6/02/14

Dominant, but hungry

What e-retailers need to know about Alibaba Group, China’s e-commerce king, and the projects it is developing as it expands its empire.

Katie Evans , Managing Editor, International Research

Keep a rookie mentality. That might sound like an odd mantra for Alibaba Group Holding Ltd., the 15-year-old e-commerce company with more than 20,000 employees around the globe whose forthcoming initial public offering is valued at well over $100 billion. That valuation is not far off Amazon.com Inc.'s $160 billion market value and well above eBay Inc.'s nearly $70 billion value. But that attitude has helped it grasp command of the majority of the online retail sales in China, soon to be the world's largest e-commerce market, and it will likely continue to help as Alibaba expands. In fact, rookie—or Cainiao in Chinese—is the name of one of Alibaba's newest projects.

Alibaba last year helped create the Cainiao Network Technology Co. Ltd., which brings together a variety of companies to overhaul the scattered and inefficient fulfillment network across China. (Delivery woes are a major issue in China where there are no national carriers similar to UPS or FedEx.) Alibaba and the other major shareholders in the company—including several Chinese carriers and e-commerce companies—say they chose the name to remind themselves to stay on their toes and keep innovating to keep online sales growing in China. Alibaba is also shopping Cainiao services to U.S. e-retailers wishing to sell to Chinese consumers.

Chinese online sales are set to grow from $294 billion in 2013 to $672 billion in 2018, a compound annual growth rate of 18%, according to Forrester Research Inc., and about twice the compound annual growth rate expected for U.S. e-retail over the same period.

But to meet those growth expectations, e-retailers need to iron out the kinks in the Chinese logistics infrastructure, says Jack Ma, chairman of Alibaba Group.

Alibaba's recent focus on logistics epitomizes the hunger it has to keep working on ways to drive e-commerce in China and beyond. It's that hunger that has fueled the company's success.

Launched in 1999 by Ma, Alibaba has evolved from an 18-person company into a Chinese e-commerce powerhouse. It operates two online marketplaces. Taobao.com, launched in 2003, is an open bazaar where millions of entrepreneurs, individuals and factories offer 760 million items for sale, usually at cheap prices. Chinese analysts call this part of the market "consumer-to-consumer," even though many of the sellers are small businesses attracted by Taobao's free listings. (Alibaba makes money from sellers advertising their wares.) To accommodate larger brands, including foreign companies, that wanted more control of their presentation to Chinese online shoppers, Alibaba in 2008 launched Tmall, which charges listing fees and takes a commission from each sale.

These two sites, which Alibaba calls the Tao companies, host more than 7 million sellers and attract 100 million shoppers daily. Taobao accounts for more than 90% of China's so-called consumer-to-consumer online shopping market and Tmall.com, in the third quarter of 2013, accounted for 51.1% of business-to-consumer online retail sales, according to Julia Q. Zhu, a former Alibaba employee and founder of Observer Solutions, a research and advisory firm that helps Western businesses develop and execute their e-commerce strategies in China.

But Taobao and Tmall are only one piece of Alibaba's business. There's also the PayPal-like Alipay payments service, which boasts 900 million accounts; shopping search engine eTao; and the Amazon Web Services-like Alibaba Cloud Computing, which provides companies with Internet-based computing services including data mining, data processing and data storage.

Alibaba's success so far isn't stopping it from venturing into new services. Besides the project to create a nationwide delivery network, Alibaba has begun offering savings accounts via Alipay that pay out far more interest than a typical Chinese bank, and the company has made sizable investments in social networks. The e-commerce giant has built its business spotting e-commerce opportunities. And the giant isn't resting.

To understand the potential impact of Alibaba's new projects, it helps to understand the company's market positioning. Often called the Amazon of China, most consumers visit Taobao or Tmall at some point during their online shopping trip, says Kelland Willis, a Forrester associate analyst.

"The vast majority—above 90%—of shoppers touch on one of the marketplaces as a part of their shopping journey," Willis says. Taobao.com ranks as one of the world's top 10 most-visited web sites, according to web traffic measurement firm Alexa Internet Inc. And Tmall.com, which hosts more than 70,000 brands, including U.S. companies like Gap Inc. and Apple Inc. that sell through the site, ranks within the top 25 most-visited sites.

One of the reasons behind Taobao's and Tmall's success is that Chinese consumers—many new to shopping online—feel safer shopping on a well-known and trusted marketplace over a stand-alone e-commerce site, experts say.

"Alibaba has such a strong hold on the market because it has created an e-commerce ecosystem that assuages consumers' trust concerns," Willis says.

Tmall in particular seeks to build confidence by setting strict rules for sellers, such as requiring them to allow consumers to return goods for free for seven days. Alibaba's Alipay holds a shopper's money in escrow until she is satisfied with the purchase, so that she can be sure she will get her money back easily if she is not satisfied. And many Chinese pay using Alipay. Willis says in metropolitan areas in China 75% of shoppers used Alipay—not just online but also offline to pay utility bills and for other purposes—in the past three months. That is 1.5 times more than those who used a credit card.

Chinese consumers are also intensely focused on value, Willis says, and Tmall and Taobao help shoppers feel confident that they are getting the best deals by showing prices on similar items across thousands of merchants and sellers in one spot.

Alibaba goes to great lengths to make it easy for consumers to shop its marketplaces. Template-based listings on Taobao require sellers to fill out mandatory fields leading to more detailed product information. A click-to-chat feature on both marketplaces also allows customers to chat with sellers to get more information on the product, the shipping costs and speed, and even to negotiate the item's price.

