Fresh produce has long been seen as an undeveloped area within e-commerce.
The penetration rate of e-commerce in the Chines apparel market is ~35% in 2017, while the fresh produce category’s is only in the single-digit range (but growing fast!).
The overall size of fresh produce market in China is around 5,000 billion RMB. So the online sales is ~1% in 2015 and ~4% in 2018.
First Round
The first wave of exploration is an extension of traditional e-commerce platform + specialized logistics (cold chain).
Miao Fresh (by Tmall, Alibaba) and JD Fresh (by JD) are the two examples (and first movers) in this round.
Self-built logistics has been one of JD’s core capabilities for a long time. And the war in fresh produces, requiring an upgrade in cold chain, has made JD Fresh a very competent player in this field (besides the upgraded potential in logistics-as-a-service) .
Meanwhile, Alibaba (Tmall) has been investing in Yiguo continuously. In March 2016, Yiguo raised ~$250 million Series C from Alibaba and KKR.
Yiguo’s subsidiary ExFresh (安鲜达), China’s largest cold-chain company established to serve the fresh food via e-commerce, according to a new release from KKR in 2016.
So, Alibaba is now a diversified tech/internet company that not only has the biggest e-commerce presence in China, but also leads the cloud computing commercialization there.
Alibaba separates its business into four categories:
Core commerce
Cloud computing
Digital media and entertainment
Innovation initiatives and others
And “Core commerce” could further be divided based on China/International, retail/wholesale, logistics and others.
China commerce retail
China commerce wholesale
International commerce retail
International commerce wholesale
Cainiao logistics services
Others
“China commerce retail” is where most of the Taobao and Tmall’s numbers are presented – $36.9 billion, two-thirds of Alibaba’s total revenue in fiscal year 2019 (ended on March 31, 2019).
The revenue is supported by the huge GMVs of these two platforms.
Consumers come to Taobao Marketplace to enjoy an engaging, personalized shopping experience, optimized by our big data analytics. Through highly relevant and engaging content and real-time updates from merchants, consumers can learn about products and new trends. They can also interact with each other and their favorite merchants and brands. With a broad offering of interactive features such as live broadcast, groups and short videos, Taobao Marketplace has become an established social commerce platform.
Taobao Marketplace is also the entry point to verticals, such as second-hand auctions, and online travel booking, which may also be accessed through their own independent mobile apps.
Merchants on Taobao Marketplace are primarily individuals and small businesses. Merchants can create storefronts and listings on Taobao Marketplace free of charge. The escrow payment services provided by Alipay are free of charge to consumers and merchants unless payment is funded through a credit product such as a credit card, in which case Alipay charges a fee to the merchant based on the related bank fees charged to Alipay. Taobao Marketplace merchants can purchase P4P and display marketing services to direct traffic to their storefronts. In addition, merchants can acquire additional traffic from third-party marketing affiliates. Taobao Marketplace merchants can also pay for advanced storefront software that helps to upgrade, decorate and manage their online storefronts.
The revenue model of our China commerce retail business is primarily performance-based and is typically set by market-based bidding systems. Revenue from this model consists primarily of customer management revenue, commissions and other revenue.
Monetization Methods
Customer management. (and I will call it ads or marketing services)
Alibaba says a substantial majority of our China commerce retail revenue from customer management, which primarily consists of:
P4P marketing services , where merchants primarily bid for keywords through our online auction system that match product or service listings appearing in search or browser results on a cost-per-click, or CPC, basis. Whether and where the listing will be displayed, and the corresponding prices for such display are determined by the algorithm of Alibaba’s online auction system based on a number of factors with various weights and through a market-based bidding mechanism.
Display marketing services , where merchants bid for display positions at fixed prices or prices established by a market-based bidding system on a cost-per-thousand impression, or CPM, basis.In addition to the above-mentioned P4P marketing services and display marketing services directly provided on our marketplaces, Alibaba also provides such services through collaboration with other third-party marketing affiliates. These third parties are primarily third-party online media, such as search engines, news feeds and video entertainment websites. These third-party online media enter into agreements with Alibaba to connect their designated online resources to our online auction system so that the merchants’ listings or other marketing information can be displayed on those third-party online media resources. Revenue from P4P and display marketing services provided through third-party marketing affiliates represented 3%, 3% and 2% of Alibaba’s total revenue in fiscal years 2016, 2017 and 2018, respectively.
