This week’s podcast is about Dingdong, a specialty ecommerce player in China focused on fresh groceries. It has gone public while still operating profit negative – but brings to mind a similar situation with Meituan at IPO.
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- Should Vipshop Build a Logistics Network Like JD? (Jeff’s Asia Tech Class – Podcast 7)
- The Pros and Cons of Farfetch’s Global Luxury Marketplace (Jeff’s Asia Tech Class – Daily Update)
From the Concept Library, concepts for this article are:
- Purchasing Economies
- Economies of Scale – Geographic Density
- Explore and Exploit
From the Company Library, companies for this article are:
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Welcome, welcome everybody. My name is Jeff Towson and this is Tech Strategy. And the question for today, can Ding Dong win in groceries and specialty e-commerce? Now Ding Dong went public several months ago. This is a Chinese e-commerce company, along with a company called Miss Fresh. Miss Fresh is backed by Tencent, Ding Dong is backed by SoftBank. And I mean, it’s a lot about groceries, so I’m gonna go into that, but there’s also sort of this bigger, I think more interesting question of how do you win in specialty e-commerce? Because we keep seeing companies do this and some of them do succeed and others sort of go up against the Alibaba’s and the Amazon’s and fade away. So the whole question of specialty e-commerce I think is pretty interesting from an investment point of view. Most recent example would be Shien, right? That’s a specialty e-commerce player, cross-border, direct to consumer, Chinese manufacturing to… American and other international consumers doing absolutely great. So it’s an interesting space to think about like why certain specialty e-commerce companies win and others don’t. So let’s talk about ding-dong but also that bigger question. Now for those of you who are subscribers, I sent you some stuff on specialty e-commerce yesterday which was actually a Warren Buffett company. He actually owns a specialty e-commerce company called Oriental Trading, which nobody really knows about. It’s a pretty cool company. I’ve visited it a couple times. So I sent you some stuff on that and I’ll send you some more stuff on Ding Dong in the next day. There’s a lot within Ding Dong that’s actually worth reading. It’s surprisingly well written in terms of a filing and their strategy. Their strategy is incredibly well thought out. It’s one of the best filings I’ve ever read in terms of quality of thinking. lot of detail on their metrics and what they’re looking at doesn’t mean it’s a great business but it’s it’s very well written and well thought out i think it’s worth reading anyways those of your subscribers all send you the note in the next day i’ll basically tell you look read these pages it’s really worth your time to see how they lay this out and i’ll tell you specifically kind of what to read is it’s hundreds of pages and for those of you who aren’t subscribers you can go over to jeff There’s a free 30 day trial, try it out, see what you think. And let’s see, my standard disclaimer, nothing in this podcast or in my writing or on the website is investment advice. The numbers and information from me and any guess may be incorrect. The views and opinions expressed by me may be incorrect or no longer relevant or accurate. Overall, investing is risky. This is not investment advice. Do your own research. And with that, let’s get into the topic. Now first off, the concepts for this podcast, there’s really two, I guess three, but really two that I think are pretty important and I think Ding Dong is actually a good example for these. The first one is just purchasing economies, which we’ve talked about before. I’ll go into that a little bit. You know, standard, if you’re a big retailer, the more purchasing power you have, your cost of goods sold by being larger than your competitors, you can in theory get things at a lower price, higher gross profits. Purchasing economies, fine. The second one is more specific to ding-dong, which is geographic density, economies of scale based on geographic density, which plays out in companies like food delivery, I don’t know, FedEx, things like that, where if you have a higher density of orders within a certain geographic area, you can actually deliver cheaper than others. So you kind of look at the cost to deliver. each order per rider because you can send the rider to multiple spots along a route. You can get smarter and smarter. So you basically see a type of economies of scale based on geographic density in some businesses. And that’s absolutely what Ding Dong is going for. They actually talk about it quite openly that they’re going for geographic density, which is interesting because you don’t hear companies talk about that. And the third one is not really a concept. It’s just the idea of explore and exploit. which is basically the idea that look, when you get a bunch of users online or on a mobile app, you get a lot of data, you get some engagement, you can start to sort of explore and launch new things based on that. Alibaba is very good at this, Meituan is very good at this. It turns out it’s a really good strategy in general and it’s particularly useful when you’ve got one popular service like food delivery that’s not terribly profitable. and you need to pair it with another service. So I don’t know if you call that a concept, but I just call it explore and exploit. Start a lot of things and then see what works. And it was those are the ideas. You can go over to the concept library and purchasing economies is there, geographic