5 Things I Learned from Alibaba President Michael Evans on Singles’ Day 2017 (Pt 1 of 4)

It’s 6pm November 11 and China’s 24 hour shopping extravaganza is in full swing.

• Chinese are buying stuff at about $1B in sales per hour.
• 200,000-300,000 orders are being processed per second.
• Over three million logistics staff are on high alert.

It’s a nationwide frenzy. And Alibaba President Michael Evans has just sat down next to me. I’m not quite sure what one says in this situation. “Good job” seems an understatement.

I’m in a small event room at the Shangri-la Hotel in Pudong, Shanghai. Fifteen of us have been invited to attend the 11.11 gala and to meet with Alibaba’s senior management. We are mostly from the US and Asia and our backgrounds range from consultants and venture capitalists to writers and analysts. Alibaba calls us the “Global Influencers”. It’s not as cool as “the Avengers”, but I’ll take it.

My first impression of Michael is that he is a world-class runner coming down the home stretch of a particularly long marathon. The festival is in full swing and he is clearly doing what he does best. He's in his sport and he's having a blast. But he's also been working on this event for a long time. The finish line is just 6 hours away and I wonder if he is operating on mostly adrenaline at this point. And, completing the marathon analogy nicely, I notice he's also wearing sneakers with his suit. It’s good to be the boss.

Over the next hour, our group had a fantastic discussion with Michael about Single’s Day and about Alibaba’s strategy going-forward. My research is in competition (and strategy) with regards to Chinese consumers - so that was most of my interest (not marketing or tech). This article is the first of a three part series on what I learned from Alibaba senior management during the festival. Plus I'll throw in some other stuff just for fun.

Below are my 5 main take-aways from the conversation with Mr. Evans. Note: this is my interpretation and these are not necessarily his opinions. None of these are quotes or statements by him or Alibaba in any way, shape or form.

Take Away 1: Alibaba's globalization is mostly about following Chinese consumers.

Michael explained that they organize their gala each year around a few key themes. This year, the themes were “new retail”, ecommerce plus entertainment, and globalization.

I’ve been paying close attention to their globalization efforts this past year. It keeps coming up in different contexts.

• Jack Ma said he wants 50% of the company’s revenue to be international (date unclear).
• They said they are aiming to have 2B customers, which, by definition, means people outside of China.
• There has been the acquisition of Lazada.
• Ant Financial has been on an absolute tear this year with regards to foreign projects and investments. Note: if there are three Chinese Internet companies to watch in terms of globalization this year, Alibaba / Ant Financial is definitely one of them (Didi and Mobike are the others).

But from his comments (and from those of Joe Tsai the night before), it is pretty clear Alibaba’s globalization strategy is mostly about staying close to globalizing Chinese consumers. This means following them out into the world, via tourism and the increasing use of Alipay around the world. But it also means bringing more of the world back to them in China.

Yes, Chinese consumers are going out into the world in huge numbers (+130M tourists per year). They are continuing to rise in wealth and sophistication. And therefore they are also rising in their expectations. They increasingly want all the world has to offer - but at home.

Fortunately, brands from around the world increasingly want to serve these increasing expectations. The result is a still largely unconsummated love affair between foreign brands and Chinese consumers. Alibaba is becoming the matchmaker for this. And I can consider Single's Day 2017 the moment when both parties took the relationship to the next level.

There was a stunning increase in foreign brands participating in Single’s Day this year. 60,000 of this year’s 140,000 brands were from outside of China. We have also seen big growth in imported foreign foods. Michael mentioned there are surging sales of Brazilian beef, Mexican Avacados and other foreign foods into China.

So bringing the world to Chinese consumers and following them abroad seems the main globalization strategy for Alibaba thus far. The below picture is from the Alibaba media center near the end of the festival. Globalization was a big theme.

We can see a couple of other interesting global moves. They are definitely expanding into Asia, particularly South East Asia (note: Chinese make up 50% of tourism in Asia).

Outside of this, Michael said they will be “selective” in their international activities. I took that to mean they will probably not be entering new markets and building stand-alone e-commerce platforms (e.g. Amazon). But they will likely do M&A opportunistically (e.g. Lazada)

Take Away 2: Alibaba plays to its advantages, not to proven models or approaches.

Whether it’s domestic vs. international or online vs. physical retail, Alibaba mostly bases its strategy on its advantages. And it will ignore proven approaches and easier opportunities if they do not play to these strengths.

Michael mentioned Alibaba’s biggest advantages today were Chinese consumers - and increasingly Asian consumers. So, as mentioned in Point 1, they overwhelmingly focus on serving these groups with their data, technology and services. And, as mentioned, this has made their global expansion more selective than what we see by companies like Amazon and Uber.

"Leading by advantages" has also led them to expand in unconventional ways – such as with "new retail" and "entertainment meets retail" (note: they own Alibaba Pictures, Youku and others). And as seen in their Hema supermarkets, their approach in physical retail is very different than traditional retail approaches.

I think this preference for "leading with advantages" is also a good indicator of what they are not going to do. Ultimately, I don’t think they are going to own or operate a lot of physical retail in China or anywhere else. I don’t think they are going to build de novo e-commerce platforms in places like Africa. They may do these things via franchise, technical agreements and joint ventures. But I think they are staying close to their strengths in Chinese consumers, data and digital technologies.