Taobaoke program , where Alibaba collaborate with shopping guide platforms, medium- and small-sized websites, individuals and other third parties, collectively “Taobaokes,” to offer marketing services. Taobaokes display the marketing information of merchants on their media which facilitate our merchants to market and transact. Merchants pay commissions to such Taobaokes based on a percentage of transaction value generated from users under the Taobaoke program. Commissions on Taobaoke are set by the merchants. Revenue from the Taobaoke program represented 3%, 3% and 3% of Alibaba’s total revenue in fiscal years 2016, 2017 and 2018, respectively.
Commissions on transactions. In addition to purchasing customer management services, merchants also pay a commission based on a percentage of transaction value generated on Tmall and certain other marketplaces. The commission percentages typically range from 0.3% to 5.0% depending on the product category.Commission revenue increased by 37% from RMB34,066 million in fiscal year 2017 to RMB46,525 million (US$7,417 million) in fiscal year 2018, primarily due to the strong growth in physical goods GMV on Tmall.
Other. Other revenue from our China commerce retail is primarily generated by our New Retail business, mainly Intime, Tmall Imports and Hema, and primarily consists of revenue from product sales, commissions on transactions and software service fees.
Let’s do some calculation:
2018
revenue (customer management) – 114,285 million RMB
take rate: 2.3710% (of Taobao + Tmall GMV)
revenue (commission) – 46,525 million RMB
take rate: 2.1832% (of Tmall GMV)
2019
revenue (customer management) – 145,684 million RMB
take rate: 2.5438% (of Taobao + Tmall GMV)
revenue (commission) – 61,847 million RMB
take rate: 2.3678% (of Tmall GMV)
The higher take rates are generally good – it shows Alibaba’s market power and the value of its platform.
However, it also means selling on Alibaba’s platforms is becoming more expensive.
Meanwhile, it’s worth noting that when people use e-commerce to do searches, it’s not good to search engines like Baidu.
It is the same across China and US, where Amazon is growing its ads revenue in a market Google and Facebook dominate.
Actually, the value of Alibaba blocking Baidu’s search on Taobao pages in 2008 is a hundreds-of-billion-dollar action. (this didn’t happen in the US)
It has been a well-known fact that the global smartphone market is maturing and the shipment volume has found its turn.
The decline is real and accelerating.
…first quarter of 2019 (1Q19) with shipment volumes down 6.6% year over year…
Smartphone vendors shipped a total of 310.8 million units in 1Q19, which marked the sixth consecutive quarter of decline. In 2018, smartphone shipments dropped 4.1% over 2017, which was inclusive of a first quarter that was down 3.5% – just half of what the market experienced in 1Q19.
While top performers are still trying to grab market shares (some go for higher ASP targeting market shares in terms of revenue; others go for value targeting market shares in terms of shipments), they have designed their way to grow upon/out of smartphones.
Apple will go for services. [Read more from a previous post]
Meanwhile, Xiaomi, long being tagged as “the Apple of China”, is aiming the IoTs.
I would like to say the IoT focus is making Xiaomi more unique than its phone business.
As of March 2018, we (Xiaomi) had over 100 million connected devices (excluding smartphones and laptops)
…the largest consumer IoT platform globally according to iResearch
In January 2019, Xiaomi announced taking a 0.48% stake in TV manufacturer TCL, deepening an existing alliance that saw the two work together to integrate Xiaomi’s operating system into TCL products. [Techcrunch]
Another number – MIUI MAU is constantly adding ~17-19 million each quarter.
17Q1
17Q2
17Q3
17Q4
18Q1
18Q2
18Q3
18Q4
19Q1
MIUI MAU (millions)
138.3
146.0
156.5
170.8
190.0
206.9
224.4
242.1
260.9
incremental (millions)
7.7
10.5
14.3
19.2
16.9
17.5
17.7
18.8
Overall speaking, I think the IoT revenue should be around 30% for 2019 and may stay between 35-40% in the future.
At the same time, geographically speaking, Xiaomi is one of those companies that are benefitted the most from India’s growth.
So “dual pricing” sounds a little bit bizarre.. It’s not something like two menus, but it does exist in some way.
