Founder Yu Gang explains the firm’s “B2B2C” model
After selling their online retail business Yihaodian to Walmart, Yu Gang and his partner entered the online healthcare space and started a new medical group that brings together an online hospital, a drugstore and patients.
Formerly a business professor at the University of Texas and now teaching at the Cheung Kong Graduate School of Business, Yu founded Yihaodian, China’s first large-scale online supermarket, in 2008 and made it a lesser rival to the e-commerce duo of Alibaba and JD.com within the space of three years.
As both an academic and an entrepreneur, Yu quickly sensed the great potential lying in healthcare. Chinese people’s medical spending is increasing every year, and with the habit of shopping online now having been built up, nearly 3 million people are buying medicine through mobile apps, according to the Beijing consultancy firm Analysys.
In China, patients face two problems: expensive medicine and a lack of medical resources—it is common for many people to go to top hospitals, mostly concentrated in first-tier cities, and wait for hours just for a simple prescription. Yu aims at solving these problems with his new healthcare platform.
The company has a special “B2B2C” model that connects the main participants in healthcare. Online doctors give prescriptions to patients, whose needs are then fulfilled by a B2C online pharmacy, and drug manufacturers are linked with drug retailers.
While many online drug retailers are upset by the fact that online stores are not allowed to sell prescription medicine, Yu’s platform—called Yiyaowang—can offer prescription drugs based on its partnership with offline pharmacies—after receiving their prescription , patients go to collect them from a local drugstore.
Founded in 2013, Yiyaowang has become the largest in the industry, with over 400,000 medicines and nutritional products and a monthly active user count of over 1.34 million. How did Yu manage to do so well? What’s the magic that makes drugstores and upper parts of the supply chain work well together? Find the answers in the interview excerpts below.
Q. Why did you start this company after Yihaodian and what has motivated you?
A. Throughout my entire life I’ve tried to create value and look for ways to change the industrial landscape and people’s lifestyles. When I sold Yihaodian to Walmart in 2015, my partner and I made the decision to move into the online health space. We feel that this space has high potential, especially because you can use the internet as a tool, as a business model and as a way of thinking to impact the health space.
China’s health industry is backwards compared to the rest of the world. In fact, the International Health Organization did a survey on health management and found that China ranks 144 out of 191 countries. The main problems are twofold: one is it’s hard to see doctors, and the other is that it’s expensive to buy medicine.
So we are trying to change that. First of all, we have an online hospital with our own in-house doctors and affiliated doctors, several thousands of them, who can give an online diagnosis and online consultation to patients through video, phone and messaging. If they are not sure of the problem, we transfer them to our partnering hospitals to have tests like X-rays, blood tests or ultrasonic scans. If we are sure of the disease, we will give an online digital prescription, and the prescription can be directly forwarded to our online pharmacy, which dispense the drug to the patient. With that, we solve the “hard to see doctors” issue.
How do we solve [the problem of] expensive drugs? We try to streamline the entire supply chain—in China the supply chain for the drug distribution is very lengthy with many intermediate steps. Each one of them is costly. So we are building a supply chain by ourselves—a platform for wholesale, which directly connects drug brands, drugstores and even patients, in order to cut off all intermediate layers. We also have warehouses in Tianjin, Shanghai, Wuhan and Guangzhou. So we have a network.
Q. How was the network formed?
A. First of all, we tried to get different licenses. Because this is in the health space, it is highly regulated by the government. We have the C-license to do B2C e-commerce, the B-license to do wholesale for all drugstores and hospitals, and the A-license to provide the platform for all the different drug transactions. We started by acquiring all the licenses and making sure the parts of our business all complied.
Secondly, we formed an ecosystem. We have an online hospitals license allowing patients to see the doctor, and we have formed a partnership with doctors online and partnered with offline hospitals so that for any patient where we cannot fully provide a solution, we can transfer them to offline hospitals. Our wholesale platform Yihaoyaocheng, the pharmacy mall, will provide a vast selection [to drugstores] because we can wholesale certain products. We also invite sellers, distributors and drug brands to provide their offering on our platforms. This way we can provide a vast selection through our platform to meet individual drugstores and individual patient’s needs. So in this way we built our ecosystem.
