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Clash of the Ecommerce Models - Six Billion Shoppers VS Bezonomics
Clash of the E-commerce Models - Six Billion Shoppers VS Bezonomics
One of the most insightful analysis I have came across this month is from the above books written by the below authors in the eCommerce space. Porter Erisman (author of Six Billion Shoppers) is a insightful analyst as he had worked in Alibaba from 2000 to 2008, joining the company as it moved out of Jack Ma's apartment and started ramping its business up amidst the strong challengers like Ebay and Amazon. Brian Dumaine is a journalist and editor of Fortune magazine, and a fanboy of Amazon which followed the interviews of Amazon managers from its roots to what it is doing today. As most analysis on eCommerce is from top down TAM and GMV growth projections and not the bottom up business analysis, I find these publications has value insights to understand the bottom up micro-advantages of the Amazon business model VS the Chinese Alibaba model.
One crucial insight is that the business models are continually evolving. The market leaders of then like Alibaba can undergo disruption by PDD / XiaoHongshu / JD / Meituan. The Amazon business model is superbly successful in countries with developed logistics infrastructure like EU and US but is undergoing scalability issues in emerging markets. A lot of cloners tried to implement the amazon miracle in other countries but failed to made it successful, and instead defaulting to the Alibaba model. Ecommerce business is currently in my too hard pile despite my interest in it, and I might change my views as the market dynamics changes.
Amazon micro advantages
i) Operating in countries with homogeneous culture and consumer preferences
Culture of trust (Western Europe and US) supported by institutions (Better Business Bureau and Consumer Reports) that is not prevalent in emerging markets (India, CN, Indonesia) (characterized by outward scams and collectivism relationship-based trust)
ii) Initial focus on developed countries like EU and US and riding on mature delivery infrastructure and smartphone and internet development. Managed to skip the high capex phase by leveraging on existing infrastructure, and now trying to rebuild its logistics and delivery networks.
iii) Heavy spend on research and adopt technology and automation to improve operational efficiency. Founder with great showmanship and able to raise money and build trust with consumers. Able to sweet-talk investors to forego current margins and profits to reinvest for the next decades, which minmax taxation laws.
iv) Absolute voting rights of founder and able to forego wall street projections to optimise for free cash flow and tax efficiency. Able to capitalize on the innovator’s dilemma by incumbents who are too focused on high margin areas and not go after the larger under-served market. Able to poach top managers from Walmart and duplicate their competitive advantages as online Walmart.
v) Direct relationship with the buyer through the platform. Most buyers trust the platform and do not have brand recognition on the individual sellers. Able to squeeze merchants through its huge sticky consumer base to lock in merchant and retail funds, and utilize the float to achieve a lower cost of capital.
vi) Combination of luck and skill.Able to create a huge free cash flow generative and profitable cloud business that is missed out by tech rivals for years until it dominated the market.
vii) Technical insight of using free shopping delivery to lock in customers, and even disrupting the logistics industry to improve operational efficiency and improve delivery times
Technical insight of using the Costco membership model to lock in sticky customers (whom will over-consume and put Amazon at initial loss), in order to achieve scale advantage in delivery network. The membership lockup will allow horizontal expansion to other industries (movies, entertainments, ads).
Well capitalized balance sheet to survive lowered funding from external capital and outbid in price war against smaller businesses
viii) Able to identify What is not going to change for the next 10 years
Low Prices. Fast free delivery and accessibility to desired goods. Able to track status of product
Fraud mitigation and dispute resolution, easy user interface, consumer trust.
Compressing Margins, procurement bargaining power, Bulk volume to achieve steep discounts.
Evolving business models and technological obsolesce
Real estate strategy and efficient distribution outlets
Why did the cloners of the Amazon Model fail
i) Amazons of China did not have enough online shoppers to drive sales volume, or enough capital to justify asset heavy business models. Unable to continue to capture market share despite having initial success. Vulnerable to the boom and bust cycle of venture capital funding.
ii) Underdeveloped infrastructure to manage inventory management , last mile delivery, shipping, logistics, payments, reverse logistics. Insufficient capex to build from scratch.
