Why Emerging Markets Are the Next E-commerce Frontier

online-shopping

six-billion-shoppersAfter eight years as a vice president at Chinese e-commerce giant Alibaba, Porter Erisman is sharing his insights into the next frontier for online shopping — emerging markets. While e-commerce in the West is a maturing market, emerging economies are poised to become the next mega markets as internet adoption rises amid a growing middle class. In his book, Six Billion Shoppers: The Companies Winning the Global E-Commerce Boom, he looks at opportunities in up-and-coming markets for online merchants. Erisman recently joined the Knowledge@Wharton show, which airs on SiriusXM channel 111, to discuss his book.

An edited transcript of the conversation follows.

Knowledge@Wharton: Did your experience with Alibaba inspire you to want to investigate where e-commerce is growing?

Porter Erisman: I suppose I kind of liked being on the frontier. When I left Alibaba in 2008, China’s e-commerce was well on its way and I started to look at other countries where the next boom would happen. I went to Southeast Asia, India, Latin America, Africa, consulted to several companies and got even more interested. I decided to write this book about what’s going on, where e-commerces come from and where it’s going in these big emerging markets.

Knowledge@Wharton: How is it developing differently in places such as Nigeria, which is one of the countries you went to, compared with the United States?

Erisman: From looking at how it has developed around the world, I’ve come to believe that there are two types of e-commerce models. There’s the developed country e-commerce model that really took root in the U.S. and Western Europe, and then there’s the developing country model, which took a long time to take off. It finally took off in China and is spreading to other countries. … E-commerce took off very quickly in the U.S. because it was built on very good infrastructure and a very trusting environment where buyers and sellers trusted each other and felt that the courts would protect them if they were cheated.

In emerging markets like Nigeria and China, it took much longer to build the infrastructure. But as China has shown, once the infrastructure is built, it becomes the new ‘operating system’ for commerce. That’s why you’re seeing much bigger participation and sales volumes for e-commerce in China now than even in the U.S.

Knowledge@Wharton: How will e-commerce development in emerging markets affect the U.S. market?

“The smartphone has put a shopping mall in the pockets of every consumer in the U.S. and also in the emerging markets.”

Erisman: The most important thing is that the smartphone has put a shopping mall in the pockets of every consumer in the U.S. and also in the emerging markets. Of course, so much of the focus has been on selling online here. But essentially, this boom in emerging markets has meant that now there are people in rural India, rural China who have access to online shopping and American businesses. In my opinion, we need to begin to not just on focus on e-commerce here, but selling products all around the world because now these products are just a few clicks away from a rural villager in Nigeria or China.

Knowledge@Wharton: We’ve been hearing about the demise of brick-and-mortar stores for a few years now. Are we heading that way?

Erisman: I think so. The interesting thing is that in the U.S., we’re losing about 10,000 retail jobs a month because of the rise of e-commerce and demise of traditional retail. The reason it’s really devastating here is because retail had a couple hundred years to build out and mature. When the internet came along, it proved to be pretty disruptive. Although a lot of people are celebrating the rise of e-commerce, especially consumers and companies like Amazon, the small retailers have been really hurt and hit pretty hard. My thesis is that while these jobs in the U.S. are being destroyed at the traditional retailers, it’s creating new opportunities as e-commerce spreads to other countries where entrepreneurs can absorb that by building their shops to serve not just the U.S. customers, but customers around the world.

Knowledge@Wharton: We’re at a point where almost every company has to have an online presence, and most of them have to have a mobile presence to make that connection with the consumer. If you don’t, you’re behind.

“Trust is such a big issue.”

Erisman: Right. It used to be you would build the website. Now, people in emerging markets, and more and more here, are going to their mobile phones first. The nice thing is that it means you can have an impulse purchase. You see something. You see an advertisement. You research it on your cellphone while you’re on the subway, you can buy it, and it will be delivered in a day or two. What it means for companies that want to do branding is that there’s less [ad] space. There’s less real estate on a mobile phone, so people need to find other ways to tell the story about their brands that will lead to that online purchase.

Knowledge@Wharton: Within these emerging markets, are there differences between how things are developing in Nigeria compared with Southeast Asia?

Erisman: While there are some similarities, there are differences. In Nigeria, one of the biggest issues is trust. When I worked at Alibaba, there was a short time when we considered blocking all members from Nigeria because that seemed to be a hotbed of scams and phishing activities, where they were trying to come at Alibaba’s customers and get their bank account details and scam them. But then we realized it was such an important country, the most populous in Africa, that we couldn’t just simply block the whole country. But trust is such a big issue that the key to e-commerce is you need to be able to know that when you buy a product that you can trust the seller. You can trust the store that they’re selling from.

