10-12156 Fudan-CASE2014 00702 PDF

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FDC-19002-2X-P-E Rev. August 1, 2018

Li Lingfang (Ivy)

Yiwugou: How does a Traditional Brick-and-mortar Market Make its Transition?1 Suppose you are a buyer walking into the small commodity market of Yiwu, Zhejiang, China, facing the endless "ocean" of shops, you may feel confused. Zhejiang China Commodity City (hereinafter "Yiwu market") now has a business area of more than 550 square meters and 75000 shops. For a person staying at each shop for 3 minutes, walking 8 hours every day, it takes two years to finish visiting all the shops in Yiwu market. Is there any more efficient way to purchase goods? Yiwugou.com is the official website of Yiwu small commodity market and "B2B" business platform. The shops on website are one-to-one correspondence with the 75 thousand physical stores in small commodity market, so that buyers can get products information without going to the physical market.

Zhejiang China Commodities City "Yiwugou.com" is affiliated with the Zhejiang China Commodities City Group CO., Ltd. (hereinafter referred to as the "Yiwu City Group"), developed and operated by the subsidiary company Zhejiang Yiwugou E-commerce CO., Ltd. The positioning of Yiwugou is to serve the brick-and-mortar market, integrate online and offline resources, and upgrade the brick-and-mortar market to “click-and-mortar” market, which means both online and offline. Yiwu City Group is a state-owned corporation group established in December 1993. In 2015, Yiwu City Group has a total revenue of 5.7 billion CNY with its asset totaling 29.6 billion CNY. Yiwu City Group was also renowned as “the largest small commodity wholesale market” in the world by UN, World Bank and Morgan Stanley in 2005.

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This case was prepared by Li Lingfang, associate professor of Management School, Fudan University, based on research and public information. Cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustration of effective or ineffective management.

Copyright  Management School, Fudan University. No part of this publication may be reproduced, copied, stored, transmitted or sold in any form or by any means without the permission of Management School, Fudan University. To request permission to reproduce materials, please call +86-21-2501 1399, or email to [email protected]. For more case information, please login in on http://case.fdsm.fudan.edu.cn/.

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China’s e-commerce and Internet economy For now, internet-enabled businesses are the trend of China’s economic development. According a report of CNNIC, the quantity of netizens in China was 71 million in 2016, which was about nine times more than in 2003. The prevalence rate of internet increased to 51.4% in 2016 from 4.6% in 2003. According to McKinsey & Company's latest research, the percentage of internet economy in China of GDP had been more than in America. Electric Business takes a big part in internet economic, and it expands sharply in the internet trend in China. Only in the first half of the year 2016, according to the data of electronic commerce research center2, the scale of electric business trade in China, which increases 37.6%, is up to 10.5 trillion CNY. China's e-commerce market size ranked first in the world, with the e-commerce transactions expecting to excess RMB 20 trillion, accounting for the proportion of total retail sales of social consumer goods more than 10%. E-commerce brings fundamental change in production, sales, inventory, advertising and management to the traditional business. B2B online wholesale is booming rapidly. "B2B" of the Alibaba website in September 4, 2013 "stocking section" single-day trading volume exceeded 4.19 billion, creating a B2B industry global transaction records. On May 28, the amount of women's clothing online wholesale was more than RMB 290 million, ten times of the average sales in Hangzhou Sijiqing clothing wholesale market. In 2014, only the third quarter in the B2B business to achieve a total revenue of 2.407 billion CNY, an increase of 38%, growth of 11%, accounting for about 14.3% of the Group's total revenue3. In these B2B online trading buyers, Taobao shopkeeper accounted for more than a half, every day nearly 9 million customers in the B2B website for procurement. In contrast, offline trades are suffering an unprecedented impact. According to the survey, the country has more than 2,000 entities wholesale market is the "empty market", which was completed after the opening of about 1,300, operating no effect of about 900, only in Guangdong Province, there are about 500 entities market stalls rental rate of less than 50%, of which about 100 market stalls rental rate of even less than 20%. The Booth prices of Sijiqing, Dahongmen and other large wholesale markets dropped by 20%.

