A Blog by Jonathan Low


Sep 13, 2017

Has Disruption From Ecommerce Run Its Course?

There is evidence to suggest that Amazon, Alibaba, Tencent et al are recognizing that ecommerce can only take them so far.

Which means that convergence - the productive meshing of physical retail and online sales - will be the most efficient means of generating the margins to continue growing - and to compete with those retailers, like Walmart, who have the resources to fight back and compete effectively.

The result may be a kind of stasis rather than further disruption. For now. JL

13D Research reports:

Online and offline commerce are converging. “Just as Walmart is using Bonobos to get access to higher-end consumers, Amazon is using Whole Foods to get the expertise and physical presence to sell fresh foods.”Amazon needs to capture the Walmart shopper as it saturated the middle to high-end with Prime; 60% of U.S. households now have Prime, with lower-income households the only place it can still grow.” (And) if malls transition from points of sale to experiential showrooms for sales made online, the owner-tenant model  could be rewritten.
Despite the cascade of store closings, liquidations and bankruptcies, there are strong indications that pure-ecommerce, not stores, may be the endangered model. Consider Alibaba’s Hema grocery store concept, which the company has been quietly developing for the last two years, well before Amazon swallowed Whole Foods. Alibaba has opened three new supermarkets in the last month alone, bringing the total to 13, with the majority of locations in Shanghai and Beijing. The massive, bright stores blend online and offline shopping, enabling customers who have downloaded the Hema app to scan barcodes and pay with their Alipay wallets. The live seafood market is one of the primary draws, especially for Chinese shoppers who value fresh fish and would rather select it themselves. Hema shoppers can choose a crab or lobster, have it cooked on premises to eat in the store, or have it delivered to their home. The stores also double as a warehouse for delivery in 30 minutes within a close radius.
Hema is the manifestation of Jack Ma’s vision for “New Retail” — what he describes as “the integration of online, offline, logistics and data across a single value chain.” Even though online shopping in China remains poised for solid earnings growth — just last week, Alibaba, blew past analysts’ expectations with a 56% rise in first quarter revenue, driven by growth in online sales — online and offline commerce are quickly converging. O2O, “online to offline,” was China’s tech buzzword in 2015. And according to Daniel Zhang, Alibaba’s CEO, Hema is just the beginning:
“We hope to see chemical reactions. If we can incubate a type of business model that others have never seen, then we are on the right track. This is not a supermarket. This is not a food mall. This is a brand new model. Hema just is an example of how Alibaba can operate the existing offline business.”
For many industry-watchers, Alibaba serves as the unofficial bellwether for the health and future of Chinese retail. After speaking with Chinese executives, Fortune reported:
“The worst time for retail is over. The online thing is also a bit over,” one real estate consultancy executive told us. A leading executive at one of China’s largest hypermarkets went so far as to insist, “I am convinced that in the end, online will never be feasible on its own to make any profit”… The true threat to retail in China may not be online shopping. It’s the increasing likelihood that the country’s e-commerce giants will turn their attention to doing bricks-and-mortar — better.”
In a recent public statement, Jack Ma, whose online empire eclipses any of his physical competitors, put it more bluntly: “We must embrace physical space.”
Judging by recent developments, the pure e-commerce model may not be long for the U.S. either. That Amazon and eBay are the only true online shopping sites in the U.S. with any real influence is one piece of evidence. So is the fact that small online retailers are struggling to gain a foothold, while legacy retailers such as Walmart are snapping up online merchants. And yet the most vivid illustration of O2O in action is the escalating turf-war between Amazon and Walmart.
Amazon is the dominant player in online sales and has particular traction among affluent consumers in cities. Walmart has thousands of stores that sell hundreds of billions of dollars worth of goods. It is particularly strong in suburban and rural areas, where it has stores within 10 miles of 90% of American consumers. Recently, however, the two are looking more and more alike, with Amazon opening physical bookstores, a convenience store in Seattle, and moving into upscale groceries, while Walmart invests more heavily in technology.
