CASE 4: CROSS-BORDER EC (PARTNERING WITH TMALL GLOBAL)

The Problem

In EC, the world is your oyster. It can transcend borders, opening product lines and services to a growing international market. The problem is that like the original line from Shakespeares The Merry Wives of Windsor, it may take a substantial sword to open it. When a buyer makes an online purchase from a merchant or seller in another country, its called international e- commerce or cross-border e-commerce, and the two concepts are synonymous. Sometimes, researchers and practitioners refine the definition to exclude EC trade between countries that share a common language, border, and currencies (Goodale 2014). For example, trade between the United States and Canada is treated as international because their currencies and financial regulations differ and the free-flow of goods is restricted by law, while trade between many of the neighbors in the European Union is considered domestic because they share a common currency (the Euro), common payment resolution (SEPAsee section Technical Malware Attack Methods: From Viruses to Denial of Service), and open borders. Because of the polyglot nature of many of these countries, they often share one or more languages in common. When countries share common geography, language, payment systems, and currencies, a number of the key barriers to cross-border commerce are eliminated. According to a recent report (Erickson and Najberg 2015) by Accenture and AliResearch (the research arm of the Chinese Alibaba Group), in 2015 there were approximately 300 billion global cross-border B2C transactions which represented around 16% of all B2C transactions. These transactions were the combined result of the purchases of 360 million B2C shoppers worldwide which was only 25% of all online buyers that year. So, only one out of every seven transactions was crossborder, and only one out of every four buyers made cross-border purchases. Based on additional figures from survey of 24,000 adult consumers in 29 countries across the globe (PayPal 2015), in virtually every region of the world, the United States and China are by far the most popular online cross-border purchase destinations. The only exception is in Western Europe where cross-border purchases tend to be made within the region. From the buyers standpoint, the countries with the strong proclivities for cross-border purchasing (i.e., those with more than 70% of their online purchases being cross-border) are scattered across the globe and include Canada, Ireland, Austria, Israel, Nigeria, Singapore, and Australia. Those with the weakest proclivities include the United States, the United Kingdom, Germany, the Netherlands, Poland, Turkey, Japan, South Korea, and China. By 2020 (Erickson and Najberg 2015), the outlook for cross-border transactions is predicted to change substantially. The volume of cross-border transactions is projected to have a compound growth rate of close to 30% between now and then, so that cross-border transactions will reach around 1 trillion. This will represent about 30% of the estimated total for that year. At that time, close to 1 out of every 2 of the estimated 2 billion shoppers will make cross-border purchases. For merchants and sellers, these estimates paint a picture of massive opportunitythe oyster. It also represents a substantial opportunity for banks and payment service providers. So, wheres the sword? Whats needed to take advantage of the opportunity?

The Solution

Suppose a merchant wants to expand his or her online B2C specialty clothing and apparel business to handle overseas buyers. Point of fact, there are more cross-border purchases for

clothing and apparel than any other product category by a wide margin. Given this fact, how hard could it be to sell clothing on the international market? With English and credit cards being de facto standards on the Internet, it seems like most merchants could engage in cross- border EC by simply adding support for international credit cards and delivery. While this might work for a handful of transactions in some parts of the world, experience tells us it would not work for even the average number of sales transactions handled by most EC retailers. A recent study of a sample of 180 online B2C merchants in 10 countries by Pymnts.com (2015) assessed the characteristics of those already successfully engaged in international B2C, as well as the readiness of the sample to participate in cross-border transactions. Based on their analysis of 60 features, the number one key finding was that the top 10 merchants think local. They treat international customers as if they were domestic. They offer multiple languages, multiple currencies, and multiple payment systems. They customize pages to the customers country (e.g., simple things like address and phone fields). They support access through a variety of devices, especially mobile. They simplify the checkout process, eliminating the need for extensive user profiles. They also offer free shipping and rewards to encourage repeat business. The second key finding of the study (Pymnts.com 2015) was that the vast majority of businesses in the sample were far from ready to engage in cross-border transactions. Its understandable given that there are currently 195 countries in the world with a combined total of 6500 spoken languages and 180 currencies, not to mention differing customs procedures, logistics, physical infrastructures, and other regulatory and legal systems. Treating potential cross-border customers as if they were all local is almost an impossible task. Because the barriers and issues that need to be addressed in cross-border sales are so intertwined, it is hard to do it in a phased approach or piecemeal fashion. This is why most businesses start by offering a small segment of their product or service listings to a handful of countries. Also, instead of setting up local legal entities within the countries of interest or creating on their own with fully localized features for each of the countries to be served, many companies start by working with a partner who is conversant in the world of cross-border commerce and who has a site or portal that is already serving a broad spectrum of cross-border consumers. This was the approached used by Costco when they decided to offer some of their products to the burgeoning B2C market in China. Costcos 2015 annual report provides an overview of the company and the general strategy and operating principles (Costco 2015). Costco Wholesale Corporation began operations in 1983 in Seattle, Washington. From the beginning they have focused on operating membership warehouses in the United States and Canada, as well as a handful of foreign countries including the United Kingdom, Mexico, Japan, Australia, Spain, Taiwan, and Korea. Worldwide, there are 686 warehouses, the bulk (569) of which are located in the United States and Canada. These warehouses, which average about 14,400 sq. ft., are run by 200,000 employees and service 81 million cardholders. Cardholders pay annual fees that vary by country, although they are around $55 in the United States. Their basic strategy is to offer lower-priced, high- quality, nationally branded, and Costco private-label (Kirkland Signature) products across a range of categories including food, sundries, hardlines, softlines, fresh foods, and ancillary products (e.g., gas stations and pharmacy). Given the low price strategy, the profits come from selling focused inventory (3700 SKUs) with high sales volumes and rapid turnover coupled with operating efficiencies achieved by volume purchasing, efficient distribution, and

