Alibaba's New Retail Is Not About Supermarkets. It's About Participation. (Pt 3 of 4)

In this four part series, I look at how "new retail" impacts the strategies of e-commerce market leaders Alibaba and JD. My take is basically five points:

Point 1: China is ground zero for the digital transformation of retail. Explained in Part 1 here.

Point 2: But “new retail” is not just supermarkets and convenience stores. It’s much bigger and more sweeping than this. Also in Part 1 here.

Point 3: JD has been successfully following a strategy of “profitless growth”. But this is different than the pure digital competition seen in Alibaba and in “new retail”. Explained in Part 2 here.

Point 4: “New retail” is a bold extension of Alibaba’s strategy of pure digital competition into the physical world. And it hinges on the strange “economics of participation”.

Point 5: Alibaba’s “new retail” strategy is going to increasingly challenge and complicate JD’s strategy.

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In this part, I continue with Point 4 - that "new retail” is a bold extension of Alibaba’s strategy of pure digital competition into the physical world. And it hinges on the strange “economics of participation”.

The above points were mostly about how physical retailers frequently fight each other. And how online retailers also do this with a direct online model (somewhat).

However, when you are an online e-commerce site, the consumer mostly doesn’t care if you are selling direct like JD (taking the inventory and reselling) or operating as a marketplace like Alibaba (no inventory and just enabling transactions). If the price and selection are similar, they don’t care. Although there are some advantages in authenticity and delivery when going direct, which JD has and takes advantage of. But when you compete online, the discussion usually becomes mostly about the user experience. You start to ask questions like:

• How can you give the consumer a superior experience, in addition to low prices and good selection?
• How can you get more of the user’s attention, spending and time on your site?
• How can you get the user to engage and participate?

Pure digital competition (i.e., the fight on Eastern front) hinges on a lot of things. But at the center it is a fight for user participation. And this raises the topic of the strange “economics of participation”.

And I’m not just talking about consumers participating. You also want merchants and brands to participate. You might want content creators to participate. You might want advertising groups and app developers to participate. As participation increases, the economics of the platform improve in lots of ways.

I call this sort of pure digital competition the Eastern front, to distinguish it from the asset and cost based competition of physical retail (the Western front). For the Eastern front, a common playbook is:

1. Bring certain groups of users onto your platform.
2. Get these groups to participate as much as possible.
3. Continually try to increase 1 and 2.
4. And then (very important) try to build network effects within and between these user groups and their activity, if possible.

In fact, if you look at Alibaba’s 10k and their M&A strategy, you can basically see them describe these four steps.

So how do you get more participation on your platform? How do you get more engagement? And how do you create a superior user experience?

There’s no simple answer to this. Why do people like riding on-demand bicycles so much now? Why do people spend so much time on Wechat now? Why do people spend so much time shopping online in China? Engagement is a lot about consumer behavior and that can be very different for each product and service. I have no idea why women spend so much time taking selfies with Meitu. But I do understand why guys play first-person shooter video games.

But one common factor that relates to creating a superior user experience and increasing participation across all products is “getting the data”. For e-commerce, you get data about your users and you curate the product selection and personalize their online experience, ideally in real-time. That improves their experience and is one of the biggest advantages of online vs. traditional retail. Listen to the senior management of Alibaba and JD give interviews. You will hear the words “curation” and “personalization” over and over.

This type of data-driven personalization and curation can also get you a type of “data network effect”. Network effects are when a product / service improves when more people use it. For example, when someone signs up for wechat, there is another person you can call so the service gets better for everyone.

There is a data version of this that happens in e-commerce (and other services). As a consumer spends more time on a site, they get more data about him / her and they can personalize the product recommendations, the items in their search results and so on. In theory, the more time someone spends on a site, the better the service becomes for them. It’s a type of data network effect.

And we can actually see this in the latest 10k’s from both JD and Alibaba (sort of). They are growing in user number for sure. But they are also growing in the time and money individual users spend on their sites over time. There are other reasons for this but that’s what you look for. You can want time and money spent per user to increase over time.

There are other ways to improve the user experience and increase participation.

• You can get users to write reviews and create content, which improves the experience for other users. Note: reviews are a big deal in Chinese e-commerce.
• You can get users to be involved in discussions on the platform. Word of mouth is super important in China as people don’t trust sites that much.
• You can get users to chat with each other (and with merchants). This drives sales. Chat bots and social media are increasingly getting mixed in with e-commerce.
• You can integrate other products and services, like entertainment and videos, into e-commerce. The consumer experience online is expanding to become a combination of searching, shopping, entertainment and other activities.

This last point is really important.

E-commerce in China is rapidly evolving from an online version of the mall or bazaar to an online version of Orlando (the city in Florida that has Disneyworld, theme parks, massive shopping, residential complexes and other sites). Chinese e-commerce is basically becoming an online destination with every type of entertainment, shopping and service you could want. Like a big city for consumers. Note: this is a phenomenon we don’t really see anywhere but China.

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Ok, that was a lot of theory. My main point is that on this Eastern front of pure digital competition, the economics of participation are the big gun. And unlike economies of scale (the big gun of traditional retail), this effect doesn’t appear to decrease with scale. As you get more engagement, the benefits just keep going up. It turns out digital trees do grow to the sky.

And within this fight, Alibaba is a pure breed. They are a pure digital competitor. They avoid buying and selling products themselves. They avoid owning most tangible fixed assets directly. And their M&A strategy is mostly focused on adding new services and products to make the experience more engaging. They also focus their M&A on acquiring users, technology and data.

And for them “new retail” is basically adding a whole new set of users to their platform. They are adding physical merchants and their offline sales data. It is a massive expansion in their brands and merchants and in the participation and activities of their consumers.

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Which brings us back to JD. Because JD is competing on the Eastern front as well as the Western front (see Part 2). They operate as a direct online merchant, buying and selling inventory. But they have also long been personalizing and curating the consumer experience with data. They have tons of great user reviews (very important). And they have also added marketplace model, which now accounts for about 50% of their GMV. Plus, they have a partnership with Tencent which gets them Tier 1 access to Wechat (about 25% of their new users) and basically makes them the e-commerce partner for Tencent’s version of Orlando.

JD competing on both the Eastern and Western front. And “new retail” is changing both of these. That is what I will discuss in Part 4.

Thanks for reading, jeff

Part 1 is here.

Part 2 is here.

Part 3 is here.

Part 4 is here.

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I write and speak about the fight for Chinese consumers and digital China.

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If you would like my recommended China reading, you can get it at www.jefftowson.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, speaker and former executive / slave to Prince Alwaleed.

Photo courtesy of www.alibabagroup.com, media resources.