EC HH Who Is Who In China Retail

  • We present a deep-dive of the major trends shaping China retail, an overview of key players, and the investment potential in the industry.
  • An overriding trend in the China retail sector is the consolidation of major players into either the Alibaba camp or the Tencent camp.
  • We analyze the business model of the top 10 players, and reveal their strategic partnerships with and ownership ties to either camp.
  • We discuss the merits of investing in market leaders Alibaba, Tencent and JD.

With most U.S. tech stocks richly priced, we have been hard at work researching China tech. In fact, we are determined to make China one of our core competencies, so expect ticker-focused articles on the likes of Alibaba (BABA) (BBAAY), Tencent (TCEHY) (TCTZF) and Baidu (BIDU) in the coming weeks.

Earlier this month, we initiated a long position in JD.com (JD) in the mid $30s, to which we added at lower prices. JD is our third stock pick of the year, following The Trade Desk (TTD) and Alphabet (GOOG) (GOOGL), which are up some 130% and 20%, respectively, since we published our long theses.

We refer those interested in our existing long positions to the original TTD long thesis, published in January, the original GOOG thesis, published in April, and the original JD thesis, published earlier this month..

In this article, we explore the current status of the thriving Chinese retail ecosystem. At the core of the article lies a diagram, which highlights the increasing clustering of the myriad retail players into either one of two large, dominant camps: the Alibaba camp and the Tencent camp, with JD playing a major role in the latter.

 The clustering of China retail players around the Alibaba and Tencent camps is becoming increasingly evident (source: Investment Works Research)

On what follows, we briefly introduce the main trends that are shaping China retail. We then go one by one over the most relevant players. For each player, we provide a snippet with:

  • a description of the business activities relevant to retail,
  • rough measures of size, growth and brand value, when available, and
  • the strategic and ownership ties to the other players, if any.

The focus of the article is on retailers of physical goods. We exclude providers of local services such as Tencent-backed Meituan-Dianping (MEIT) and Alibaba's Ele.me and Koubei, as well as pure B2B marketplaces such as DHgate.com.

As a proxy for brand value, we use the BrandZ China ranking, which combines research on consumer data with financial analysis to produce a list of the top 100 global brands for each year. We see BrandZ's scores as a valuable indicator of business strength, while its year-over-year change figures serve as insightful indicators of momentum. Moreover, according to BrandZ's analysis, there has been a strong correlation between companies’ BrandZ scores and stock returns.

While we have attempted to keep it short, this article covers over 20 companies in China retail, making it an ideal starting point for more focused analyses of the sector (including online, offline and hybrid models).

To our knowledge, this article is the most comprehensive up-to-date report yet to have been published in the English language on the interplay between Chinese retail players. Third-party authors are welcome to build on this work by ensuring relevant reference to this article.

China retail

Within the span of two decades, Chinese Internet companies have transformed from skilled imitators, operating within the confines of the Great Firewall, to visionary leaders.

Today, the Chinese Internet ecosystem is arguably more dynamic and daring than its Western counterpart. In fact, Chinese Internet companies are starting to become a major source of innovation throughout the world. And the trend is only expected to become more widespread, as Chinese companies continue to capitalize on the strengths developed in China by adapting these to the idiosyncrasies of international markets in order to prolong their growth.

Indeed, in no other segment is the vitality of the Chinese market more apparent than in retail. Incessant innovation and consolidation are blurring the boundaries between offline and online, shopping and social, and retail and tech – all at an incredible pace.

E-commerce and B2C

The rise of the Chinese consumer is and will continue to be a secular tailwind for retail.

Within retail, e-commerce entrepreneurs have capitalized on the rapid expansion of Internet access and its widespread adoption, as well as the underdevelopment of brick-and-mortar retail franchises, to outgrow incumbents. Relentless innovation and deep pockets have helped speed up the process.

Within online retail, B2C keeps grabbing market share from C2C, as affluent urban consumers demand increasing levels of service and product authenticity (every year, some 20 million Chinese people move to the city and a commensurate number joins the middle class [1]).

New retail

Amazon's (AMZNacquisition of Whole Foods about a year ago raised a few eyebrows, but for those acquainted with China retail, Amazon was just taking a page from Alibaba's playbook.

Alibaba's Jack Ma calls it new retail, JD's Richard Lui, boundaryless retail. What both have in mind is the use of technology to seamlessly combine the virtues of online and offline retail to offer all players along the value chain the best possible experience.

Indeed, new retail is the fundamental force driving the consolidation of China retail around the Alibaba and Tencent camps. Each camp is trying to shore up its control of the value chain, filling missing links with strategic partnerships and acquisitions.

As we shall see, the links of the new retail value chain include mobile sales channels, online marketplaces, advertising platforms, payments and other consumer and merchant financial services, supply chain solutions, warehouses, last-mile delivery and brick-and-mortar stores.

Cracking the customer experience code

Experience, be it customer, merchant or brand experience, is the key word here.

Before the Internet, the main competitive advantage a retailer had was the degree of market power in relation to suppliers, with the needs of customers and other stakeholders relegated to a secondary role.

Today, thanks to the ubiquitous access to the Internet, consumers across the globe are flooded with an overabundance of product and pricing information amid the disintermediation of the middle man, forcing retailers to shift their focus away from suppliers to consumers and other platform stakeholders. Therefore, the retailers gaining advantages of scale are those who are willing and capable to offer best-in-class —customer, merchant and brand— experiences.

This is an ongoing phenomenon in every economy that boasts broad Internet penetration, but it is particularly apparent in China, where the shift is taking place faster for the reasons outlined above.

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Disclosure: I am/we are long JD, GOOG (see all the current holdings in the IW Portfolio).

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Comments

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Ayelet Wolf 2 months ago Member's comment

Excellent read!

Investment Works 5 months ago Author's comment

Thank you for reading.

Subscribe to the IW Newsletter @ www.invworks.com/subscribe to keep up to date with our latest research and stock picks --no charge.

William K. 5 months ago Member's comment

Wow, a huge amount of information. And it totally backs up my prediction that one technically literate generation and China would be a HUGE world force in commerce.

Carol D. Richards 5 months ago Member's comment

I agree.