density as a type of economies of scale is there. I’ll probably add explore and exploit, but it’s kind of a vague idea. Anyways, those are kind of the two-ish concepts for today. sorry about the noise there’s uh… some traffic on the road which is uh… it’s surprisingly loud enough not quite a few floors up here but it does seem to get into the recording sorry about that okay so ding dong goes public the basic picture i’ll go into it in detail the basic picture is they’re getting a decent amount of usage uh… delivering fresh groceries you order it on your mini app your mini program or the mobile app to your house within 30 minutes. That’s kind of the pitch. Fast, reliable, fresh groceries, high quality. That’s kind of with a large sort of spectrum of goods. So think about it like a grocery store with really fresh stuff that you can order from and get it in 30 minutes. Okay, I’ll go through the usage numbers and all that, but basically the picture you see is kind of what we saw with Meituan when they went public, which was… okay i get the business model it makes sense you’re getting a lot of usage and activity but you’re losing money which is what uh… is going on with ding dong they you know they act like a retailer they’re not a marketplace so they buy the goods they sell the goods their revenue line is the sales your take out the cost of goods sold their gross profits about twenty percent which is about the same as their you know miss fresh which is their similar competitor so they make about a twenty percent gross profit which is not terrible for groceries. I mean, you’re in the same range, 15%, 20%. But then they have their fulfillment cost, which is the person doing the delivery, and they do that by sort of contract labor. These aren’t in-house staff. They have some labor service organizations they contract from. You know, that was 50% of revenue in 2019. So you can do the math, okay? You have a 20% gross profit, and then you have 50% of a cost structure. also for delivery that doesn’t work. Now that’s dropped to about 35 ish percent in the last year so they can bring that down, you could in theory get to operating profit. But the numbers are not awesome, right? I mean, there’s still a long ways away from profits. Okay, that’s kinda how Metuan looked when they went public. And it was pretty much the same story. Very big market. In that case, it was food delivery. That was most of their business back then. In this case, it’s groceries, very big market. This company’s getting a lot of activity, but their unit economics are still negative. Same story. And there’s a fourth factor, which is in both cases, there was a major strategic competitor right next door. And actually, it’s kind of Alibaba in both cases, because Alibaba at that time was doing Elima. They still do it, but they don’t talk about it as much. And they had a strategic interest in doing food delivery and sort of daily life services. So that was what Maytuan was being facing, was sort of being faced with. And Ding Dong has basically the same scenario. We know these major e-commerce companies are putting a huge priority on groceries and on on-demand delivery. So you’ve got a major… threat right on your doorstep in both cases and unit negative economics. Now inside story, I can’t tell you the exact names because I don’t think it was public. This was years ago, it doesn’t matter anyways, but just as a courtesy to the people. You know, some of the Alibaba people were kind of saying back then, you know, we can see their numbers now. This was made to one because it was public and you know, their unit economics were negative. And they were just talking about, look, we can just keep hammering them and keep them unit economic negative and their investors will probably get frustrated at a certain point. And that’s kind of what I thought would happen. I thought they would get stuck there and I was wrong. I was totally wrong. A year later, Maytwan announces that they’re operating profit positive. which was really surprising. And not only did they not get pounded by Alibaba, they took market share significantly from Ulema. You know, it was like, I don’t remember off the top of my head, but Alima was like 35% market share, Meituan was like 44%. You know, a year later, Meituan was 60 plus percent. I mean, they just ran the table. How did they get profitable? Couple things. One of the things was what I just mentioned, they had… geographic density. So as they started to deliver more and more orders within certain parts of the city, they managed to drive the cost down in a way that their smaller competitor could not. That helped. And probably the bigger lever was they started to pair their high frequency food delivery activity, which gets a lot of usage, but isn’t terribly profitable. They started to cross sell things like hotel reservations, which are low frequency. but actually much more profitable. So they sort of used their high engagement numbers to push more profitable services. And that’s pretty much how they got there, I think. So, and also their management is just really good. Okay, you know, so I was wrong then. So it’s reading Ding Dong, the sort of same thing came to mind. Is this gonna be another scenario? Cause it would have been real smart for me to invest in Maytwan, you know, a month after they went public. So anyways, that’s kind of what I was thinking about when I was reading this. Okay, let me start going through Ding Dong a bit for those of you who aren’t familiar, which I think is most people. This is not a widely followed company. But basically, you know, they have a saying or a mantra or whatever that