The following is the transcript of the speech by Wang Chaocheng, founder of Yi Jiu Pi, at the 4th China B2B E-commerce Conference.
Is B2B destined for scale?
I think first we need to clarify: what kind of endgame is B2B? Is it a scaled endgame? If it is destined to have scale, then those without scale will die, and we need to think about how to achieve scale. If it is not destined to have large scale, then we don't need to fear scale.
Looking at B2C internet, today it's Alibaba and JD. Other e-commerce companies can still survive, but with great pressure. Why is that? Will B2B be the same? Clarifying the endgame, clarifying the word 'scale', and then thinking about how to scale is actually a very important proposition.
BAT has entered everything from industrial internet to MRO. Alibaba and JD are both aggressively entering, so everyone's thoughts on this matter are very important. You must look at the big picture in reverse. Why did BAT become the leading companies while others died out? People say it's traffic, but what is the essence behind traffic? The essence behind traffic is likely users and supply chain. If your upstream and downstream are the same, then it's destined that those with more traffic will kill those with less. In B2C e-commerce, all users are individuals, with no differences. When users are a single entity, if I buy something on Alibaba, it means Alibaba can sell me something else. Because the same user, traffic can directly kill all related industries. So B2C ends up as a platform.
From the upstream perspective, why did TMD (Toutiao, Meituan, Didi) emerge in recent years? The important reason is that the upstream is different, the suppliers are different. The suppliers of TMD are essentially services. Meituan is in-store services, Didi is travel services, Toutiao is also a service, information. Toutiao provides customized information. Alibaba and JD satisfy goods, broadly including goods and services, but services were rare in traditional internet, so TMD emerged. TMD's users are the same as JD and Alibaba's users, all C-end, but JD and Alibaba cannot satisfy them because they are services from different supply chains. For goods, the supply chain for JD and Alibaba is the same, though in different forms: JD buys and sells, Alibaba has merchants open stores, but overall it's the same type of suppliers selling goods.
TMD is different because the suppliers are not the same group, or the goods are different. So with the same downstream but different upstream, a new wave of consumer internet giants emerged. So you see, the first wave was BAT, the second wave was TMD, because they provide different things. Xiaomi is theoretically a brand, not like traditional internet, more like Wuliangye or Moutai, just that Xiaomi is a mobile phone brand.
So let's think back: What is B2B? Are B2B users the same? Obviously, B2B users are different. Gas stations and convenience stores are clearly different users. So why are we having this conference? After B2B rose, Old Liu's business rose. Why? Because B2B is destined to be an industry with many players, with different stores and different users. Different users mean many companies will be involved, because few companies can satisfy all these users. If stores were the same, then big companies would easily kill small ones, but users are different. When a liquor store owner sees Yi Jiu Pi, they think it's much better than JD, with a much better experience.
The essence of C is completely the same, but the essence of B is very different, meaning demand is different. If you give me a long category with a full range of products and ask me to search, I would be annoyed. I want a very specialized category that only has my needs. A liquor store owner wants to see alcohol and beverages, nothing else. If you have many other things, they have no interest, so they are unhappy. If you satisfy them, they don't need to search; they can find what they want directly in the category. If Alibaba and JD do it, they would have a comprehensive offering, so users would have to search. That's a big difference.
The second is upstream. Actually, I don't know if B2B internet has platforms. B2C has platforms; Alibaba and JD are now platforms where you can sell to C-end on their platforms. But does B2B have platforms? I'll talk about that later.
Upstream is also different. Those selling alcohol, small commodities, beverages, industrial auxiliary materials, steel—they are completely different. If both upstream and downstream are very different, will a single formula devour all industries? I think it's highly unlikely. In C-end, Alibaba reaching first can achieve trillions in market value and trillions in transaction volume. If B-end also became one company devouring everything, it would mean 30-40% of China's GDP would be occupied by Alibaba. That is almost impossible in terms of probability.
If the endgame is impossible because of too many differences in upstream and downstream, then a bunch of companies will emerge. We know that B2B scaling and B2C scaling are two different concepts. You might say, "If you say that, we are happy; we can all do well, and the endgame is many companies, a prosperous ecosystem." Not entirely. Within an industry, it's likely to be head players. If you subdivide into a specific field where upstream and downstream are the same, why would a second company exist? That's dangerous. If upstream and downstream are the same, it means only one dominant player will rise, and others will die. That is, the big ecosystem has many players, but within each track, there is likely only one. Competition may be even more brutal than B2C. Whether it's one or two depends on the transaction model.