Take Away 3: Online retail is a powerful way to expand into some physical retail, especially in unstructured markets.

How online retail can be leveraged into physical retail is the center of their new retail initiative. It looks to me like this is mostly three things (thus far):

1. You drive your existing online customers into these stores, so they get an increase in traffic. I think you can see this in all of Alibaba’s new retail initiatives. When we visited the Hema supermarket, they mentioned that 50% of their orders were coming from online, outside of the actual store.
2. You bring in online data so local merchants will know what people in their local area are buying – or would want to buy. This improves merchandising and should lead to increasing sales over time. Note: This is not just online shopping data.
3. You tie these stores into your logistics network. How much these physical locations are going to become forward locations for delivery and fulfillment is an important question. For some, like Hema, this appears a big part of the strategy. For others, like convenience stores, the logistics aspect seems more limited to an IT upgrade for their existing supply chain.

Michael talked a lot about how online retail can transform physical retail. And how this effect can be particularly powerful in fragmented, underdeveloped and / or unstructured retail systems, such as the mom-and-pop stores you find across China, SE Asia and India. It raises some pretty interesting questions:

• Can data and digital technology modernize small and/or isolated stores that often get left behind in traditional retail economics?
• Can you do this type of digital transformation if you don't have a local e-commerce platform in a country?
• How much is Alibaba going to try to capture consumers outside of China / Asia? I think this question is the most important one long-term. 

Take Away 4: “New retail” is still in the experimental phase.

Alibaba's “new retail” is currently a grab bag of various business models. The convenience stores are very different than the supermarkets. The pop-up stores are very different than the department stores. Alibaba seems to be experimenting, and each model has different capabilities.

• Some have warehouses and serve as distribution points close to consumers (which increases speed of delivery. Very important.).
• Some have local pick-up, such as convenience stores.
• Some have delivery. Hema delivers the goods to local customers with in-house staff (thus far).
• Some have services. For example, the supermarkets have nail salons, laundry and food preparation (see photo below).
• And most all have merchandising, online ordering, and other data and digital tools for modernization.

But it looks to me like Alibaba is experimenting with a lot of models and seeing what works. One of my questions for senior management was which model they are most excited about. I'll put the answer to that in Part 2. :)

Take Away 5: Hema and retail food are the biggest departure from Alibaba's core business. But it's really exciting.

I got the sense that Michael particularly likes Hema, the new Alibaba supermarket. He talked about it more than the others initiatives. And he mentioned how unlike most products sold via e-commerce (say smartphones), we all need food 2-3x per day. So grocery stores get a lot more customer engagement. That's pretty great.

But food is particularly difficult in terms of logistics, especially in China where 30% of the food supply is lost to wastage. And sourcing, supplying, selling, delivering and sometimes preparing food are activities that are far from Alibaba's expertise in e-commerce. This initiative struck me as a big departure from their core business.

But against this big challenge, you also have the mother-of-all opportunities. China's demand for food is going to be way beyond what can be produced domestically (due to limited acreage, very limited water supply, low soil productivity and other factors). Feeding China is going to a big huge global business.

Alibaba does seem drawn to big problems that can be attacked with data and digital technology. In contrast, local convenience stores actually don’t have that many problems to solve (probably just traffic, merchandising and modernization).

As he talked about the Hema store, it was also clear there was more innovation and experimentation happening there than I had appreciated. For example, many of the foods sold (say fruit) are sold as a single serving for a family of three. They sell in these smaller amounts to keep the inventory more tightly controlled and to limit wastage. It also means more frequent purchases and probably visits. He also said they focused a lot on fresh fish and seafood because it is a product where customers care more about cleanliness, safety and health. Note the clean water in the Hema market below.

I'm going to go into more detail on these new retail initiatives in another article. But my impression is that Alibaba is going for situations in physical retail where there are:

• Big problems.
• Where customer involvement is higher (as opposed to higher quantity buying).
• Where data and digital tools can have a big impact.

Against these three criteria, supermarkets and food are pretty exciting.

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That’s it for Part 1. Here is Part 2 with my take-aways from the discussion with Chris Tung, Chief Marketing Officer (who may have the most fun job in China). And Part 3 will be my take-aways from a dinner with Vice-Chairman Joe Tsai.

Thanks for reading. Cheers from Beijing - jeff

Here are the final five seconds of Singles’ Day 2017, from the Alibaba media center.

And here is the arrival of Jack Ma a few minutes later (sorry for video quality).

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I write and speak about the fight for Chinese consumers and digital China. If you would like to read my posts, please click 'Follow'.

If you would like my recommended China reading, you can get it at www.jeffreytowson.com. You can also get a free chapter of my One Hour China Book there as well.

Some previous posts include:

• I Took 20 Chinese Students to Meet Warren Buffett. Here's What Happened.
• Stop Calling Me an Introvert. I Prefer "Power Thinker"
• How I Went From NYC to Working for Prince Alwaleed
• My Favorite Map for Understanding China

About: I am a Professor of Investment at Peking University Guanghua School of Management in Beijing. I am also an investor, consultant and former executive / slave to Prince Alwaleed.