In the past decade, by leveraging 4G and smartphones, several e-Commerce companies such as Alibaba and Amazon have gained significant scale in a relatively short period of time. We believe that the deployment of 5G, along with breakthrough in AI and robotics, will unleash the power of logistics automation and smart manufacturing for the next decade. Companies that take advantage of 5G and automation might be well-positioned to challenge the incumbents. Below we highlight two early disruptors in the new e-Commerce space.
British pioneer in online grocery delivery. It was founded in 2000 and started its first commercial delivery in 2002. Ocado opened its first automated OFC (Ocado Fulfillment Centers) in 2013. The warehouse was armed with over 1000 packing robots, each of which was able to pick up to 50 groceries within five minutes. By 2018, Ocado has become the largest online grocery retail company in British with 1.4 billion revenue and 14% of market share. With the help of its advanced automated warehouse solutions, Ocado is one of very few profitable online grocery companies with EBITDA margin of 5.6%.
Since 2014, the company has gradually transitioned from a pure online grocery delivery company to an asset-light model by providing warehouse solutions (Ocado Smart Platform) to other retail companies. As of 2019, Ocado has signed eight large global retail partners and expects to build more than 30 fulfillment centers by 2023. Grocery delivery is one of the fastest-growing businesses in e-commerce. For example, the US online grocery market will grow by 149% by 2023 but account for only 3.5% of the total US grocery market. We view Ocado as a key player to benefit from this secular trend as consumers are shifting their grocery shopping online.
Founded in 2015 by Colin Huang, PDD is a much younger company compared to Ocado. As a disruptor in the Chinese e-Commerce market, PDD pioneered a new online shopping model that provides “team purchase” and “value-for-money” merchandise for budget-conscious consumers. The company has initially attracted significant popularity in lower-tiered cities and is now rapidly penetrating more affluent first- and second-tiered cities. In 2019, PDD is expected to generate close to 1 trillion RMB of GMV on its platform, seven times larger than volume in 2017. Within less than five years, PDD has now ranked the fifth-largest Internet company in China.
We think there are three contributors to PDD’s early success a) innovative team-purchase model, b) rapid adoption of e-Commerce in low-tiered cities, and c) strong partnership with Tencent. In the long run, we believe that PDD will need to execute well on its “Consumer-to-Manufacturer” (C2M) strategy to continue scaling up. C2M is a model that aggregates consumers' demand and connects this demand directly to manufacturers, which will allow consumers to save money through reduced manufacturing costs and less intermediary distributors. The C2M model is very disruptive to the existing Chinese manufacturing supply chain. To successfully implement the C2M model, PDD will need to provide its automated warehouse and smart logistics to thousands of different manufacturers in China. PDD has currently signed up to 500 manufacturers in its pilot program and received more than 6000 applications. The management has laid out its long-term C2M vision to change the industrial supply chain in its Q3' 2018 earning call:
“The next step in this evolution is the utilization of 5G, IoT and AI. As 5G rolls out at a scale and adoption grow, the industrial supply chain will also be transformed as data flows and information exchange happens on a much faster level. Whether it'd be a tree in orchids or a batch of raw materials in the factory, all of the information about different parts of the supply chain can be readily grasped. At the same time, as the vast amounts of information gets processed that it paves the way for innovative new technologies”
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