If you were to ask people who live outside China if the Chinese economy is competitive, most people will likely say no. As evidence, they would point towards state-owned enterprises and high barriers to entry for multinational organizations. However, the Groupon story is a perfect illustration of the contrary. When Groupon launched in the US around 2008, entrepreneurs across China saw an opportunity to build the next multi-billion dollar business. By the time Groupon IPO-ed in 2011, there were already over 5,000 different companies in China with similar business models. [i]
The “War of a Thousand Groupons” did eventually end with a victor, but many wars remain unfinished in the tech sector. Today, I want to talk about one such war — the war to bring the 6.8 million mom-and-pop convenience stores around China into the digital era. [ii]
These mom-and-pop convenience stores offer products that are not too different from your local gasoline stations in America. However, besides refrigerators and freezers, many stores do not have much technology. Functions such as inventory and accounting are typically done on paper, and stores are family operations who have to do everything themselves. As big box retailers and digital commerce grows, tech giants saw an opportunity to help mom-and-pop shops evolve.
A win-win-win-win solution
Alibaba calls this initiative 零售通 (pronounced Ling Shou Tong), and it literally means retail integrated. This initiative aims to not only transform the convenience stores physically (see below), but it also aims to transform how these convenience stores do business. For instance, by digitizing inventories, mom-and pop-shops know what goods to order before it runs out. It can even provide mom-and-pop shops with the latest consumer trends based on the geographical location of the shop.
In addition, Ling Shou Tong solves a major problem for brands as well. Historically, brands have a hard time breaking through to third and fourth tier cities in China. Brands want to be able to develop consumer habits as people become richer. However, now with a platform connecting the two parties, brands can now communicate with mom-and-pop shops and provide them directly with promotions or customized products.
The consumer benefits as well. With their phones, consumers can now see what is available before stepping out of their homes. In the future, there are also plans for these mom-and-pop shops to support delivery as well.
Finally, Alibaba stands to gain as well — with more convenience stores ordering from Ling Shou Tong, Alibaba will be able to grow its platform and pass along cheaper prices to convenience stores owners. More importantly, these stores will then become critical assets as Alibaba plots to conquer China — leveraging them to serve in strategic events such as Singles Day and closing the last mile for Alibaba.
How does it work?
Integrating with Ling Shou Tong and becoming a Tmall Convenience Store does require upfront investment and recurring costs. Physical renovation of stores cost around 30K to 60K RMB ($4.4K — $8.9K USD), a franchise fee of 10K RMB ($1.5K USD), 4K RMB technology fee per year ($590 USD), and a commitment of purchasing 10K RMB worth of goods from Ling Shou Tong. To extend its reach, Alibaba has also created a third-party sales program, and third-party partners would acquire and serve these mom-and-pop shops.[iii]
The ongoing war
While Alibaba has the lead right now, the war has no clear winner yet. JD, another e-commerce giant in China, aims to build 1 million franchises in 5 years even though it is bleeding money [iv][v]. As Kai Fu Lee wrote, this phenomenon illustrates one of the main differences between American and Chinese tech companies:
“[The] willingness to get one’s hands dirty in the real world separates Chinese technology companies from their Silicon Valley peers. American startups like to stick to what they know: building clean digital platforms that facilitate information exchanges. Those platforms can be used by vendors who do the legwork, but the tech companies tend to stay distant and aloof from these logistical details… Chinese companies don’t have this kind of luxury. Surrounded by competitors ready to reverse-engineer their digital products, they must use scale, spending, and efficiency at the grunt work as a differentiating factor. They burn cash like crazy… It’s a defining trait of China’s alternate internet universe that leaves American analysts entrenched in Silicon Valley orthodoxy scratching their heads.”
With the exception of Amazon — who has made significant investments in the offline space via AmazonGo, Whole Foods, and its own fulfillment centers — Western technology companies run the risk of losing the offline space in the long run. After the “wars” end, it won’t be long until Chinese players start to export its offline technology to US and European markets which have historically been tough markets for Chinese companies to enter. After all, the offline technology in this case — retail — isn’t something that is a threat to national security the way 5G networks are. Retail technology will be the foot in the door.
Make no mistake — Chinese companies are hyper competitive. And when the time comes, will Western technology companies be willing to get their hands dirty?
[i] Kai-Fu Lee, AI Superpowers: China, Silicon Valley, and the New World Order
[ii] 人人都是产品经理 古廿; 夫妻店: 我不是零售业的边缘者; http://www.woshipm.com/newretail/1746736.html
[iii] 人人都是产品经理 深情; 天猫小店：如何改造传统小卖部; http://www.woshipm.com/newretail/1084877.html
[iv] 人人都是产品经理 Anne; 巨头鏖战社区便利店; http://www.woshipm.com/newretail/1555755.html
[v]人人都是产品经理 舍予兄; 京东退兵新零售！; http://www.woshipm.com/newretail/1794526.html
Opinions are my own and not the views of my employer
