Alibaba and Specialty Coffee in China

Traditionally, B2B sales have required face-to-face interactions in order to complete deals.  This is especially true in the coffee business. However, the industry is beginning to change particularly in the specialty segment of the market.  Few of the world’s leading coffee commodity trading companies offer e-commerce services and even fewer are competing for business within China.  While the Chinese market may not seem very exciting with less than .1 kg per capita consumption (compared to over 4 kg in the US), there is a great opportunity to take advantage of China’s e-commerce purchasing habits and increased interest in coffee.

Last year, there were nearly $300 billion in transactions processed on Alibaba’s e-commerce platforms and the company accounted for roughly 8% of all of China’s retail sales.  Alibaba has quadrupled in size since 2010 and will continue to grow faster than China’s annual GDP.   However, there are some very important distinctions to be made about the company’s business units.  First, Alibaba consists of three major e-commerce business platforms: Taobao, TMall, and Alibaba.com/1688.com (described as C2C, B2C, and B2B US/China platforms respectively).  With the rise of Alibaba there have been incredible, or maybe more accurately described as crippling, network effects for doing business in China.  For example, many consumers do not consider businesses to be legitimate if they do not have an Alibaba store.

Coffee has seen a similar growth story in China in recent years observing as high as a 25% compounded annual growth rate.  Furthermore, when you take a closer look at the Chinese coffee market, first tier cities like Shanghai are consuming closer to 3 kg per capita (a city with a similar population to the country of Australia).  The types of coffees that are being consumed are also shifting from lower quality commercial grades to higher-end specialty grades.  China’s traditional tea drinking culture is now a viable market for “third wave” coffees in cities like Shanghai.

The biggest challenge is reaching the myriad of small and micro roasters popping up around the city who typically buy less than standard volumes of coffee.  Currently, there are only a handful of raw coffee suppliers on Alibaba’s Chinese B2B platform (1688.com), the majority of which sell locally sourced, medium quality beans from Yunnan with the intention of exporting abroad.  However, with the growing demand for premium coffee there is a supply gap for domestic consumption in the e-commerce market.  The real question is whether Chinese roasters would be receptive to buying premium coffees through an e-commerce platform.  After all, the industry standard is to taste small samples prior to purchasing a 60-70 kg bag.  Furthermore, specialty grade coffee has a more difficult sales process than commercial coffee.  Consumers demand certifications (Fair Trade, Organic, etc.) and supply chain transparency.  Can 1688.com provide the necessary tools to compliment raw specialty coffee sales?

There is without question a growing market for specialty coffee in China’s first tier cities and 1688.com gives importers easy access to the country’s roasters.


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In recent years, there’s been an increased amount of scrutiny on online gambling and in particular, online poker. The states of Nevada, Delaware and earlier this week, New Jersey have approved and launched online gaming markets.

POLITICAL CONTEXT
There has been increased scrutiny from government players with Republican politician, Joe Barton advocating the roll out of nationwide law that will help regulate and legalize online gaming. Barton had introduced a bill in the US Congress that would help create a licensing system for online poker companies. Whilst, this was welcomed by many, it was also simultaneously opposed by many and this can be seen by the fact that the bill was introduced in July and has not made any progress in the last 4 months. Making things illegal can increase the price of the illegal activities – there have been instances in the past where the prohibition of marijuana or the prohibition of texting & driving, went on to increase the occurrence of the prohibited activity post the passage of the law. Pro-online gamers have supported a controlled and closely monitored legalized online poker world. Whilst this is easier said than done, the golden question is whether the government can help the online poker companies to take baby steps in the near future?

ECONOMIC AND ETHICAL CONTEXT
Whilst we are still recovering from an economic recession, arguments can be made to support banning online poker – gambling can easily become an addiction and cause serious mental and economic harm. Having access to online poker via the internet can provide easy access to the wrong individuals which can only exacerbate the current economic condition. But one can argue that similar addictions currently already exist in the form of the lottery, cigarettes, alcohol, drugs etc. Furthermore, the underground gambling market without access to casinos can potentially operate in an open monitored environment and hence enable the government to collect taxes on winnings while enforcing necessary regulations to protect consumers. There are ways to curb abuse of IP addresses, credit cards, age of players etc. by monitoring patterns of play among many other sophisticated security measures. However, is this enough to give parents the comfort that underage children will not have easy access to online poker?

 

COMPETITION
The best form of innovation eliminates wastage in the system and removes inefficiencies. We have seen e-commerce disrupt the traditional brick and mortar retail model benefiting consumers tremendously. E-retailers are able to pass down costs savings from zero physical store rent to consumers in the form of lower prices, better selection of products and quicker & convenient service. This very concept can be applied to online poker — the casino business is a high fixed cost business which runs continuously regardless of the occupancy rate or utilization level. By providing consumers with the ability to play poker online, consumers are able to save money on travel and hotel charges and casino companies can save on rent and other fixed/variable costs. It’s a win-win for both sides of the network. Also, legalization of online poker will be a breath of fresh air for dynamic and entrepreneurial companies such as Zynga, thereby enabling and supporting innovation in the gaming industry.


