A Glimpse of Future Retail in the Corner Stores

This article first appeared here.

Shopping, as we busy city dwellers know it, has never been easier. Whether it is Amazon’s “1-Click” buy button or Alibaba’s 30-minute delivery, it is no longer something that needs planning.

The shift of our collective shopping behavior has fueled double-digit eCommerce growth worldwide, going against the stagnating department stores and big-box retailers.

Rapid urbanization and the fast adoption of smartphones in emerging markets would make us believe that the next billion internet users already shop in similar ways or are going to. A close look at the data, however, will tell us something different.

Offline is David, Online is Goliath

As Amazon turns 25 years old this year, it’s easy to overlook the fact that eCommerce is still in a nascent stage. Global online sales in 2017 totaled US$2.3 trillion, 10.2% of total retail sales. The sales are heavily concentrated in travel, entertainment (books, music, and events), and durable goods (fashion, IT/mobile, and electronics).

With consumers becoming more accustomed to shopping online, many have predicted that the fast-moving consumer goods (FMCG) segment will be the next to rise because of the high frequency of purchases. In the FMCG market, however, eCommerce only holds 5.1% of the value.

Even in Asia, the most developed market for eCommerce, online FMCG sales are less than 10%. Somehow, the fast-growing online consumers have yet to be converted into business value.

In the US, the total eCommerce value of FMCG products accounts for 4.4%. The same rate in China is 14%, where eCommerce giant Alibaba (a GGV Capital portfolio) managed to leapfrog ahead because of China’s inefficiency in offline retail.

That inefficiency is common to other emerging markets, usually due to fragmented regional markets, excessive layers of the distribution channels, and lack of quality local suppliers.

So will history repeat itself in other emerging markets like India, Indonesia, Vietnam, Brazil, or Mexico? Will startups leverage the less developed retail infrastructure and become the next billion-dollar companies for the region?

The intuitive answer would be yes, why don’t we just look for the likes of Alibaba for each region? It is easy, however, to forget about the context of Alibaba’s success. The manufacturing capabilities with China being the world’s factory since the 80s, fast-growing urbanization along with GDP per capita, and the government’s aggressive efforts in building a high-speed transportation system. These external factors helped to make the equation work. The average order value and the quality of goods both grew high enough while the cost of goods and fulfillment costs could be kept relatively low, and Alipay functioned as an escrow service to bridge the trust gap between sellers and buyers.

Most of these macro conditions are not ready in other emerging markets yet. That’s why we decided to look for other players who are tackling the same inefficiency problem differently.

Anyone who dabbled in eCommerce would know, user acquisition and last-mile delivery are two key costs in the business model. What if we can take that away by serving small business owners who already a stable group of end consumers?

What if we find startups in each emerging market which best serve the mom and pop shops?

The Mom and Pop Shop Pie

You know these types of stores, those with tiny space, floor-to-ceiling stacks of goods, and an owner who seemingly knows everyone in the neighborhood. They are called kirana in India, warung in Indonesia, cua hang in Vietnam, xiao maibu in China, sari sari in the Philippines, kedai runcit in Malaysia, and tienda in Mexico.

In India, kirana store owners are also the holders of the unofficial local credit scores. In China, a xiao maibu receives packages for consumers who are not home to sign off their online shopping deliveries. In Indonesia, warungs are where Grab and Gojek riders, hungry students, and the homemakers come together for a cup of tea while buying their daily essentials. In Vietnam, a cua hang is where people go to watch a sports game.

Before modern trade, these stores provided life essentials and were a venue for neighborhood gossip. They are run by residents who have lived in the area for many years – they know their customers’ names, what brand of beer they like, and even deliver to their homes with a phone call.​

What you probably didn’t realize is just how significant they are for distributing consumer goods.

The Game of the Giants

You know these types of stores, those with tiny space, floor-to-ceiling stacks of goods, and an owner who seemingly knows everyone in the neighborhood. They are called kirana in India, warung in Indonesia, cua hang in Vietnam, xiao maibu in China, sari sari in the Philippines, kedai runcit in Malaysia, and tienda in Mexico.

The social ties embedded within these stores are hard for big companies to replace. This old form of trade, however, has many inefficiencies, and plenty of big companies are vying for that massive market.

For retail giants, this is a significant piece of customer data that will increase their bargaining power with brands. For tech companies, on the other hand, this is a group of new users to acquire and can provide high-frequency transaction data points. And for eCommerce companies, this kind of store is the most efficient distribution center for last-mile delivery of low-cost, frequently purchased goods.

Since 2015, Chinese internet giant Alibaba has been trying to extend its dominance to offline retail. First through multiple supermarket and retail chain acquisitions, then its new retail chain Hema Fresh, and later, a retail management platform Ling Shou Tong, which is aimed at bringing cloud-based technology to the 6 million mom and pop shops in China.

China’s innovative community group buy startups, which rely primarily on community influencers to acquire users and fulfill last-mile delivery, have also turned to the mom and pop shop owners in the neighborhood. More than 60% of the community influencers on Shihuituan, the category leader in China (a GGV portfolio), are mom and pop shop owners in the local neighborhood.

Kirana stores in India have also become the battleground for the raging retail war, with demand coming from venture capital-backed fin-tech startups to big companies like Reliance and Amazon. Similar stories are also happening in Indonesia.

Where We Bet

Away from this battle, there is another group of companies trying to solve the less sexy and more operation side of the equation: supply chain, logistics, and financing.

For as long as mom and pop shops have existed, they have been faced with limited sourcing information, opaque pricing, and unstable cashflows. That’s where we believe technology can add the most value, not by replacing the human touch and the shops’ anchoring role in the community, but by empowering them to be more resilient and make better money.

We believe in a future where offline consumer shopping co-exists with online business-to-consumer commerce. It’s not one or the other, especially in markets where physical infrastructure is still playing catch-up with digital infrastructure.

Unlike in the US, where offline retail is still dominated by mature players like Costco or Walmart, or China, where Alibaba and Tencent dominate across sectors, emerging markets like India, Indonesia, and Vietnam are still largely level playing fields with opportunities for different players.

Whoever figures out how to build trust with the mom and pop store owners have a shot at becoming the operating systems of the multibillion-dollar retail economy.

Here’re a few GGV portfolios across different markets.

Udaan (India)

Udaan is a network-centric B2B trade platform that connects manufacturers, wholesalers with retailers online. Udaan currently serves a network of 3 million retailers in 900 cities by connecting them to 20,000 sellers across the country.

Khatabook (India)

KhataBook is an SMB Tech company with a digital ledger app as the primary product. The app helps small shopkeepers and kirana store owners in India manage their accounts by helping them track the money owed to them through the means of a digital ledger. Currently, Khatabook has over 10 million registered users in 4395 Indian cities.

Telio (Vietnam)

Telio is Vietnam’s largest B2B eCommerce platform, connecting small retailers with brands and wholesalers on a centralized platform that delivers more choice, better pricing, and more efficient logistics. The company now serves over 3,000 retailers in Hanoi and Ho Chi Minh City, providing more than one-third of those retailers’ monthly stock. Retailers are placing an average of seven orders per month on Telio’s platform.

Shihuituan (China)

Shihuituan is the leading community commerce company in China. With its network of 80,000 community influencers, the company currently serves 20 million households in 60 cities in China.

More than 60% of the community influencers on their platforms are mom and pop shop owners in the local neighborhoods. Their monthly income has increased 200 dollars since they joined Shituituan’s platforms.

Fresh insights delivered to your inbox.

I would like to receive news and updates from GGV.