Ep. 26: The O2O Local Services War: Alibaba vs. Meituan? Part 2: Koubei

Transcript

We are TechBuzz China by Pandaily, powered by the Sinica Podcast Network.
We are a new weekly podcast focused on giving you a peek into what’s buzzing within the tech community in China. We uncover and contextualize unique insights, perspectives and takeaways on headline tech news that don’t always make it into English language coverage. TechBuzz China is a part of Pandaily.com, a new English language site that tells you “everything about China’s innovation.”

(Y: Ying-Ying Lu; R: Rui Ma; E: Ed Sander)

[00:00] R: Last week, we went over the convoluted founding story of ele.me, China’s #2 food delivery service after the newly IPO’ed Meituan. Ele.me was acquired by Alibaba for $9.5Bn in April, the largest acquisition in Chinese internet history, and merged with Alibaba New Retail subsidiary Koubei last week.
Y: This is a two-part series, like our deep dive into bikesharing earlier this year, and is meant to be listened to in the order that they are released. Better yet, you should listen to both last week’s story on ele.me and our earlier episode on Meituan first, before jumping in today.

[00:36] R: Basically, we are seeing the emergence of a new battlefront in China — a battle that is currently being called local services, 本地生活, or pretty much the old O2O, online-to-offline businesses that included group buying and food delivery, but which is now increasingly being tied up with a concept known as New Retail, you know, high-tech supermarkets, grocery delivery, cashierless stores, stuff like that.
Y: And nowhere is this convergence of sorts more clearly demonstrated than in the recent ele.me and Koubei merger. And since we gave you a ton of detail — maybe too much detail, sorry! — on ele.me last week, this week — you guessed it — we are going to talk about Koubei.

[01:22] R: What is this company? Why is it important? Why the merger? What does this mean for the battle between Meituan and Alibaba? And why should you care?
Y: Well, this battle, like so many of the other battles we’ve covered so far on Techbuzz, is actually a pretty good example of how China is farther ahead in certain market segments versus the U.S. I mean, most of the same pieces and technologies exist, but China has rolled out many parts faster, and so we might see certain business dynamics emerge earlier than even here in Silicon Valley.

[01:58] R: Right, I mean, just in food delivery, a core reason behind Uber’s jump in valuation recently, China is about twice as big as the US, with a $33Bn market expected this year versus $17Bn here. And that’s just one piece of the puzzle. So keeping an eye on this story might also inform those working on these sectors elsewhere — because you never know, maybe Amazon, Uber, Instacart, and other internet giants, are going to take a page out of the same playbook if Meituan or Alibaba can make it work.
Y: Or learn from their mistakes if it doesn’t. But Techbuzzers, we’ll let you decide for yourself — is New Retail and Local Services truly a killer combo? And who might have the best shot at making it work? Meituan, or Alibaba?

[04:51] R: Koubei, which literally means “Word of Mouth,” has led two lives, so no, you’re not crazy if you think you’ve heard of this brand before. It was started in 2004 by an early Alibaba employee and initially focused on housing search. Then it tried to be the Craigslist, then Yelp of China, before being bought by Alibaba and merged into its Yahoo! China division.
Y: None of those efforts worked though, of course, and it’s hard to say if Koubei was just too early in its timing or too unfocused or what, but by 2011, it was basically left for dead. By the time 4 years later in 2015 when Alibaba officially revived and restructured the brand, everything had changed except the name.

[05:38] R: Yeah, because it wasn’t a revival as much as a rebirth. In June 2015 Alibaba and Ant Financial put in $6Bn RMB, or almost $1Bn USD, and split ownership in Koubei 50/50 to fight against the still separately dueling Meituan and Dianping at the time. Even though the O2O online-to-offline local services market had already reached $30Bn in 2014, researchers estimated that the market penetration was just a paltry 4.4%. So that means everyone could see the growth potential, especially commerce-minded Alibaba, who was drooling after this ginormous market opportunity.
Y: Which might explain why it could not help itself but jump into the fray, despite already having a horse in the race by way of portfolio company Meituan. But as we already know, Alibaba likes to own, and not just influence as an investor. Either way, I wonder if that was the beginning of the end of their relationship, because before they were the rivals they are today, Alibaba had led Meituan’s Series B.

