Livecast #7: Jordan Berke of Tomorrow Retail, former Walmart China Head of E-Commerce

Jordan Berke spent fifteen years transforming the world's largest retailer into a truly digital organization by leading strategic alliances with JD and Tencent. He's now the founder of Tomorrow Retail, a consulting company. Hear about:

How does Walmart China outstrip the US in four major categories?

What are retailers in the U.S. focusing on right now?

How do retailers turn their business into a platform?

What are the differences in the China and U.S. business ecosystems?

What myths persist in the industry?

And finally, what's the future outlook?

The following transcript compiled by Karrie Huang.

Rui: Hey everyone, it’s Rui Ma, and we’re here for another episode of Techbuzz China livecasts! Today’s topic is digital retail and our guest is Jordan Berke. A little background on Jordan: Jordan is currently the founder of Tomorrow Retail, a consulting company, but previously he was the head of e-commerce at Walmart China where he spent about fifteen years turning the world’s largest retailer into a truly digital organization from Shenzhen, China. He led strategic alliances with JD, Tencent, all the big China e-commerce companies. And prior to Walmart, he was at Beyond Interactive, which was one of the world’s first full service digital marketing firms, so he’s been in the industry for a very long time.  

And the special thing about today’s episode is that we have two hosts, myself and Jan. You all already know what I do, so Jan, please introduce yourself! We’ll have a 30 minute fireside chat with Jordan and then we’ll open it up for guest questions.

Jan: Awesome Rui, thank you so much! I was trying to figure out the technology here to connect everything properly, so I’m sorry for the delay. Jordan, good to see you, good to hear from you again! It has been some time since we connected last time but I always enjoy talking to you because of the so many insights that you can share with the world and I’m very very excited for this episode and for this interview. 

So my name is Jan. Very briefly, I am based in Shenzhen actually, we met with, connected with Jordan when he was still here, while he was still in Shenzhen, and now he’s not here anymore but I’m based here. I’ve been here for the past five, five and a half years and basically really contributing to the startup ecosystem, hosting a lot of events, building communities, helping companies to get in China, helping even some companies to go out of China et cetera. And I’m just very passionate about creating content, you know we have podcasts as well, interviewing people like Jordan on a regular basis to basically tell the stories from China and local entrepreneurs, foreign entrepreneurs, that have succeeded or are really doing great stuff here.

Rui: So, as Jan said, he also has a podcast, and it’s called D Network. I highly recommend it! It’s really really good. Jordan here was actually featured on the very first episode of D Network back in June of 2020, and so if you listen to that episode we won’t be going over the exact same things. We’ll actually be asking questions here as a kind of follow-up to that episode. 

To set the stage, one of the things that stood out to me from that episode was that Jordan said China was actually, in his opinion, three to five years ahead of the US in digital retail. He’d delineated four major parts to that thesis. The first one is turning stores into distribution hubs,  and then it’s developing and using digital sales channels, and then third is digitizing customer engagement, and finally how China uses data to personalize across multiple channels. So my first question for you Jordan would be: Could you use Walmart China as an example to explain how a digital retail experience looks like for a Chinese consumer along these four main points that you talked about?

Jordan: Sure. Awesome! Those four elements of digital retail are pretty distinct. 

The first is that, in China, it's very normal for customers to be able to order online and get their orders within 30 to 40 minutes from a retail store. Not just in tier one cities, but all the way down to tier five, tier six cities. So retailers have been operating in a mode where their stores are fulfillment centers and where they've got to fulfill orders in minutes, not hours or days. And so those stores are really well laid out and structured to be fulfillment centers. That's the first area. 

The second is the plethora of digital channels that retailers use in order to reach those customers. Which means as a retailer, you have an independent native app, you've got a mini program you're likely selling on one or more what are called O2O platforms or kind of the Instacarts of China, and in Walmart's case, we're also selling on JD on the B2C platform that is JD so a single store in China could have four to five different online channels through which it's reaching customers. That is not yet really seeing a parallel in the U.S. though that is starting. 

