What does it take to run a successful e-commerce business in China, in the face of strong competitors such as Alibaba and JD.com?

EMERGING MARKETS

Closing Case: Online Shop Number One

Online shopping has become the new normal in urban China. Rather than heading for a local supermarket, many consumers in Shanghai turn to the Web, click, and pay—a few hours later, a deliveryman on motorcycle comes to drop a box of food, household goods, or the latest fashion at the doorstep. Why carry home a crate of beer from the supermarket, and then up to the 20th floor? Let the deliveryman do it for you! A revolution in retailing is under way.

One of the latest entrants into the market is Yihaodian, which is literally translated “Number-One Shop.” Founded in 2008, it became the third largest online retailer in China—after Alibaba and JD.com. It was founded by Gang Yu, a Chinese-American returnee who had been a professor of logistics at the University of Texas at Austin and who had managed Asia Pacific supply chains for Dell and Amazon.

In 2008, Yihaodian started with food, beverages, and household goods. In 2009, it expanded into cosmetics and consumer electronics. Clothing was its latest offering. The growth has been spectacular. In 2009, Yihaodian celebrated receiving 1,000 orders an hour. By 2014, that number increased to 300,000-400,000.

Between 2010 and 2015, the number of product items carried grew from 50,000 to eight million, and the number of registered customers from four million to 100 million. At present, it operates over 200 distribution centers in 40 cities throughout China, and employs 10,000 people, mainly in the “last mile” delivery.

Yihaodian’s strategy is supported by the latest marketing and supply chain management practices. The company does all its technological development in-house, and controls its information systems, including supplier relationships, warehouse management, and delivery stations. One-tenth of its employees are IT engineers. In the central control room, 16 screens allow managers to track online traffic in real time, by region and by category. For example, one screen displays a word cloud with the keywords most frequently entered in the search engine on Yihaodian’s website in the last minute. Such tools enable the “instant” capturing of new consumer trends and the targeting of consumers far more precisely than in traditional retail outlets. This includes consumers on the move. With the spread of smartphones and tablets in China, the mobile sector has become an important part of e-commerce, accounting for 10% of all e-commerce in 2013 and predicted to reach 30% in 2018.

In 2011, Walmart acquired 51% of the equity of Yihaodian, but the two companies operated largely independently—apart from cooperating in sourcing and supply management. Both believed they could learn from each other. Walmart had long been famous for its capabilities in supply chain management, yet it had not been successful in translating that expertise to e-commerce. Yihaodian thus became a source of new ideas and inspirations. At one meeting, Walmart executives shared their ambition to fill every order in two days in the next two years. Yihaodian executives laughed at this idea. Their ambition was to fill every order in Shanghai in three hours. Yihaodian has not attained this goal yet, but it is close. In part, this capability stems from high urban population density and relatively cheap “last mile” delivery using an army of deliverymen on electric motorcycles. Yet, it is enabled by groundbreaking new technologies that analyze mountains of data and coordinate numerous players in a vast supply chain. So impressed was Walmart that in 2015, it went ahead to acquire all the remaining 49% of the shares of Yihaodian at $760 million. “Yihaodian will continue operating under its existing name and will maintain its focus on having strong local leadership with a clear understanding of the needs of online consumers in China,” according to a Walmart press release announcing the acquisition. Walmart’s faith in Yihaodian was short-lived, however. The US retailer sold its entire stake in Yihaodian to JD.com in June 2016. The deal was valued at $1.5 billion.

What does it take to run a successful e-commerce business in China, in the face of strong competitors such as Alibaba and JD.com?

Sources: Author’s interviews; M. W. Peng and K. E. Meyer, International Business, 2nd ed. (London: Cengage EMEA, 2016): 488-489; Walmart, “Walmart acquires remaining shares to take full ownership of Yihaodian e-commerce business in China,” 23 July 2015: corporate.walmart.com; www.yhd.com.