Unable to rein in logistics cost, delivery times, service standards. Unable to track the progress of product delivery. Payment networks are underdeveloped and cash delivery has high risk of misappropriation
iii) Internal divisions and disputes between founders and their board of directors.
iv) Amazon end-to-end transaction platform worked well when the only variable in the purchase process is price, and everything else (delivery and payment terms etc) are constant. But when other factors are considered (product quantity, payment terms, shipping terms, production timing due to specific events, quality control, pushing of risks from seller to buyer) it is hard to standardise them.
v) Charging high commission from each transaction made the merchants taking their exchanges offline.
vi) Standardising and delocalising the website made it lost the consumer touch, and made the website slower to incorporate new features
Alibaba micro advantages
i) Able to bypass legacy infrastructure and transit to Internet and smartphone purchases and payments immediately. Started with a high gross margin business and capitalize on developing internet and logistics infrastructure investments by the government. Able to avoid high capex phase by outsourcing to 3rd party delivery networks. Able to have very low-cost advantage in last mile delivery.
ii) Foreign companies unable to swiftly adapt to changing Chinese regulations and consumer trends
Foreign companies failed to localise their services to local preferences
Trust within tight communities do not readily extend to strangers from other groups. Collectivism and interpersonal relationships Chinese culture interwoven into user interface (Direct relationship with seller through the platform)
Able to develop escrow payments network as a trusted central counter party. To assure consumers safety of their funds, and prevent merchants from defrauding consumers.
Allow merchants to customise their storefront and make it easy to setup their online booths. When merchants advertise their businesses, this also drove volume to the Alibaba platform. Focus on empower sellers , rather than control sellers in closed end-to-end platforms.
To avoid merchants taking their exchanges offline, avoid commission from each transaction but instead charge annual subscription fee to use the platform, and sell additional services such as sponsored keyword listings, <Gold Supplier> certification, and prominent display themes to earn ad revenue.
Alibaba is able to solve all the inefficiencies of traditional commerce for small businesses. Easy to onboard, customizable storefronts, low fees. Able to undercut competitors like EBay with free listing fees.
Unable to successfully defer frauds and fake reviews in third party sellers Taobao. But able to create specialized branded goods marketplace TMall for branded merchants to focus on premium brands positioning with quality assurance.
Comparison of different business models
Alibaba / Shopify
Amazon / JD
Consumer-First (online-Walmart) retailer
Customizable storefronts, differentiated products display
Standardized storefront, and commoditization of comparable products
Merchant focus, live chat, and streaming. Building the relationship between shop owners and consumers
Platform Focus, Building the relationship between amazon platform and consumers
Bazaar and promotions driven. Visual stimulation. Gamification
Online ratings with photos, videos. Internal rating agency for buyers and sellers to incentivize honest behaviour.
Migration of traditional localized storefront businesses to the internet
Migration of wholesale Walmart business to the internet
Community Driven to keep customers coming back. Platform for hosting forums (mods), platform improvements, arbitration panel for buyer/seller disputes, gatherings and events.
Lateral acquisition of sticky platforms in other industries and try to create a closed ecosystem to increase data collection and user monetisation
Existing but fragmented logistics services, merely need a platform to create linkage
Existing but slow logistics services, Bezos intend to create a logistic from scratch, high capex
Taobao General Merchants (Price sensitive, higher propensity of fake goods)
Tmall brands (Higher premiums, high margins)
Amazon merchandise (higher control, lower propensity of fake goods)
Amazon /JD strategy to move the Walmart economy online, creating a huge retailer based on the high volume low cost model, than depend on large scale and technology to achieve cost savings. Standardised platform with a focus on consumers.