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Retailers speculate that double digit growth in online economy increases show rooming, leading to decline in sales in brick-and-mortar stores, specifically fashion retailers. Fashion retailers have long fought and lost the battle against show rooming where customers window-shop offline and go order online because of price sensitivity or convenience. In the Stone Age, these retailers adopted online platforms as independent channel and separate P & L with a view of a marriage that was meant not to last but seemed wise at that time because everybody else was doing it. Majority of retailers thought online can never replace in-stores shopping experience. Online retail was nascent and did not pose a threat until recently when retailers could no more deny that 22% growth in online retail year-over-year could cut deep in their topline for brick-and-mortar stores. After it dawned on many retailers, many fashion retailers such as Men’s Wearhouse explicitly defined their future strategy in 10-K report to improve digital innovation in their stores to improve sales.

I believe that innovation will drive future of brick-and-mortar retail, making it more cross-channel integrated and personalized. From industry reports, of 15 trillion in global retail, 93% of retail is still offline. 68% of the lost sales in-stores can be captured by ordering the item online from the stores and 74% retailers wants more engaging experience for their customers in-store and are willing to adopt in-store solutions that would facilitate personalized shopping experience for their customers in next 5 years. Reports show that there is a new mobile point of service industry, snowballing around the corner with double digit growth to facilitate this transformation of pure offline retail to a more integrated shopping experience with online, where customer can shop in-stores and buy things online or vice versa.  The forerunners such as Nordstrom and Burberry have proven that there is a positive linear trend in retailer adoption of new technologies that enable online shopping for customers in-stores and growth in revenue per square foot in stores.  Also, this new buzz among industry leaders about “Omni-Channel” experience continues to draw investments in new omni-channel infrastructure for these retailers.

There is enough available evidence to validate the upside of adopting technologies to create omni channel vision for customers in brick-and-mortar stores but I am not sure if this would be sufficient to offset the impact of growth in online retail or if it is safe to assume that the future of brick-and-mortar retail will not be of a 100% showroom.

Source: Motorola Solutions (White Paper “What’s driving tomorrow’s retail experience?”), Marketline Research Reports

 

 

 

 

 


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E-Commerce: the tail end of brick and mortar in the Middle East

Still in its embryonic stage in the Middle East, retailers are looking at e-commerce like it’s the wave to either ride or they will be taken over by the bigger players. The long established brick and mortar can choose to ignore e-commerce and bet that it’s difficult for Arabs to change their buying behavior by going on the online platform, or they can realize that it is that very Middle Eastern buying behavior that will fuel e-commerce in the region and they need to address it.

With a tendency to go for luxury high end products, an average Middle Easterner’s shopping receipt is double what shoppers elsewhere. With such extravagant shopping patterns, it is no wonder that E-commerce in the Middle East would grow twice as fast when compared to EU and US markets. When PayPal first launched in Egypt, it estimated that a third of internet users in MENA are already shopping online and spent $9 billion in 2012, expected to grow to $15 billion by 2015.

That said, should the brick and mortar start worrying? Is now the time to go online?

While the opportunities are there, the barriers also pose barriers to overcome:

  1. What is local? Shopping in the Middle East is mainly targeted towards imports with only 10% of total online spending spent regionally. This means that e-commerce is acting mainly as a direct channel to gain access to markets abroad and bypassing the intermediaries. Now, you no longer need the brick and mortar that imports from Europe and sells at a premium in MENA, you can get it directly by shopping online and incurring the delivery and tariff costs while cutting out the middlemen’s margins. Nevertheless, local retailers should still be concerned that with consumer’s increased access to international brands, they are in direct competition.
  2. Payment: With lower credit card penetration in the Middle East, e-commerce is still heavily reliant on cash on delivery which makes up 80% of online purchases. The majority of shoppers are still skeptical about using their credit cards online which creates the greatest hindrance to online purchases. They don’t mind viewing products online but they are much more reluctant to get out their credit cards and make a payment when they have big questions over the security of the website.
  3. Regional disparity: To date, the lovers of e-commerce in the Middle East are in The United Arab Emirates, this pattern has yet to pick up across North Africa and the Levant countries where there is a considerable market to address.
  4. Inter-regional trade: Local products in the Middle East do not have equal visibility in neighboring countries as compared to US, European and Chinese products. Accordingly, without increased quality of local products and services, competitive pricing and increased marketing, it is difficult to see inter-regional trade for the brick and mortars scaling up in the Middle East.
  5. Talent: The underlying problem to overcoming the abovementioned challenges and identifying more challenges and opportunities for e-commerce in the region is attracting talent with a willingness to take risks and challenge existing structures. To that end, it is directly related to investments in education and technology and without the prerequisites, it is easy to see how the Amazons of the west can overtake the market. Nonetheless, opportunities exist for the local emergants that leverage local knowledge pending their ability to attract the right talent.