like, we want to bring fresh groceries to everyone’s house the same way running water comes out of your tap. Okay, so sort of, that’s kind of a nice image, I suppose. Direct to consumer, right? Get rid of the retailers, get rid of the wholesalers. target a high frequency activity which is buying fresh groceries and they also do daily necessities now but they really begin in fresh groceries and then sort of solve the problems that go along with that. I mean there’s a reason why e-commerce has not gone into groceries. I mean it took 15 plus years for these companies to go from books to electronics to appliances to everything else to general merchandise and finally to get to groceries. because it’s difficult. I mean, it’s a difficult sector. So that’s what they were going after. The company launched in 2017. The management team is pretty seasoned. This is sort of serial entrepreneurs. They’re not rock star famous, but you know, this is 20 years of more or less the same team launching companies with some degrees of success. So they launched in 2017. And basically start, and this is about the same time Ali Baba was talking about new retail. And we’re going to focus on high frequency perishable products. And because it’s a very sort of local business where you do a lot of delivery within a certain area, the way they work is, OK, you can go onto their app or their mini program, and they have 12,500 SKUs, different types of products you can choose. You choose the ones you want, and then you get it within 30 minutes. How do they do that? because they have what they call their frontline fulfillment grid. And that’s basically regional processing centers that then supply fulfillment stations that are really close to people’s houses. So it’s a bit of a counter strategy to the new retail idea. The new retail idea, Alibaba, is we want to deliver to people in 30 minutes. The way we’re gonna do that is we’re gonna open Fresh Hippo, we’re gonna buy SunArt, and we’re gonna build these hypermarkets that are within 30 minutes of people’s houses, and then we can do delivery from there, but they can also come into the store, and we can do new retail and services and other things. This is the same idea, but it’s a counter strategy. We’re gonna do the same thing, but we’re only gonna do groceries, and we’re not gonna have big stores. We’re going to have these little fulfillment stations where people shoot out from there and do deliveries all over. And because we don’t have those big stores, we can put these things in much more flexible locations. We don’t need a big location. We just need a little warehouse somewhere. And that’s kind of, so it’s the same idea, but one, they’re only doing groceries and two, they have a bit of a different fulfillment model, which they say is specialized for cold chain. So a lot of refrigerated trucks, certain types of capacity. The argument is that cold chain is different in terms of logistics, but it’s kind of similar. Just it’s an interesting idea. Okay. Now that’s a classic specialty e-commerce play. Most all e-commerce plays have the same story, which is we are different than the major Amazons, Alibaba’s, Shoppe’s. because there are unique needs on the user side, the consumer, that we can tailor to and therefore provide a superior user experience because this product category or this type of specialty we’re doing is different. So they differentiate on the consumer side and then they also differentiate on logistics usually. And they say the logistics required to do this type of business is actually different. and we’ll get a lot of benefits there. It’s usually that’s kind of the story they say. I’ll go through some other specialty e-commerce players later on the podcast to sort of give you examples, but that’s pretty much the pitch. Okay, and so how are they different? How are they specializing? Well, on the user side, the consumer, now I guess one thing to point out is they’re operating like a retailer, not as a marketplace. So it’s not an Alibaba type model, it’s more like JD. We buy the goods, we sell the goods, we are the retailer. Okay, how do you differentiate on the consumer side? The three things they mention, product quality, speedy delivery, which is under 30 minutes, and a wide variety of products all at attractive prices. Okay, now that kind of sounds like every retailer. What is different here is because it’s groceries, freshness matters more. I mean, people usually like to feel the fresh fruit and they like to look at it, so product quality has a little bit more bite here. And they’re able to deliver on the product quality because they do the procurement themselves. They’re not acting like a marketplace. They’re acting like the retailer. So they actually control the quality from farm to table. Speedy delivery is normally not that exciting, but in this case it is because people buy groceries all the time. They buy it to cook dinner that night. And you haven’t been able to really get speedy delivery in groceries thus far. And then product variety is also pretty useful. Alibaba does not have 12000 different types of meats and pork and vegetables. Right. So I think they are to some degree correct. I think that groceries does get you a different answer to those three attributes on the consumer side. So I’m pretty much on board with that. OK, then you look at the differentiation in logistics. How is that different? Well, they say we have our frontline fulfillment grid. which is a pretty weird phrase. Regional processing centers going into fulfillment stations. At those fulfillment stations, we have delivery people who are mostly on scooters. And the