Price War, War of Words, Logistics War: Yihaodian and Tmall Supermarket Engage in a 'Protracted War'

Article reposted from: 调戏电商 (ID: tiaoxiEC)

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Offline supermarkets are increasingly being abandoned by the middle class in big cities because the physical shopping experience is the worst among offline shopping options. No one feels joy from buying a good bottle of soy sauce, and urbanites spend less and less time on this. Therefore, the future business opportunities for online supermarkets are limitless, and the market has indeed given corresponding feedback. However, in the internet world, there is only first and only. Both Yihaodian and Tmall Supermarket are eyeing this territory with determination. Since Yihaodian recently fired the first shot, this fierce battle has been declared open.

Since they are old rivals, they tacitly skipped the formalities and went straight to a price war.

Yihaodian's First Wave of Attack:

In August, Yihaodian held a media strategy conference in Shanghai, grandly announcing that it would invest 1 billion RMB over the next three months to conduct a comprehensive price comparison campaign against Tmall Supermarket, with real-time price comparisons and intelligent price adjustments for a vast array of products. "The goal is to be cheaper than Tmall Supermarket," said Song Chunlei, Senior Vice President of Yihaodian's Procurement and Sales Department.

Tmall Supermarket's Counterattack

Facing Yihaodian's provocation, Tmall Supermarket immediately launched a large-scale promotion of "Spend 188 RMB, Get 100 RMB Off" and shouted the slogan "Compare savings with me, I save you to the max." Meanwhile, Alibaba's CFO Wu Wei stated: "Take Tmall Supermarket's business, for example. The competitor said they would invest 1 billion RMB in the supermarket sector, but we are willing to invest several times that amount."

Of course, Yihaodian did not back down and quickly launched its second round of plans:

On August 15, Yihaodian released a series of posters via its official WeChat, announcing an "escalation" of the price war: In response to Tmall Supermarket's promotion of "Spend 188 RMB, Get 100 RMB Off," Yihaodian would offer "Spend 188 RMB, Get 108 RMB Off" on designated items in categories such as imported food, food and beverages, beauty and personal care, and household cleaning. Additionally, it introduced a price guarantee of "If more expensive, compensate 20 times the difference." Yihaodian promised that during the promotion period, users with delivery addresses in Beijing, Shanghai, Guangzhou, Shenzhen, Tianjin, Jiangsu Province, and Zhejiang Province, who purchased self-operated items marked with the "贵1赔20" badge and found that the price exceeded the same item on Tmall Supermarket, and met other relevant conditions, would have the right to apply for a rebate equivalent to 20 times the price difference within 24 hours of order generation.

This strategy was like dropping a bombshell on the market, immediately igniting public opinion. A Yihaodian insider revealed: "Tmall Supermarket has not yet adjusted its mindset and doesn't even know who its opponent is. I suspect they are unaware that their own similar products are priced much higher than Yihaodian's."

Tmall Supermarket Counterattacks Again

To support its new strategy, Yihaodian released provocative posters directly targeting Tmall Supermarket, following the "unwritten rules" of e-commerce that have persisted for years. But unexpectedly, such a "standard" advertising poster was ordered to be taken down, catching Yihaodian off guard. Isn't it standard for internet companies to engage in verbal sparring and tease competitors? Why did it suddenly not work today? Many uninformed people turned their attention to the "innocent" Tmall Supermarket.

Yesterday, Jiang Pan, General Manager of Tmall Supermarket, said sarcastically in an interview: "JD.com pulled out a little brother to be cannon fodder, while hiding behind. It's obvious who is cowardly." This statement was full of gunpowder, very Tmall-like.

Why Is the Supermarket Business So Difficult, Yet Giants Are Desperate to Enter?

Although Yihaodian and Tmall Supermarket are exchanging blows, if we think carefully, with such a big cake shared by only two "small" giants, it fully demonstrates that the life of online supermarkets is far from rosy.

"Online supermarkets have inherent bottlenecks and difficulties." This is a common industry perception. Currently, online supermarkets mainly focus on FMCG and fresh produce, with many categories, complex products, heavy orders, and low average order values. The degree of standardization is so low that it may not be suitable for existing e-commerce practices, and the average order value is sometimes insufficient to cover operating costs.

But despite the many problems, why are all parties desperate to seize this high ground?

First, online supermarkets have a vast market. Currently, the online penetration rate of supermarket and department store goods is less than 7%, indicating huge growth potential.