That third piece that I talked about back in June was around how digital is a part of the in-store experience. So not just shopping online, but you walk into a store in China, first thing you do before you grab a shopping card is pull out your phone. Because you're going to be using your phone to know what's on promotion, to find where an item's located, to read reviews before you decide what to buy. And then most certainly to check out whether they're using scan and go, to scan and walk out themselves, or just mobile payment. Today, a typical store, like a Walmart in China, sees 75% of their transaction volume on digital payment.

And then that fourth area is around using data to personalize. As you're shopping, either online in China or in store using that in store digital app, to be getting a personalized, curated experience.

So on the Walmart mini program that you use in store, every item that you see that's being recommended for you is deeply thought out based on the algorithms selection of who you are as a user, look alike users, time of in-store, season, everything that is likely to determine your interest in an item.

Yeah, so if we look at retailers around the world, China still stands out in terms of how advanced retailers are in all four of those areas. So using their stores as highly efficient fulfillment centers, having multiple digital channels, et cetera. 

But one area that has been really interesting though, is in the US and in Europe, the development of micro fulfillment which is automated picking of orders where the store is actually implementing robotics in order to replace the human element of picking orders in stores. This is something that just hasn't happened in China because of the labor efficiency that exists. 

So Walmart, it's opening a hundred, what they call market fulfillment centers, which are picking locations where robots are doing 90 plus percent of the order picking in the location. 

And some really interesting and I'm referring specifically to e-commerce and store based automation here. There are areas certainly where China's still leading in areas of automation, but in retail the West has not only caught up, but is leapfrogging I think what we've seen in China.

Jan: Yeah, this is very interesting, Jordan. I actually want to follow up on this and so I remember we were speaking on this last year in June, so it’s a couple months back. So since then, you have actually been working with many different retailers, mostly in the United States and then of course we have also been through COVID, and we’re still kind of experiencing COVID in many places around the world to a very large extent still. What are some of the most sought after solutions that the retailers are now saying: okay, we need to implement this as soon as possible, this is going to bring the most benefit, this is going to help us grow, this is going to help us sustain the operations in the US? Could you comment on this? What are the things you are most busy with right now, working with the retailers? 

Jordan: So I would categorize this into two areas. There's a core set of foundational changes that retailers are trying to make in the US and even around the world. And then there's some things where we're seeing retailers that are really trying to make this a strength and lead in this space where they're making a certain set of changes.

So I think in that first tier, nearly all clients today are looking at how they make their digital channels more competitive and how they make their store picking or store fulfillment piece more efficient. On the front end, they're really looking at how they differentiate between their own branded app and an Instacart or a marketplace that they're selling on.

So many retailers in the West entered the same day e-commerce market or the on-demand e-commerce market via a marketplace, even before they built their own app or before they built their own on demand channel within their own app. And so at this point it's a regressive stage, whereas in China, for instance, most retailers built their own app and built their own mini programs. The Western retailers are working backwards from a marketplace and to building their own apps. So we're spending a lot of time with retailers defining: What is it that you're going to do via your own app that's unique, that's above and beyond, that's more exciting to customers than what they're getting on a marketplace?

The second piece is really making an investment and technology in space and process so that they can pick orders in their stores in a more efficient way.  A year ago, the average large US retailer was doing 1% of their store volume on e-commerce. Last quarter of 2020, that number went up to 16%. 16% of their store sales were coming via online demand, whether that's delivery or pickup. And pickup for those that aren't as familiar with it, in the West, is where the customer orders online and then they drive to the store and their orders waiting for them in the store, pops it up to their car.

16% of all of their traffic now requires them to pick the order and prepare that order for handover. So retailers are scrambling to figure out how they make that part of their operation efficient. So they really revisit the layout of the store and the use of space, how they use technology to speed up their picking and guide their pickers, what kind of labor structure they bring in to be able to attract and incentivize pickers.

