March 28, 2013, 3:40 PM

The challenger

(Page 2 of 3)

Mikitani—who Rakuten executives say moves from idea to action quickly, never slows down and knows every detail of each business unit—acknowledges the competitive obstacles at play, although he brushes aside suggestions he's ready to compete directly with the likes of Amazon. Rakuten, he says, will succeed by following its own strategy. "I'm sure Amazon will be continuously growing, but I think at this stage we should focus on what we are good at and keep growing [in the United States] at a speed of 50% to 100% a year for the next three to five years," he says. "And then, when we get to a certain stage, then I think we will be ready to reconsider how we compete against the big ones."

However, Rakuten is already competing with Amazon—which is much bigger, with $61.1 billion in 2012 worldwide sales versus $4.66 billion for Rakuten. The two companies go head to head in Japan, and now in the United States—since Rakuten's Buy.com acquisition—and in several major markets in Europe where Rakuten has bought web marketplaces in recent years.

In Japan, Rakuten comes out the winner, at least in terms of market share. E-commerce numbers culled from regulatory filings and Japan's Ministry of Economy, Trade and Industry have Rakuten commanding 28.8% of the Japanese domestic e-commerce market to Amazon's 12.4%.

Amazon began selling in Japan in 2000 and recently reported 2012 sales of $7.8 billion in Japan, up 18.7% from the year before. That made Japan the second-largest foreign market for Amazon, behind Germany and ahead of the United Kingdom.

Even so, Rakuten is by far the largest e-commerce company in Japan, and the second-largest in Asia, trailing China's Alibaba Group, according to Internet Retailer's 2013 Asia 500. Gross merchandise sales in Japan transacted on Rakuten sites totaled $15.05 billion in 2012, the vast majority of which the company says took place on the Rakuten Ichiba marketplace. Rakuten says 80% of Japanese consumers have a user ID for a Rakuten Inc. service, which beyond the Rakuten Ichiba online marketplace include online travel, banking, credit card and securities services, not to mention a baseball team franchise in Japan's equivalent to Major League Baseball. Gross merchandise sales transacted on Rakuten's overseas marketplaces are much smaller—totaling the equivalent of $474.4 million in 2012.

Rakuten makes its money through the flat fees it charges for each transaction completed on one of its marketplace sites, plus a cut of each sale. In the United States, the fee is 99 cents per transaction plus 8% to 15% of the sale price; the percentage varies by product category. In some areas, it also charges a monthly store fee. In the United States, the minimum fee is $33 per month.

Simply put: Rakuten's no e-commerce amateur, but the majority of its experience has been limited to Japan.

"Rakuten's challenge will be how to leverage the company's strengths in Japan and elsewhere to help compete against Amazon and eBay," Sebastian says.

Having established a strong base in Japan Mikitani says Rakuten embarked on its second phase in 2008, aiming to expand its e-commerce footprint beyond its home turf. That began with the launch of a Taiwanese marketplace. Then, starting in 2010, Rakuten went on a rapid-fire acquisition spree of established marketplaces in more mature e-commerce markets like France, where it acquired PriceMinister for about $250 million, and the establishment of Rakuten marketplaces in less-developed e-commerce markets where it wanted a foothold, like Malaysia.

Last fall it acquired French e-commerce logistics business Alpha Direct Services, giving Rakuten an on-the-ground presence in e-commerce fulfillment in Europe, and in Mikitani's view, warehouse technology that's faster and more scalable than what Amazon got when it bought Kiva Systems Inc. last year.

Rakuten will be putting ADS's systems into the two fulfillment centers it currently operates for merchant sellers in Japan (and the three centers it is building), where Mikitani expects to have same-day delivery available for marketplace sellers "very soon." He anticipates installing the system in the five U.S. warehouses where it is testing Rakuten Super Logistics fulfillment services, promising two-day delivery—the same time frame offered with Amazon's Prime shipping program. "We are going to build a very state-of-the-art fulfillment and delivery platform. [This is to] try to empower the individual merchants, who need the tools to compete against the giants."

Phase three is where Rakuten is right now, Mikitani says, establishing the Rakuten marketplace model and crafting unique services for its marketplace sellers. "Phase three is to really bring our proprietary business model, to transplant that business model to the companies we acquired or the companies we built," Mikitani says. Eventually, Rakuten plans to allow merchants to cross-list products across its various marketplaces to enable international sales; it already helps U.S. merchants sell in Japan on Rakuten Ichiba.

Now the challenge is to build up these properties, generating recognition, traffic and a larger seller base. Numerous brand studies place Amazon and eBay among the world's 100 most-recognized and valuable brands, but Rakuten doesn't appear on any of them. "Rakuten has very limited brand awareness in Western markets, which is a concern since even recognizable companies such as Wal-Mart and Sears have struggled to build online marketplaces," Sebastian says.

In the United States, which Mikitani calls Rakuten's biggest overseas opportunity, he says investments to build the brand will be well coordinated and "super scientific" but offered no details. Merchants who previously sold on Buy.com—there are a little more than 5,500 sellers—are unsure of what the rebranding will mean for their sales on the platform.

Geeks.com's Zinsmeister says Rakuten did an adequate job communicating to merchants its plans to phase out the Buy.com name in favor of Rakuten.com Shopping, posting news on the portal sellers use to check on their sales and upload new product listings, but there's been less detail about how Rakuten will market it to consumers and increase traffic. "For buyers and the public at large I don't know if they've done enough," he says. "Speaking from an average consumer's point of view, I have no idea what Rakuten is. They'll have to spend a good amount of capital to get their name out there."

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