Q. So when you first approach your drugstore partners, do you use the system as a tool to approach them?
A. Yes, it is part of our offer. In China, the drugstores are very fragmented, unlike in the US. In the US, the top 3 chain stores, such as Walgreens and CVS Health, account for more than 70% of all drug distribution. But in China, if you combine the top 30 chain stores, it’s less than 30%. And most of the small chain stores, with only 50 to 100 stores, don’t have a smart system, data analysis or tools to forecast inventory to manage their products and customers. So this is where we provide value. We have a system that we call a SAAS (software as a service) that they can use. The system can forecast inventory and decide what to source and how much to source. We have a JIT (just in time) [function]—anytime the drugstores run out of any products on their shelves, our system can remind them it’s time to place an order again and this is the amount you need to order. So we become their supply chain.
Q. How did you form the relationship with doctors and hospitals? What do they get?
A. We have a few thousand doctors affiliated with our hospital, and for every consultation they do for our patients we pay them a certain commission. They allocate their time slots for our patients. We list them all on the platform with their credentials, so patients can decide which doctor they want to see, and what time slots there are available. They can use their mobile phones to see the doctor right away and get a prescription. I think that is the future of the online hospital.
Q. Your online pharmacy currently has over 24 million monthly active users. How did you manage to get so many users and become the leader of the industry in such a short time?
A. Through the experience of building Yihaodian, we know that the most critical factor for building a successful website is the customer experience. So first of all we made sure that all our products are authentic. Especially in the health space, authenticity is most critical. Our partners are big brands such as Pfizer, Eli Lilly, Novartis and also Tongrentang and Baiyunshan—we form alliances to make sure that we source directly and our products are authentic.
Secondly, we make sure that we deliver all our products on time and we provide a vast selection. We have the highest selection among all our competitors; about 200,000 products through our own offering and the market place.
Certainly we work a lot on the system side to make sure the whole shopping experience is good with a user-friendly interface, very simple procedures. All these different factors are combined to provide a comprehensive customer experience.
Q. For online sales, when we look at the products on your website, most of them are disease prevention drugs and basic physical care products—there is even milk powder and other nutrition products. What’s the proportion of that category? Is it a major part of your online sales?
A. Yes, OTCs (over-the-counter drugs) and health and nutrition products are the major part of our offering. Basically, our model is that for anything related to health, we can provide it through our own inventory or through our partners and market place sellers to cover as much as possible. We now provide the largest selection among these products—over 20,000 products, because regular offline stores only offer 2,000 to 4,000.
Q. You mentioned you could also sell prescription drugs. How do you do that?
A. Prescription drugs are done through offline pharmacies. We partner with 20,000 offline pharmacies, so anytime consumers place an order, the partnering drugstores fulfill the order, because prescription drugs are not allowed to be sold online. But we can forward the order to the offline drugstores. So this is the model we use.
Q. In terms of the revenue distribution, how much of that is 2B? And how much of that is 2C?
A. Right now, because our 2C business has been there for quite some time and is probably the largest B2C online drugstore, the 2C side has higher revenue. But our 2B side is growing faster because of our new strategies and new offers. So I think that probably by the end of this year, the revenue side of the 2B and 2C will be similar. And in the next year, the 2B side will be several times the size of the 2C side offering.
Q. What makes your current business different from Yihaodian?
A. It is very different. Yihaodian was B2C e-commerce. Basically the main focus was on FMCG (fast-moving consumer goods) products—we called it an online super market. Although you have the market place, it is mainly B2C. But now we have an online hospital, B2C plus B2B—basically we built a digital mobile health platform
Q. What if a big player wants to buy your company, just like Walmart bought Yihaodian? What’s your thought on that?
A. I haven’t given any thought to that. We are very focused. We focus on the current business. We make sure that we create value. Once we create value for our customers, employees and investors, then we create value for ourselves. Always focus on value creation.
Q. Having said that you are planning to build a whole ecosystem and given that this is a really new and emerging sector, where do you position yourself in this industry?
A. We are very unique. We provide the so-called B2B2C platform. We enable the drugstores to serve the individual customers with a unique business model. And our core competence is the supply chain that will be built, a very high-efficient supply chain. Our inventory turnover is 30 days instead of three months or six months as it is currently in the offline drugstores, so we feel this positions us in a unique way in this space. We position ourselves as a digital mobile company in the health space to provide a platform service toward drugstores, hospitals and individual customers.