Modernizing Millions of Mom-and-pop Stores in China – Alibaba’s LST platform

While Alibaba may be best known for its B2C and C2C ecommerce platforms (Tmall and Taobao), it recently developed a massive B2B platform modernizing millions of mom and pop convenience stores in China.

The Challenge

Mom-and-pop stores: In China, offline retail is highly fragmented. There are 6.8 million independent mom-and-pop stores serving hundreds of millions of consumers in low-tier cities and rural areas. These stores are typically run by unsophisticated owners – assortment decisions are often arbitrary, accounts are kept in notebooks, and sourcing options are limited. It is not uncommon for store owners to drive for hours once a month to stock up their inventory at regional wholesale marketplaces.

Brands and manufacturers: Historically, brands and manufacturers distributed products through massive networks of thousands of distributors, wholesalers and channel vendors built over decades. The model presented the following challenges:

  • Cost: Products often change hands multiple times – with a markup each time – before reaching the point of sale.
  • Product quality and authenticity: The loosely organized network introduces many opportunities to infuse obsolete, damaged and even counterfeit products.
  • One-way information flow: The networks only have the ability to distribute products down the chain but cannot relay consumer feedback in the reverse direction to brands and manufacturers.

How LST Solves the Problem

LST is a two-sided platform connecting brands and manufacturers directly with millions of mom-and-pop stores.

Store owners can use LST in multiple ways:

  • Sourcing: Stores can source specific SKUs through LST at competitive prices with quality assurance and value added-services such as logistics and financing (provided by Ant Financial).
  • Assortment: LST can provide assortment guidance based on Alibaba’s big data capabilities. For example, LST once suggested a store to sell dog food because it found that the neighborhood owns significantly more dogs than average based on consumers’ online purchase behavior on Taobao and Tmall.
  • Become Tmall-branded stores: Stores can fully integrate with LST by becoming Tmall-branded stores while retaining ownerships and operational autonomy. LST provides a consistent look-and-feel and smart POS terminals. Through the smart POS terminal, LST can track real-time sales of the store and provide value-added services including inventory management, auto-replenishment, assortment guidance, accounting, financial planning and etc. The Tmall brand helps to draw new customers.
  • Online-offline integration: In the next stage, Tmall-branded stores will be equipped to fulfill online orders as well.

A store in Hangzhou before and after becoming a Tmall-branded store

Value to brands and manufacturers

  • Lower cost: As market growth slows in recent years, brands have significant difficulties sustaining their costly distribution network, which has since compromised their market reach. The LST platform enjoys significant economies of scale and is much cheaper for brands while providing significantly better access, especially for smaller brands.
  • Customer feedback loop: The LST platform allows brands to track purchases in real-time on the SKU level. The insights in turn enables brands to quickly improve products and target customers more accurately.

Value Creation

The LST creates value by 1) cutting out intermediaries in offline retail distribution and 2) providing “shared services” for small stores who do not otherwise have access to such services. The quality of such services (data insights, supply chain, technical solutions) improves as the platform continues to scale.

Alibaba is also seeking to deliver a full suite of services to its brand partners beyond traditional ecommerce, including digital marketing, supply chain, logistics, cloud computing, etc. The addition of LST to the offering allows brands to better coordinate their online and offline strategy.

Value Capture

With ecommerce accounting for just over 1/3 of the total retail market in China, the LST platform allows Alibaba to tap into the large and fragmented offline retail market (significant first move advantage) without committing significant capital

Alibaba can capture value by earning commission on product sales and service revenues from stores and brands. The increased scale, data, customer and brand relationships further benefits other platforms in the Alibaba ecosystem.

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1 thought on “Modernizing Millions of Mom-and-pop Stores in China – Alibaba’s LST platform

  1. Thanks for sharing this platform! Very interesting and thought provoking. On the one hand LST empowers mom-and-pop shops with information and supply chain solutions. On the other hand LST allows brands and manufacturers to operate more efficiently via bottom-up feedback from the front end. Two questions came to me as I try to understand more about this topic.

    1) With this platform, who owns the inventory and delivers goods to those mom-and-pop stores? My understanding is intermediaries used to own inventories and distribute products to local retailers. As those intermediaries were cut out in the new system, who is taking care of product distribution?
    2) What will offline retail stores look like in 10 years? In this highly fragmented offline retail market, it’s not easy for one single player to dominate. Although no doubt Alibaba has the capability to leverage its scale and technology to disrupt this space, other players might have distinctive edges that could deliver similar if not better value propositions. JD and SF Express for example, are also investing heavily in similar platforms. My guess is 10 years down the road, mom-and-pop shops will be gone, or rather rebranded under a few big players such as Alibaba, JD and SF Express.

    Reference:
    [1] http://baijiahao.baidu.com/s?id=1602899888143782140
    [2] https://baijiahao.baidu.com/s?id=1610590408428825842

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