Second, supermarket goods have high purchase frequency, and operating supermarket categories can increase customer stickiness. For products with poor offline shopping experiences, customers are willing to pay more for home delivery, such as oil, beverages, milk, and paper. Some supermarket items are easier to showcase online, such as imported food, textiles, and health products.

Moreover, online supermarkets are better positioned as supplements to comprehensive platforms. Supermarket and department store goods can easily activate old users and attract new users, driving traffic to other products on the platform.

A Fair Game: Whoever Has Lower Prices Wins

Facing Yihaodian's aggressive and wave-after-wave attacks, Tmall Supermarket seems to have been counterattacking but has never produced a fatal weapon, always avoiding the sharp edge. Because Yihaodian's intention this time is very clear: a naked price war, setting a very simple criterion for victory or defeat. Given Tmall Supermarket's current model, this battle may be tricky.

(1L*12 boxes of Dela skim milk: Yihaodian price 69 RMB, Tmall Supermarket 179 RMB, a big price difference.)

Tmall Supermarket's prices for many products remain high, reflecting its insufficient cost control, with logistics costs being the main issue. According to Morgan's report, in fiscal year 2016, Tmall Supermarket's GMV was 14 billion RMB, and the cost paid to Cainiao Logistics was 2.37 billion RMB, with a fulfillment cost rate of nearly 25%. If calculated based on Yihaodian's average order value of 150 RMB, Tmall Supermarket's average fulfillment cost per order is as high as 36 RMB. In terms of delivery costs, Tmall Supermarket's Cainiao network is far higher than its competitors.

Therefore, Tmall Supermarket did not react aggressively on price after Yihaodian's high-profile declaration of war. Tmall Supermarket relies on Alibaba, a big tree, but inevitably inherits many of its bad "genes," such as the lingering counterfeit problem. Of course, this is a huge issue, and even the omnipotent Mr. Ma Yun is helpless, and Tmall Supermarket has been plagued by this problem.

Because Tmall Supermarket adopts a platform self-operated model, after consumers place orders, the goods are delivered to users, but the ownership, pricing, and promotion rights throughout the process are all in the hands of cooperating merchants. This leaves a lot of room for manipulation in terms of quality and authenticity.

Additionally, this model makes Tmall Supermarket's control over product prices weak. So we see that although Tmall Supermarket claims to invest several times more money to counter Yihaodian, Tmall Supermarket has been expanding too quickly in recent years, and many backend facilities are not yet complete. Warehousing, logistics management, etc., all need improvement. Just this year, it plans to add 8 more warehouses. Therefore, the money Tmall Supermarket is spending was already planned, not specifically to counter Yihaodian.

In contrast, Yihaodian has been deeply cultivating for eight years, both internally and externally. This time, it only needs to spend money on the right things, and the effect is immediately visible.

In short, Tmall Supermarket is large in scale, while Yihaodian is deep in expertise.

Who Will Win in the Next Three Years? Besides Price, Logistics and Efficiency Matter

In the long run, price wars are an entry point but should not be the norm, especially for supermarket categories. Prices are transparent, and ultimately it comes down to efficiency. Since almost everyone sources globally, it's hard to create fundamental differences in product assortment. To make users loyal to a platform, you need to give them more reasons. Price is a topic, service is the foundation, and efficiency is the prerequisite for the best service.

Compared to price, logistics service is more sensitive to consumers in the online supermarket sector. So behind the waves of price wars, the most critical and deadly war is the logistics war. As a consumer, when buying a barrel of oil, I would rather pay 5 RMB more to get it half a day earlier.

Let's look at the different characteristics of the two logistics systems:

Profit Model: Tmall earns warehousing and storage fees, logistics fees, and other service fees, while Yihaodian mainly earns the price difference.

Goods Ownership: Tmall's goods belong to manufacturers or merchants; Yihaodian's self-operated goods are bought from suppliers or manufacturers, with ownership and pricing rights mainly in Yihaodian's hands.

Logistics Model: Tmall's logistics is basically outsourced, while Yihaodian uses self-operated logistics, enabling "half-day delivery" and faster logistics. Supermarkets have high frequency and high stickiness, and logistics experience is very important to consumers. Clearly, Tmall Supermarket, relying on Cainiao, has an obvious shortcoming here. Of course, Tmall Supermarket is trying to fill this gap, but the effect and whether Yihaodian will give it time is anyone's guess.