whole thing is based on cold chain. We have a lot of cold chain capacity. We have refrigerated trucks. Okay. I could see how that might have some power against something like a regular supermarket. I’m not sure it’s that different than something like JD does. We’ll see. The other thing they talk about, how they differentiate, is they control end-to-end quality because it’s farm-to-table, which is important in things like pork and steak and chicken and lettuce and vegetables and whatever. Okay, I tend to believe that too. I think there is a bit of a strength there versus a marketplace model where you have much less control. And then the other thing they mention within this is we work with the suppliers. They work with about 1,600 third-party suppliers. These are the farmers. some distributors, but they’re mostly going directly to farms. And they’re working with them to put in place standards, giving them digital tools to standardize their growing, and they’re giving them demand projections so that they can grow and sell. So they’re sort of integrating all the way. Okay, I mean that’s interesting. And they argue that this is powerful because agriculture in China is particularly problematic. If you’re selling consumer electronics in China, it’s pretty efficient, but these are small farms, not very developed, there’s a lot of intermediaries, there’s distributors, it’s very fragmented. The net result is consumers are very used to paying higher prices than they should with inconsistent quality. So this is sort of attacking that, which I think is a good argument, I think it’s just difficult to do. So you can see how maybe that’s better than going to the supermarket, which is time consuming. There’s less product variety, things like that. It’s more expensive because you have retail and distribution. You could see that maybe e-commerce isn’t optimized for grocery. It’s hard to tell the freshness when you’re looking at a mobile app. You don’t know if the delivery is going to really get there on time. It’s uncertain. It’s okay. You know, I’m kind of, you know, if they can pull this off, you know, I could be a believer. It all sounds relatively reasonable. But the proof is always in, did it work? But it sounds good on paper. OK, so does it work? Well, you look at their numbers, their usage numbers, and yeah, they’re doing all right. They focused on fresh groceries. They expanded from there to what they call daily necessities. They’re basically going for the most high frequency categories. Monthly transacting users. I like the fact that they give you real data. They don’t give you like annual active users. You don’t know what that means, right? Monthly transacting users is people who bought stuff this month. Okay, that’s pretty real. And they say we have 6.9 million monthly transacting users in the last year. Okay. The average transacting user does six to seven monthly orders. Okay. And within this, they also offer a membership program. So it’s kind of like Amazon Prime, you can sign up. It doesn’t cost very much, 100 renminbi or something like that. They say about 1.5 million, so about 22% of their users are signed up. And those people, those 1.5 million are about half of their GMV. So they’ve really got some great usage by a couple million people. I mean, it ain’t the 200, 300 million people on the big e-commerce platforms. But this is by definition a specialty play. You’re not going for everybody. You’re going for a segment, but you’re gonna get your hooks into them so deep that you’ll have them forever. That’s the specialty play. Okay, I mean those numbers look directionally correct. Fine. Then you get to the sort of economics which I mentioned are not pretty. Gross profits of about 20% based on revenue minus cost of goods sold, which is not terrible for groceries. most retails in that price range. But as again, I said the fulfillment expense in 2019 was 49% of revenue. So it’s just wiping out those gross profits. Drop down to 35% in 2020. I mean, if they keep nailing that down, they still got a long ways to go and that’s not even counting GNA, sales and marketing and other things. So, you know, the economics are not there and they’re not close, but. So far, there’s some interesting stuff here. Now the part that really got my attention was their strengths and their strategies and how they talk about their business. And it really kind of, I don’t want to say stunned me, but it really made an impression when I was reading this. I was like, this is outstanding. Like the quality of the thinking is as good as I’ve seen. This is like Alibaba level thinking. This is like Amazon level thinking going on here. And I actually stopped and I looked up who the management was. and who’s on their board. I’m like, who are these people? Doesn’t mean it’s gonna work, but yeah, it really got my attention. You know, I’ll read you a little bit of how they talk about their business. So they have a section in their filing about strengths, whatever are strengths. This is their language, right? Number one, superior value proposition. Pretty much what I said, product quality, variety, delivery speed. Product competitiveness. You start with high frequency groceries and then you expand to process foods, beverages, seasons, and daily necessities. Makes sense. It’s reliable, on-demand fulfillment within 30 minutes. It’s personalized, data-driven, and they have good user service, especially for their members and their customer service. Fine. Good solid argument. Strength number two. Strong sourcing and procurement capabilities. which are basically working with farms and cooperatives and that they are quote, cultivating