[06:48] R: But today, just 3 years later, Alibaba’s ele.me and Koubei are named as main competitors in Meituan’s IPO prospectus. So alliances, even if forged together by strategic equity investment, can be quite fleeting in Chinese tech.
Y: Right, but back to Koubei. While it began with the food & beverage or “F&B” restaurant business much like a Yelp or Dianping, Koubei 2.0, like its predecessor, always had grander ambitions from the start. In fact, its very first press release said that it was eventually going to go into healthcare, supermarkets and vending machines.

[07:25] R: And it pretty much does do everything now, having expanded significantly since launching 3 years ago. You can book travel, buy movie tickets, find a gym, do your laundry … But the main business still seems to remain F&B. Or at least that’s what Meituan thinks. In its prospectus, Meituan names Koubei as its main competitor in its “in-store” business, which means the following: “allowing consumers to make reservations, line up virtually, place orders, purchase vouchers and much more, addressing potential consumer demands and improving merchants’ service quality. At the same time, merchants are further enabled through technology that improves their IT and operations, accelerating their digitization.”
Y: Simply put, Koubei and Meituan are both working on digitizing every aspect of the restaurant dine-in experience, not just what the consumer experiences, but also the backend as operated by the restaurateur.
R: In July, Koubei announced that it was going to apply New Retail to the F&B business by introducing smart restaurants. What are smart restaurants, you ask? It’s basically the things we just mentioned, but just taken to an extreme. And oh yeah, with AI.

[08:41] Y:Yeah, as a consumer, you will get AI recommendations on what to order. As a restaurant owner, you’ll be able to manage your inventory, offer real-time discounts, maybe personalize offerings to customers and more. Technically, you should be able to run your restaurant at a higher efficiency and for longer hours, like, for example, 24 hours a day.
R: One chain signed on to be an early beta customer in January. After six months, the location grew revenues 40%, labor efficiency by 3 times, and had 37% higher table turnover rate. Based on these early promising results, Koubei has announced new partnerships and intends to remake 1mm restaurants into intelligent ones.
Y: Koubei has also worked with a convenience store called 24鲜 to pilot cashierless payments. While there is still a cashier in the store, customers with the Koubei app can just scan the goods and pay for the items in-app and show the receipt to the cashier as they leave, saving a lot of time and labor. It’s also been using AI and facial recognition to help chains choose locations to expand to.

[09:49] R: OK, if you’re like me, you’re probably thinking, that’s cool … but also kind of gimmicky. Yeah, add AI to everything. Yeah make everything robotic. But is that Alibaba’s plan to win against Meituan?
Y: No, of course not. These are newer initiatives and make for good headlines, but the crux of the battle is still for all of local services, not just F&B. There’s so much offline consumption that can be digitized. In China, it’s popular to refer to the 30T RMB of annual Chinese 社会消费, AKA private consumption, sometimes also called household or just domestic consumption. That, by the way, equates to about $4T USD. And F&B? Accounts for just 12-15% of this number.
R: Yes, and over $30Bn of that in China is already online. But guess what else is also $30Bn? E-grocery in China. The US, again, is about half the size of China. So naturally, beyond F&B, Koubei has pushed into other aspects of daily life, such as convenience stores and supermarkets.

