Decoding China’s “New Retail” + Giant Internet Ecosystems LatAm Retail and Internet Sector Note - May 2018
Fabio Monteiro Luiz Guanais [email protected] [email protected] btgpactual.com /BTGPactual /BTGPactual +55 11 3383 2006 +55 11 3383 2755 Summary
03 China trip: Internet DNA as a driving force of retail revolution
04 A few thoughts about Chinese e-commerce …and our reading for Brazil and Mexico
07 Delving deep into Chinese ecosystem
15 China snapshot - The O2O experience
22 The main players in China’s booming e-commerce
LatAm Retail and Internet BTG Pactual Affiliate Research - Banco BTG Pactual S.A.
Fabio Monteiro [email protected] +55 11 3383 2006
Luiz Guanais [email protected] +55 11 3383 2755
of the BTG Pactual Equity Research team
LatAm Retail and Internet - Equity Research 2 China trip: Internet DNA as a driving force of retail revolution Napoleon once said: “Let China sleep. When China (41% of global total by market value), such as Didi wakes up, the world will be shaken.” Of course, (US$50bn valuation), mostly supported by at least China woke up many years ago to become the one of the giant ecosystems. world’s second largest economy (so far), with GDP of US$11.2 trillion. All eyes on China and its secular growth trend… but it isn’t a copy-paste trend! We herein provide our feedback from our recent trip The secular growth trend in the Chinese market is to China, where we met leading Chinese and global set to persist in the coming years, with a burgeoning companies in the e-commerce ecosystem. Our initial presence of mobile commerce and payments, takeaway was that, from a retail and e-commerce impressive digitalization of people’s daily lives, and perspective, China is changing global dynamics. market consolidation by players who have created a bona-fide ecosystem to attract consumers and sellers Our 1-week trip focused on internet and technology to their platforms. and the main goal was to form an initial view on what internet players (to differing degrees of scale Meanwhile, looking specifically to Brazil and Latin and success) are doing and the main technology America, although e-commerce in the region is still at its trends, hopefully giving us an initial reading on early stages, there are already a few successful players, Brazil, Mexico and the rest of Latin America. with market share ranging from 10%-25%, but that already hold relevant organic traffic and a fulfillment More than bringing definite answers, decoding structure to support growth in the coming years. China’s ecosystem means diving into “New Retail”, which will eliminate the boundary between offline Yes, companies such as B2W (BTOW3 - Buy), Magazine and online commerce, with integrated channels, a Luiza (MGLU3 – Buy) and MercadoLibre (MELI - Buy) seamless consumer experience and an increasingly have all invested (or have plans to invest) in logistics cashless and card-less society. Chinese “New Retail” and payments solutions to increase buyers’ and seller’s harnesses convenience, a personalized experience stickiness (such as the Chinese titans did), which, like a and big data analysis, focusing on consumer déjà vu experience with China’s case, should lead to a experience - a trend we expect to spread (to differing consolidation of the online market in the hands of a few degrees) around the world in the coming years. potential winners in the region.
