Marketplaces, like platforms in general, create winner-takes-all dynamics by virtue of the network effects that create an ever growing gravitation towards the biggest entities. As online retail goes more and more towards marketplaces everywhere, this dynamic gets more prevalent as well.
This holds equally opportunities and strategic pitfalls for online retailers as well. Case in point: JD.com and WeChat in China.
As a preface, here is a post by Connie Chan of VC firm a16z from 2015, explaining what makes WeChat, the most popular app in China, so special:
Instead of focusing on building the largest social network in the world, WeChat has focused on building a mobile lifestyle — its goal is to address every aspect of its users’ lives, including non-social ones.
The way it achieves this goal is through one of the most unsurfaced aspects of WeChat: the pioneering model of “apps within an app”. Millions (note, not just thousands) of lightweight apps live inside WeChat, much like webpages live on the internet.
This makes WeChat more like a browser for mobile websites, or, arguably, a mobile operating system — complete with its own proprietary app store. Not what we’d expect from a messaging app.
The lightweight apps on WeChat are called “official accounts”. Approved by WeChat after a brief application process, there are well over 10 million of these official accounts on the platform
This dominance of WeChat in China has only grown since. A few days ago, industry analyst Ben Thompson made the compelling case that WeChat’s popularity and omnipresence in its users’ lifes poses a challenge for Apple’s iPhone in China: The underlying OS doesn’t matter much if one does everything in just one app. Thompson: Stratechery Apple’s China Problem:
The fundamental issue is this: unlike the rest of the world, in China the most important layer of the smartphone stack is not the phone’s operating system. Rather, it is WeChat. Connie Chan of Andreessen Horowitz tried to explain in 2015 just how integrated WeChat is into the daily lives of nearly 900 million Chinese, and said integration has only grown since then: every aspect of a typical Chinese person’s life, not just online but also offline, is conducted through a single app (and, to the extent other apps are used, they are often games promoted through WeChat).
Naturally, WeChat works the same on iOS as it does on Android. That, by extension, means that for the day-to-day lives of Chinese there is no penalty to switching away from an iPhone.
So, with that preface out of the way. Let’s get to the meat of it.
Fung Global Retail & Technology has published a deep dive on WeChat. In Q4 2016, WeChat reached 889 monthly active users, and they are quite active:
According to data from Tencent Penguin Intelligence and the China Academy of Information and Communications Technology (CAICT), over 55% of users use WeChat for at least 60 minutes a day. […]
Daily average users (DAU) on average spend 82 minutes per day on WeChat, while the total number of messages sent per day has grown by 67% year over year. WeChat is by far the most attention-grabbing app in China, and that creates an enviable environment for future monetization through more sophisticated advertising.
All sorts of transactions happen via WeChat:
WeChat users have access to transaction functionalities such as booking a taxi, ordering food and even managing a personal wealth fund. Notable features include Moments for SNS, Official Accounts for news and WeChat Pay for payment. In this sense, the company is ahead of its peers when it comes to its ability to monetize above and beyond its messaging service—a strategy highlighted by Tencent’s push into payments, advertising and gaming. Because of WeChat’s all-in-one DNA, its users are more likely to adopt new transaction features than users of any of the other messaging service globally.
Now, recently we wrote that the fast rise of WeChat Pay poses a challenge to marketleader Alipay. It is certainly in the realm of possibility for WeChat Pay to overtake Alipay in the near future. The fast rise in the past certainly points towards this. I would posit the question is not if but when. The reason for this is simple: The vast variety of transactions that can be done over WeChat pulls users in. It is not just about buying goods but also for paying for rides and other services. It’s the gravity of a general interest platform at work. In China, you get constantly reminded how you can make your life easier by using WeChat for ordering and paying for things.
Payments usually matter far less strategically than most people, especially those working in payments, think. But here it is crucual. We’ll get back to this in a moment.