Does B2B have self-operated and platform models?
There are two transaction models in C-end: one is the platform model represented by Alibaba, the other is the self-operated model represented by JD. Does B2B have self-operated and platform? I doubt it. Many of us started with platforms, but those who did platforms basically started doing self-operated. They tried matchmaking, but found it meaningless for the industry and couldn't make money. If both platform and self-operated succeed, it means there will likely be a big platform company like Alibaba, and also a significant self-operated company in each track, like JD. So there could be first and second.
If only one model succeeds in B2B, and the second model doesn't, or this model can only be parasitic on one company, then only one company can survive in a track. Because your scale is smaller, you don't have the inclusiveness of B2C, and eventually the big will kill the small. So we wonder: Does B2B have self-operated and platform? Will both models coexist? This is still highly debated.
Let's talk about the self-operated model. In FMCG, self-operated has been more common in recent years: buy in, sell out. Some argue this model has many problems, but in reality, if you don't do self-operated in FMCG, you're basically out. Many people are in pain and can't accept this reality. Why is there no platform in FMCG? Or why is it difficult for platforms? The success of B2C platforms has two prerequisites. The first is changing the scale of users. If I run a trading company offline selling goods to terminal stores, versus opening a store on Tmall, the user scale becomes completely different. Opening a store on Tmall faces users across China, while a local trading company's users are only in my city, or within my network, which is small. So Tmall can gather many users for you, and the user scale changes geometrically.
The second reason is that the channel chain changes. If you are a trading company or agent, opening a store on Tmall means you sell to C, whereas locally, as a trading company, you sell to B. You eliminate an intermediate link, so your gross margin improves. Of course, your costs also increase. If you do local, you just need to deliver by car to small stores, with very low distribution costs. But selling through Tmall increases delivery costs because you have to pay high B2C logistics fees. Of course, when user scale is large enough, you can cover these logistics costs, and you succeed. So the B2C platform model can succeed because it changes the transaction method, greatly improving the scale of user transactions and gross profit levels. So it solves a business model change. The platform plays an important role, and thus makes money.
In the B2B field, if you are a platform, think about it: the general agent sells to the second-tier distributor, who sells to the third-tier. This is the basic distribution model in a city. If you don't sell to C, and you set up a platform in a city where general agents join, it generally won't succeed. Most general agents won't join because if they set prices too high, they can't sell; if too low, traditional second-tier distributors will complain: "Why is your platform price lower than what you give me? Why should I do business with you?" So those selling on platforms, including Alibaba and JD, are mostly second-tier distributors.
But think: second-tier distributors already sell to terminals. Why go through your platform again? If it's a strong brand, the city's users are already theirs. The platform doesn't expand user scale, at least not significantly. Strong brands already cover the city's terminals. If it's a weak brand, and you help bring traffic but only charge a small platform fee, aren't you foolish? You should give them a very low price and keep the main profit for yourself. So for B2B, this becomes: In the same region, user scale hasn't changed, and the links haven't been reduced. What's the point of a platform?
You can't assume that because Alibaba's model succeeded in C-end, there must be an Alibaba model in B-end. You need to think about the real scenario and model. We should buy from the first-tier distributor and sell, not from the second-tier. Even if we buy from the first-tier and sell, we haven't reduced links, but we've improved efficiency: the first-tier supplies 50 second-tier distributors in the market, and their vehicles are independent. When user orders come, vehicles aren't full, order efficiency is low, warehouses aren't full, and matching together, warehousing and logistics efficiency are low. B2B lowers fulfillment costs and improves efficiency through sharing.
B2B can also change links. For example, we import a lot of wine globally. We take new products directly from wineries as national general agents. We don't affect existing brands; existing brands can't be replaced. We do incremental business. These can make a lot of money because we shorten the chain. Originally it was factory -> general agent -> second-tier -> terminal. Now it's directly to terminal, with only one link. But these products had no traffic before, so we need to create brands to generate traffic.
