4/18/22 Latest Chinese Ecommerce Framework #1: Near vs. Far
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Insider Digest 4/21/22: Latest Chinese Ecommerce Framework #1: Near vs. Far
Housekeeping / Announcements / Fun:
A reminder that I will be taking maternity leave beginning June 15, and will be putting your subscription on pause at that time. We’ll play by ear how it goes, but I plan to keep open the Discord server and try to be active there, but you will not be charged for anything while I am on leave (3-4 months). We may have some guest posts here and there, but I will be pausing payment for that time period.
The newest TBC Syndicate deal with Huashan Capital is having our Zoom AMA with the founder Friday at 7AM PST. Do definitely join us if you are interested in the deal!
What You Missed on the TBCI Discord
Are you watching Zhihu’s disastrous HK debut?
Kirius7 says: “I’m not entirely sure what’s the rational of it tanking with the IPO in HK. I guess it’s the bad perception with the existing VCs dumping their shares. The IPO price is still more than $2 per share, which is at least valuing the company more than its EV. The balance sheet of zhihu is really clean” Do you have comments?
Ant’s MYBank can no longer accept direct transfers from Alipay
hc-72 says: “So apparently, MYbank accounts are "type 2" bank accounts which, by law, can only receive transfers from bank accounts from same owner. However, Alipay is NOT considered a bank account thus transfers from Alipay is illegal.
Also, many MYbank users said the only reason to use MYbank is because Alipay waived the transfer fee if you withdraw from Alipay to MYbank (apparently MYbank subsidized this fee but maybe anti-competitive too?). Without direct transfers from Alipay, many are saying MYbank is not that useful.”
The Chinese Way of Innovation by Insider Matt Sheehan!
However, I disagree with the importance of the Great Firewall: “my point is most of the close clones didn’t work. The ones that are big today look very different from their western comparables. So if even cloning with protection and Capital (that was indeed the easiest way to get Capital in china for a long time) didn’t work then why would you expect The Original version to work”
The exception is Baidu, who greatly benefitted from Google’s exit
Tencent (in the OTC market) could be named in ADR delisting
Because Luckin is included in the latest HFCAA list, and they are OTC traded. However, they did announce their intention to relist
I think Didi committed a grave “ideological error” in pushing forward with the IPO despite being told not to, what about you?
4/21/22: Latest Chinese Ecommerce Framework #1: Near vs. Far
Chinese internet analysts and players love to give new names and theories to existing concepts and business models, and 近场电商 jinchangdianshang, or Community Ecommerce is the latest refresh of an old play.** We’ll see if the term catches fire as some of its core ingredients such as O2O and CGB have ... but I wanted to take some time to talk about why I find its revival interesting and why maybe it’s not quite as dumb as it first appears.
First of all, you probably noticed the two asterisks I put by Community Ecommerce, mainly because I’m not convinced that’s how it should be translated. But the full name of this model is typically referred to as 近场社区电商, which Google translate will spit out as “near-field community e-commerce,” so I do suppose Community E-commerce captures it pretty well, although I think it is easy to confuse with CGB (community group buying). Anyway, I actually posed the question to my Twitter followers and then conducted a poll whereby I had people vote on what I thought were the top 4 choices out of those submitted. Out of Community, Neighborhood, Hyperlocal and Last Mile, Community came out with the highest votes, so that’s what I’m using for now.
Secondly though, let me actually define Community Ecommerce (which I’ll abbreviate as CE for the remainder of this post) for you. It’s not that easy, because there are a few conflicting definitions out there, but there is one shared thread, and that is CE is distinct from traditional ecommerce, or the Amazon / Alibaba model, where a near-infinite number of goods, located somewhere far away (or at least not in one’s immediate neighborhood) is available for sale and delivered through a vast, sometimes global logistics network. CE is typically, though not always, limited by the physical “shelf space” of your neighborhood and has the following characteristics: necessities over luxuries, therefore frequently purchased, with an inelastic demand curve, and often time sensitive (or maybe perishable). But maybe the best way to divide the two really is just by distance. Traditional ecommerce realizes efficiencies by pairing up sellers and buyers who are located very far away from each other and generally have no relationship nor trust in each other. Community ecommerce is all about pairing up supply and demand within the neighborhood — there is usually some trust, often some relationship, and the choices on both sides are much more limited.
The evolution of CE in the past decade, as outlined by analyst Pei Pei, goes something like this, which I largely agree with:
2013-15: O2O (online to offline)
2016: new retail (e.g. Hema)
2017: e-grocery (e.g. MissFresh, Dingdong)
2020: CGB (community group buying, well how can we forget that!)