close collaborations. They’re helping them modernize as a supply chain. They’re integrating their operations. Of the food they source and sell, 75% would be categorized as direct, where this is within their, they’re not buying from just random wholesalers and distributors, right? They’re dealing close to the source and that they offer them a large order flow and accurate demand projections. What is the benefit of that? Stable supply of quality products and reducing procurement costs over time. I mean, that’s spot on. Okay, strength number three, robust fulfillment capabilities anchored in frontline fulfillment grid model. This is basically last mile delivery. That’s what they’re doing. Each of their fulfillment stations, they say can reach tens of thousands of households within 30 minutes. which guarantees freshness. They’re not dependent on site selection or on front end operators like a supermarket would be or like an Alibaba would be. It’s not a store-based model. One of the other benefits is it’s highly scalable. It’s easy for them to go from one city to two city to five to 10 because they just have to open these little small fulfillment stations and it’s self-operated. They’re not franchising it. The whole thing is supported by 40 regional processing centers. And they basically talk about how the fulfillment cost was 50% of revenue. Now it’s dropped down to 35%. The fresh grocery turnover, two days. Their inventory turnover was two days. All products, about four days. Yeah, I mean, there’s some good numbers on. the frontline stations that are mature versus still emerging. And basically 95% online or on time delivery from a mature station. I mean, there’s really, this is all about the geographic density argument. And the metrics they talk about is how many daily delivered orders, how many daily processed orders per picking staff, how many daily delivered orders per rider. I mean, they have very good metrics for measuring geographic density in a particular place. Next strength, I’ll do one more of these. Smart operations powered by technology and data. Yeah, absolutely right, absolutely. End-to-end quality control, starting with procurement, accurate demand forecasting and modernization measures gets you stability and quality and gets you higher inventory turns. Regional processing. This is the regional centers doing allocation, warehouse management systems, things like that. Frontline fulfillment, which is algorithms for batching inventory storage and order packaging at the fulfillment station level. Intelligent dispatching, this is the sending your riders not just to one location, but what they call single origin to multiple destinations. So they can leverage regional order density per rider. That’s their phrase. We are going to use single origin to multiple destination approach so that we can leverage regional, we can leverage growing regional order density per rider. I have never heard a food delivery company talk with this type of specificity before, ever. I mean, this is absolutely outstanding in terms of their thinking and what they’re measuring. Now, maybe other companies are doing this. Obviously they probably are. This is the first time I’ve ever read it in filings. Last one, strength, highly scalable business model with a growing track record. Pioneered in Shanghai, they launched in 2017, they began expanding in 2019. The time to reach, if they open a new fulfillment station, what is the time to reach 100 million gross merchandise value within an area? And they give you numbers, that it used to take them 17 months to get to 100 million rem and be gross merchandise value. that’s dropped to 13 months in 2019, and now it’s six months in 2020-ish. So, you know, they’re basically expanding city by city with this sort of scalable business model. Yeah, it’s really, for those of you who were on the subscriber list, I’ll send you the specific stuff to read. It’s quite impressive. I’m sort of curious who did the writing. They were an investee of General Atlantic private equity board, so they have some of the people on their board. I kind of wonder if this is coming from a private equity shop because it sounds like that to me. Anyways, those are kind of my people. Okay, one more sort of comment on Ding Dong and then we’ll sort of go to specialty e-commerce and I’ll try and wrap it up earlier. I’m trying to get these a little shorter. Okay, we get to the competition question. We get to the question that overhangs every specialty e-commerce player is what are you going to do about Amazon? What are you going to do about Alibaba? That’s always the question. and it’s not like Alibaba isn’t interested in groceries. They’ve opened hundreds of fresh hippo stores. They bought Sun Art. They are all in on groceries and on-demand delivery. JD has done some, but not as much. Even Meituan was trying to get into this space. So, you know, that’s kind of the key question that always overhangs a specialty e-commerce players. What are you gonna do about the big boys? Okay. Well, they spoke to that. You know, it reaches some of what they said. I mean, they basically said, There’s two e-commerce type players that they have to worry about. I don’t think we need to compare this to regular supermarkets. I think that’s pretty obvious. But let’s compare it to other e-commerce players that do groceries. Okay, the easier version is, well, what about a platform business model? The platform business model without the retail stores. So that would be Alibaba before Fresh Hippo. That would be half of JD. Okay, how do you compete with this end-to-end integrated online retailer, specifically for