reduced handling of merchandise in no-frills, self-service warehouse facilities. They also come from membership fees. In 2015, Costco had total sales of $114B with an annual growth rate of 20% annual. The overwhelming majority (97%) of these sales were in store. Costco was late getting to EC and, as a consequence, they lag behind their competitors. Their anemic EC sales are also a consequence of their expressed strategy. EC sales dont generate memberships, nor do they encourage much foot traffic along with in-store impulse buying. While Costcos international presence is limited, it was hard for Costco to ignore Chinas astounding retail growth, especially from online sales. In order to test the retail market in China, Costco decided in 2014 to enter the market by setting up a shop on Alibabas Tmall Global site without capital investments in Chinese real estate. In recent years, the Alibaba Group has made a concerted effort to encourage cross-border online B2C imports. Toward this end, in 2014 they launched a new cross-border EC website called Tmall Global. Its a platform that enables foreign companies to sell to Chinese consumers without having a physical presence in China. This was particularly attractive to Costco because they were wary of following the same path of the big box stores. Tmall has a number of key features supporting cross-border EC, but two of the more important are Alipay and Tmalls bonded warehouses and logistics partner network (Tran 2015). Alipay is Alibabas payment platform (sort of like PayPal). It is the largest payment system in China, used much more than credit or debit cards which Tmall also supports. The platform automatically handles currency conversion so that Chinese buyers pay in Yuan and retailers are paid in their home currency (once a buyer has received their goods). Basically, once a merchant is hooked up to Alipay, it provides entee to Chinas 300 M online buyers. The other key feature revolves around a set of bonded warehouses located in five major cities (Shanghai, Guangzhou, Hangzhou, Zhengzhou, and Ningbo) where merchants can pre-ship products in large quantities. The warehouses are in duty-free zones dedicated to handling imports and delivery for international merchandise purchased online. They not only enable faster shipping times to customers but also lower fees on customs and duties. Technically, the warehouses are operated by customs, but in reality the actual goods are the responsibility of Alibabas logistics subsidiary, Cainiao, who uses a network of third-party logistics providers (3PLs) to perform the necessary warehouse activities including the sorting, picking, delivery, and customs clearance. Closing Case: Cross-Border EC (Partnering with Tmall Global) 532 In exchange for these types of key services, which arent free, retailers must meet certain criteria. Among other things, they have to (Tran 2015):

Have a retail or trading license.

Prove they own the brands or have rights to distribute them.

Provide their Tmall site in Chinese.

Have products manufactured outside inspected and approved by Tmall. Provide customer service including Chinese language service support.

Support customer returns and provide a return location in China.

Provide shipping direct to the consumer in China.

Many of the required services can be and are often outsourced to third-party providers, who are preapproved and endorsed by Tmall Global.

The Results

Today, Costcos Tmall Global site sells around 200 items from its food, healthcare, and

private-label Kirkland Signature product offerings. They also used their base in Taiwan to help support operations and rely on Tmalls inventory storage and 20-day delivery to limit operating expenses. Unlike some of the other 5400 Tmall Global customers, Costco has enjoyed a modicum of success. While there are no official annual statistics provided by Costco or Tmall, Tmall did report that Costco sold over $6.4 million in the first month of operation and that during the 2014 Singles Day Sale, Costco sold $3.5 million in merchandise. Because of Costcos razor thin margins, whatever revenues are made have to be weighed against the benefits and costs of operating accrued from the site and partnership. On the benefit side, the operation (Mahajan 2015):

Enables them to test the market without having to invest in real estate; this was the mistake that many big box retailers (e.g., Home Depot and Best Buy) made when they entered the Chinese market.

Allows them to experiment with the market to determine those products that will sell, the features that are important to Chinese customers, the prices they can charge, and the general spending patterns of Chinese consumers with respect to their offerings.

Alleviates the need for a local business license to establish an online store. This can be a complex, lengthy, and costly endeavor.

Eliminates many of the typical interchange costs associated with card-based payment systems and reduces overall logistical costs by speeding transit time. In terms of limitations, the operation:

Restricts them from advertising on Tmall Mainland and Taobao which accounts for 80% for Chinas online sales. They have to rely on company name and brand recognition to drive business.

Charges merchants a deposit fee ($25,000), an annual fee (somewhere between $5000 and $10,000), a sales commission fee of 2 to 5% of the product price and logistics fees, and an Alipay fee of 1% of the product price and logistics fees.

Eliminates a key element of their business strategymembership fees. Theres no assurance that Costco will succeed in the Chinese online B2C market. There is tremendous competitive pressure coming from leading Chinese retailers and from other cross-border retailers and manufacturers. If they are successful, eventually they will probably have to go the local route and establish an independent online presence in China in order to reduce their overall costs. Sources: Costco (2015), Erickson and Najberg (2015), Goodale (2014), Mahajan (2015), PayPal (2015), Pymnts.com (2015), and Tran (2015) (all accessed February 2017). Questions

14. What is cross-border research and under this definition is trade between two member countries of the European Union cross-border or not? Explain.

15. Describe the current and estimated size of the cross-border market.

16. What are the key elements of success for an EC company wanting to expand into global markets?

17. What is the basic approach that Costco used in entering the Chinese EC market? 18. Would the approach used by Costco work for a company like Walmart? Explain.

18. Would the approach used by Costco work for a company like Walmart? Explain.