Here is Fung on the history of WeChat Pay:
WeChat Pay was launched in 2013. Based on data from the CAICT, more than 300 million users have tied their bank cards to their WeChat account. The combination of WeChat Pay and QQ Wallet is the #2 payment platform in China. […]
According to Global Web Index, 33% of Chinese users have used WeChat to pay for an item, which is comparable to Alipay—the #1 payment platform in China—which is owned by Ant Financial Services Group. That WeChat Pay has managed to catch up with Alipay in only three years is remarkable.
While Alibaba’s Taobao drives Alipay’s adoption, WeChat Pay has all the services and retailers on WeChat to drive adoption. And also JD.com, which adopted WeChat Pay:
Although WeChat Pay was late to enter the mobile payment market, it offers similar functions to Alipay and entered into a strategic cooperation with JD.com in order complement the company’s e-commerce payment functionalities.
The key functions of the two companies—Alipay and WeChat Pay—are similar: they both offer money transfer, bill payments, e-commerce payments, etc.
There is a perfectly reasonable rationale for JD.com to do this: As a distant number two to Alibaba’s no. 1 position in the Chinese market, JD.com could never establish a payments service successfully on its own against Alipay. Remember, marketplaces create winner-takes-all dynamics. (JP Morgan estimated that Alibaba got 78% market share while JD.com got 14% in 2016.)
So, it makes sense to cooperate with the biggest partner available. JD.com and WeChat together are a strong enough force to, in the medium term, challenge successfully Alipay. And indeed it now looks like this will happen.
WeChat Pay accounted for only 11.4% of total mobile payment transaction volume compared to Alipay, which had a 74.9% market share in the first quarter of 2015. In only six quarters, WeChat Pay’s share increased to 38% in the third quarter of 2016, according to Analysys. The increase in adoption was mainly due to its integration with JD.com in May 2016 and the introduction of P2P (person-to-person) money transfers.
As WeChat is not just online retail, its payment arm encompasses more than just, say, paying at Taobao. And while Alipay is not confined to Taobao either, WeChat Pay’s integration into WeChat means it is readily available in far more use cases.
This is why the payment part matters here. The vertical integration reduces friction and in the process lifts all boats on WeChat.
WeChat’s online-to-offline (O2O) opportunities are being recognized by merchants. According to a Tencent press release in February 2016, more than 300,000 offline stores worldwide accepted WeChat Pay. WeChat has also begun to charge users a fee when they transfer money from their WeChat Pay account to their bank account, and as a result, users will be more likely to keep their money within the WeChat ecosystem.
This fee creates an insidious user lock-in.
And this is where the problem for JD.com emerges. Already, JD.com is increasingly reliant on WeChat. Digiday:
E-commerce giant JD is one of Alibaba’s biggest competitors in China, and Tencent holds more than 20 percent of stake in JD.com. A click on “Specials” takes users to the JD site where they can adjust their shopping cart or make a purchase.
Josh Gartner, vp of international corporate affairs for JD, explained that WeChat has been critical for the company since 2014. In general, 25-30 percent of first-time site visitors to JD.com come from WeChat, and that number can go up to 50 percent during major shopping events like Singles’ Day, noted Gartner.
(Emphasis by me.)
While WeChat becomes (or, frankly, already is) a serious e-commerce platform in China, JD.com gets slowly but surely relegated to ‘just being a retailer on the platform.’
It seems like JD.com is fine with this. And, certainly, good money can be made on someone else’s platform. (JD.com is on WeChat since 2014. The company joined WeChat a week after its IPO. JD.com almost immediately got a sales boost from that.) Also, the hard question here is, what else could JD.com realistically do?
It certainly looks like we will see more cooperations between the two companies.
E-commerce is likely to play a bigger role in driving WeChat Pay’s monetization efforts. In May 2016, Tencent and JD.com said they would offer a WeChat marketing and branding data analytics tool to marketers worldwide. With the tool, Tencent will provide data to marketers about which public WeChat accounts users follow and which brands and celebrities they like. JD.com will offer sales data about users’ product purchases. The data could help marketers target specific demographics most likely to buy certain products.