So from this perspective, I am very skeptical about the platform model in B2B transaction models. There may be no platform model in transaction models. How can you do a platform model? We tried for a long time. Initially we wanted to do a platform. Which internet person doesn't want to be asset-light? Who doesn't want upstream as payables and downstream as cash? Who doesn't want to roll up with little money without needing A, B, B+ rounds? But in reality, under the noses of BAT, in the B2B track, those who want to do this are likely speculators, and you won't succeed. Pure traffic platforms have no barriers for BAT; they already have huge traffic. Why would there be barriers? So you must make the supply chain heavy and the infrastructure heavy.
Why can't Didi and Alibaba do it? Didi's upstream and downstream are different; the upstream supply is different from what you originally had. How can you do it? Why did Meituan rise under the nose of Dianping? Because it's not a pure traffic business. Why did iQiyi, after Baidu acquired it, beat Youku? Because Baidu provided traffic, and traffic determines success, so iQiyi could directly beat Youku. But in the food delivery industry, Baidu couldn't beat Meituan and Ele.me? Because traffic alone is useless. You need to solve supply and upstream-downstream problems. If you only have downstream, you're doomed.
That's my first view: What is B2B scale? B2B scale is much smaller than B2C, but every industry will have scale. B2B scale will affect each track, and likely only the head company will survive; second and third will be very difficult.
The largest FMCG company in the US has annual sales of $48.5 billion. A wine company sold $16 billion last year, called Glazer (phonetic). Many investors haven't noticed it because it's not listed, being a family business, operating in over 50 states. In the US, you can't find a second company; the second would be merged by the first. This is an important rule.
How to scale in FMCG?
After that, let me talk about how to scale. In my view, FMCG scaling has two types: one is horizontal scaling—how many regions you cover. Another is deep scaling, or vertical scaling—how big you need to be in a city to have a moat and barriers. Horizontal scale is a big debate. Now in FMCG B2B, there are national and regional players. Does regional have value? Any company's regional presence initially has value, but eventually it may have none. All of China's commerce is now national companies killing regional ones. In the past, real estate was the most regionalized because real estate users are local, land is local, you can't bring land from another region or move users. So real estate is the most typical regional industry, but even so, now national companies like Poly, Vanke, Wanda, and Country Garden are killing regional ones. All industries in China are nationalizing and defeating regionalization. How big does a region need to be to have scale?
In FMCG, I do alcohol. Our alcohol business this year is close to 10 billion, which should be a relatively large scale in FMCG. We operate in over 80 regions. Why insist on doing regions? My investors tell me, "Don't do so many regions; just do a few deeply and go public quickly." But if we did that, JD might have become a home appliance seller, and its fate would be like Dangdang's, selling books. If you wait to go national, you'll miss the opportunity.
Now, even though ground promotion is expensive, isn't it expensive in provincial capitals? It's also very expensive. If you don't go national now, it will be expensive to go to prefecture-level cities later. So since it's a trend, why not do it early? So I follow my own judgment. I resolutely do it. I've done over 80 cities. I think besides Alibaba and JD, no one dares to do 80 cities. Only I dare. If we didn't have 80 cities, how could we have this scale? What's the value of scale? When I go to a winery to get a wine, I need to monetize it by selling directly to terminals. If I only did Beijing, Guangzhou, Shenzhen, and Shanghai, how could I sell 50 million of a single SKU? Remember, these are new products from the factory. Without traffic scale, you can't sell them. But with 80 regions, I can.
Our distribution is planned logistics. Planned logistics requires deep familiarity with the products. For example, we often need to replace caps (for prize redemption). Caps can be real or fake. If we used a Didi model, with different drivers each day, I couldn't train drivers every day on how to identify real caps.
We've built a national warehousing network horizontally. For example, in our financial services, we did several billion this year. When upstream agents need money to stock up, we lend them money, but the goods must be stored in our warehouses. These distributors are spread across the country. If we didn't have over 80 warehouses nationwide, we couldn't keep an eye on the goods. If you can't watch the goods, would you dare lend money to distributors? No. So when we act as agents or do financial services, this regional network has huge value. It definitely requires a big layout.
The second is depth. Now in B2B, everyone segments by store type, but you can't absolutely segment by store type. Now people say, what is B2B for convenience stores? Alibaba and JD are doing it, and many companies are doing it. There are 5.6 million convenience stores, and everyone values them. You could call FMCG B2B as convenience store B2B, but is that right? Actually, for upstream, it's not right.