One example is the prices in restaurants/dining rooms affiliated with state-owned-enterprises (SOEs) or established traditional corporations. The price in restaurants in the same/nearby block would be 4-10 times more expansive (food quality and others things adjusted).
This is actually similar to what US tech companies provide – free lunch. The difference is that US tech companies actually pay a lot for those food as an employee benefit, while the cost for established/connected Chinese companies are very low.
Essentially, there are some places in China that are not affected by as much inflation as other parts are. And throughout the pat 10-20 years, the “dual pricing” has become increasingly evident. (US tech companies’ free lunch is actually on par with the inflation I think)
Another example is “friendship-based” transactions. It is more like the world in the “exchange economy” so that goods/services are not priced in numbers. Due to the nature of exchange, there will be no/little markup in “prices”.
Say Service A costs $100 and is usually priced for $1,000; good B costs $50 and is usually priced for $500. Then exchange based transaction would probably involve one A and two B (the value of which depends on people’s perceptions, say $300 but no money exchanged), while money-based normal business would involve two $1,000 transactions.
Friendship-based economy exists everywhere I believe and is a very natural/common development in history. Since China’s friendship-based transactions are more pervasive and maybe represents a higher percentage of the “economy”, it does create another “dual pricing” in China.
The mass production of Model 3 in 2018 H2 helped to improve the automotive sales gross margin in Q3 and Q4.
However, due to the price reduction in 2019 Q1, less absorption of fixed cost and more international deliveries, the automotive sales gross margin went back to the 18-19% region in 2019 Q1.
Though, Tesla reaffirmed its prior guidance of 360,000 to 400,000 vehicle deliveries in 2019, thanks to the confidence in Model 3.
China Sales
Although China (China and Europe mainly) sales in 2018 decreased compared to 2017, Tesla’s March performance in China is exceptional, with 9,273 in total (Model 3: 7515; Model X: 1490; Model S: 268)
Tesla Vehicles Sold in China 2019 Q1 | Source: Che Jing She, sohu.com
Many attributed the jump in sales to the “one time” price adjustment in China, including a ¥341 drop in the most expansive Model X (P100D), which then corrected by a general 3% increase.
Source: sohu.com
But the ongoing sales numbers is still in question.
When all the fellow streaming platforms are adding their original content capacities, on April 11, the biggest original content provider Disney Group finalized the pricing ($6.99/month) of its own streaming platform, Disney+. And the official US launch date is later this year on November 12.
Disney+ pricing | Source: Disney investor day presentation
What we’re going to do with the Disney direct-to-consumer app or platform is, first of all, we’re going to launch it in late 2019. We’re doing that for 2 reasons. First of all, as we exit the Netflix output deal, we don’t get access to our theatrical release movies until the beginning of ’19. Secondly, we wanted time to actually develop and build up original programming for the platform.
Following the 2016 transaction, Disney made plans to test BAMTech’s delivery and support of streaming video and other digital products from Disney|ABC Television Group and ESPN.
ESPN+ as a test-out
Following the 2017 transaction, Disney said it would launch its ESPN-branded multi-sport video streaming service in early 2018.
What is different though, is that the content on ESPN+ is not a replacement of cable subscriptions (at least for now). ESPN Plus will not provide live access to ESPN’s main channels like ESPN and ESPN2 – you’ll still need a cable subscription to authenticate and watch. [TechCrunch]
new ESPN app and ESPN+ | Source: theverge.com
After all, ESPN is originally a cable business and sports are heavily rely on ads. ESPN+ is an ad-embedded streaming service (video ads).
Zoom is relatively young. It maintained high growth (2018 revenue of $331 million, 2017 revenue of $151 million) and is expected to grow fast.
Zoom is making a net profit in 2018 (~2.3% profit margin) and has maintained a high gross margin (~80%).