This is a battle for supermarket transformation, and the war has just begun. After acquiring Yihaodian, Liu Qiangdong's ambition is to end the war within three years and become the industry leader. Tmall Supermarket also hopes to exceed 100 billion RMB in sales within three to five years and become the leader. That is to say, the next three years are the critical intersection for both. Perhaps this is not just competition in the business field; the business model competition behind it is what we should pay more attention to.

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1: Yihaodian's New Posters Unleash a "Price Kill"

The online supermarket war is becoming increasingly fierce. The "customer-grabbing war" initiated by Yihaodian has gradually evolved into a battle of business models. Tmall Supermarket and Yihaodian are attacking and defending each other, making it exciting. The latest development is that to support the "10 Billion Battle," Yihaodian carefully prepared to launch large-scale elevator and building advertisements on August 13, but they were forced to be taken down due to "unknown origin" complaints. In response, Tmall Supermarket's new chief repeatedly taunted Yihaodian through the media. As a counterattack, Yihaodian recently launched new advertising posters across the board, with content very JD-like.

The posters are simple, eye-catching, and clear in intent. Yihaodian chose Beijing, Shanghai, and Hangzhou, the three most representative e-commerce cities, as the main battlefields. The meaning of capturing these three cities is self-evident. The three lines at the bottom of the poster are particularly noteworthy: "Designated items in eight categories: spend 188, get 108 off," echoing Tmall Supermarket's "spend 188, get 100 off"; "Hot-selling items: if more expensive, compensate 20 times," because Tmall Supermarket had previously launched a "if more expensive, compensate 10 times" activity.

The posters are highly provocative, and the onlookers welcome them.

2: Strength Comparison Between Yihaodian and Tmall Supermarket

Online supermarkets are recognized in the industry as a tough nut to crack because FMCG categories are numerous, fulfillment costs are high, and gross margins are low. Especially for food, fresh produce, and other items, there are very high logistics requirements. Many platforms are daunted by these reasons, but daily consumer goods, the mainstay of online supermarkets, are a rigid demand for users, with high repurchase rates and high average order values. Through supermarket business, user stickiness can be enhanced. Despite some "happy troubles," no one can give up this piece of fat.

The outcome of the confrontation between Yihaodian and Tmall Supermarket may represent the new development direction of the industry in the future, because online supermarkets are the most stringent test of logistics, warehousing, supply chain, and other operational links. Let's first look at the current strength comparison between the two sides.

First, Logistics System

Yihaodian, like JD.com, uses self-operated logistics. After eight years of deep cultivation, its logistics system is well-established, with over 300 cities achieving "half-day and same-day delivery" or "next-day delivery." Tmall Supermarket's logistics is basically outsourced to Cainiao, which has integrated multiple logistics companies and is very large in scale. However, in terms of timeliness, it may be slightly inferior to Yihaodian. Tmall Supermarket is aware of these issues, which is why this year, Tmall Supermarket General Manager Jiang Pan announced that Tmall Supermarket will invest 2 billion RMB in the construction and improvement of its service system, but the results remain to be seen.

Second, Self-Operation Experience

Consumers tend to prefer buying all daily necessities from the same platform. Unlike 3C and clothing, FMCG requires more unified logistics and distribution. Tmall Supermarket's platform model mobilizes merchants' initiative, provides warehousing and logistics, and hands operations to merchants. However, this means merchants also have to pay operating costs and traffic promotion fees. Since gross margins are already low, this has caused large-scale losses for merchants.

Self-operation is undoubtedly a better answer to this pain point. Yihaodian has accumulated years of experience in category self-operation, giving it an advantage. The number of SKUs in the eight self-operated supermarket categories is almost three times that of Tmall. Tmall Supermarket has now woken up and is investing more energy and resources into the self-operated model.

Third, Capital Investment

Even without a price war, online supermarkets face losses. The price war only exacerbates this problem. Therefore, the outcome is closely related to the will of the backers behind them. Alibaba and JD.com have both shouted "support our platform at all costs" and have put real money on the table. How Yihaodian and Tmall Supermarket spend their money wisely will be verified by consumers.

Fourth, Service Reputation

Consumers are increasingly concerned about the consumption experience and service quality, a demand that never ends. Tmall Supermarket claims that it will invest 2 billion of the 4 billion RMB in supply chain, product structure, and service upgrades.

Tmall Supermarket has sent a keen signal to greatly improve service quality. Tmall Supermarket was only established four years ago and has developed too quickly, inevitably leading to some backend service inadequacies. So this improvement is crucial.