The goliaths have been eyeing each other’s models for a while now. But the tipping point may have begun last year, when Walmart acquired Jet.com, the fastest growing e-commerce site in the U.S. Since then, the company has launched an incubator lab in Silicon Valley to foster tech startups, acquired three more e-commerce sites (Moosejaw, Shoebuy, and Modcloth), and is building the world’s largest private cloud. Walmart has also continued its rollout of online grocery, with curbside pickup and delivery options available, and is testing convenience stores and technologies that suggest it is embracing the cashless future. Just this month, Walmart acquired Bonobos, the upscale men’s clothing company that has innovated exactly the type of online-offline hybrid that the retail giant is going for. Because all the inventory is centralized, Bonobos stores themselves take up minimal space.
“Just as Walmart is using Bonobos to get access to higher-end consumers and a more technologically savvy way of selling clothes, Amazon is using Whole Foods to get the expertise and physical presence it takes to sell fresh foods,” The New York Times reported.
Walmart fired another shot across the bow this month, when it applied for a floating warehouse that could make delivery via drones. Amazon received a patent for a similar vessel in April 2016. But one of our sources is skeptical: “Many people may see the floating warehouse as a bit ‘pie-in-the-sky’.” By contrast, Walmart’s new massive online pick-up towers, now featured in close to 20 stores, are making an immediate impact. After testing one of the machines for Business Insider, reporter Haley Peterson declared, “it shattered our expectations.” Peterson, who had ordered several items online at Walmart.com, then gone to the store a few days later to retrieve them, continued:
“Within five seconds of scanning the barcode, a previously hidden compartment above the screen lit up, revealing a conveyer belt and a cardboard box that was seemingly produced out of thin air. It was the easiest and most convenient Walmart experience we’ve ever had.”
This has left some analysts feeling optimistic about Walmart, even as they forecast that many legacy retailers are only headed for more pain. Walmart said Thursday that online sales jumped 60% in the past three months as people shopped more at Walmart.com, Jet.com and its other websites. We quote Josh Brown, the CEO of Ritholtz Wealth Management, who thinks the e-commerce landscape is shifting beneath our feet:
“Amazon is starting to look more like a classic incumbent and Walmart is acting in a very aggressive way…Walmart already has that brick-and- mortar infrastructure. So anything that Amazon does with Whole Foods, just as an example, Walmart can probably do as well. The old phase where we’re thinking about Amazon pulling sales away from Walmart retail stores — we’re probably through that period.”
As O2O accelerates in the U.S., each company has its competitive advantages: Walmart with its massive footprint of warehouses and distribution centers; Amazon with its data and market-leading cloud computing services. In the U.S., 55% of shoppers begin their product search on Amazon, according to a recent survey from BloomReach. And yet, as TechCrunch recently observed:
“The truth is, Amazon needs to capture the Walmart shopper as it has saturated the middle to high-end of the market with Prime memberships; approximately 60% of U.S. households now have Prime, with lower-income households the only place it can still grow Prime stateside.”
The Amazon-Walmart “turf-war” and its broader implications for retail, not to mention commercial real estate, are trends we will continue to watch. Meanwhile, if Alibaba’s developments are any indication (and we think they are), the O2O revolution has only just begun, especially now that Tencent is in on the action (China’s two internet titans are locked in a retail war of their own, with convenience stores being the new battleground). The resulting disruption in China may be an indication of what is to come in the U.S. We conclude with this quote from Fortune:
“If Alibaba turns its attention to real estate — and is able to gain access to prime assets and design its own unique physical shopping experience using a data-centered approach — traditional developers will be displaced. As it and Tencent harness their own algorithms to identify the perfect blend of stores for their target demographic, commercial real estate agencies could quickly find themselves marginalized…Meanwhile, if malls transition from points of sale to experiential showrooms for sales made online, the whole owner-tenant model — based on a percentage of in-store sales — could be rewritten, disrupting not just individual stores or chains, but the entire retail real estate industry in China.”


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