HBR.org

There’s Only One Way to Break into China’s Crowded Retail Market

You'll have to partner with Alibaba or Tencent.

Par James Root

First published on août 13, 2018
min


This article originally appeared on HBR.org. China’s two retailing powerhouses, online commerce pioneer Alibaba and social media-gaming pioneer Tencent, have systematically established a duopoly of record proportions in record time. Combined, they have spent more than $20 billion in the past 12 months alone to change the way people in China shop. (The precise value of their investments cannot be determined, given that many of them are undisclosed or private deals. This figure, along with some others in this article, are drawn from a Bain analysis.) It started when online retailer Alibaba made the seemingly counterintuitive expansion into the brick-and-mortar world. To do this, they invested heavily in everything from Lianhua supermarkets to Intime department stores to electronics retailer Suning. Alibaba is now working to connect China’s millions of mom-and-pop stores with their internet-based distribution network, an initiative called Ling Shou Tong. It has opened futuristic Hema Xiansheng supermarkets, where consumers use the Alipay app to order groceries or prepared food for delivery to their homes—in many places, within 30 minutes. Tencent took a different path to becoming China’s other retail leader. It began life as a social networking services company, and then added gaming, electronic payments, media content, cloud computing and devices. With successive investments into Chinese e-commerce company JD.com, it has become China’s No. 2 online retailer only four years after entering the retail industry. It invested in Yonghui, one of the fastest-growing Chinese grocery chains, and partnered with Carrefour and Walmart (which also owns 12% of JD.com). Among many other advances, with JD it created the fresh-food supermarket chain 7Fresh and invested in social commerce app Pinduoduo, a rising e-commerce company targeting the country’s booming smaller cities. Alibaba and Tencent each is valued at around $500 billion on public markets, and both act as the SoftBank or Berkshire Hathaway of the new Chinese economy, investing in hundreds of companies at all stages. With their mounting arsenals of digital and physical assets, each has created its own closed-loop opportunity capture as much information as possible about a consumer—all day and night, at any browsing or buying moment. They gain invaluable data that fuels everything from hyper-targeted marketing to store locations to product assortment to pricing. Now, with a combined 80% market share of the world’s largest e-commerce market and stakes in four of the top five hypermarket and supermarket chains in China, a fundamental question looms: Is there space for anyone else? China’s retail landscape has room for companies to elbow their way in. However, in China there are two decisions that guide any retailer. The first one is choosing sides: Do you want to align with Alibaba or go with Tencent? For any retailer hoping to earn its slice of China’s expanding retail pie, at least for now, there is no alternative but to play alongside one team or the other—and there are pros and cons with each. The second decision involves the partnership model. When partnering with China’s leaders, you can choose from three basic strategies: Do you want to use the big partners as a way to test and learn in this vast market or to enhance a core business or to fully integrate? Let’s consider the first decision, whether to go with Alibaba or Tencent. Alibaba prefers to integrate all data, marketing, and logistics of acquired companies. For its part, Tencent allows each retailer the choice of connecting and upgrading its existing business activities. The next consideration: What types of data do you need to complement your own? Tencent will have more data on social media behavior while Alibaba will have more purchasing behavior data. Finally, what kind of expertise do you require? For example, unless the partnership is in conjunction with JD, Tencent does not really have core retail expertise in areas like supply chain and logistics. The second decision—choosing a partnering strategy—depends on your starting point and your ultimate goals. A test-and-learn strategy is most suitable if you do not already have a presence in China and would like a non-capital-intensive way to test the market—to learn what customers want and how well your products would sell, for example. No physical stores are required, and if the arrangement doesn’t go well it is relatively easy to exit the market. Costco, the U.S.-based store, took this approach, using Alibaba as a way to test its offerings and learn about China before fully committing. In 2014, it opened an online warehouse store on Tmall Global, Alibaba’s cross-border e-commerce channel. That move helped it take advantage of a special government program that allows retailers to sell specific goods (with favorable tax status) without being granted a license to operate in China. It also helped Costco gain widespread name recognition. By the following year, Costco had made it into the top 10 sellers on Tmall Global during the 11/11 Singles Day sales promotion. In 2017, Costco obtained a license to open a flagship store on Tmall and began moving toward its goal of offering nearly 800 SKUs to Chinese consumers. These online steps paved the way for Costco to obtain permission to open physical stores, the first of which is expected to greet customers next June in Shanghai. Costco’s China stores will operate differently than its outlets elsewhere in the world. For example, they will rely on Alibaba’s data-heavy approach, using the past four years of consumer data gleaned on Tmall to determine product assortment and influence operations. Say you already have a presence in China but want access to a leader’s data and technology without losing control of your brand or operations—and without giving up ownership control. In that case, consider another option: using the partnership to enhance your existing core business in China. That’s the approach taken by Walmart. Through a strategic partnership, it now uses Tencent’s technology to both upgrade Walmart’s in-store customer experience and help it learn more about its customers. Among the innovations: the WeChat Scan & Go mobile payment option, which gives the U.S. retailer access to consumption data from customers paying with the WeChat mobile app. It is data that will help Walmart build more sophisticated consumer profiles. However, there is a downside to this approach that will lead some retailers to take a pass. You have to share a lot more information with your chosen partner to make the partnership really work. Finally, some companies opt to integrate fully with one or the other. It allows a retailer to gain full access to a leader’s user base, insights, data and technology. It also opens up opportunities to gain scale benefits or share processes such as purchasing. The drawback is that the leader becomes more involved in the operations of the store. Hou Yi, a former leader at JD Logistics, took this path after launching Hema Xiansheng, the online-to-offline fresh food supermarket concept that has since become the most tangible example of what is being referred to as “new retail.” Mr. Hou serves as Hema’s CEO and oversees the rapid expansion that ensued after Alibaba invested in and funded the company—and made Hema a part of its powerful ecosystem. Now, even as they carve up China, both Alibaba and Tencent are poised for global expansion. When that happens, retailers on other continents may find themselves with the same set of options: choosing a partner and determining their own best partnership strategy if they hope to play in this high-speed game. James Root is a partner in Bain & Company’s Consumer Products and Retail practices. He is based in Hong Kong. Jonathan Cheng is a principal in Bain & Company’s Consumer Products and Retail practices. He is based in Hong Kong.