Yihaodian has established a very mature system in all aspects of the consumer shopping experience. FMCG has high purchase frequency, and consumers have high requirements for logistics and intimate service. Data shows that Yihaodian's average annual complaint rate is no more than 3%, which is commendable in the FMCG field.

3: The War of Words Between Yihaodian and Tmall Supermarket

The exchanges in the business arena are exciting, and the war of words among the bigwigs is equally intense. Tmall Supermarket General Manager Jiang Pan explicitly expressed his disdain for Yihaodian to the media, saying: "JD.com pulled out a little brother to be cannon fodder. Yihaodian is not on the same level as us; the scale is not comparable."

Yihaodian's Senior Vice President of Marketing and Operations, Wang Chunhuan, countered: "Competition cannot be won by a quick tongue; it depends on who ultimately wins consumers' hearts. Facts show that at the end of 2015, Tmall Supermarket achieved its sales target of 10 billion RMB. In the same year, Yihaodian's sales in East China alone far exceeded 10 billion. I don't know where the 'scale not comparable' comes from. Moreover, Yihaodian is the true initiator of the supermarket war, not cannon fodder. Jiang Pan still hasn't figured out who his opponent is, which I find very puzzling."

Jiang Pan also said: "A price war is the simplest and most crude way... Tmall Supermarket has 4 billion RMB in funds. We use this money for logistics, supply chain improvement, and reasonable subsidies to consumers—this is a long-term, sustained investment."

Wang Chunhuan said: "My understanding is this: the usage period of this 2 billion subsidy cannot be disclosed; it could be several years or decades. In subsidizing consumers, Yihaodian has always been very straightforward: invest 1 billion RMB in three months, and give back to consumers with high-quality, low-priced goods and a first-class shopping experience. Facts show that price is a comprehensive reflection of all operational links. A price war is crude but effective, and behind it is a competition of comprehensive strength, covering products, prices, logistics, and more. In this supermarket war, Yihaodian's strategic goal is not to defeat Tmall Supermarket, but to leave it behind."

4: Yihaodian and Tmall Supermarket Each Set Up Their Battle Formations and Formulate Strategic Plans

Unlike non-standard products like clothing and cosmetics, FMCG is actually a very standard and objective category. Consumers don't care about the platform's backend logic; they only care about the front-end experience: low prices, fast logistics, and good service. Everything else is a false need.

Therefore, a strong supply chain and overall operational capability are the strategic competitiveness of future online supermarkets. Wang Chunhuan said: "Yihaodian's core advantages are threefold: high-quality e-commerce capabilities brought by the self-operated business model, deep brand influence and consumer understanding built over 8 years in East China, and a strong FMCG sales channel alliance formed with JD.com and Walmart."

Jiang Pan explained Tmall Supermarket's strategy in detail: "In the past few months, after strict selection, Tmall Supermarket's product SKUs increased from over 30,000 to over 50,000, with overseas products accounting for more than 15%. Tmall Supermarket adheres to the principle of 'global products, local services.' All products will achieve 'unified warehousing, unified distribution, and unified service,' and all service teams will be locally operated."

The supermarket war continues. Consumers, as bystanders and participants, will vote with their feet, and the result will determine the market landscape.

The core of retail lies in quality and customer experience. "Quality" means brand and product, and "experience" means quality and service. Only by improving internal capabilities around these core factors can we truly enhance retail competitiveness. E-commerce supermarkets are a long-distance race. We need to make long-term plans. Improving user experience is a never-ending job. On this endless road, whoever dares to slack off will immediately see their end.

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South China Warehouse: Who Has the Advantage?

The war between Yihaodian and Tmall Supermarket ignited in East China and spread to South China within days. A few days ago, Tmall Supermarket General Manager Jiang Pan confidently invited media to visit its warehouse in South China. Yihaodian also did not show weakness and immediately opened its South China Operations Center to the media, clearly displaying this 100,000-square-meter warehouse. Yihaodian's South China Operations Center Hongmei Warehouse has unique geographical conditions, located in the hinterland of the Pearl River Delta, 35 kilometers north of Guangzhou, 80 kilometers south of Shenzhen, and 100 kilometers east of Hong Kong.

However, what is even more distinctive is the warehouse's management technology and operational efficiency.

Aren't warehouses just rows of shelves and flow sorting lines? Automation is basically achieved by everyone. How can Yihaodian's technology be so superior?

In fact, there are quite a few technological innovations. Let me give an example: wave picking.

