Faustian bargain: Regret awaits Metro/Alibaba deal

This global Faustian bargain assumes that this deal will last forever. Didn't Borders/Amazon teach us anything?

alibaba

Last week, one of the world's largest retailers cut a deal with Alibaba, China's global e-commerce giant. German retail chain Metro Group will turn over its online operation in China to Alibaba. Unfortunately, this is becoming a familiar tale in e-tail, it just about never ends well.

This kind of alliance only makes sense when the retailer doesn't mind surrendering the territory involved forever. Alas, retailers generally use these kind of deals in the opposite way — for extremely important segments, assuming they can move in directly down the road, after their partner has done the dirty work for a while. Gee, what's wrong with this picture?

Metro is an extremely influential chain, and it's the planet's seventh-largest merchant, with about 2,200 stores in 30 countries. It ka-chinged the equivalent of $87 billion last year and has a quarter-of-a-million people on its payroll. In short, this is a powerhouse retailer with substantial global reach and, perhaps more to the point, one of the most revered IT operations anywhere in retail.

In my 15 years of covering retail IT almost daily, barely a month goes by that some IT innovation from Metro doesn't cross my desk. Those innovations are not just good, but creative, risk-taking and relatively well financed. So Metro certainly has the chops and the resources to make a direct move into the challenging China e-commerce space.

But wait, you say. Making a successful e-retail play in China is not just about technology and investment, but also involves understanding the culture and being integrated into local and national politics. That's absolutely true, which makes this move even more frustrating. Metro has been a force within physical stores in China since 1996. It today runs 82 wholesale markets in 57 Chinese cities, generating payroll to more than 12,000 people inside China. Metro itself points out that it was among the very first foreign players to obtain form permission from the Chinese central  Government to open stories in all major Chinese cities. In other words, Metro knows the Chinese market well and has a substantial workforce ingrained.

If this is starting to sound familiar, you may be recalling the deal that another powerhouse retailer cut back in 2001. That would be Borders, which closed its doors permanently 10 years after its alliance with Amazon. In the Borders case, simply substitute one extremely strategic retail arena for another, swapping China for e-commerce. Remember that 2001 was a time when, just like China today, retail executives and boards knew it was going to be extremely important, but it was also seen as difficult to do well. Hey, gang, why not strike an alliance with a company that is dominating that space (Alibaba for China, Amazon for e-commerce) and we'll have instant clout?

Retailers know bargains and they like bargains, even Faustian bargains, apparently. Did Borders really think that it would effortlessly be able to later take back e-commerce from Amazon? That all of those customer names and purchase histories would be returned and deleted? Didn't it occur to Borders that, after such a deal played out, Amazon could demand anything?

As mentioned earlier, if this was a minor but attractive segment — a small niche that no one thinks will grow into anything much more — this deal might make sense. It simply requires the willingness to forever forgo servicing that market directly.

Please let me be clear. If this deal was limited to having a presence on Alibaba's massive e-commerce site, it wouldn't be that problematic. The problem, as Borders employees who watched the company go belly-up can confirm, comes when data is exchanged. The only safe way to explore this kind of a deal is to think like a lawyer. Envision yourself in a conference X years from now, as the deal has soured and this partner is now an angry, highly motivated direct competitor. Even worse, you need to fight them on their terrain, where they would constantly have the home-court advantage.

Did Borders execs really think about how it would fight Amazon in an online-only war, especially when Amazon owned years' worth of Borders' most sensitive data? Has Metro envisioned itself, in a similar situation a few years down the road, trying to battle Alibaba inside China? Metro, if you’re going to do that battle — and I assure you, you will — do it now before you start the fatal and irreversible data exchange.

How serious a data exchange is being envisioned here? Consider this news release quote from Alibaba Group CEO Daniel Zhang: “This partnership will encompass collaboration in areas including cross-border e-commerce, logistics, rural e-commerce, online supermarket and online-offline initiatives. Insights provided by Alibaba Group’s Big Data will help Metro Group effectively capture the demand for quality imported products among Chinese consumers. Additionally, Alibaba Group and Metro Group will work together to help more European consumer brands establish fast-track solutions for expanding into the Chinese market. In addition to the cross-border e-shop, both companies also agree to explore omni-channel and comprehensive collaboration opportunities in areas including global sourcing of quality products in different categories, supply chain optimization and market insights leveraging on big data."

Faustian bargain indeed. Like any decently crafted satanic special, the initial incentives have to be very compelling, and Alibaba's offerings certainly look good — until you view from a post-agreement perspective. Here's another nice perk: "The international shipping from Europe to China is performed in advance to ensure sufficient stock is stored in Shanghai Free-Trade-Zone warehouses. Chinese customers are able to benefit from cross-border delivery directly from the Shanghai Free Trade Zone and fast customs clearance fulfilled by Alibaba Group’s specialized service team."

There's no doubt why Metro would have found such offerings attractive. What does it think is likely to happen even in the short term? Who has more to gain/lose from this deal happening and this deal ending? If these two players divorce, how much will it hurt Alibaba? If this deal was truly reciprocal — which it isn't — and Alibaba was expected to gain as many European sales as Metro was expected to gain in China, it might work. And that would be because both sides have roughly the same amount to gain/lose if the deal were to go away.

As for that deal going away, don't even briefly think that a legal contract would prevent that. First, such contracts are not enforceable unless one of the parties is willing to sue. In an intra-country agreement, especially in the U.S., that question hangs on whether the value of the contract sufficiently exceeds lawyer costs, court fees and the huge amount of executive time in depositions and the resultant distractions, as well as the probability of success. That alone can be dicey.

But when agreements are between different countries, the political and legal realities in each country play a potentially larger role. Metro must understand that fighting such a battle, against a homegrown favorite, in Chinese courts, would be remarkably inhospitable. And although fighting it in a German court would be a bit easier and more evenhanded (for Metro), there's a big question over whether a German court could enforce its ruling on a powerful Chinese conglomerate.

Therefore, the contract has little practical ability to enforce terms. That means that either side could try and unilaterally change conditions later. Given that this is all about Chinese commerce, it would be Alibaba that would hold the cards and be in the position to — albeit gradually — change the terms. And because this would all happen post-data-sharing, what can Metro do about it?

I wish Metro all the best, but this is one retail deal that has "you'll regret this" written all over it.

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