It is exciting to see e-commerce budding in the Middle East which is bound to have healthy repercussions on growth, employment and the opening of new doors- still, we have yet to see more forward looking players building an eco-system that supports this growth and nudges the brick and mortar to look up at the online economy as an opportunity to explore, not one to fear or ignore.


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By the end of 2013, Forrester anticipates that B2B e-Commerce transactions will reach $559 B, which is almost twice as much as B2C e-Commerce’s $252 B.  Despite the large opportunity that B2B e-Commerce represents, online innovations have been largely centered on the B2C side.  From McMaster-Carr to Grainger, there are a handful of companies beginning to invest heavily in shifting their large, complex product portfolio online and providing detailed content to enhance the customer experience.   But there is still a large gap.  While 88% of B2B procurement specialists indicated a strong preference for an online purchasing channel, only 25% of B2B companies have an online presence and significantly less than that have a site that is current and regularly updated with product offerings [1].

Manufacturers and distributors have traditionally conducted their B2B dealings over the telephone, via experienced salesforce, or at industry specific trade shows.  Web-based procurement options have been severely limited given outdated product catalogs and non-existent B2B e-commerce sites.  In a 2012 survey of 224 B2B procurement personnel, 40% respondents indicated that they have changed suppliers because of difficulty navigating product catalogs and lack of e-commerce options [2].   An online ordering system can greatly benefit B2B procurers who can efficiently place online orders, have the option of conducting business outside of normal working hours, and monitor order status online.

e-Commerce does not only offer significant value to B2B consumers- it also represents a major opportunity for B2B merchants, especially manufacturing companies.  Transforming a basic company website to a sophisticated digital resource would allow B2B companies to effectively promote their product portfolio, receive orders outside of working hours, and gather a wealth of data on purchases and consumer behavior.  More importantly, e-Commerce allows an improved, personalized customer experience when sales representatives can allocate more time identifying new customers and maintaining existing accounts.  Instead of spending time on taking orders and administration, salespeople can engage in consultative selling.  This is especially important given the complex nature of typical B2B product purchases and large dollar amount of procurer accounts which have average budgets of $1M [3].  These benefits of e-Commerce all translate into measurable results and ultimately improving a B2B company’s bottom line performance.

If e-Commerce represents such promising potential, what are good practices to adopt and how can B2B companies that are still stuck in the Stone Age broaden product purchasing options, as well as improve customer web interactions?

  • Product Information Management– Creating a single product information hub allows a consistent view of product data across the company and its web procurement business.  It also makes better analytics possible, which can be used for product profitability analysis and faster response to changes in customer demand.  In addition to online detailed descriptions, video content and user feedback/reviews can be included to improve the customer experience and the company’s product understanding.
  • Content Marketing– A digital strategy that allows for content marketing establishes a B2B company’s online presence.  Email marketing, company blog, or newsletters can promote consumer engagement, by generating leads that salespeople can follow up on.
  • Guided Navigation– Unlike B2C websites, B2B e-Commerce sites require a guided navigation capability in addition to a typical search.  Guided navigation would allow customers to sift through information efficiently and further narrow down search results.  Grainger’s guided navigation system effectively allows navigation by product compliance, brand and model number, and technical specifications.

    Guided Navigation

  • Alternative Product Cross Reference– Comparison function of alternative products is a feature relevant to many engineers and procurement specialists who need to complete takeoffs from CAD design and drawings.  3M’s competitive cross reference function has an intuitive, easy to use interface.  Rather than having to search through broad product lines, consumers can use a quick, direct means of cross referencing competitors’ products to find your corresponding part number for pricing and ordering.

    Competitor Cross-Reference

An online presence and digital strategy is necessary for B2B companies to stay competitive and attract recurrent customers.  Rather than having a handful of B2B organizations driving change, an industry-wide move to utilizing efficient e-Commerce processes is necessary.

[1] “2012 B2B e-Commerce Survey: Results and Trends.” Oracle.  2012.  13 Oct. 2013 <www.oracle.com/us/…/web…/b2b-ecommerce-trends-2012-1503041.pdf‎>.

[2] “B2B Purchasers Demand Consumer-Like E-Commerce Experience.” hybris. 2012.  13 Oct. 2013 <http://www.hybris.com/en/news-events/press-releases/121115-b2b-purchaser>.

[3] http://www.manufacturing.net/articles/2013/08/better-b2b-e-commerce-misconceptions-missed-opportunities

 

 


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