Favorable ecosystem created a competitive However, we do not expect that this consolidation edge to succeed. will lead to the creation of complete ecosystems that China is already a global e-commerce leader, with dominate consumers’ daily lives, such as in China, GMV of US$1 trillion, accounting for 23% of total given these Latin American companies should face retail sales, which compares to 9.0% in the US, competition from players in different segments (such 2.2% in India, 1.7% in Mexico and 4.3% in Brazil. The as Cielo and PAGS in the payments front), while there is Chinese e-commerce market grew 24% in 2017, still a high dependency of Brazil Postal Service (Correios) as per Euromonitor, and 2017-20 growth should to deliver e-commerce purchases (and private players be 14% p.a. The drivers of China’s success are: (i) still do not have the capacity to absorb this pent-up the country’s massive base of young consumers, demand). Thus, Latin American e-commerce should (ii) significant investments in infrastructure, (iii) be a history of consolidation but not full integration of open source technology, which allows for fast services under the same platform. technological advancement and (iv) a physical retail sector in its early stages. Meanwhile, Latin America isn’t an easy environment Over time, China has created a favorable ecosystem for a foreign player to start operations from scratch, dominated by Alibaba, Tencent and (to a lesser thus creating further opportunities for Brazilian (and extent) Baidu, ranging from payments to logistics, LatAm) companies to partner up with Chinese players. which now paves the way for innovation that However, given compelling opportunities in other translates into growth (and what growth!). A great Asian markets, we believe China’s focus (in the case of LatAmexample Retail is theand numberInternet - ofEquity unicorns Research in the country the online channel) is still a long way from Latin America.3 A few thoughts about Chinese e-commerce …and our reading for Brazil and Mexico
4 LatAm Retail and Internet - Equity Research One of the objectives of this report is to share Based on the above-mentioned highlights for the our main thoughts about e-commerce in China Chinese internet ecosystem, an easy conclusion is and have a reading for Brazil, Mexico and the rest that Latin American countries are not even close of Latin America. We present below our main to China in terms of e-commerce development, thoughts, considering the meetings, store visits and it should take a long time to catch up in the and overall experience we had in China (which will e-commerce, payments and logistics businesses. be explored in details along the report): This is an opportunity for the players that are more capable to occupy the space and gain share in a E-commerce is a high growth market with supposedly high-growth market. increasing penetration: China is connected, from taxi drivers to large supermarkets, e-commerce Most of the large e-commerce players in Latam represents 23% of retail sales, much above were originally large retailers that moved into American and European average, and, despite the e-commerce. In Brazil, for example, B2W, a high penetration, prospects for e-commerce Magazine Luiza, Via Varejo, Walmart, which are the growth are still high. largest players, are all linked to large retail groups. Only B2W has double digit market share (19% of Huge ecosystems dominating the e-commerce’s GMV in Brazil) and launched its e-commerce market: E-commerce is dominated payments platform (Ame Digital) a month ago, by three groups – Alibaba, Tencent and Baidu, which still with limited number of services and products. have morphed into huge ecosystems, comprising Magazine Luiza has much superior growth and businesses such as e-commerce, mobile payment, above-average service levels (per Reclame Aqui), logistics, ride sharing, games, video, search, news but still have not launched its payments platform. and social media. These three groups have a The other players need to catch up given many combined market cap of over US$1 trillion. internal and/or governance issues.
Mobile payment is impressively penetrated Very few players are pure online players. in all types of business: two players – Alipay and MercadoLibre (29% of e-commerce’s GMV in Brazil) WeChat Pay – dominate the market, with market started as a pure marketplace, with technology share of 88%. These players are linked to Alibaba DNA. Amazon, which has less than 1% of and Tencent, the main ecosystems in China. e-commerce’s GMV in Brazil, is still in the early stages of its strategy in Mexico and Brazil, and should have Strong support for startups and unicorns, difficulties to understand the specificities of taxes, especially those focused in sharing economy, consumer finance and logistics (Inditex, Walmart AI (artificial intelligence), and content: Tech and many other successful international retailers environment in China with strong support from are struggling in Brazil for a long time…). the whole ecosystem helps the creation of startups and the development of unicorns, such as Didi (ride E-commerce penetration: In Latin America, sharing) and Sensetime (AI / facial recognition), e-commerce penetration is increasing, but still valued at US$50bn and US$4.5bn, respectively. representing a much smaller part of retail sales compared to China, south Korea, the UK and the US. Cross boarder commerce in China is growing Brazil has a 4.3% penetration as a % of retail sales, the significantly: Cross boarder commerce jumped to largest in Latin America, and we think it can reach US$100bn in 2017 from US$54bn in 2015, bigger high single digit penetration in 5 years. Mexico and than the whole e-commerce in Germany and in Argentina have 1.7% and 2.7%, respectively, with line with the UK. Alibaba (Tmall Global) and JD good potential to grow as well. This is, by the way, (JD Worldwide) are expanding their businesses to one of the main reasons behind our secular growth almost all the countries in the world. call for e-commerce in the region.