And then over time as they reach scale, how they automate that process with some of the micro fulfillment technology. Those are table stakes. Any retailer today that we work with is working on those two

They are really at that next level of digital maturity. And so what they're looking at is how do they turn their business into more of a platform?  How do they open up their business to allow sellers, to reach buyers, to allow them to make money on assets that they have to monetize their business in new ways.

And how do they use customer data to really build a cohesive set of services that can take more of that customer's time and spend. And this is an area that Walmart has just tripled down on: really wanting to become a fully digital ecosystem complete with a massive marketplace, all the services that need to be there to support sellers on that marketplace, all the last mile delivery and fulfillment services that are needed.

And then monetization capabilities in terms of media sales, fulfillment services, that they can monetize it, et cetera. That's becoming really the playbook for leading retailers globally. 

Jan: This is great, Jordan! Before I move on, to the next question, I want to follow up. I have two short follow-ups on what you just described because I think there were a lot of interesting points that I would like to clarify for myself and the audience and even the entrepreneurs in the room, maybe kind of in the industry. First one was that you said you were working with the clients on those specific problems, and my question is: Is it mostly that they do everything in-house? Try to invest and build it all themselves? Or is it that they’re engaging other parties, engaging different startups, different companies to basically collaborate and make it happen quicker? What is usually the process when you try to solve some problem for retailers that didn’t have the capability before but now realized that hey, we need to do this? 

Jordan: Yeah, that's a great question. Actually, it's both, so in general, I would say that retailers do struggle to get great technology talent. 

So in many cases, retailers are saying, look, I know I need this capability, but I just don't know if I'm going to have the ability to build it. And so I'd like to find someone who can build it. And in many cases, I'd like them to be able to build it and then give me the IP so I can integrate it and ultimately manage it.

But not always, retailers are also much more open than they've ever been to find innovation outside of the business and be able to partner to be able to speed up and improve  their proposition. So we have a client who is doing that in multiple areas. 

They're building out their marketplace, they're building out an on-demand business — the marketplace would be a next day delivery model, on demand would be one hour delivery from their stores. They're building out their media business. And in about half of the areas they're accelerating we've decided together that outsourcing or going outside the business to find a solution makes more sense.

And so they are going to be sourcing for some of their picking technology.  Some of their ad tech. And so multiple areas will have outside entrepreneurial or outside innovation to fuel it.

So China is certainly a unique market relative to the rest of the world, not just for Walmart, for, but for everyone. And one of the uniquenesses is that the marketplaces in China are stronger. They developed earlier and the market's pretty crowded. I'm not sure that would be a market where Walmart is going to be leaning in on building its own marketplace.

As we've talked about, Jan, we decided to buy an equity stake in JD and to build an alliance with JD and ultimately within the Tencent ecosystem. To be a role player in that ecosystem and to do everything we could in our role as an Omni retailer in that ecosystem to win.

But part of that means, giving JD the space and the support to be a leading marketplace. In other parts of the world, whether it be Latin America, Africa, certainly the U.S., Canada, A. the marketplace market or the competition isn't as strong. It's not that there isn't some great marketplace offerings. But China, like I said, is just a once in a lifetime situation where you've got multiple top five marketplaces competing in one market.

So hope that answers your question. Happy to go in another direction with that.

Rui: Thanks Jordan! That’s a great segue into my next question. At TechBuzz, we run a community for folks, investors and  interested in China tech. Something that came up was that people noted that even the largest offline retail chains in China are actually really small in market cap. Much much smaller than Walmart, for example. Why do you think the ecosystem in China looks the way it does? Is it just because the offline retailers didn’t have as much time to grow bigger before the ecommerce players came in? Why did you settle on JD as a partner instead of going it alone?

Jordan: I think you're, Rui, touching on a couple topics. The first one being, why does it seem like there are no massive retailers that have 20, 30% market share? There are in the UK or the US. And then second, why would, in our team art or others, not have seen the potential of  e-commerce first and then longer term the power of the digital ecosystem?

