1/ Today's thread is on Zhang Lei's thoughts on retail. You guys remember of course that he is the founder of Hillhouse Capital, the long-term $60Bn asset manager, Yale alumnus, David Swenson follower & friend, generally one of the most successful investors in China.
2/ Hillhouse is a heavy investor in ecommerce and retail. An early win was JD, but they're also in Haiziwang (toy store chain), Belle (shoes), Bianlifeng (convenience stores), $YSG Perfect Diary (cosmetics), Blue Moon (China's P&G), LPPZ (snack chain) & too many others to name.
3/ Hillhouse is a research heavy org. They spent years studying retail. That's bc Lei believes you need to know at least a few decades of the industry's history before you can make decisions. One of the first markets he studied is US, which has a very long history.
4/ Like elsewhere, mom & pop stores initially dominate market. Many pros to this model, ie extreme alignment of capital & mgmt. Personalized service. Cons are also obvious. Small selection, not usually best price. Then railroads came & improved distribution led to chain stores.
5/ As logistics further improved & urbanization accelerated, some chains became supermarkets. They needed standardized, mass market products, thus P&G & other FMCG brands were born. When TV arrived, these brands became even more ubiquitous (ie sponsored "soap operas").
6/ Increasing ubiquity of refrigerators and family automobiles also led to more retail. Centrally located dept stores ie Macys initially did very well. As everyone had a car, location became less impt and formats like Walmart thrived. Changing environment means new & diff opps.
7/ Lei also loves Costco (don't all value investors?). He met w them as part of BoD search. Costco has 3K SKUs vs Walmart's 140K, allowing it to beat in price due to scale. It lives off of membership fees & some items it charges premium for bc consumers don't trust too low price.
8/ But these aren't the only models. Europe's Aldi's does only 800 SKUs, 90% own branded, decentralized purchasing. In Japan, after 90s stagnation & w an older population, lower desire to consume meant that retail had to focus more on services, emotional appeal & convenience.
9/ The purpose of retail, Lei believes, is to provide "safety, convenience, happiness." But the specific format appropriate for the age really depends on understanding key timing of systemic structural changes + those key changes. Some examples from China follow:
10/ Blue Moon, Hillhouse's star investment & "China's P&G," won bc the co was begging on an emerging higher end segment as part of China's consumption upgrade. Hillhouse supported its investment into R&D & turned lossmaking. But this was an investment needed to win long term.
11/ Same with JD. When Amazon got started, UPS was already huge, but in China, JD has the opp to go for its own logistics. Hillhouse supported this, seeing that it was good for the biz long term. Today, JD's exceptional logistics (& continued improvement) is indeed a strength.
12/ In today's China, Hillhouse sees an aging population, small family sizes, increasing need for emotional connection, and so has invested heavily in the pet ecosystem. (food, vets, everything.) Also, the age of mass market brands is past, it is about individualized connection.
13/ Lei says, "retail is service, content is merchandise." (So does Alibaba). Nowadays, low profit high volume = undesirable. Differentiated offerings, long & personalized customer relationships are. Use social networks to aggregate buyers, provide great exp, attract more buyers.
14/ There's always "new retail" coming. The word itself is old & was in fact used in the 1920s in US. There were even unmanned store experiments then. There are always new trends, but the key is figuring out which trends are mutually reinforcing vs independent.
15/ There's more from Zhang Lei in the below thread as well. All of this is taken from his 2020 book, Value, which unfortunately only has a Chinese version right now. For more China tech nerding out, consider joining us at techbuzzchina.com/insider
https://twitter.com/ruima/status/1392213200922365956
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