[11:03] Y: And this push has been very serious, too. So most of you probably know about Singles Day, or November 11, commonly referred to as 双十一 or Double Eleven in Chinese, the equivalent of Black Friday or Cyber Monday in China, and something Alibaba invented but is now probably the single most important day for the company. But you probably haven’t heard much about 双十二, or December 12, Double 12, which is also an Alibaba invention, but was a pretty lackluster affair until a few years ago, when a bunch of offline merchants adopted it as their own shopping holiday. We are talking about large electronics stores, supermarkets, convenience store chains, and basically a lot of businesses with an offline presence who tried to make it into the O2O holiday of the year.
R: It’s still not that big, not compared to Singles Day anyway, but because Singles Day is so closely affiliated with Alibaba’s Taobao and Tmall, other players like Baidu and Meituan have been trying to get a piece of the action on Double 12 instead. But Alibaba wasn’t going to let them get away with that so easily! Beginning in 2015, Alibaba has been trying to brand Double 12 as a Koubei holiday, and last year, it upped the stakes by having its most popular app, mobile Taobao, include a special promotional link for Koubei Double 12 Shopping Holiday.

[12:26] Y:And how has that worked out?
R: Well, on last year’s Double 12, Koubei issued 140mm coupons on behalf of 1mm merchants, and induced what they said was 65mm transactions in 300 cities.
Y: Is that good or bad?
R: I don’t know. Obviously, these numbers are large and impressive, and there seems to be significant growth from the year before. And unlike Singles’ Day, these coupons are not used online but redeemed in the actual store, usually. But since many articles talked about how you could buy 70 RMB of goods with just 25 RMB cash on this day, meaning there were significant subsidies being given out, can you really say this was super successful, or just a super expensive customer engagement strategy?

[13:15] Y: Nothing beats free money! Alibaba has plenty of cash though, so I would expect this to continue for a while, or at least until they are sure they’ve won this market.
R: And now that Koubei has merged with ele.me, maybe they will. The combined company coverage, at least, is immense. Together they have 3.5mm merchants across 676 cities. And Koubei alone has 167mm MAU. Couple that with ele.me’s nearly 700K delivery workers … Meituan should be very very worried. I mean, they are worried. As we said, they very responsibly highlighted these risks in their prospectus.
Y: The question though, is, who is set up better to win in this space? And by this space, we mean local services. Originally the focus had been on food delivery, but now digitizing offline retail, or what’s called New Retail 新零售, is also front and center.

[14:14] R: Yeah, as we quoted last episode, according to Jack Ma, New Retail is “a seamless merger of offline, online and logistics for a dynamic new world of retailing.” That means e-grocery, cashierless stores, high-tech retail, and all that good stuff.
Y: With both Alibaba and Meituan, the emergence of Local Services and New Retail as a key business unit has been very obvious. In January, Koubei changed from reporting to Ant Financial to reporting directly to Daniel, the CEO of Alibaba Group. If you can’t quite remember what’s the difference between the two, we highly suggest you listen to our Episode 11, which does a deep dive on Ant. Now that Koubei is combined with ele.me, it is still directly overseen by Daniel.

[15:04] R:Remember too that on the retail side, Alibaba has significant retail partnerships and investments in the form of Yintai, Sanjiang, and RF Mart, all large department store and supermarket chains. In consumer electronics, it’s got Suning. In fact, it has invested nearly $10Bn into traditional brick-and-mortar retail since 2015. But beyond that … perhaps most importantly, it’s got Alipay. And because ele.me, Koubei, Alipay, Taobao … they are all one big happy family, they can all agree to share all their data.
Y: Which leads to Koubei being able to offer you a discount voucher to karaoke in the mall when you finish your Hairy Crab dinner, because Alipay data shows that you have a 30% chance of wanting to sing your heart out after a gourmet seafood meal.
R: Which is either creepy or convenient depending on where you stand on the consumer privacy spectrum.
Y: Right. But if you are the merchant, then you love this solution. You also love how you don’t need to deal with all the hassles of managing a mall membership program, which by the way, is very common in China. Statistics show that only 30% of visitors return to the same mall within 6 months. But if they have a membership with perks and you can keep track of who they are and push them timely discounts … then maybe you won’t be wasting ⅔ of your foot traffic.