One major characteristic of e-commerce is the instability of order volume. A big promotion can cause warehouse overflow, which places high demands on warehouse management. How does Yihaodian solve this? Full-process RF operations, automatic sorting technology, and voice picking technology make their operations very simple. These automation investments can reduce order outbound time by more than 30%.

The essence of this system lies in the wave picking in the sorting process, which changes the traditional order-by-order picking. Sorters use QR code information to quickly sort into baskets, improving efficiency by more than three times.

It is reported that this is entirely due to Yihaodian's self-developed PTP automated sorting and packaging system. The overall optimization and improvement have enabled Yihaodian's output per square meter and labor efficiency to reach twice the industry average.

Tmall Supermarket General Manager Jiang Pan announced that its South China warehouse can pick 1 million items per day, while Yihaodian's South China Operations Center exceeded 1 million items per day during last year's Double 11. In other words, Yihaodian reached Tmall Supermarket's current level nearly ten months earlier.

Self-Operation vs. Platform: Which Is Better?

In addition to the economic benefits brought by technological advantages, the South China warehouse also innovates in social benefits.

Many of their packaging boxes bear a green environmental protection logo. According to Yihaodian, this is the "carton recycling project" they launched in 2013. According to statistics, a ten-year-old pine tree can make 625 cartons. As of June 2016, Yihaodian had saved 1.8 million pine trees.

"This is the power of self-operation. Because our delivery personnel are our own, we can control the intensity of carton recycling. It is said that competitors are also promoting this project, but it is difficult to promote, and the delivery personnel's enthusiasm is not high. This small detail reflects the pros and cons of the two business models," said Li Yaping, General Manager of Yihaodian's South China Operations Center, proudly.

Of course, environmental protection is just a small advantage. The bigger advantage lies in the dominance of the price war.

Price wars have always been a weapon in e-commerce competition. Even if they can't solve all problems, they can solve one opponent.

A Yihaodian insider admitted: "Compared to competitors, because we are self-operated, we can be a bit more arbitrary in price wars. Prices can be lowered at will. What can competitors do?"

Management rights, pricing rights, and property rights are entirely in Yihaodian's hands. If there is a strategic need, prices can be adjusted at will. They can even sell Coke as mineral water. Competitors have much weaker control over prices, simply because they don't own the goods. If merchants don't want to lower prices, you can't force them with a gun, unless everyone just parts ways.

Retail ultimately comes down to competition on three levels: cost, efficiency, and service.

Price wars are based on cost and efficiency. The green carton initiative is a form of service. Focusing on these core points, Yihaodian seems to have many advantages in the supermarket war.

Whoever Takes South China Takes Half of China

What are the results of this battle so far?

According to Yihaodian data, since the August promotion, its overall new customer increase is 1.5 times that of the same period last year. Especially in East China, Tmall Supermarket's home turf, Yihaodian's new customer growth has been rapid. Compared with the same period last year, new customers in Zhejiang increased nearly 4 times, Jiangsu increased over 200%, and Shanghai doubled. In the new battlefield of South China, Yihaodian's new customers in Guangdong increased 191% year-on-year.

The official operation of the South China Operations Headquarters and Hongmei Warehouse provides the most efficient support for Yihaodian's entire supply chain system in the South China market. Dongguan is of great significance to Yihaodian's overall supply chain layout, shortening delivery distances to Guangzhou and Shenzhen, easily achieving next-day or even same-day delivery across the two regions.

In addition, the economic and consumption levels in South China are similar to those in East China. With the successful experience in East China as a endorsement, Yihaodian is confident in taking South China.

Furthermore, this South China battle has another layer of significance. Historically (although e-commerce history is not long), online supermarket wars have been fought many times, and most companies failed. However, Alibaba and JD.com are determined to attack on this front, not by accident.

Tiaoxi E-commerce once participated in recording Liu Qiangdong's appearance on CCTV's "Dialogue" program. Liu Qiangdong's first priority in his future development plan was to fight a supermarket war and end the battle within three years, because supermarkets are too important for JD.com's overall layout. Although JD.com started with 3C and home appliances, it is now a full-category platform. Liu Qiangdong said: "Our platform has everything, with a complete range of categories, but consumers just don't browse. They don't have the habit. Supermarkets carry the important task of cultivating user consumption habits."

Previously, e-commerce wars were centered on category layout. Now, they are centered on consumption habits. This is also the new competitive strategy under the current new normal of e-commerce.

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