That’s proven to be a bigger issue in Nigeria than other countries. But it’s still an issue in places like India or Southeast Asia. Each country has its own characteristics. In India, the delivery addresses are so poor. Sometimes people don’t even have an address. They simply write on a package, “Take it to the house to the left of the mango tree, next to the temple.” That’s literally the type of thing that shows up on addresses in India. Other countries, like Indonesia, where you have people scattered across thousands of islands, it’s more the logistics of getting a package from one island to the next. The good thing about e-commerce is that it can bring products to people who might not have had a store on their local island that provided that item.

“They simply write on a package, ‘Take it to the house to the left of the mango tree, next to the temple.’”

I mentioned that e-commerce in the U.S. has been pretty destructive to traditional retail. In emerging markets, studies done by people smarter than me have said that e-commerce has more of a creative impact because it creates jobs and opportunities that weren’t there before simply because the infrastructure is so poor. That means there are plenty of workers who come in from the countryside into the big cities of China, hundreds of thousands of workers who come looking for jobs. E-commerce absorbs that because those workers can deliver packages as their entry level job. To deliver a package in the U.S., you’ve got to pay someone $15 to $20 an hour sometimes. In China or India, it might simply be a dollar or two to have someone take a package an hour away. On a grass-roots level, it’s creating these small economic opportunities that grow over time.

Knowledge@Wharton: The potential for growth in Nigeria or some other emerging market is a significant component to the economy of that country in the next 20, 30, 40 years.

Erisman: Exactly. One of my main motivations about this book is that I’ve seen the economic benefits that e-commerce has brought on a grass-roots level in China — employing millions of people, empowering tens of thousands of entrepreneurs. People talk about microloans playing a big role in helping emerging markets. E-commerce is doing even more to create grass-roots economic opportunities in these markets.

Knowledge@Wharton: Some of the numbers that Alibaba is putting up now, on their special shopping days and in general, are just unbelievable. As you look back, what were some of the key ingredients that took the company from Jack Ma’s apartment to what it is today?

Erisman: Last year on Alibaba’s single-day promotion, which is their equivalent of Black Friday/Cyber Monday, they did over $17.8 billion worth of retail transactions. That’s more than the U.S. Black Friday/Cyber Monday online sales combined. What I’m seeing is that this is expanding, so that will be happening in India, in Latin America. But when we got started, it didn’t look that easy. I remember back in 2000, people said e-commerce will never work in China. They said the infrastructure was poor, the government may not even allow the internet. People didn’t trust each other. People had no way to pay.

Jack Ma had a broad vision. If you have Steve Jobs who made a revolution with Apple and the iPhone, Jack Ma looked at the commercial operating system of China and said, “Someone has to come and build the infrastructure instead of wait for it.” Bit by bit, he and Alibaba set up the infrastructure and created payment systems that fit the local market. It took a long time to take off. But once it did, you can see the effects. E-commerce has a much bigger role in China than it does here. In China, about 15% of retail is done online. In the U.S., some people say it’s about 10%. But all the projections are that within five to 10 years, as much as a third of all retail will be done in China.

Knowledge@Wharton: Why do you think there hasn’t been the same level of growth in the United States as there has been in China?

Erisman: Well, I think we’re all creatures of habit. In the U.S., people had ways of buying things and shopping that were good enough. I’m in New York right now and you can walk down the street and find what you’re looking for. Retail is pretty well-penetrated in the U.S. The same with payments. Credit cards are already here. When e-commerce got started in China, credit cards weren’t very prevalent. What it means is that people are just slower to transition. Even though this e-commerce march in the U.S. seems to be going pretty quickly, people are just slower to transition because the existing way of buying things is not that bad. It’s good enough.

“In most of these countries, people didn’t want collectibles or second-hand goods. They wanted new products.”

But what you see in China, on my last trip there I went to buy a cup of coffee at a little boutique shop. They had a sign that said, “Sorry, we don’t accept credit cards. Cash only. Mobile payments.” Then I went to meet a friend for lunch, and he opened his wallet and said he had no cash. Everything he did was mobile. Because the previous way of paying was so slow and inefficient, people were checking 100 renminbi bills just to see if they were legitimate or counterfeit. Once the new system is in place, people leapfrog forward to it because it’s such an improvement over what existed before.

Knowledge@Wharton: You talk about the fact that there’s a failure to adapt American business models to what’s happening in emerging markets. Why?

