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April 16, 2015

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Why e-commerce giants must reinvent, and why the human touch is still vital

EDITOR’S note:

THE growth of e-commerce cuts both ways, benefiting billions of customers but also hurting brick-and-mortar stores. Will it spell the demise of mom-and-pops? And do e-commerce poster boys like Alibaba have what it takes to succeed in a different market like India? Sunil Gupta, professor of business administration at Harvard Business School, recently spoke to Shanghai Daily reporter Ni Tao about these issues while attending a forum held by Fudan University’s School of Management and American Marketing Association in Shanghai.

Q: Have some of the old challenges besetting e-commerce in Asia, such as logistics, payment and cultural differences, been overcome?

A: E-commerce has evolved quite dramatically in all of the emerging markets, certainly in China. Some challenges like logistics have been sorted out. In China you have logistics companies and different kinds of systems in place. It’s the same thing in India and other places.

The payment system has also been largely solved. For example, you have Alipay here, in the US it is PayPal, and other countries have some other systems. So the basic structure is taken care of.

Consumer trust has improved, people are willing to do more e-commerce shopping than before. Smartphone penetration has increased. All those things are moving in the positive direction.


Q: What are the new challenges?

A: The new challenges are twofold. One is that as every company goes onto the e-commerce platform, whether it’s Tmall (a spinoff from Taobao, China’s leading online shopping site) or their own website, you have increasing competition for consumer attention. The second challenge is that as consumers move from desktops and laptops to mobile platforms — in other words, you move from e-commerce to m-commerce — that will also change the nature of discussions.

I understand that WeChat is very popular here. So how you advertise on WeChat is very different from how you advertise on Baidu or desktop.


Q: Is price sensitivity on the wane since there is a burgeoning middle class in China and India?

A: More income means that they are willing to buy more expensive products, but nonetheless consumers are always looking for a good deal.

And what e-commerce allows you to do is compare prices very easily. And as competition increases, there will be more temptation for companies to attract customers by giving discounts.

So it’s not quite clear whether price sensitivity will go up or go down. My sense is that competition will drive prices down, except that some companies may create very different products and experiences. But there will be price pressure for sure.


Q: What are the strengths and disadvantages of Chinese e-commerce giants?

A: Chinese e-commerce companies are very innovative and creative. They mix and merge different models. In the US, you have only one model, but the Chinese mix and merge different types of things depending on customer needs.

Alipay is doing extremely well, they are going to the retail channels also. They are ahead of the game in many different areas, because they have a large base, they understand customers and the Chinese market, which is very difficult for external players to do.

So that is a strength, being very fast, innovative and adaptive in how they respond to the marketplace.

The challenge which Alibaba and other companies will face is that they are very strong in China, but it’s not quite clear whether they will become major global players.


Q: You mean their global strategy is not yet in place?

A: If you look at all the Chinese companies, I can only think of two companies that have done successfully globally. Lenovo is one, Xiaomi is the other. Maybe Huawei is a third. But in some ways those are all product-based companies, not e-commerce companies.

When it comes to e-commerce companies, they have a harder time partly because the Chinese market is so different, and that’s why they are successful in China. If you look outside of China, there are already well-entrenched players. So the right strategy for Alibaba would be to invest. And they are already doing that.


Q: Talking of overseas investment, Alibaba recently made inroads into India. Any suggestion for its expansion there?

A: Alibaba has invested in Snapdeal, an e-commerce platform in India. In India there are three major players of e-commerce, Flipkart, Amazon and Snapdeal. Amazon is of course part of the Amazon US. Flipkart was founded by some venture capitalists. It is ahead of the game in terms of starting e-commerce there.

The Chinese e-commerce companies will have a difficult time becoming a global player. The only way for them is to partner with some of the local players. And that’s what Alibaba is doing now. Snapdeal already has a footprint. It has a customer base and logistics.


Q: In what areas do you see room for major improvements by Chinese e-commerce firms?

A: I think they can help traditional brands. For example, if I’m Nike or another brand, I can put my shop on Tmall. That is one way Alibaba is helping me.

But they can probably help me also in terms of connecting better with my customers, digital marketing, engagement and so on and so forth.

If I’m a brand, I really need to connect with customers rather than simply having a place for commerce, because reaching and engaging customers is much more difficult.

I don’t know if Alibaba has plans to do that, but right now it’s just a platform, a retail channel where I can sell the product. But can you help me with marketing these products and tell me how to leverage the social media? It could be a great advantage.


Q: How can traditional brick-and-mortar businesses survive the challenges of e-commerce?

A: Certainly traditional brick-and-mortar stores are under pressure, as people do more and more shopping on e-commerce websites. It’s convenient, the price is lower, because there are no fixed costs associated with e-commerce platforms. And consumer trust will increase over time.

Brick-and-mortar stores certainly will have problems. The way for them to compete is not be in the old model of business.

People will not go to a shopping mall simply for transaction. You have to convert the whole transaction model into an experience-based model.

I’ll give you an example. I did a case study for an Italian grocery company called Eataly. This was started by an entrepreneur in 2007, and now it’s close to a US$500 million company.

It’s a grocery store, supermarket. Supermarkets are a very tough business, with very low margins.

You would ask, why would anyone open a grocery store? It makes no sense. But what Eataly has is a grocery store, marketplace and restaurant, all in one.

They are not selling products but experience, somewhat like Disneyland. That’s what they are trying to do.

As brick-and-mortar stores, because you cannot fight on the basis of price with e-commerce platforms, the only way is to fight with something e-commerce platforms cannot provide, which is the human touch, interaction, and a meeting place. And that means experience.


Q: Will we see an overhaul of business landscape as companies like Apple engage in crossover activities, tearing down boundaries between industries?

A: You’ve already seen that. The traditional definition of industries is breaking down. It used to be that if you are in banking, only banks do the banking.

Now lots of different players can do the banking. If I’m Alibaba, I have a large customer base, I can start Alipay because that is consistent with doing e-commerce on my platform.

In this case it makes perfect sense to have a bank or payment system.

And all that is driven by, say, what is your core asset? The core asset is that you have customers and their trust, and therefore whatever customers need I can go with them, or whatever technology I have I can leverage that.

Suppose I’m Apple, I have the technology, and consumers want to play iPhones in the car, Apple’s shift to car making seems natural. They may not produce a car, but certainly their product will go into the dashboard of a car.


Q: Do well-established firms have to act like start-ups to stay in the game?

A: Absolutely, if you look at the pace of new products launched by Alibaba, Amazon, or any of these e-commerce players, it’s amazing.

I know a little bit more about Amazon. Amazon started with books, but now they have film studios, advertising networks and payment system.

So you just have to keep innovating with new products, ideas and systems, and that is absolutely start-up mentality.


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