groceries, how does that compare to like a JD marketplace model? You know, the platform business model doesn’t have inventory risk. That’s actually a big part of why groceries are so difficult is the inventory risk. You know, they just sort of enable interactions and take a commission. Well, the answer of why it’s better. why Ding Dong is better. Better control of the supply chain. By controlling things end to end, you get higher quality. You also get flexibility in your SKUs. That’s pretty true. And in fact, this is what JD does in a good portion of their business is they have end to end control as well for certain higher quality items. Okay, fine. You also get a more efficient fulfillment process because you’re not using third party delivery people, which is how a lot of Tai Niao works. You know, you can’t just have, if you’ve ever seen third party delivery in China, it’s, I mean, it’s a bunch of dudes sitting on a street corner, all the boxes are in a big pile and they just sort of pull up on the street corner and just throw the boxes around and then pick them up and go. I mean, you can’t do that with steak and, you know, chickens. Number three, directing closer relationships with upstream sources. You can give them demand projections, you can work with them on standards, you can let them be partners. And last one, deep consumer insights from their end-to-end data. Okay, I mean, it’s the basic strategy, here’s why we’re better, that you always hear with an integrated online retail model versus a platform model where you have far less control but you can grow much faster. Right, that’s always the trade-off between do I do it as a retailer or do it as a platform? The platforms grow faster but you have far less control. Apple likes to do things in-house, Android likes to use an open platform. Okay, so that’s kind of half of the answer. So what about the Alibaba plus Fresh Hippo competitor? They have an answer to that too. They basically call that the store model, Fresh Hippo, versus the fulfillment grid model, which is the ding-dong model. They’re basically arguing more flexibility in site selections. You don’t need the large prime locations to launch these major stores. So you’re more flexible, your leasing costs will be less, you can grow faster, and you have a more concentrated focus on just groceries. They also say that you’ll get higher density leads and you’ll get more efficient coverage within an area. I’m not sure I believe that to tell you the truth. I’m not sure what’s preventing Alibaba from hiring a ton of writers as well and having them go out from their store. I’m not sure what’s stopping Alibaba from saying, okay, we have our major fresh hippo store, let’s open five other distribution stations nearby as well. And we’ll just do both. So I’m not really sure I’d buy that. But that’s their argument. Anyways, the competitive question I think is kind of the big one here. And I think they’re kind of asking the wrong question or they’re dodging the question. It’s not what are you doing that Alibaba can’t. Because the answer to that is nothing. It’s what are you doing that Alibaba doesn’t really want to do. And the email I sent out yesterday to subscribers about Oriental trading, that was the answer to that question. Oriental trading is not doing anything Amazon can’t do. It’s just doing stuff that Amazon doesn’t really want to do. That’s a better answer to that question. Does Alibaba want to do groceries? Absolutely they want to do groceries. That’s not good. But they also wanted to do daily services against Maytwan and they got beat there. Okay, I think that’s enough on Ding Dong. Let me sort of get to the other question then I’ll finish up. I mean, the question here is, how do you win as a specialty e-commerce player? And we can see examples of this. There’s a VIP shop. which is, you know, they do flash sales in China. Basically, they’re kind of an intermediary between brands who want to get rid of some of their decaying, out of fashion, out of season inventory. And then people like to just sort of log in and, you know, get branded apparel cheap, you know, flash sale every day. It’s a nice little business. It’s probably more of a feature than a business, but they’ve been around for a while. There’s a couple luxury cross border plays in e-commerce, Farfetch, Siku, S-E-C-O-O. And they kind of took advantage of the fact that most luxury brands are kind of scattered all over the world. You know, there’s not like Chinese consumers who like luxury aren’t buying from Chinese luxury brands. There’s little fashion houses all over Milan and Paris and US and… I mean, they’re just sort of scattered around the world in terms of supply, but they’re also sort of scattered around the world in terms of consumption. So both of those are sort of stitching that. And also people buy luxury in a very different way than they buy groceries or they buy, you know, typical electronics. So you can see that that would be different on the consumer side. And there’s not actually going, there’s much going on on the logistics side. I actually visited… the JD Luxury warehouse a couple years ago, and there was literally nothing there. I mean, it was a small warehouse, and there’s Prada bags on the shelf and stuff, but it was really small. I mean, it’s just not a lot going on in terms of the logistics side, but the user, the consumer side is interesting. We’ve seen used goods sort of take off as a specialty play. That’s interesting just because of the whole, you’re returning something and you have to, you know, it’s used. and you gotta check it and make sure it’s fine. So there’s an extra step in there