Yiwugou India and South-east Asia are rising stars in small commodity market, which brings shocks and challenges to Yiwu market. The competitive market for homogenous goods leads to a price battle. It is urgent for Yiwu market to find out a new way. Yiwugou puts the world's largest entity market online. The shops commodities are one-to-one correspondence with the real market, building an integrity transaction security system with linkage of online and offline, to help build trust for each transaction. Yiwugou aims at building a “click-and-mortar” market, which is different from other online B2B platforms like Alibaba. all the sellers on Yiwugou have physical stores at Yiwu market, which makes Yiwugou more trustworthy than other online markets. Jianjun Wang, CEO of Yiwugou website, once served as CEO of a Chinese video website www.56.com and senior vice president of Sohu, joined Yiwugou in May 2012. In October 21, 2012,   2 3

http://www.100ec.cn http://liuningbo.baijia.baidu.com/article/35267

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"Yiwugou" was formally launched online. In October 21, 2013, the international website of Yiwugou, yiwubuy.com was opened. Yiwubuy.com is the English version of yiwugo.com, designed for international buyers. Yiwugou is growing rapidly. In 2017, the revenue of Yiwugou could reach more than 50 million CNY. According to Yiwugou statistics, in 2013, the total online transactions of Yiwugou amounted to 60 million CNY. In 2014, the total amount of online transactions reached 1.5 billion CNY. The amount of matchmaking transactions through Yiwugou online inquiry reached 15 billion CNY. In 2015, the total amount of online transactions exceeded 4 billion CNY, and the number of offline matchmaking transactions reached more than 30 billion CNY. In 2016, the total amount of online transactions exceeded 6 billion CNY, and the number of offline matchmaking transactions reached more than 40 billion CNY. Now Yiwugou has more than 2.77 million items on the websites, as well as more than 3.5 million visits and 300 thousand users per day on average.4

Strengths Now Yiwugou has the following strengths: 1.

The supply of goods. As the world largest small commodity market, Yiwu market has competitive advantage at the supply of goods.

2.

Bridging online and offline. Yiwugou is trying to build more connections with the physical shops in Yiwu market.

3.

Reputation system. Yiwugou tries to build an online reputation system for each shops to prevent cheating behaviors in transactions.

4.

Logistics service. Logistics is one of the most important part in e-commerce. Traditional consign market cannot solve the “last mile” problem. The last mile of delivery still requires efficiency improving. Now the Joint project supports delivery service to solve this problem. Joint project can help wholesalers in Yiwu market build connections with retailers in more than 30 local markets in China.

5.

Personalized services. Traditional way for revenue is the fixed shop rent. Yiwugou provides personalized service such as advertising, data and logistics so as to make money in different ways.

Profits By the end of 2014 Yiwugou’s profits are mainly from shop rankings and advertising. For example, the online search of goods, the sort of goods, as well as the website of the shop ads. The current size is not

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large enough, because most transactions are still offline, which means Yiwugou only serves as a yellow page. Running a shop now on Yiwugou is much cheaper than on Alibaba, since Yiwugou is mainly served the Yiwu brick-and-mortar market (sellers already pays the rent for the physical shops). However, Yiwugou might adopt Alibaba’s model in the future, to make profits by more specialized shop rankings and auctions for key words searching. If the trading volume can exceed 10 million CNY, advertising revenue will be a big cake even when it only accounts for 1.5%-2% of the trading volume.

Promotion and services In the early stages of development, promotion within the Yiwu market is a very critical issue. Although the more than online 70,000 shops are one-to-one correspondence with the offline shops, many sellers are too reluctant to upgrade the shop webpages, because they do not pay much attention to the online business. Yiwugou selected some active sellers to provide training, and then let those active sellers to motivate other sellers to join, which forms a kind of “word-of-mouth” reputation and scale effect. On the other hand, Yiwugou can help encourage online transactions by developing customers’ habits of online trades. Buyers in online trades tend to be more loyal than those in offline trades, because online buyers less likely to compare and negotiate with different sellers than offline buyers. Sellers can see the number and ranking of daily PV and buyers’ IP, which help sellers target clients more easily. Many sellers claim that Yiwugou brings new opportunities. Since sellers have online shops now, the location and size of physical shops are not that important, while the personalized and friendly webpage seems to be a key point for online trades. Some sellers say that they put the personalized “on sale” information on the homepage and keep updating, so that buyers won’t get bored when searching for goods.

