It was in the year 1999 that 18 people under the leadership of Jack Ma, a teacher from Hangzhou, China, were to begin a journey known as Alibaba Group. Its headquarter lies in Hangzhou itself. Alibaba group have established, as of December 2013, 73 offices in China and 16 outside its borders. At the end of the 2014, it was reported to employ over 22,000 people from across the world. It was initially conceived as an online wholesale channel for enabling small traders to get in touch and conduct business with global entities. The group operates several businesses such as Juhusuan, Aliexpress, Tmall.com, Alimama, Taobao marketplace,1688.com, Alipay and Alibaba cloud computing. At its heart, the core objective of Alibaba is to provide a platform via internet to small enterprises so as to benefit from modern innovation and communication technology in growing into profit centres, both domestically as well as internationally. The name “Alibaba” was chosen for its simplicity and catchiness and easy recognisability world over. Alibaba and its other branches function in an environment that is inclusive, where the online operant can fully utilize its medium to exponentially grow its business and keep its clients/customers satisfied. Right from day one, Alibaba has grown and diversified its range of services in online retail/wholesale, cloud computing and as gateways for online payment.
Alibaba caters to both ends of the spectrum- the seller as well as the buyer. Both parties can browse, evaluate and choose to enter into transactions with one another. The beauty of Alibaba is that is free of cost and accessible to all. The buyers could be anyone ranging from simply someone who wishes to buy for his or her own consumption, to a buyer who wishes to source articles for his own business with intention to resell. Sellers such as manufacturers, retailers, brands and wholesalers use this space to stamp their and their product/service’s presence to a wide array of million customers and several disparate businesses. The several wings of Alibaba can be classifies as follows- AliExpress as the wholesale platform to enable small buyers to make purchase at wholesale rates. Tmall deals with customers and businesses. ETao is the comparatively smaller search tool. Alipay, much like Paypal is a third party online payment system provider.
Aliyun handles data oriented computers and cloud computing. In 2013, Alibaba’s gross merchandize value reached to a staggering $248 Billion in value. Alibaba is not the proprietor of the merchandize sold over its websites and makes money through advertising and other related fees. Alibaba today stands as the website network with the highest gross merchandize value and strives to become the second largest e-commerce player usurping the likes of eBay. The main objective of this case study is delve deeper into the reasons for success and follow their journey and struggles to become the best. To shed more light on their expansion strategy, exploratory data will be availed to find facts and data to highlight the chances of them becoming the second largest e-commerce website in the world. Descriptive data will be used to emphasize on projections of the above mentioned becoming true.
Analysis of Alibaba’s business model:-
Unlike eBay, Alibaba does not carry specific merchandise. Rather it carries a very different mix of items and brands. Few of their offering includes everything from agriculture to transportation items. The list is not only limited agriculture, apparel, chemicals, environment, energy, printing and publishing, automotive, luggage, rubber and plastic, service equipment, textile and leather products. Alibaba has got a completely different business model as compared and practiced by other ecommerce giants such as Amazon. Usually companies like Amazon take the ownership of the inventory, stock it in their distribution centres and then order fulfilment is done, but this is not followed by Alibaba. They have an e-commerce platform and a “community” to connect buyers and sellers. In this way the transactions on Alibaba’s online site sums up to $248 billion last year, which is far more than that of Amazon’s i.e. about two and half times great than Amazon’s. And Alibaba is hugely profitable whereas Amazon barely so. The companies have difference in approach towards Omni channel logistics because of the different business models that they are following.
Traditional retailers have been spending billions of dollars in developing their Omni channel capabilities to compete with companies like Amazon, but such companies are stealing market share from them for years, thus competing against the Omni channel initiatives taken by the retailers. Alibaba, entered into an agreement to take equity stake in one of China’s leading department store operators, Intime, to develop a new “offline-to-online” (O2O) multi-channel retailing model. It included exploring options of giving one of their e commerce sites to Intime’s store inventory. This gave the ability to increase the offering of products from international brands and use Intime’s physical stores as hubs for fulfilment for those online orders and to make the deliveries quicker (Alibaba’s average delivery time is 3 days). Alibaba got the ability to increase its total offering of products from international brands and used Intime’s stores as fulfilment hubs, which helped them to deliver the goods to customers more quickly .Similar pattern can be adopted by partnering with those chain stores which has lots of outlets. Alibaba can provide the option of picking up the merchandise from neighbouring store to its customers. This pattern was followed by one of the convenience store chain last year in Taiwan, which used its 2,900 store outlets to deliver products to customer by tying up with Alibaba.
One of the China’s leading provider of navigation and location based services was also made to enter into agreement with Alibaba, with help of which the merchants on ecommerce platform could advertise their offline locations all the users of the app. The reason which makes customers to purchase from other e-retailers is because most of them don’t monetize their sales in the same way as Amazon does. They derive revenue from online marketing services primarily where the marketing fees is paid by the sellers to acquire user traffic, as well as from commissions based on completed sales transactions settled through a sister company. Using Omni channel retailer is some of the newer flow paths that are coming in use in the e-commerce. Alibaba seeks to expand internationally, like Amazon. Alibaba also took a 10 percent stake in Singapore Post recently. One particularly visible part of this logistics infrastructure in Singapore is the POP Station (Pick Own Parcel Station). A majority of the customer segment was out for work during day according to the demographic study and were unable to receive parcels, so this model helped them to collect their parcel conveniently from specially constructed lockers which could be opened only after receiving a special code used to unlock it.