This article originally appeared on HBR.org.

China’s two retailing powerhouses, online commerce pioneer Alibaba and social media-gaming pioneer Tencent, have systematically established a duopoly of record proportions in record time. Combined, they have spent more than $20 billion in the past 12 months alone to change the way people in China shop. (The precise value of their investments cannot be determined, given that many of them are undisclosed or private deals. This figure, along with some others in this article, are drawn from a Bain analysis.)

It started when online retailer Alibaba made the seemingly counterintuitive expansion into the brick-and-mortar world. To do this, they invested heavily in everything from Lianhua supermarkets to Intime department stores to electronics retailer Suning. Alibaba is now working to connect China’s millions of mom-and-pop stores with their internet-based distribution network, an initiative called Ling Shou Tong. It has opened futuristic Hema Xiansheng supermarkets, where consumers use the Alipay app to order groceries or prepared food for delivery to their homes—in many places, within 30 minutes.

Tencent took a different path to becoming China’s other retail leader. It began life as a social networking services company, and then added gaming, electronic payments, media content, cloud computing and devices. With successive investments into Chinese e-commerce company JD.com, it has become China’s No. 2 online retailer only four years after entering the retail industry. It invested in Yonghui, one of the fastest-growing Chinese grocery chains, and partnered with Carrefour and Walmart (which also owns 12% of JD.com). Among many other advances, with JD it created the fresh-food supermarket chain 7Fresh and invested in social commerce app Pinduoduo, a rising e-commerce company targeting the country’s booming smaller cities.

Alibaba and Tencent each is valued at around $500 billion on public markets, and both act as the SoftBank or Berkshire Hathaway of the new Chinese economy, investing in hundreds of companies at all stages. With their mounting arsenals of digital and physical assets, each has created its own closed-loop opportunity capture as much information as possible about a consumer—all day and night, at any browsing or buying moment. They gain invaluable data that fuels everything from hyper-targeted marketing to store locations to product assortment to pricing. Now, with a combined 80% market share of the world’s largest e-commerce market and stakes in four of the top five hypermarket and supermarket chains in China, a fundamental question looms: Is there space for anyone else?