It's good to keep in mind that in China, there is a very large retailer with similar scale to Tesco in the UK, for instance, and that is China Resources — Vanguard Hua Ruan and they are the largest retailer within the hypermarket supermarket segment.

And I think what's unique about China is that given that the other major players have historically been foreign owned enterprises, there hasn't been as much support for them to get as big as they might in other markets. Despite there being lots of consumer opportunity or lots of demand, it's been a bit harder to expand for many of those enterprises versus China Resources.

Another challenge is on profitability. It is hard to make money in the China retail market. Just as an example, many folks don't realize how expensive real estate is in China. 

Investors are also not getting the same kind of profit out of these businesses as they would have in other parts of the world. That said, in the early 2000s, e-commerce began to gain a lot of momentum in China. And at that time, I would say retailers across the industry were really dismissive of this new channel and so nearly all of them waited on the concept. It wasn't until 2011, 2012, that physical retailers really started paying attention and realizing they needed to invest. And by that time, certainly Ali, JD, particularly Ali and JD already had a big enough headstart that they were able to defend.

I think the third part that people need to realize is Alibaba's genius was in leading with a true marketplace. And in doing that, most people will understand the margin structure at Ali has always been so much more favorable than traditionally commerce and certainly than retail.

So Ali has had this amazing flywheel where they've been able to earn so much more cash on their core business that they can reinvest in support of that core business in adjacent businesses, that it was almost like a forest fire that as the stronger they got, the faster they grew because of the favorable P&L structure, the lucrative nature of being a marketplace.

Rui: Alright. It’s actually time now for Q&A. So everyone can now start spooling out questions. And while we wait for them to do that, I’m going to ask another question. So, Jordan, I always ask this of all my guests, can you think of one myth that you’re finding yourself always having to debunk in your industry? What is just one thing people consistently get wrong?

Jordan: Sure. Sure. Certainly at least once a week, I hear from a retailer that there's no way we could be competitive with Amazon in terms of delivery speed or front end product user experience. That's a huge myth. It is not out of reach for any retailer that's ready to invest in their digital capabilities to be great in this space. That's an area we try to help demystify and show it's possible.

Rui: So Sashi’s question is around membership clubs, so Sam’s Club, Costco. What’s your prognosis for how these business models do going forward with expansion of digital platforms? How will they be affected?

Jordan: Hi Sashi. Great questions. So the membership club model is really gaining a lot of momentum around the world. The upper-middle class segment of the population is really falling in love with this format and what they're loving about it is the ability to get really high quality product at disruptive prices. That's what they do well — is get you product that you just wouldn't find anywhere else at a value. Now where you traditionally have to compromise is on convenience.

To be unique in the assortment, they will often have larger pack sizes and require that you buy say months of quantity of an item rather than a week. And the clubs themselves are big, they're often crowded, and they're very what we call low frills, right? 

So what's been interesting is the difference between Sam's Club and Costco. As the pandemic occurred, what we found was Sam's club saw an enormous benefit from having a strong, what we call digital flywheel. They had a number of digital products that helped make it easier for members to shop and a better experience for members. Whereas Costco has had an almost religious bias against digital. They just under-invested.

So Sam's club on the other hand, has been doing delivery from their club, pickup in club via their app. They've also been giving their members Scan and Go. And so what we found is that before the pandemic, Costco was outperforming Sam's club pretty significantly by about 600 basis points of sales growth for five years. And that completely flipped basically. Sam's club passed Costco and was growing — not completely — they're growing a hundred basis points faster than Costco since the pandemic. So almost a 700 basis point swing in sales growth. All — we think — all because of that digital capability. So a great format, certainly one, that's got a lot of upside around the world, but don't assume it's only going to be the product that keeps the format thriving. I think it's got to have a digital element too.