that a lot of major companies don’t have. We’ve seen some specialty plays in arts and crafts because your typical arts and crafts are not made by brands and merchants, they’re made by random people who do this stuff in their garage. So you have a very different supply side and these are the people that go to swap meets and set up tables and sell their candles and things like that. You know, so that’s a interesting play. The big one obviously this year is Xi’an, which is let’s connect Chinese manufacturers with the American and now other consumers and we’ll offer them very very low priced rapidly evolving apparel. So that’s kind of direct to consumer, low price cross border. And it’s really the cross border side that’s interesting because what Xi’an does in the U.S. but it was uncommon in the US. You can get cheap direct to consumer stuff all over China because the manufacturing is there, but Americans hadn’t had that before. So it’s really the cross border side that’s kind of interesting there. You could describe a little bit about what Ding Dong is doing is C to F. If Xi Yin is C to M, consumer to manufacturer, maybe this is consumer to farm. You could see a domestic version of that versus a cross border. One of the problems I think Ding Dong has that Xi does not have is most of the world’s manufacturing comes out of Asia. So that is where things are, especially clothes and electronics, it all comes from here. So there is an advantage there as a Chinese company to sell to consumers in Brazil or US or wherever. Agriculture is basically the inverse. There is not that much agriculture in China. There is very little land that you can grow things on. There is very little water. So China is a massive importer of agriculture. It’s almost like you need a version of Xi-Yin going the other way. Rather than trying to fix agriculture in China, you connect Chinese consumers with agriculture in Thailand and other places. So it’s kind of the exact Xi-Yin play. They didn’t try and build manufacturing in the US, they just connected it to China. Maybe. And then the company I sent you, B2B Oriental Trading. Same thing, but. I mean, you can kind of see the same question as, look, how do we differentiate the user experience and how do we differentiate on supply, logistics and infrastructure? You kind of need an answer to both of those for this to work. How do you differentiate on the user experience? Well, you can try and do it by goods, which luxury tried to do, it didn’t work very well, which is what groceries are trying to do. I don’t think it’s that powerful. I think the more powerful one is when you differentiate based on entertainment, where you know people love live streaming and they love watching people do fashion and makeup things and unboxing and I think if you’re going to do specialty e-commerce you know basing that on entertainment and media, live streaming, social media, influencers is far more powerful than saying you know our tomatoes are fresher than his. So I think that’s a great angle. The other one I like is experiential retail, where companies like JD are opening small stores because certain things when you buy them, you need the experience. You wanna ride the motorcycle, you wanna try on the makeup, you wanna sit on the sofa. Anytime there’s an experience aspect, that changes, it’s hard to just list that on an Amazon page as one of 10,000 items. So I tend to like things that differentiate based on entertainment or experience. I think that’s pretty strong. On the supply side, how do you differentiate there? What Ding Dong is saying is we’re differentiating based on cold storage. I don’t really think that’s true. I think that’s pretty common and standard. And then they’re saying we’re direct. I also don’t think that’s terribly unique. I think a lot of companies are doing that. I think the strongest one on the supply side is actually cross-border. Most companies don’t want to do that. If you have a foot in Chinese manufacturing, but you have deep connections with Thailand consumers, that’s a really nice specialty play. I know somebody who’s doing that actually. So I think cross border tends to be particularly powerful. If there’s a retail component, that’s helpful, which I think is necessary for things like luxury, because people by and large don’t buy luxury over their phones. They watch videos of luxury on their phones and they read about them. but the purchases are almost always done in person, which is good for these companies. And then sometimes the logistics can be more complicated depending what you’re doing. But I tend to like cross border and I tend to like a retail component more than what I heard with Ding Dong. Okay, so last point and then I’ll let you go. The question for this podcast is can Ding Dong win in groceries and specialty e-commerce? I think the key thing here they need to do is obviously they got to get to operating profits. They’re actually getting decent usage. They’re actually providing a service that people like and that is not a small thing. But they’ve got it. They’re way too negative to be able to survive again. I mean, if you’re going to be a niche player, a specialty player, you better have some good cash flow because you’re going to have to keep off the big boys, right? You can’t be small and weak. If you’re going to be small, you better be pretty strong. Okay, so how did they get there? I think option one, they just keep grinding down the cost structure by growing. So they keep adding products and they keep adding geographies and then they just grind that down. And what are the two levers? Well, the two levers are the two concepts for