Erisman: I went around the world and traveled to these places, talked to a lot of the early pioneers of e-commerce, and the theme is really the same everywhere you go. When the e-commerce boom happened in U.S., people in other countries got inspired. The two companies that they were inspired by were eBay and Amazon. What happened time and time again is people decided to try to replicate the exact business model of eBay or Amazon to their local markets. But there was a problem with this. First of all, the Amazon model is built upon a very efficient system. Amazon depends on scale. It depends on keeping costs down and really high efficiency. But if you’re in India and the address says, “Take it to the house next to the mango tree,” it’s going to be a lot more difficult, a lot less efficient.

Companies found it just wasn’t profitable to have an asset-heavy business model that Amazon depended on. It was the same with eBay. In most of these countries, people didn’t want collectibles or second-hand goods. They wanted new products. The first stage in all of these countries was simply trying to replicate what happened in the U.S. But almost without fail, those companies died out. The only ones that survived were the ones that adapted it to local conditions.

I think that’s why Alibaba was able to beat eBay in China. Alibaba’s view was, “Let’s understand the local market, almost forget about what happened in the U.S., and build something for the local market.” What that meant was that when you look at these markets, there are millions of entrepreneurs, little mom-and-pop shop owners, who want to sell new products. Typically, what happens in emerging markets is those are the folks that build e-commerce. It’s the small, mom-and-pop shop retailers that decide to embrace e-commerce. In the U.S., it was more the bigger companies.

Knowledge@Wharton: When you’re talking about global sales via e-commerce, cross-border sales are an important factor moving forward.

Erisman: Yeah, this is a major trend that I think people aren’t really recognizing right now. I’ll give you an example. When I went to Nigeria, I had a driver who took me to my hotel. He found out I had worked at Alibaba. He pointed to his jeans and said, “Oh, I bought my jeans on Alibaba and had them sent from China to Nigeria.” I said, “Don’t you have jeans here in Nigeria? Why would you do that?” He said the cost is so much lower to get it sent straight from China that he was willing to wait two weeks.

That really surprised me because, even when I was at Alibaba, I always thought it was going to be a long time before people would buy on a retail level to have things sent around the world. But in a study by Accenture and Alibaba, they’re expecting $1 trillion worth of cross-border retail done online by 2020. Even in China last year, there was $85 billion worth of purchases in China from overseas sellers. The point is that e-commerce is making retail a seamlessly global market. People in the U.S. aren’t aware because they’re not as often buying something from overseas and having it sent to the U.S. But it’s going to really have a big impact on all aspects of the distribution channels.

“In the next 15, 20 years, with the smartphone getting in everyone’s pocket, there are going to be six billion shoppers.”

Knowledge@Wharton: Where are the potential pitfalls in this growth?

Erisman: For the U.S., there are very few pitfalls. The tough time for the U.S. was when the manufacturing jobs picked up and left and went to China and other countries in Asia. E-commerce facilitated that. Now is the time to reap the benefit where that trend has created a middle class in China, in India, in the Philippines. So, it’s not quite as risky for the U.S. because the pain was when the manufacturing jobs went overseas. Now is the time for the dividends.

For a lot of these emerging markets, it’s going to be tough for a lot of retailers. For example, in Mexico, people are no longer shopping from the Mexican local retailer. They’re just buying from Amazon and having the products sent across the border. The biggest pitfall would be if President Donald Trump lives up to some of his campaign rhetoric and implements some tariffs or creates a trade war. It would be the worst possible timing because we’re now at the point where we in the U.S. are able to sell to consumers around the world through e-commerce. He’d be putting tariffs in at just the time we’re standing to benefit from this trend.

Knowledge@Wharton: You also say one of the negatives could be the environment. Could you explain what you mean?

Erisman: In China, they had this big PR gala to celebrate this big single-day of shopping, a sort of orgy of consumption. At the same time they’re holding this event in Beijing, it was one of these high-pollution days where everyone had to wear masks and were warned not to go outside. I think the risk here is that simply replicating this culture of consumption that the U.S. has, and if it were to spread through e-commerce to all these other markets, you’ll see the same issues popping up where the environmental concerns that come out of this consumption culture are issues that these countries need to deal with. This growth shouldn’t go unchecked, in my mind, the way it has been done in China.

Knowledge@Wharton: The title of the book is Six Billion Shoppers. Is there going to come a point where that number will be an underestimation?

Erisman: Six billion is the world population that’s in emerging markets. I think that’s where we’re headed. The reason I chose that title is because I think it hopefully will open people’s minds to the opportunity that you’re no longer limited to the customers in your country or in your region. In the next 15, 20 years, with the smartphone getting in everyone’s pocket, there are going to be six billion shoppers. And for the next 20 years after that, as long as the population grows, everyone will have access to products from around the world just from their smartphone.

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