RETAIL: Alibaba, Tencent Take Wars to Convenience Stores

Bottom line: Alibaba’s move into unmanned coffee shops could stand a strong chance of success due to its relative simplicity, while WeChat’s move into Hong Kong convenience stores should also be relatively well received.

Alibaba samples coffee shops

Convenience stores are shaping up as the next battlefield in the wars for supremacy between Internet titans Alibaba (NYSE: BABA) and Tencent (HKEx: 700), at least based on the latest headlines. One of those has Alibaba preparing to roll out an unmanned coffee store concept in its hometown of Hangzhou, while the other has Tencent’s WeChat rolling into Hong Kong in a big way in a new tie-up with 7-Eleven convenience stores.

Starbucks (Nasdaq: SBUX) probably doesn’t need to be too worried just yet about the new threat from Alibaba in coffee shops, though many of the dozens of smaller coffee chains that have set up shop in China these last few years might take note. Likewise, Hong Kong’s incumbent electronic payments service, Octopus, probably doesn’t need to worry just yet either.

But these two developments do seem to show that smaller, convenience-style stores could well become the wave of the future, replacing the big-box stores and more traditional retail stores of today. That’s because these smaller stores are cheaper to operate and probably easier to automate than bigger stores, and provide numerous places for people to grab a quick drink or bite to eat, or to pick up their latest e-commerce purchase.

All that said, let’s zoom in on the latest headlines starting with Alibaba’s move into unmanned coffee shops. The reports say Alibaba has set up a team that is working on the concept and plans to roll out its first store by the end of the year. (Chinese article) There’s no additional detail, but we should note this move comes just a month after Alibaba demonstrated a larger unmanned convenience store concept. (English article)

The coffee concept is a little easier to imagine, since many coffee shops today are already quite automated and most of the work done by people could easily done by machines. What’s more, with electronic payments in China so advanced it would be quite easy to pay for such purchases. We recently had one such machine installed in my office in Beijing, and the coffee is quite good and ground fresh, and also includes freshly steamed milk. Plus, it’s just about half the price of a basic cup of Starbucks.

WeChat Dances With 7-Eleven

Next in the convenience stores headlines is WeChat, whose electronic payment services is being rolled out to 7-Eleven’s vast network of 900 stores in Hong Kong. (Chinese article) It looks like the product will initially be aimed at mainland Chinese traveling to Hong Kong, but that Tencent plans to target local Hong Kongers by the end of the year as well.

The latter move would mark a relatively major step, since it would require Tencent to provide services purely based in the Hong Kong dollar for local users. Right now Tencent and Alibaba-affiliated Ant Financial’s Alipay both offer payment services in a wide range of foreign markets. But most of those are denominated in China’s currency, the yuan, and aimed at Chinese citizens traveling abroad.

By comparison, services in local currency would require some relatively major infrastructure adjustments, most notably tie-ups between local banks and Alibaba or Tencent, which would allow local consumers to link the services with their bank accounts. Then of course there’s the marketing factor, as both companies would need to launch campaigns to make people aware of these services.

The 7-Eleven win for Tencent certainly looks like a relatively large deal, though I’m unaware if 7-Elevens in Hong Kong may already accept Alipay as well. Regardless, the stores are quite popular in Hong Kong and Asia in general, and Chinese traveling to Hong Kong are likely to quickly embrace the concept. I expect local Hong Kongers will ultimately embrace it too, which could spell trouble for incumbent Octopus.

As to the unmanned convenience store, we’ve seen a few others experiment with the concept so far as well, and I expect the traditional names like 7-Eleven are also toying with the idea. Alibaba clearly has the edge in terms of resources and in its background as an e-commerce company. At the end of the day I do think these coffee shops look like an interesting idea due to their relative simplicity, and wouldn’t be surprised to see the concept go national within the next couple of years.

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