and it’s complicated and all ties together to sort of boil that down to something relatively… easy to understand. Now I was thinking maybe the best way to do that would just be to hide out on a beach for two weeks and just crank it out. I think I could write it very quickly at this point. So I think that’s probably what I’m going to do. If anyone has any suggestions for beaches to hide out at, that’d be great. I wrote one book in the Dominican Republic several years ago. That’s okay, wasn’t I? The Caribbean beaches, I’m never a big fan of that. Mexico. I have enough time. I like to maybe Rio. I loved going to Rio. It might be a little bit too far. Plus, I think the COVID thing is kind of out of control in Brazil these days. Anyways, any suggestions? Let me know. I’m looking for somewhere to basically hide and write like crazy for two weeks. That’s not too far from a flight from the US. Anyways, I’m pretty excited. I feel like I’m ramping back up. I’ve been, you know, my life has been sort of this this unusual nomadic, somewhat adventurous. approach to living and that really has been shut down for the last year and it’s it’s it was interesting for a while but now i’m really not enjoying it i’m really unsettled so i’m kind of anxious to just get going and if if there’s a greater hassle factor because of all this stuff and all the testing and all that and all the corn okay i’m just gonna suck it up and that’s it but yeah so i’m pretty good mood anyways that’s me i hope everyone is doing well and Hope this is helpful. If I can ever be of help, don’t hesitate to reach out. And that’s it for me. Have a great week and I’ll talk to you next week. Bye bye.