We sell alcohol, and we know that for a wine to sell in the market, you need to do promotions in restaurants. Because in restaurants, you can interact with consumers, changing their purchasing behavior. When a brand establishes its first wave of users in restaurants, seed users are formed. These consumers spread word-of-mouth, and then the brand enters liquor stores for display. After display, some consumers will buy at liquor stores because prices are lower. When liquor stores also rise, the brand gradually succeeds in the market and enters circulation, and small eateries and hypermarkets gradually rise. If you only do grocery and convenience stores, you can never build a wine brand. It's almost impossible to create a new wine brand through convenience store channels alone.
If B2B is just a supply chain for one type of store, relative to the many channels upstream needs, its value to upstream companies is not obvious. In the alcohol field, we are far ahead, with no second or third. We've already killed them all. So many people ask me: Why enter FMCG? Because if I don't enter FMCG, I can't create value for upstream.
I found that alcohol and beverages sell well in liquor stores, and also in convenience stores and restaurants. So we entered convenience stores. Then we found that selling only alcohol and beverages doesn't work because convenience stores have many other product needs. So we started selling food. If we only did liquor stores and not convenience stores, we would barely compete with Alibaba. But in our category, alcohol is distributed across multiple channels. If you can't create consumer momentum in a city, you can't build consumer demand, and making money from wholesale becomes difficult.
So in B2B, simply dividing by store type is also wrong. Upstream may see your channels as three, but downstream prefers you to do one channel, maximizing sharing. So what is the true depth of B2B channels in a region? It's related to your product attributes. You seek a balance between upstream product attributes and downstream channel efficiency, occupying the largest market share in your category without diluting your resources too much. That's depth, the depth of B2B. I think we need to clarify: How big is B2B scale? Is there only one company in the whole industry, or does every industry have its own B2B?
Second, we need to think: If every industry has a B2B, and upstream and downstream are the same, will there be second and third companies? If there are no second and third, and you don't want to be eliminated, what should you do? You must run forward crazily. After I got funding, I did 30 regions in 2015, and by 2016 I basically reached 80 regions, covering almost all good prefecture-level cities. I may expand further next year.
I think in an industry track, if upstream and downstream are the same, if you don't become first, you will 100% die. So we must run. This year we've gradually realized that you can't just do one channel; doing one channel won't work. Because then your upstream product depth in a region won't be enough, and you can't achieve scale, whether it's brand profitability, financial profitability, or chain profitability.
Finally, let me talk about how we should respond when JD and Alibaba enter. At all B2B forums, I make an appeal: we must have a session dedicated to studying how to do B2B under Alibaba and JD. This is my appeal to Brother Er (the organizer). I hope next time there will be such a session. All entrepreneurs in China, if you don't treat this as a top priority, you will be very, very miserable.
Just think: we have a good ecosystem where users are different. We've found an effective method that makes it hard for them to compete. The more they follow, the faster they die. Only then will the B2B ecosystem flourish.
Alibaba and JD are big, but they have two flaws. The first is that they are too big, so they can't be detailed. The second is that they can't concentrate pressure in just one or two industries. Only a small scale has no value to them, so they will first target the most numerous small stores.
Also, in the convenience store track, it's a red ocean for a long time. Alibaba and JD won't give up. But don't be pessimistic. The current store rebranding model is basically one model. From a chain perspective, they can't beat 7-Eleven or regional professional chains like Xingbianli. From a cost-efficiency perspective, they can't beat individual convenience stores. Rebranding doesn't change much, but the words "Tmall" and "JD" are very valuable; people recognize them. So they keep rebranding. As long as rebranding works, they will have opportunities in the market. So it won't be a short-term battle; it will be a long-term one. They will keep burning money. We must find a way to persist without burning money, and then they'll be done. In this track, we don't rely on their traffic. If they use promotions to burn money, users order more; when they stop, orders drop. They can't kill us, and they can't burn us out. That's our advantage. So this is very important.
Yi Jiu Pi has an advantage: we've built a very high barrier in the liquor store channel. It's unrealistic for them to enter liquor stores now; our scale is already large. We have a base. In this track, we follow the advantage rule. We select categories; we don't do everything. We'll find a path that doesn't rely on burning money, competing more healthily. These are my basic views on scaling. I hope they are inspiring. Thank you!
Source: B2B Industry Information -END-