LatAm Retail and Internet - Equity Research 5 Winner ecosystems: We do not believe LatAm countries will have a dominant player in e-commerce with a similar scope compared to Alibaba or Tencent. Currently, e-commerce is still small and most platforms are just starting its ventures in payments, logistics, advertising. Thus, most of the money is still flowing through the main commercial banks (Banco do Brasil, Itaú, Bradesco), most of the payments are made through the main acquirers (Cielo, Rede, Getnet), and logistics for e-commerce needs to develop a lot, with private players investing in capacity and starting to gain share over the postal service (Correios).
Mobile payment: As we mentioned before, B2W just launched Ame Digital, a payment platform inspired in Alipay and WeChat Pay. It should take time for the platform to gain scale, even though the downside risk is limited and the potential is huge. MercadoPago – launched by MercadoLibre in 2004 – has a strong penetration, but MELI just started to add other products and services besides factoring receivables and processing payments. The other e-commerce players have not launched their platforms yet. Overall, we think it is early to do a strong bet on possible winners, and new entrants (such as Paypal, Pagseguro), incumbent acquirers (Cielo, Stone and others), and banks are also interested in gaining importance in this business as well.
Support for startups and unicorns: So far, we have not seen an ecosystem in LatAm helping entrepreneurs and startups to develop (like in the Sillicon Valley or in China). There are a few successful cases in Brazil such as Movile/iFood, VTEX, 99, but this is very little compared to the 65 unicorns in China, which account for 41% of the combined valuation for unicorns in the world (US$814bn).
Cross boarder commerce: Cross boarder commerce is irrelevant in the region. Brazil buys R$9bn abroad from websites such as Aliexpress, Amazon US, Wish, JD Worldwide and eBay. However, the country is selling almost nothing through international platforms. There are a few brands such as Melissa and Havaianas selling thourgh JD, but there is potential for much more.
6 LatAm Retail and Internet - Equity Research Delving deep into Chinese ecosystem
LatAm Retail and Internet - Equity Research 7 Napoleon once said about China: “Let China sleep. Aspects that help explain China’s differentials as a When China wakes up, the world will be shaken”. global internet player include: the role of government, education levels, the huge amount of investments, Of course, China woke up many years ago to become Chinese entrepreneurship, the competence and the second largest economy (so far), with GDP of success of internet platforms that became “national US$11.2 trillion. However, as it was our first visit, our champions”, and a booming economy. initial impression was that China is indeed changing global dynamics, as Napoleon anticipated. China is already an e-commerce leader, with GMV of US$1 trillion. E-commerce represents 23% of Our 1-week trip focused on internet and technology total retail sales, the largest penetration in the and the main goal was to form an initial view on world, which compares to 9.0% in the US, 2.2% what internet players (to differing degrees of scale in India, 1.7% in Mexico and 4.3% in Brazil. The and success) are doing and the main technology Chinese e-commerce market grew 24% in 2017, as trends, hopefully giving us an initial reading on per Euromonitor, and 2017-20 growth should be Brazil, Mexico and the rest of Latin America. 14% per year.
We also know that China is very different to Latin We visited the following companies: America and that our region may never be like China. Alibaba Group: largest marketplace in China, with 52% market share. Market cap: US$500bn JD.com: largest B2C player in China and
1. JD.com unmanned store second largest marketplace, with 33% market share. Market cap: US$51bn Huawei: world’s largest telecom and IT solution provider. Revenues: US$100bn Didi: largest ride-sharing player in China and world’s second most valuable unicorn (valued at US$50bn) Ctrip: China’s largest online travel agency. Market cap: US$23.5bn LianLian: third largest payments player in China Sensetime: world’s most valuable AI unicorn (valued at US$4.5bn) So Young: world’s largest beauty service platform
We also had the opportunity to experiment JD’s unmanned store (same concept as AmazonGo), Hema Fresh, a “New Retail” store and an effective example of online-to-offline (O2O) experience, and Y-Fresh, another unmanned store owned by Yiguo.
JD.com unmanned store: In the case of JD’s unmanned convenience store, the pilot store we visited is being tested since last fall by the 10k employees at its Beijing HQ.