[16:31] R: Not just for mall operators but also for store owners, you don’t need to manage your own members or loyalty program either. You know those buy 9 get your 10th boba milk tea free deals where you have to remember to carry around this flimsy paper card and get it stamped? Koubei can manage that for you automatically. And when shoppers come into your store, instead of bothering the sales people for promotions, they can just scan the Koubei QR code at the entrance and get all the coupons they need. Even for a small store, this could save you entire one or even two salespeople, which is a very significant cost saving.
Y: That’s actually what the app really is. Unlike Meituan, which is really still very much reviews based, Koubei is all about drawing you in with deals, and allowing you to order inside the app as much as possible. It’s much more on-the-spot promotion and order completion. Much more transactional, but at the merchant’s location, versus Meituan and ele.me which focus on delivering to the home.

[17:37] R:Meituan obviously has seen the same opportunity, and was already starting to experiment with its own offline stores by mid-2017. At the time it said to investors that it expects to be “the most aggressive investor in the offline retail space.” It officially announced last November that it would increase its focus on New Retail, breaking out those revenues separately under “New Initiatives” in its financial reports.
Y: Even on the logistics side, it’s tried to follow in ele.me’s footsteps by focusing less on food and more on delivering things in general, launching a 闪购 product in July that delivers not just food but groceries, convenience store goods, flowers, jewelry, and other things that are not quite so high frequency as food, but would still benefit from delivery.
R: It’s also been testing robot delivery. But let’s not get into that today, because these initiatives are still so early. Instead, you’ve heard us talk about Koubei and local services and new retail for the last twenty minutes. Let’s get another voice on the show, our friend Ed, who’s been looking into New Retail for a while. Ed, can you introduce yourself briefly to Techbuzzers?

[18:48] E: Hello, my name is Ed Sander of ChinaTalk in the Netherlands, and ever since working as an international volunteer in the city of Xi’an, I have been writing, giving lectures, and guiding study trips for individuals and groups with a special interest in mobile digital innovation, and New Retail more recently.
Y: Alright, In case that’s not clear, Ed takes people to China, not the Netherlands, for the study trips, and he has recently done some fantastic videos on New Retail that you can find on his website at chinatalk.nl. OK Ed, what do you think is the main benefit of Alibaba now combining ele.me and Koubei?

[19:33] E: There’s some interesting aspects about the combination of local services and new retail. One part is of course the delivery. With the army of Kuaidi, of couriers that Alibaba now has available after fully acquiring ele.me, it can probably use these in other areas as well, like for instance orders that come in at Hema. Another thing is that with Koubei and ele.me merging in the backend, not so much the frontend, but the backend, they will probably be able to offer a more full service package to the merchants. Of course ele.me is doing food delivery, there is other services that Koubei offers more in the customer acquisition and online presence that can complete the service package that is being offered to the merchants. So that’s where I expect synergies and a better full experience on the merchant’s side. On the customer side, I expect another fierce war between Meituan-Dianping and ele.me as we have seen before between Meituan and Dianping before they merged together. So it will probably result in more customer discounts and merchants subsidizing.

[20:50] R: I’m not sure that’s a good thing, that Chinese people will have cheap fast food delivery. But I suppose as long as they are also ordering fresh groceries with the same infrastructure and eating healthy , maybe it’s not all bad. But Ed, is there anything the West can learn from this?
E: As far as the question is concerned of how the West can learn from these developments in China, I’ve always personally been very skeptical about the possibilities of copying Chinese concepts to other markets. Most of all because the conditions are very different in most other markets. The labor costs are still quite low in China and that’s for instance how you can apply a lot of order-picking people inside the Hema stores, and lots of couriers delivering food and groceries. Also, the population density in the Chinese cities is very high. If you look at food delivery in the Netherlands, it’s mostly fast food, because eating out is quite expensive and it’s really considered to be a bit of a special occasion if you go and eat out, so you wouldn’t really go and have a courier deliver a real meal that’s not fast food. But if we look at what we can learn from these Chinese internet companies and these developments, I think the most interesting thing is how Chinese internet companies diversify, whereas in the West we tend to stay in our own field and our own area. I think that’s where the West can really learn from China.