“We can help a brand narrow down its target audience on WeChat from 800 million people to 1 or 2 million, for instance,” [Josh Gartner, vp of international corporate affairs for JD,] said.
WeChat is hard at work increasing its e-commerce footprint. Fung:
Youzan and Weidian are two of the leading Software as a Service (SaaS) providers for online stores in China. Similar to Shopify, users can open an online store through the Youzan or Weidian platforms. The websites can then be accessed through WeChat browser and WeChat Official Accounts.
By connecting to WeChat, store owners can use WeChat Pay for transactions and Official Accounts for advertisements. Consumers can browse goods online before buying them, forward them to friends or groups using WeChat, or publish them in Moments.
When it comes to the companies that have the power to shape the Chinese market, JD.com is increasingly getting pushed aside by WeChat. It may not look like this is happening, but it has already started.
Remember, Pinduoduo (PDD) is predominantly used via WeChat. Unsurprisingly so, as PDD is putting social shopping to good use. But the point here is that PDD is already number four in GMV in China according to their numbers, only behind Vipshop, JD.com and Alibaba.
We will hear more and more stories like the one from Pinduoduo. WeChat is very fertile ground for e-commerce in China.
And thus, Alibaba and JD.com do not just compete with one PDD but with the WeChat ecosystem. (Similar to, for example, Walmart in the US not just competing with single Amazon Marketplace merchants but with the whole Amazon ecosystem itself. Think about this from the consumer’s perspective and where the friction is. (and where the friction goes away))
Eventually, this will catch up with Alibaba as well. But that is a long time off. It’s JD.com that is caught between the bigger Alibaba and WeChat, whith the latter being completely different to the former two.
Now, JD.com is not in any kind of imminent danger. JD.com will be a formidable online retailer for a long time, and the company may well remain the biggest merchant on WeChat for a long while.
And not just that. JD.com recently created a new business group, JD Logistics. This is just a culmination of what JD.com sets apart from Alibaba. JD.com has been building out its own logistics network for years. This new business group is certainly going to concentrate on offering more of its fulfillment services to other retailers. ChinaDaily:
“By providing logistics services to retailers, which use our online platform to do business, we can not only better the customers’ experience but also make the service a growing point for our business,” [Shen Haoyu, chief operation officer of JD.com] said, adding that what makes JD.com stand out from many other e-commerce players in China is the company’s self-built and self-operated logistic system.
Many of China’s e-commerce companies, such as China’s e-commerce king Alibaba Group Holding Ltd, are building their own warehouses and delivery teams. JD.com started to build up its own logistic network about five years ago.
About 90 percent of the 1 million orders JD.com receives every day are delivered by the company’s own delivery team.
Though JD.com has provided its logistics services to third-party vendors since earlier this year, only a small number of them choose the company’s logistics service over traditional courier companies in China.
And who in the future will need someone to rely on for speedy logistics? Why yes, online retailer who grow fast like PDD via WeChat, of course. (The “which use our online platform” part in the above quote is wishful thinking that will soon be a thing of the past.) So, JD.com’s future is closely tied to WeChat on several fronts; as an online retailer on top of WeChat and as a service provider to other WeChat merchants. And there is tremendous growth potential here.
But JD.com will never be the dominating commerce force in China.
This battle will be carried out between Alibaba and WeChat.
- Now, JD.com Creates a Logistics Unit as Well
- JD.com Sees GMV and Annual Active Customers Grew by Over 40% in Q1 2017
- JD.com Is Already Using 30 Self Designed and Engineered Drones for Delivery
- Alibaba’s Alipay Is Under Fire from Tencent’s WeChat Pay in China
- How China Became the First True Mobile-First Commerce Nation
- How China Post’s Ule Is Building the World’s Largest Retail Network