Source: 1. BTG Pactual
8 LatAm Retail and Internet - Equity Research 2. JD.com unmanned store
The company also launched two unmanned online. An employee immediately runs around the convenience stores in January in Tianjin, now store with mobile devices and an optimized “in- open to the public at Joy City mall in Yantai in store route”, picking up products from shelves and the Shandong province, and at Sunrise Shopping putting them in shopping bags with digital tags. Center in Dalian in the Liaoning province. They After the purchase is finished, the shopping bag is put expect to open approximately 100 unmanned on hangers that lift the bags to the ceiling and onto stores this year alone. the overhead conveyor belts, which take the bags to the delivery area. Delivery can be made in up to 30 The concept requires consumers to scan a QR minutes if the consumer lives within a 3km radius. code upon entrance. Stores are using RFIDs and ceiling cameras with facial and image recognition Products are fresh and consumers can choose and heat mapping technologies to track each live seafood from the tanks, fresh fish or beef, take customer’s movement and product selection. them home or get them cooked onsite and eat at These innovations will help the company to offer the seating area inside the store. personalized promotions and ads, and will help the inventory management process as well. Price tags are digital and prices can be easily changed (similar to Lojas Americanas store in Leblon Hema Fresh: Founded by a former executive of district in Rio and Pão de Açúcar store in Iguatemi JD Logistics, the first store was opened in January Faria Lima mall in São Paulo). Consumers can also 2016. Alibaba acquired the company shortly after scan QR codes on the tags for product information. and the current store count is 25. Hema Fresh stores are a hybrid of offline retailer, Payment is made via Alibaba’s Alipay. Stores are food service and online retailer. With an average cashless and consumers must download the app. of 3,000 sqm, it is a true (above-average) O2O Consumers’ data are gathered online and offline shopping experience. and Hema Fresh offers personalized promotions. Unmanned checkouts are easy to use (similar to A few highlights on Hema Fresh: CVS in the US and Sainsbury’s in the UK).
An effective 020 (online to offline) and shipping from store example. Consumers place their orders
Source: 2. BTG Pactual
LatAm Retail and Internet - Equity Research 9 4. Hema Fresh - select products 3. Hema Fresh - store front using an app
5. Hema Fresh - digital checkout 6. Hema Fresh - product pick up
7. Hema Fresh - delivery bag scan 8. Hema Fresh - conveyor belts
Source: 3, 4, 5, 6, 7 and 8. BTG Pactual
10 LatAm Retail and Internet - Equity Research 9. Y-Fresh - store front
Y-fresh: a 10-15 sqm unmanned store that looks training. Already home to hundreds of small like a container. Mix is similar to a convenience store. businesses, the hub invites the most famous and professional incubators around the world to choose Owned by Yiguo, a player originally focused on B2B projects and organizes meetings with investors for in the fruit niche. It entered e-commerce operating startups in different stages. the fresh fruit platform for Alibaba (Tmall), receiving a US$300mn investment from Tmall. Finally, we visited Fosun (leading private equity player with total investments of US$64bn) and CICC The experience was good. To enter the store, (one of the largest investment banks in China) and consumers need to scan a QR code via Alipay or had the opportunity to touch base with venture WeChat Pay apps. After selecting the products, the capitalists and startups at a cocktail event held at customer puts them in a basket for recognition. Brazil’s embassy in Beijing. Customers pay via one of the mobile payments platforms. If the customer forgets to pay for a With such a diversified list of meetings and product and decides to leave the store, the door experiences, we learned a lot of things about doesn’t open and advises the customer that there internet and e-commerce in China. The main is an unpaid product. highlights are:
We also visited Dream Town, a startup hub China is connected, from taxi drivers to large near Alibaba’s headquarters. It offers successful supermarkets, from mom-and-pop stores to applicants free office space, cash subsidies and big chains, and most individuals have access to the internet;
Source: 9. BTG Pactual
LatAm Retail and Internet - Equity Research 11 10. Top 10 countries by number of internet users (mn) - 2016 14. Chinese mobile e-commerce GMV - US$bn 11. Smartphone penetration in China E E E 15. Penetration of mobile e-commerce (as a % of online GMV)