today, purchasing economies and geographic density for economies of scale. The bigger they become when they go from four cities to 20 cities to 200 cities, their ability to buy produce should get much stronger and their purchasing power should get more. In theory, their gross profits should increase. But there’s probably a point. Get bigger, drop your cost of goods sold. That gets you closer. And then the other lever is, okay, geographic density. just keep getting more and more orders in a specific area and drive that 35% of revenue cost for fulfillment down. That’s just doing what they’re doing, right? And I think we saw Meituan do that. I think they just got bigger. They drove down their geographic density costs and such. But I also think they did another thing, which is they kind of said, look, our core business that gets us a lot of activity, Food delivery is never going to be that profitable because you got to hire a dude on a scooter to deliver Dinner that only costs seven dollars or eight dollars We’re never going to get their cash flow wise with that service, but it gets us a tremendous amount of activity Let’s add a highly profitable service on top of that and start cross-selling like crazy That’s what I would be doing at DingDai. I’d be like, okay, we’ve got our food, it’s going well, we need a high gross margin sale that we can stick on here and we’ll just cross out. And if we can move the needle even a little bit, it’s gonna make a big difference on the bottom line. That’s kinda what I’d be doing is do that. And then the third one, so that’s one, two. The third one is, look, ultimately, you have to do something Alibaba doesn’t wanna do. If they want to do it, you can’t stop them. So, okay, they want to do certain types of groceries, what don’t they want to do groceries wise? And I try and get there. Now you can try and fight them off like Meituan did, which surprised me, I’d rather avoid them. Which is what Oriental Trading did, is they just do the stuff that Amazon doesn’t care about. I’d be looking for a small profitable niche. Too small. Why wouldn’t Alibaba do something? They wouldn’t do it because it’s too small of an opportunity for them. They need big numbers. I’d look for a small, very profitable niche to go after and I’d grab that. It would help your numbers and probably they wouldn’t care. That would be kind of my go-to strategy for this. Keep doing what you’re doing, go for scale, get your purchasing economies up, drop your fulfillment costs, find a high margin product to go after. Ideally, it’s in a small niche that’s too small for Alibaba to focus on. That’s what I’d be doing. Anyways, I recommend you take a look at this. It is particularly well written. It’s very interesting. If you know who wrote this, let me know. I’m really curious who was the sort of, there’s certainly somebody behind this who really knows what they’re doing. Because sentence by sentence reading this thing, it was impressive. So anyways, if you know, let me know, because I’d be curious to find out. That’s it, but the two concepts for today, purchasing economies and economies of scale by geographic density. Oh, that last one I mentioned, explore and exploit. That was basically like find another product that you can sell with a high margin. Hopefully Alibaba doesn’t care about. Explore, look at the data, what are people buying, and then exploit it. So that was that one. And that is it for Ding Dong. As for me, it’s just another beautiful week in Rio. Wake up every day, you look outside, and it’s like wow, it’s really pretty here. take a walk around the lagoon, go down to the beach. It is really pleasant. I’m starting to teach this week, so I am teaching at Seebs China Europe International Business School in Shanghai on Wednesday, Thursday, which is fun because I like teaching there. And the problem is the time change. Because it’s a bit intensive, so my time is going to be like 11 p.m. till 6 a.m. So I’ve been sort of shifting my sleep schedule over the last week, staying up an hour later, an hour later, hour later. So I can’t go to sleep tonight until 4.30. So I’ve got to get my schedule reset within the next two to three days. I rented a WeWork space to do this because I needed a better environment, but no one will be there but me. It’ll be me and the security guard all night long at the WeWork in Rio. So it’s going to be kind of an unusual week, but that’s okay. I like teaching the SEAB students. They’re really, these are MBAs, some executive MBAs, very, I’ve been teaching there for quite a few years and it’s one of the highest quality in terms of students, yes, and also just the administration. There’s a lot of famous schools in China, but in other places as well, where… they’re not really that good. They have big names, but they’re not really that good. Some are, but sometimes there’s a bit of a disconnect. I’ve encountered that a bit here and there, but Siege is really one of those ones where it’s really a pleasure. The people there are just great. The admin people are fantastic. So I always kind of look forward to that one. And it’s only about five days of teaching, so that’s about right for me. Anyways, that is my week. It’s gonna be fun. I hope everyone is doing well, especially if you’re in Thailand. I hope you’re locked down. Stay inside. It looks like the fourth wave is upon everybody. And I’ll be back in Bangkok in a couple weeks, sort of stuck in my room as well. That’s it. Take care and I will talk to you next week. Bye bye.
LI MaJuly 19, 2021 at 5:56pm
Great sharing. But just wondering can all podcast have a written version which might be more time saving? Thanks