[22:33] Y: Hema, by the way is Alibaba’s tech-infused supermarket that we will have to go into another time. Anyway, I agree that operationally there might not be too much in common, but from a high level consumer needs and trends perspective, there’s still a lot to digest and maybe to incorporate.
R: Totally agree with you there. And I also agree with Ed and his point on the sprawling, seemingly endless business expansion that these Chinese tech giants take on. Perhaps at the end of the day, this is not as much a battle between Meituan and Alibaba, as it is of Tencent, which of course owns part of Meituan, and Alibaba and their two divergent approaches to empire building. If it hasn’t been obvious from our prior coverage on these two companies, Tencent invests, while Alibaba acquires.
Y: Perhaps that’s an oversimplification, but Tencent is often content to take a minority stake and stay there, while Alibaba likes to incubate and spins out, acquires, or sets up JVs, often with a majority ownership position. Or even if it began as a strategic investment, the goal for Alibaba is often to acquire outright, as in the case of ele.me.

[23:45] R: Tencent’s strategy might be faster and less risky, since it is more light-touch and less capital intensive after all, but Alibaba has more control and can integrate much more tightly. While Tencent has created a superstar team — we’re taking about JD, Meituan, Didi and all that — Alibaba has a Family with a capital F. They share Jack Ma’s blood, while Tencent’s companies only share Pony Ma’s friendship. Well, friendship and funds.
Y: Yeah, integrating across two independent companies headed by two hotshot CEOs, is obviously going to be more difficult than Alibaba CEO Daniel Zhang just issuing an order that says hey guys, your units are now combined. Have fun working together. Here is your new KPI. Beat Wang Xing.
R: And now Meituan is a public company, with investors scrutinizing its every move. Its latest financial report shows that food delivery still makes up the bulk of its revenues at 60%, while new initiatives, which combines Mobike, grocery delivery, and other stuff, is only 14%. It’s already promised investors it won’t go after ride-hailing despite a much publicized attempt to go head-to-head with Didi earlier this year. Can it convince investors New Retail is a sector it must be in? That will only push back profitability even further, I’m sure.

[25:13] Y: And is it even necessary to do so, with Tencent also having mirrored many of the same moves Alibaba has made? We won’t list all of them here, but Wang Xing has a lot of teammates to buddy up with.
R: As much as I am a fan of Wang Xing, I think he has his work cut out for him here. Alibaba is serious about local services, and the amount of data it has on its users, coupled together with the amount of cash it’s willing to through to back these initiatives, as evidenced by its subsidies for ele.me and Koubei Double 12 shopping festival we talked about earlier , really makes me favor Alibaba more in the long run.
Y: Not to mention that these new businesses require significant amounts of operating know-how. Alibaba is a much older and more experienced business, and being the leader in e-commerce, means that it has been dealing with supply chains and suppliers for much longer than Meituan has. I’m also going to cast my vote with Alibaba. For now.
R: Yeah, so while we are not discounting Tencent, it’s got its hands full now with its own troubles. What do y’all think? Is Alibaba’s ele.me and Koubei combo the killer duo that’s going to shake up Meituan? Or is it still too early to tell?

TechBuzz China by Pandaily is powered by the Sinica Podcast Network. Pandaily.com is a new English language site that tells you “everything about China’s innovation.” You can find us on twitter at @techbuzzchina and @thepandaily, or reach out to Rui and Ying-Ying at @ruima and @ginyginy. Our producers are Bonnie Zhang and Kaiser Kuo. Our intern is Wang Menglu.