Ebay Strategy to move the yard sale economy online, creating a market for used goods and collectibles. Focus on product listing fees and transaction fees. Non existent supply side market for second hand goods, made the demand and marketplace for EBay CN unfeasible
Shopify is a merchant focused platform, whereby it retains the differentiating factor of ecommerce shops and attempts to help physical shops transit to online ecommerce, without too many heavy investments in its own infrastructure. Highly dependent on Facebook to drive traffic into the underlying shops.
Taobao strategy to move mum and pop economy online, where retailers can open shops to sell new products. Alibaba succeeded because it already taken existing business practices and scaling it online, and waived fees to attract merchants to onboard.
PinDuoDuo / SEA is a combination of (Costco + Disneyland) whereby it combined the cost savings of group buying into wholesale prices, and gamified shopping to keep clients coming back. But not profitable and dependent on share appreciation and dilution to raise money
Portfolio updates for the Month of Feb
I bought 1 share of GOOG at the price of USD 2,728.51 on 17 Feb on the announcement of earnings beat yet stagnant share price movement. I believe that the underlying free cash flow generative you-tube ecosystem and google's maneuvering around the Apple ad-tracking restrictions shown that Alphabet is able to execute well despite attacks by its competitors and is in its scaling phase of a successful formula. The quality and quantity of content by skilled creators is creating a positive flywheel and attracting more viewers of differentiated age groups, interests and geographies in. As the development of internet infrastructure by emerging countries and thirst for entertainment is an inevitable certainty, I treat Alphabet and its portfolio of call options (Waymo self driving, Google Fiber, youtube and google search, GPay) as an industry bet.
I Sold 200 shares of OCBC at the price of SGD 11.93 on 25 Feb 1pm (SGX resumption of afternoon trading) upon the declaration of war from Russia. I needed to raise cash for US / foreign markets as I have drawn down on my warchest as I averaged down across the months. I retained odd lot of 20 shares to monitor for updates as OCBC is ultimately a well operated bank with good cost efficiency and ROA.
My Paypal position got hit hard by dampened investor sentiment and uncertain guidance by Paypal managers regarding its earnings guidance and effects from transitioning from Ebay (failing eCommerce platform) to Amazon. The nature of sell side analyst projections is that once there is uncertainty in management guidance, the Pavlovian instinct is to downgrade the stock by an arbitrary change in the valuation multiples or discount rate and growth rates. The other analysts will follow the leader and engage in herd instinct to do the same, as it is better to follow the herd and ensure job security, than be different from others in your recommendations
Focusing on the earnings call, there is a change in its user growth strategy. Paypal is deterring from simply increasing user acquisition costs to acquire low quality users whom are there to monetize Paypal signup rewards, but instead focus on acquiring quality users with better spending ability on Venmo / Paypal. Although I believe this is the best way to improve free cash flow generation metrics on a 5-10 year basis, I am still wary of the increased competition in the payments space and the possibly of another disrupt-or whom may takeover the space. I might average down as the months go along and the Ebay - Amazon migration effects is clearer, until I hit my portfolio allocation limits. I also believe the suspension of payment networks in Russia by Mastercard / Visa / Paypal and possible future sanctions / escalation of war could impact spending habits and valuations as a whole, and I will try to stick to a disciplined allocation plan as the months play out.
The geopolitical tensions around the world has rapidly escalated unexpectedly. The attack on Ukraine by Russia to takeover its strategic resources (oil and natural gas) and recapture its strategic location (prevent the possible installation of missiles to hit Kremlin) is a shock to many. The devastation of the country displayed on traditional media is also accompanied by both Russian and Ukraine Propaganda on social media. Physical bombardments are coupled with cybersecurity attacks between the West and the East. The US stock market remains resilient so far and I see better opportunities in EU and CN / HK. There are a lot of moving parts as the situation evolves and I will attempt to DCA across my portfolio as the months go by. I cannot predict how severe the aggression could escalate beyond Ukraine borders, but I will continue to stay opportunistic as the months play out.