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the “Joint project”

Yiwugou now is building connections with local markets in different cities, to promote the Joint project. Joint project is trying to help local markets in different cities to build online platform, based on Yiwugou’s experience on the e-commerce platform operation. A platform covers the items of goods, a map of the physical market, the forum, complaint center, online payment, app, Wechat shops and so on. Yiwugou will also provide those local markets goods from Yiwu, to deal with the problems of supply chain for the local markets. Meanwhile, sellers in Yiwu markets can also purchase featured products from those cities, and Yiwugou will offer delivery and warehousing support. Yiwugou regularly organize sellers in Yiwu market to negotiate with different local markets. Sellers can apply for this activity and Yiwugou then screen the applicants by their reputation credits and their demand for the local markets. For domestic services, Yiwugou has established cooperation with 44 loacal markets in China, with the market area of 18 million m2. For overseas services, Yiwugou’s Joint overseas project aims to make Yiwubuy a worldwide brick-and-mortar small commodity wholesale platform,5 to bring benefits for overseas buyers, based on Yiwugou’s advantage on information and low transaction costs. Sellers from abroad can also come to Yiwu to exhibit their products. After this overseas project launched in 2014, Yiwugou has built cooperation with more than 60 local markets, 13 of which have opened their sub-website online on Yiwugou6. The expansion of Joint project depends on the features of products. Now the price for one exhibition counter is 2500 CNY, which is relatively low.

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As we introduced on page 2, yiwubuy.com is the international version of yiwugou.com. http://biz.zjol.com.cn/system/2015/01/27/020483369.shtml

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“Yiwugou Exhibition Center” is an important part of Joint project. At this center, Yiwugou shows the best items and suppliers in Yiwu market to the local market in different cities, bridging the gap between the traders in local markets and Yiwu market. In 2014 the exhibition centers at Building 1 and Building 5 in Yiwu market have been open to the public. Exhibition centers in Hungary, as well as China’s provinces Hunan, Guangdong, Shanxi, Ningxia and Hebei have also been open, followed by those in Poland, Spain, Czeque, Portugal and Italy in 2015. A dozen of exhibition centers are built in 2015. “Jack Ma now comes up with a new idea of ‘new retailing’. I can’t agree more with that idea. Sellers in Yiwu market should not only keep doing their wholesaling business, but also try the online retailing, because they can offer a very competitive price of goods. I predict that online retailing will be a very important growth driver of Yiwu’s trades.”Wang said.7 On May 19, 2016, Yiwugou announced the launch solution plan version 2.0 of Joint project, transforming the B2R to B2B2R. In this model, the first B refers to a online warehouse cloud, mainly for the cooperation of the market and the integration of high-quality supply of goods; the second B refers to the co-market sub-warehouse cloud, mainly for the cooperation market merchant docking main warehouse supply; The R refers to the retailers in the surrounding area where warehouse cloud can reach. Xingliang Shou, Yiwugou’s deputy general manager, thinks that this solution plan version 2.0 of Joint project aims to highlight the role of the "Center Plan" market center node, according to the characteristics of local partners to promote, so as to improve the communication mechanism and service mechanism and make further cooperation. Meanwhile, Yiwugou’s experience of success can be replicated to partners of this project, to strengthen and expand the commodity markets nationwide8. 