While Taobao and Tmall are the established marketplace leaders, they do face increasing competition. Realizing that Chinese consumers are most comfortable shopping online via a marketplace, some big e-retailers are inviting other merchants to sell on their e-commerce sites, creating their own shopping portals.

Most notable is online retailer JD.com, which launched its marketplace in 2010. By the end of 2013, third-party sellers offered approximately 23.5 million SKUs through the retailer's site, the company says. 67% of the value of merchandise sold on JD.com is sold by the company itself and the rest by outside merchants for the first three quarters of 2013. And net GMV, or the value of goods sold through its marketplace, reached 71.7 billion yuan ($11.83 billion) in the first nine months of 2013.

Seeking to offer a wider selection of products, and better compete with Alibaba's dominant shopping sites, JD.com's IPO last month raised $1.78 billion.

And JD.com is also exploring ways to get products to shoppers more efficiently. It's invested heavily in its fulfillment network in recent years, hoping to gain an edge over Alibaba. JD.com said in a U.S. Securities and Exchange Commission filing that it operates 82 warehouses with a total area of over 1.3 million square meters in 34 cities, as well as 1,453 local delivery stations in 460 cities across China. The company's 40,000 employees include 18,005 delivery personnel, 8,283 warehouse staff and 4,842 customer service agents, as of Dec. 31, 2013. JD.com says it provides same-day delivery in 31 cities and next-day delivery in another 206 cities across China.

Another retailer, Suning Commerce Group Co., which began as a Wal-Mart-like store-based retailer, also recently expanded its online platform to sell via a marketplace. Suning runs its own logistics operation that lets it offer competitive shipping prices and times, Forrester analyst Willis says. For example, it offers 12-hour delivery in many markets. Amazon's China site, which, like Amazon.com offers goods from Amazon and outside sellers, meanwhile, seeks to set itself apart by telling shoppers in many cases the time frame they will receive their packages down to the hour.

Not to be outdone, Alibaba has its eyes toward future growth and, like many of its competitors, is focusing on fulfillment.

Alibaba announced two years ago plans to invest more than $1.5 billion to build a nationwide network of warehouses in a bid to "revolutionize China's fragmented logistics and distribution sector," as part of a $15 billion delivery network project. Last year, it helped launch the Cainiao Network Technology or "Rookie Network," as part of that plan. Alibaba owns a 43% stake in the company. Alibaba says it aims to improve all aspects of fulfillment from information technology to physical delivery to warehouse management. Alibaba is also beginning to offer logistics services to help U.S. retailers reach Chinese consumers via a deal with U.S.-based ShopRunner.

In another fulfillment and logistics play, Alibaba in December 2013 announced plans to invest $364 million in Chinese appliance maker Haier Group in a deal that includes building a logistics network for delivering appliances and furniture throughout China. As part of the deal, Alibaba will acquire 2% of Haier's Hong Kong-listed subsidiary, Haier Electronics, and a 34% stake in Haier's Goodaymart logistic network. Goodaymart operates 90 fulfillment centers with more than 2 million square meters in warehouse space. It provides some services not typically provided by logistics companies, such as installing air conditioners. Haier's service and distribution networks cover more than 2,800 cities and villages in China and the company operates more than 17,000 service stations.

Beyond fulfillment, Alibaba is also exploiting its Alipay payment system's massive popularity. In June 2013, Alibaba launched Yu'e Bao, a money market account that pays up to 7% in interest, according to Li of Alipay, compared with the standard 0.35% annual interest rates offered by conventional bank and checking accounts. Yu'e Bao, which means "Leftover Treasure," has accumulated nearly 50 million accounts, Li says.

Alibaba, like U.S. e-commerce companies, is also seeking ways to use mobile commerce and social media marketing to drive more sales on its marketplaces. Alibaba in April 2013 purchased an 18% stake in Sina Weibo worth $586 million, with rights to increase its stake to 30%. Weibo is China's most popular social network, and Alibaba is tying Weibo more tightly with Taobao so Chinese consumers can shop more easily on their mobile phones.

Weibo is eager to find a way to monetize its 500 million strong user base who post 100 million short messages per day, with 75% of activity taking place on mobile devices, Alibaba says. In August 2013, the two companies tested letting three merchants that sell on Alibaba's Taobao marketplace sell directly through posts on Weibo. The retailer's posts showed the price, the merchant's logo, its customer rating on Taobao, and a button for sharing with other consumers.

The alliance with Alibaba has led to concern among Weibo users that they may see too many offers that don't interest them, and Weibo will have to keep that from happening, says Cheng Qu, CEO of Netconcepts China, an online marketing consulting firm. "To maintain healthy customer satisfaction, Sina Weibo has to control strictly how merchants send posts to users on Sina Weibo," he says. Sina Weibo has promised it will limit the number of posts from merchants with low consumer ratings.

With ventures into social media, mobile commerce, banking and logistics it's tough to predict what Alibaba Group will look like even just a few years from now. But it certainly plans to keep evolving and stay relevant. The three visions listed in its Corporate Overview make that abundantly clear: 1. To become the first platform of choice for sharing data. 2. To be an enterprise that has the happiest people. 3. To last at least 102 years.

It's clear that Alibaba isn't going anywhere. At least not until 2101.

Katie@verticalwebmedia.com

@KatieIR

Topics:

Alibaba, Alipay, Chinese e-commerce, Chinese online marketplaces, Chinese online retailing, JD.com, June 2014 Magazine, Suning, Taobao, Tmall

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