China’s retail landscape has room for companies to elbow their way in. However, in China there are two decisions that guide any retailer. The first one is choosing sides: Do you want to align with Alibaba or go with Tencent? For any retailer hoping to earn its slice of China’s expanding retail pie, at least for now, there is no alternative but to play alongside one team or the other—and there are pros and cons with each.

The second decision involves the partnership model. When partnering with China’s leaders, you can choose from three basic strategies: Do you want to use the big partners as a way to test and learn in this vast market or to enhance a core business or to fully integrate?

Let’s consider the first decision, whether to go with Alibaba or Tencent. Alibaba prefers to integrate all data, marketing, and logistics of acquired companies. For its part, Tencent allows each retailer the choice of connecting and upgrading its existing business activities. The next consideration: What types of data do you need to complement your own? Tencent will have more data on social media behavior while Alibaba will have more purchasing behavior data. Finally, what kind of expertise do you require? For example, unless the partnership is in conjunction with JD, Tencent does not really have core retail expertise in areas like supply chain and logistics.

The second decision—choosing a partnering strategy—depends on your starting point and your ultimate goals.

A test-and-learn strategy is most suitable if you do not already have a presence in China and would like a non-capital-intensive way to test the market—to learn what customers want and how well your products would sell, for example. No physical stores are required, and if the arrangement doesn’t go well it is relatively easy to exit the market. Costco, the U.S.-based store, took this approach, using Alibaba as a way to test its offerings and learn about China before fully committing. In 2014, it opened an online warehouse store on Tmall Global, Alibaba’s cross-border e-commerce channel. That move helped it take advantage of a special government program that allows retailers to sell specific goods (with favorable tax status) without being granted a license to operate in China. It also helped Costco gain widespread name recognition. By the following year, Costco had made it into the top 10 sellers on Tmall Global during the 11/11 Singles Day sales promotion.

In 2017, Costco obtained a license to open a flagship store on Tmall and began moving toward its goal of offering nearly 800 SKUs to Chinese consumers. These online steps paved the way for Costco to obtain permission to open physical stores, the first of which is expected to greet customers next June in Shanghai. Costco’s China stores will operate differently than its outlets elsewhere in the world. For example, they will rely on Alibaba’s data-heavy approach, using the past four years of consumer data gleaned on Tmall to determine product assortment and influence operations.

Say you already have a presence in China but want access to a leader’s data and technology without losing control of your brand or operations—and without giving up ownership control. In that case, consider another option: using the partnership to enhance your existing core business in China. That’s the approach taken by Walmart. Through a strategic partnership, it now uses Tencent’s technology to both upgrade Walmart’s in-store customer experience and help it learn more about its customers. Among the innovations: the WeChat Scan & Go mobile payment option, which gives the U.S. retailer access to consumption data from customers paying with the WeChat mobile app. It is data that will help Walmart build more sophisticated consumer profiles. However, there is a downside to this approach that will lead some retailers to take a pass. You have to share a lot more information with your chosen partner to make the partnership really work.

Finally, some companies opt to integrate fully with one or the other. It allows a retailer to gain full access to a leader’s user base, insights, data and technology. It also opens up opportunities to gain scale benefits or share processes such as purchasing. The drawback is that the leader becomes more involved in the operations of the store. Hou Yi, a former leader at JD Logistics, took this path after launching Hema Xiansheng, the online-to-offline fresh food supermarket concept that has since become the most tangible example of what is being referred to as “new retail.” Mr. Hou serves as Hema’s CEO and oversees the rapid expansion that ensued after Alibaba invested in and funded the company—and made Hema a part of its powerful ecosystem.

Now, even as they carve up China, both Alibaba and Tencent are poised for global expansion. When that happens, retailers on other continents may find themselves with the same set of options: choosing a partner and determining their own best partnership strategy if they hope to play in this high-speed game.

James Root is a partner in Bain & Company’s Consumer Products and Retail practices. He is based in Hong Kong. Jonathan Cheng is a principal in Bain & Company’s Consumer Products and Retail practices. He is based in Hong Kong.