Value Chain Generation

Insider's perspective on applying business model innovation to value chain design

Taobao villages; how the internet is blurring rural-urban boundaries

Taobao Marketplace is China’s premier online consumer-to-consumer market place. It is owned by the Alibaba Group, a company that grew in fame for its online wholesale platform. Recently, Taobao was covered by The Financial Times in an article describing how the marketplace spurs entrepreneurship in rural areas.

Village epicenters called Taobao villages, where 10% or more of the families are involved in e-commerce operations with joint revenue of over 1.5 million USD, are mushrooming. Entrepreneurs are investing in order processing operations, and hiring people to make sure that products are packaged properly and on time for shipment. There are even reports of youth returning to the village from the city after their studies to help grow the business.

Taobao advertisements are seen in Qinghe village, Hebei province. Photographer: Tianyi Li/Alibaba Group Holding Ltd. via Bloomberg

 

What’s under the hood?
One element that drives success for the platform is a demand for authentic and healthy products, directly from the countryside with Chinese rural consumers. A backlash following the stream of food scandals in the country’s food industry. The platform can now link producers and consumers directly together, and they are able to forge deals based on trust.

But this is not the most compelling element of the platform. What the FT article also mentions is that poor and less-developed rural areas are spurring sales growth the most. What I thus suspect to be the real driver underlying these new rural business models is revealed by what this rural e-shop owner says in this short video. As the most import problem that Taobao solves, he states:

“With a real shop, the worst thing is that customers pay on credit. The advantage of Taobao is that you can’t pay on credit”

Instantly you can see the value that the platform has been able to create. Before, a rural shopkeeper’s market was tightly geographically constrained to where the influence of the next village took over. No wonder that many of its customers could get away with putting their purchases on the tab. With the internet enabled marketplace, this geographic constraint is lifted. Shopkeepers are now able to filter out rural dwellers who have cash in hand to directly pay for their purchases, amongst a population of a couple of 100 million people.

Through creating new and expansive market connections, the internet has been able to accommodate a new revenue stream, and to accelerate cash flow within a rural economy. It is a classic mechanism that creates economic development, just like cash accelerated trade in the barter economy. And it all flows naturally from what people on both sides of the trade aspire to achieve.

Take-aways:

  • the internet is blurring urban-rural boundaries; an e-commerce site can contribute to rural development!
  • expansive social networks generate new opportunities for value creation
  • value creation can only be achieved if these networks allow people to fulfill their own purposes.

Cracks in the walls of mainstream consumer food retail: Naked Wines meets Kagio market.

Some time ago, I wrote about the concept of the value chain, and that I couldn’t match it with what I observed in informal emerging markets like in rural Kagio, Kenya. What I observed of the market there was not a neat box in the formal structure of a value chain, but a flexible, multipurpose node in the rural economy’s complex web of human interaction and exchange of goods, services, and knowledge; a value web.

Recently, I revisited this notion when I was reading an article on a company called Naked Wines. This company is by no means serving an emerging economy audience, but it is trailblazing the wine market and working it in the same way as I saw at the farmer’s market in Kenya.

Intoxicating innovation
Founded by an ex-banker and wine aficionado, Naked Wines provides a compelling value proposition to a considerable group of people who are looking for exclusive wines of origin. Naked Wines provides an online market place, where independent wine producers can sell their wines, and connect with the current 200.000 subscribers, as well as with occasional customers, through an online forum and rating system. The company shifts around 10.000 bottles a day.

The value proposition lies in solving a big chunk of search costs that wine lovers usually place into finding their exclusive wine, and offers it to them at a very compelling price point (though still more than what the average consumer pays for). No longer do you need to organise a wine tour to Lombardia each time you want to purchase batches of exclusive wines.

The crux
Many wine-grape growers would dream of being able to sell their own wines. Yet, most are deterred from doing so because of the financial risk. The whole system of the mainstream wine market is based on selling your grapes as fast as you can at moment of harvest to the bidder who will buy as much as possible, or preferably all, of your product. Going at it alone could come with the repercussion of big wine houses boycotting your grapes for good. No banker minding his pinstripes would fund such a move.

Naked Wines has solved this financial risk. By asking an upfront monthly membership subscription to its customers of about 20 euro, the company has a monthly reserve of 6 million euro to pre-finance a winegrower’s full harvest in return for exclusive purchase. Through this pre-finance, growers commit themselves to the platform, and in return customers can buy wines that are not available elsewhere at a discount rate.

For many growers the pre-finance is what convinced them to take the plunge, and is thus the x-factor that makes this business model work. Have a look at this awesome business model in the slides below, compiled with the business model canvas.

 

The bigger picture
Back to the case of Kenya, I see comparison. The integrated functions of the value web I saw there, are utilised in the same manner by Naked Wines through combining finance and a marketing proposition to growers, into a unique value proposition that can be carried by a specific market niche (“these melons are destined for Mombasa”). Also, in both circumstances the ubiquity of ICT has enabled this distributed, networked type of market, or value web to come into existence.

The big insight here is that in order to create a market, we are not dependent on figuring out what the average person wants on average anymore. Our connecting technologies support endless market re-segmentation possibilities at a global level, and serving them effectively and at low cost. Mainstream targeting is turning into a vulnerable strategy, and is likely be substituted by an endless variety of globally dispersed, yet easily connectable niches. 

There are those that say that the advancement of the modern supermarket, indicates advancement in developing nations. But with the new layout of the competitive landscape, I think that the legacy of the supermarket system in developed economies inhibits newer, and higher forms of value creation. In countries like Kenya, I predict you will not likely see the same pattern of development in consumer retail as in the current developed nations. Instead I expect a surge in food retail innovation that will leapfrog western markets (just like with mobile payments).

There is tremendous market power by coalescing value chain functions. By turning these functions from separate islands of myopic economic optimisation into purposeful networks that are hosted by a common business model, a new market power is unleashed. Cases like Naked Wines, show what can be achieved.

I think that businesses that are able to achieve these type of connections are serious contenders for overturning the status quo in the agriculture and food system. This is a huge opportunity to stab at mainstream retail culture, which has become complacent in providing value to farmers and consumers alike. Risk capital investing in the future of agriculture and food should be on the look-out for this business model pattern.

Take-aways:

  • Difference is not so much made by the product or product technology, but more so by the business model
  • Integrating value chain functions into a network setup, hosted by a common business model, creates a disruptive innovation juggernaut in our food and agriculture economy
  • Yes, you can create tons of value by connecting consumers and farmers. But only if it’s purposeful
  • I think I need to change the title of my blog. Suggestions anyone?