Alibaba: Ready to Conquer the Far West?
Alibaba has been featuring quite frequently in business news of late as the company piques investors’ interest with the issuing of its prospects for the planned IPO on the New York Stock Exchange. Notably with the opening of 11Mail.com, the Chinese e-commerce giant made clear that its presence in the US market will not only be limited to Wall Street or to Silicon Valley with investments in tech start-ups and that, with this move, Alibaba will attempt to compete against its fiercest global rivals, Amazon and eBay, in their domestic territory.
Global E-Commerce Competitive Environment
At present, and despite being mainly a regional player, Alibaba is the world’s second largest e-commerce company, with total B2C value sales of US$44.3 billion in 2013, according to Euromonitor International. However, when considering other indicators, in 2013 Alibaba was already the biggest online retailer in the world. For example, in terms of Gross Merchandise Volume, the Chinese company is bigger than Amazon and eBay combined, and also appears ahead of its two main competitions in terms of profits. So how do Alibaba’s operations compare with those of its main competitors?
How Alibaba Compares Against its Two Main Global Competitors
Alibaba vs Other E-Commerce Giants
Alibaba can count on its leading place in the enormous Chinese market with around 230 million active users, not far from the entire US population, and around seven million sellers, figures that explain the disproportionately greater number of transactions compared to its competitors.
Unlike Amazon, Alibaba does not sell directly. Its platforms Taobao and Tmall are pure online marketplaces, the former with millions of merchants selling directly to consumers, and the latter a virtual shopping mall, in which big brands open their virtual stores. Alibaba generates revenues mainly through optimised searches and advertisements that help vendors to stand out from the enormous crowd of other sellers on Taobao and by renting the “virtual” selling space on Tmall, a platform so valuable that even Inditex, despite already having a Zara-branded Chinese transactional website, rented a space there. The different focus of the business explains why Alibaba’s revenues are, at present, lower than those of Amazon, considering that the US company makes money not just by renting its marketplace but also as a direct seller. However, this means that Amazon has higher operational costs, and, as such, this can explain why, profit-wise, Alibaba posts better figures. Both Alibaba and eBay manage a dedicated payment system, Alipay and PayPal, respectively, and, in both cases, charges fees for the transactions.
Despite its dimensions, because of its regional nature, Alibaba hasn’t so far been a significant threat to global players Amazon and eBay. However, the global e-commerce competitive environment could soon change, as Alibaba appears to be willing to expand beyond its traditional geographies. Alibaba’s filing for its IPO has been surrounded by news about the Chinese e-commerce giant and speculation about its strategy. For example, the purchasing of a stake in Guangzhou Evergrande football club was explained by the intention of investing in entertainment, while the acquisition of the leading mobile browser company UCWeb was seen as a way to gain an extra edge in the expanding m-commerce market.
Sales of Top Global Pure E-Commerce Retailers
Source: Euromonitor International
Alibaba Enters the US
One of the most significant pieces of Alibaba-related news is perhaps the launch of 11Main.com, its first US operation. The website is a virtual “boutiques mall” featuring carefully selected retailers and products. 11Main.com is not a US replica of Taobao, and its proposition should be different from eBay and Amazon, as it provides a more niche offering. Despite this, the move can be seen as a first tangible step into the US market, and, as such, surely of concern to the two US e-commerce giants. The opening of 11Main.com was driven by Alibaba’s need to grow its presence in the US before the IPO on Wall Street. It is too early to judge how Alibaba’s strategy for the US market will develop and to assess what the implications could be for Amazon and eBay. Alibaba might decide to limit its presence in the US market to 11Main.com or might consider introducing a Taobao or Tmall US website, which would effectively constitute a threat to Amazon and eBay’s dominance.
What are the Challenges for Alibaba in the US?
Whatever its strategy, Alibaba will need to consider that its size is a projection of the dimension of the Chinese market and the company’s success is not exportable in a straightforward manner to the US, where competition is intense. While Alibaba can match eBay’s offering, Amazon provides much more to US consumers. For example, the company sells directly its own electronic devices such as Amazon Kindle tablets and the recently launched Amazon Fire smartphone. Offering this range of products and services in the US market, Amazon is effectively able to lock consumers in its “retailing world”, encouraging them to shop and to repeat purchases exclusively through its channels. For example, the new Fire smartphone features Firefly, a visual search technology that allows users to scan physical products and search and buy them instantaneously on Amazon. Therefore, to compete effectively in the US, Alibaba will have to offer more than a simple marketplace.