Not everyone would characterize it this way, by the way. Some analysts distinguish CE as distinct from CGB. Their reasoning is thus: CGB is combining “pre-sale, self-pickup and next-day delivery,” and so is not really that different from traditional ecommerce, besides these tweaks. But CE is primarily about the digitization of existing retail channels in the community — primarily your offline mom-and-pop shops that don’t know how to expand and operate online. In doing so, you can then aggregate demand and influence the supply chain, achieving a level of integration never seen before in commerce. While both CE and CGB shorten the supply chain and aggregate consumer demand, CGB is really about aggregating digital demand, while CE’s focus is on digitizing and networking the entire physical community. If you’ve been paying close attention, you’ll notice that this definition of CE is pretty close to what Alibaba has been doing as part of their greater MMC business unit, which I’ve written about in detail before in this thread. It in fact sounds really close to Alibaba’s Lingshoutong LST service, which is precisely in the business of digitizing mom-and-pop stores. For this reason, some analysts will actually date the popularity of the concept of CE to when Alibaba began to push its MMC business unit earlier last year.
For most of the rest of this post, I’ll focus on this narrower definition of CE, because, well, as we’ve seen, the other business models (e-grocery, CGB, etc.) have yet to yield profits, and for CGB in particular, the government is simply not a fan.
Why doesn’t the government like platforms getting into CGB but loves efforts to “digitize” offline retail, especially mom-and-pop shops? (This article mentions the 180-degree difference between People’s Daily’s coverage of the two business models, for instance.) I think it’s pretty obvious, actually. CGB is B2C, where the bulk of the profits is hoovered up by the platform, and where even if abusive practices like selling below cost were curbed, I just don’t see how small vendors can compete with the likes of Alibaba et al, whereas the narrow definition of CE is actually B2B2C, with the SME layer in the middle performing a very important part in the process, and therefore able to extract value and remain sustainable. And China, if it’s not clear by now, loves small businesses unequivocally, unlike the uneasy relationship it has with large platforms:
First, according to the Ministry of Commerce, 6 million local shops serve 200 million customers every day in China. Due to the low level of digitization, they’re at an disadvantage in terms of marketing, supply chain efficiency, and service experience. If nothing is done to help them, the platforms would drive them out of business, price wars or not.
Thus, "to deeply promote the digital transformation of the service industry" is a central part of the 14th Five-Year Plan and outlined in the long-term goals for 2035.
In July 2020, seven departments including the Ministry of Commerce jointly issued the "Notice on Carrying Out Small Store Economic Promotion Actions" to support ecommerce platforms providing digital services such as wholesale, advertising and marketing, mobile payment, data analysis, and software systems for local shops;
In May 2021, 12 departments including the Ministry of Commerce issued the "Opinions on Promoting the Construction of a Fifteen-Minutes Convenience Living Circle in the City" to support convenience stores, fresh supermarkets, and front-end warehouses entering the community.
Oh and let’s not forget that the pandemic chaos made it clear that consumers need well-functioning community ecommerce. It’s literally a matter of survival.
It’s extremely compelling, however, for the mom-and-pop shops:
Low traffic, low variety, and high prices are the three major problems that plague every small local shop and most have meager profit margins.
The ideal CE product should empower these mom-and-pop shops to:
Streamline supply chains so that shops can purchase directly from factories and farms
Reduce operating costs through digital logistics, intelligent warehousing, replenishment, and product selection
Utilize high-tech solutions such as smart shelves and fridges, etc.
But it is incredibly capex and operationally intensive ... for the platforms to execute. For example, cross-sector interdependencies like agricultural IoT and big data, which would be hugely beneficial if available, but will take oh-so-much time and investment to ramp up. This is just an asset heavy industry (e.g. large investment in production warehouse and cold chain construction) with extremely high requirements on the supply chain. Operationally, it’s a fast moving and complex business involving interfacing with many traditional industries, with varying degrees of corruption and other inefficiencies.
Whatever these obstacles though, there is this belief amongst the tech giants that there is tremendous value to be unlocked from this integration of resources. Which if you think about it, makes sense. If you have the neighborhood stores aggregate demand, fulfill delivery and after-sales, there should be a model whereby platforms can focus on the software and the supply chain and make money there. Theoretically.
Between the large platforms, Alibaba clearly has the most comprehensive suite of solutions for both B2C and B2B2C CE, while JD is, as always, focused on the physical infrastructure side, building out warehouses, cold chain logistics, etc. Meituan, on the other hand, currently has the best coverage of the mom-and-pop shops, especially in third and fourth tier cities, across multiple verticals, and Pinduoduo, like JD, is more focused on building infrastructure, but specifically for agriculture. So each one has their own strength and strategy, and may yet win at their own game. Because if you think the definition of CE sounds super broad ... it is, and there is no reason to believe that there will be one leader across all its functions. In fact, it may be very difficult to win at even one thing.
So while I don’t really like how there are clear attempts to fan this CE concept into the next investment frenzy, it’s something that I think you’ll just have to keep in mind as it might just stick around. And it is somewhat useful as a framework. Either way, I think China (especially rural China) will leapfrog the West in this area of retail technology, and that’s probably a very good thing for the economy overall.
Next up, the other commonly mentioned distinction in China ecommerce that I rarely hear segmented as such in the West: search / intentional vs. browsing based ecommerce ...
Reply here on the Circle forum
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