Rui: Okay, so David has a question about shrinkage. Especially about if you learned any interesting lessons in China’s retail market about how they’re dealing with shrinkage, which is as we know one of the major costs of running a retail platform.

Jordan: Cool. So David, I think shrink is a fact of life in the retail business because of the need to have products close to the customer and not ever being able to be completely accurate on what the demand of the customer will be. 

In retail, there is a kind of standard belief that one of the worst things you can do is be out of stock when a customer walks into your store, right? And so retailers will always have more than enough inventory to serve that customer demand just because the risk of not having enough is so high.

You always have this overage challenge. And typically a portion of that overage ends up as shrink or throw away. I think the area you're referring to is this sort of inefficiency that comes from needing to throw away inventory that's unused. 

What I'm excited about with the Community Fresh model in China among other things is that complete change in the model in the sense that this is predetermined demand, that allows the platform to be able to place precisely the amount of inventory that customers need close to the customer. Because waiting a day or whatever that lead time ends up being before you decide on your quantities is an incredible change.  

That is the ultimate potential of that business model is the ability to know in advance and being able to get that to them all in one shipment, in the most efficient packaging, to enable that to be then distributed once it's arrived to the customer. 

So that's a model that I think has a lot of potential. It's unclear right now how it becomes sustainable because as with many sectors in China, the early say five to seven years are just so intensely competitive and so bloody that it's hard to forecast when that's going to settle and there will be the winners who can ultimately find a way to make it to break even. 

I'm not sure that's clear yet in China, just like it wasn't in the old marketplace market, the ride hailing market. 

Rui: Okay. Question from Peter: Could you elaborate on the difference in density between the US and China and what that implies for the retail business?

Jordan: Yeah, I mean, debt density is a major tailwind to e-commerce in China. It certainly has enabled much faster returns on capital investments for e-commerce companies, retailers getting into digital space. Up until nine months ago it was hard for you to see enough demand in the U S on a big e-commerce investment, if you're a Walmart or if you're a Target. And it's only now today that they're starting to really reap the rewards of all of those investments. 

So now you're seeing really the push into cap ex, but because the densities are so low, you needed a much higher adoption rate of e-commerce among Americans or Western customers to be able to get that kind of density. I think that's yeah, that's what I would say on that one, Peter.

Rui: Okay, we have a question from the audience. How did you pick between JD and Alibaba for the Walmart partnership?

Jordan: Yeah. Great question. When you're looking at two very good digital platforms you really, in many ways can't go wrong. If your mission is to be able to create an omni-channel partnership that gives the retail business certain support from a digital perspective and supports the digital platform with physical assets, both are very good options.

Ultimately, the culture fit and the ability to cooperate with JD was just much higher. Ali, as you probably know, tends to be a fairly controlling acquirer in the sense that they essentially tear the brain and guts out of a retailer when they buy it. 

So as a retailer, if you have strengths and you think that you can bring value, Ali's probably not a great retailer for you. Not saying it's any worse, it's just, you've gotta be ready to be replaced by the Ali organization. So JD was much more collaborative and wanted to build things together. And that's what’s happened. 

The question is what happens next? Now, one of the things that's interesting is that Tencent in general has not been a very controlling investor and has not taken its ecosystem and tried to pick winners and tried to push together entities that have synergy.

We always thought that would ultimately be the right play: for Tencent to say, listen, you've got such an amazing portfolio of assets and partners. It's time to start stitching that together so everyone can do the best they can. I'm not sure — long answer — to what happens next. 

Rui: All right, that’s all we have for today. Thank you so much, Jordan, for joining us, and thank you, Jan, for joining us all the way from Shenzhen! Please do go download Jan’s podcast, D Network. And we’ll see you again for our next livecast recording. Thank you

Jordan: Thanks! You can find me on LinkedIn, also find me on Twitter at Jordan B tomorrow. And WeChat of course at J Berke, J B E R K E. Thanks for getting up early guys. Bye everybody.