Source: Zoom SEC Filing. Author
Growth in customers – “As of January 31, 2017, 2018 and 2019, we had approximately 10,900, 25,800 and 50,800 customers with more than 10 employees.” they “represented 69%, 75% and 78% of revenue“
Market Size – In the US, business with
10-19 employees: 46,635
20-49 employees: 37,495
50-249 employees: 23,065
250 or more: 5,672
~113k in total, so Zoom has another 50% room to grow (will be harder and more costly)
market penetration and growth opportunity in large enterprise customers – “greater than 50% of the Fortune 500 had at least one paid Zoom host, compared to only 4% that contributed more than $100,000 of revenue. We believe this demonstrates that our product has already gained a foothold in many of the largest enterprises in the United States, and there is a large opportunity to expand within these large enterprise customers”
Revenue per large enterprise customer will grow, easily – “Some of our larger enterprise customers start with a single deployment of Zoom Meetings with one team, location or geography, before rolling out our platform throughout their organization.” “As of January 31, 2017, 2018 and 2019, we had 54, 143 and 344 customers that contributed more than $100,000 of revenue in each of their respective fiscal years”
Zoom’s future depends on its business outside video conferencing; it could grow into an essential infrastructure for business operations; it could do more than video conferencing, but also scheduling, internal messaging and other management tools.
Starbucks Rewards April 2019 | Source: starbucks.com
Taking the previous revamp into account, from pre-April-2016 to post-April-2019, the program has been through 2 major changes with “points inflation” being the unchanged theme.
Let’s go back and do some calculation.
Program Redesign In April 2016
Starbucks Rewards has been through a redesign in April 2016, which transformed the transaction-based system into a value-based one.
Basically, before 2016, a $1.95 purchase is equivalent to a $5+ purchase in terms of stars earned (1 star; 12 starts = 1 free drink).
Starbucks Rewards revamp in April 2016 | Source: starbucks.com
Assuming a customer would use his/her stars for a free item with an average value of $5:
For a customer normally purchase an item of $2.5 to earn stars, the reward yield is approximately halved:
previously – 5/(12*2.5) = 16.67%
2016 program – 5/(125/2/2.5*2.5) = 8%
For a customer normally purchase an item of $3.5 to earn stars, the reward yield is cut by 1/3:
previously – 5/(12*3.5) = 12%
2016 program – 5/(125/2/3.5*3.5) = 8%
This change was resonating with a broader trend in “rewards” offered by consumer-facing industries such as airlines.
United award miles redesign | Source: thepointsguy.com
Program Redesign In April 2019
As I mentioned at the beginning, the new program features a 20% inflation in terms of redeeming free drinks.
For dollar values, in the 2016-version, a Starbucks star is approximately worth 4 cents ($5/125); now, it is approximately 3.33 cents ($5/150). [to enhance the utility, one could order a venti drink and add a shot, making free drink ~$9 so a star is worth ~7 cents before and ~6 cents in the new program]
However, better yields could be found in hot coffee/tea.
hot tea usually has a price of $2.25/2.45/2.65 for tall/grande/venti size; simply taking it as a $2.5 value, a star = $2.5/50 = 5 cents
hot coffee (in brewed coffee category) usually has a price of $2.15/2.45/2.75 for tall/grande/venti size; in a venti size coffee, a star = $2.75/50 = 5.5 cents
there is a brewed product called Caffe Misto, which has a value of $3.35 for venti size, then a star = 6.67 cents
for lunch items, to make a star’s value above 4 cents, items needs to have a value of $8; and a $10 item for 5 cents value. Those items could be easily found in Starbucks’ new Mercato lunch category
The items above will maintain the value of stars and provide the valuable revenue diversification for Starbucks (especially for lunch items).
Plus, those items usually involve less manual work from baristas. They could enhance the overall productivity for Starbucks stores and increase the profit margin on average.
Future is closer than most will believe. Drone delivery is yet another example.
Imagined Reality
A few days ago (around April Fools’ Day), a FAKE video (by rendering) populated on Twitter, presenting an Amazon mothership equipped with drones.
However, this may not be far away from what the future will look like, especially for the drone part.
Amazon’s Plan
The idea could be seen in an Amazon patent US000009305280B120160405 filed in December 2014 and issued by the USPTO in April 2016.
Amazon patent for massive flying warehouses equipped with fleets of drones that deliver goods to key locations | Source: BBC
This is part of Amazon Prime Air program first announced in 2013. It looks more viable on the drone-only side, the first delivery made in December 2016 in Cambridge, UK.
And in 2017, an Amazon Prime Air drone dropped off some bottles of sunscreen for attendees at the company’s invite-only MARS conference in California. [The Verge]
The deliveries will start with roughly 100 homes in the Canberra area. The drones are required to operate during daylight hours, banned from crossing over major roads and there’s a minimum distance they have to maintain from people on the ground.