"Yiwu brand"

In April 2015, Yiwugou launched the “Yiwu brand” strategy, selecting and promoting high-quality products in Yiwu market to the local markets in the Joint project. Served with Yiwugou’s promotion, sellers in this list can expand their reputation. As Wang says, “Yi brand” integrates more than 100 thousand sellers in Yiwu both online and offline, to provide them a package of services in branding, sales, and finance. “Yiwu Brand” is based on Joint project and China’s government’s new concept of “Internet +”, to explore a new way of exporting business and connections with local markets. Now 300-500 suppliers are shortlisted in “Yiwu Brand”. Sellers in "Yiwu brand" all have their own factory, so that they can ensure 100% quality of goods and services before and after transactions. Sellers in "Yiwu brand" at the same time can enjoy Yiwugou’s resources such as advertising and online promotion to enhance brand popularity. “Yiwu Brand” also integrates financial services such as credit firms, small loans, consumer finance, and innovation investment fund, to build a trustworthy click-and-mortar platform. It is a resource-sharing and advantageous-complementary eco-system, which combines Yiwugou’s e-commerce and Yiwu market’s financial services9. On October 21, 2015, followed by Joint project, yiwubuy.com transnational B2R platform is launched, which is another important way to expand transactions overseas. The target of this platform is “going out”. As Wang says, now given Joint project the yiwubuy.com, Yiwugou’s click-and-mortar model has been adopted by the market in China as well as other countries, to promote the development of global trades. Based on the click-and-mortar model, Yiwogou plans to reach a trading volume of 100 billion in   7

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http://www.jhnews.com.cn/2017/0319/747675.shtml http://hzdaily.hangzhou.com.cn/mrsb/html/2016-05/23/content_2269601.htm http://www.jhnews.com.cn/2015/0412/470749.shtml

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next three years, and help Yiwu market to make the trading volume up to 1 trillion.

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“Delivery express”

Yiwugou launched “delivery express” service in October, 2016. Yiwugou integrates the delivery services of some delivery companies, in order to offer sellers faster service with more favorable price. Now “Delivery express” service has more than a thousand sales per day on average, and more than three thousand sales in per day in peak seasons. Such leading companies in China’s delivery industry as Shentong, Yunda, EMS and CNYtong are all members of “delivery express”, by the date November 30 2016.

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“Checkout counter”

Yiwugou launched “checkout counter” in January 2017, an offline QR code transaction settlement service. With more than one thousand users, this service now has a daily transaction volume more than ￥1,000,000.

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“Best purchase”

In March 2017, Yiwugou established its beta version of retailing advertising platform “Best purchase”. Sellers can promote products to this platform. Commission will be charged per transaction.

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“City venue”

The occupancy rate of Yiwu market is 96%, according to the recent statistics. This performance is better than most of the brick and mortar markets in China. However, since Yiwu market has more than 70,000 shops in total, 96% occupancy rate means there are still around 3000 shops for lease. How to make best use of those 3000 empty shops？Mr. Wang says, the “City venue” project can not only make best use of those empty shops, but also attract more traders to come. The idea of “City venue” is to select some cities, and provide each city a venue to exhibit its local products. Those cities are from both home and abroad, with which Yiwugou can build some connections. Yiwugou will promote the products in the city venue. What is the benefit of this “city venue” project for the selected cities, the producers as well as Yiwu market? Wang says, this project can make best use of not only empty shops, but also Yiwu market’s clustering function and Yiwugou’s spillover effect as an online platform. We are able to gather sellers so that they can lower their transaction costs. What’s more, this project can also attract more potential and loyal clients for Yiwugou.



Membership

Since August 2016, Yiwugou offers different levels of membership for individualized services, including senior, gold and diamond membership, with membership fees of ￥1,000, ￥5,000 and ￥10,000 respectively. This membership is so popular that it has already attracted more than 10,000 sellers to join. Yiwugou’s goal is to double this number of sellers by the end of 2017. In the following years, Yiwugou will try to make all sellers in Yiwu market covered in this membership.

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Reputation system and “Fraud Detection platform” Reputation system and “Fraud Detection platform” are two highlights of Yiwugou. Since all the sellers on Yiwugou have physical stores, Yiwugou can make some constraints on sellers’ physical shops to ensure their online transaction behaviours, so that the reputation mechanism can be implementable. The link to “Fraud Detection platform” makes sellers search for reputation record e...