One would have thought of Omni-channel flow paths as something that applied to brick and mortar retailers. It could not have occurred to anyone until reading Alibaba’s IPO prospectus that e-commerce players could play in Omni-channel too. The core business model for Amazon relies on three pillars. First one being, very low margins. Jeff Bezos in almost every interview refers how they have become used to such margins But here’s where Alibaba differs from Amazon, as instead of making sales and profit through margins, it relies on advertising and providing premium services. Up till now, this revenue model has proved successful for Amazon, by providing the greatest possible deals to its customers. Due to this, it may face difficulties when its very own customer starts purchasing at zero mark-up from other retailers. To connect the largely unconnected was the challenge for Jack Ma in china and also to establish business between willing sellers and buyers who doesn’t have any means to exchange money. Alibaba also emerged as a huge player in decrepit financial system of china. Alibaba brought into existence Alipay, which is a payment system that used to protect the buyers if sellers don’t deliver, to solve this problem of buyers trusting the merchants on the site.
EBay had it relatively easy which had PayPal as its part in US. In America almost everyone has a credit or debit card as they have banking or checking accounts. Whereas in china, bank accounts and credit cards were common in large cities, so Ma created Alipay, which is having more than 800 million users as of now. Alibaba umbrella extends far beyond the Alipay commerce services. It has a high end portal known as Tmall where 70,000 brands like Apple, Gap, and many others are offered and where Ma charges participants large annual fees for the virtual storefront exposure. Mixing Amazon.com, eBay, and PayPal with a part of Google thrown in is the best way to understand Alibaba. Alibaba doesn’t procure goods from the suppliers and sells directly customers unlike Amazon, rather it has always acted as middleman that connected buyers and sellers and helping them to make transactions. The role of middleman is similar as played by eBay, although it’s not an auction company. Alibaba’s biggest website, with about 760 million product listings from 7 million sellers Taobao, is a Chinese bazaar.
Rather than paying for selling products on Taobao merchants, Alibaba was funded for promotion and other services that let them to be noticeable from the mass, resembling google; the way ads from merchant appeared whenever a search was made. To stand out of all the customers the merchants paid to advertise that helped them to attract customers and which was the prime reason why Taobao was making money. Taobao’s own search engine was linked to many of the ads. When keywords are typed inside the search box by the customers, the site not shows only the results but it also shows the ads related to the keywords. Launched in 2003, Taobao has grown rapidly over the past decade, the site’s revenue has grown to those merchants who spend more on ads to secure the page views for their items listings. Users in U.S generally search items on google if they wish to shop anything, but the Chinese shoppers rather prefer to go on specific search engines like Baidu Inc. if they wish to shop. Taobao is the best possible platform for millions of budding Chinese entrepreneurs trying to into online retail business, because the initial cost of setting up the business is low, and also because the site has the ability to attract customers.
Merchants are unable to generate any sale until and unless they spend money to advertise their product on the website, although merchants are allowed to list their products for free, but they got to give ads if they really want their product to sell. So the business model that Alibaba follows means that they generates less revenue through sales, the company makes majority of its profits through ads. For the last nine months of 2013 the net profit of Alibaba was at $2.9 billion. While the net profit of Amazon was at $274 million for all of the last year, whereas the net profit of eBay was at $ 2.8 billion in contrast to others. Alibaba is best recognised as Alibaba.com i.e. a trading website in U.S, the Chinese based manufacturer with the foreign and domestic businesses who are looking for Chinese suppliers. But the fact is that Alibaba.com accounts only for a small part of its growing business profile which was one of the company’s first businesses when it was established in the year 1999. Last year, Tmall and Taobao contributed for the majority of revenue that Alibaba generated.
Alibaba’s Initial Public Offering in U.S.
Initial public offering for Alibaba is one of the significant financial occurrences of 2014, the gigantic Chinese e-commerce company, anticipated to be one of the principal IPOs ever. One of the main strategies of Alibaba’s aggressive growth plan is to enter into the American market, where it is going to test major E-Commerce players in the market like Amazon, Walmart etc. Many of the retail experts believe that there is going to be a huge fight between the Chinese newcomer Alibaba and the dominant American champ, Amazon to gain the supremacy. The leading source of news, “Forbes” last year acknowledged that “Alibaba is a danger to Amazon, eBay, Walmart and everyone else.” With the inauguration of its internet website named 11main.com Alibaba started its operation in the U.S market. Encouraged by the shopping familiarity found on Main streets across America, 11 main is now a new online destination for speciality shops and boutiques. As an invite – only marketplace, 11 main unites shoppers with a hand – selected collection of shops and boutiques carrying articles that help express one’s personal elegance.
With the increasing network of speciality traders, 11main.com features a distinctive collection of merchandises through a variety of categories, as well as in Fashion & Style, Home and Outdoor, Jewellery and Watches, Baby and Kids, Collecting and Art, and Crafts, Hobbies and Toys etc. As the first step, in what could be termed as a major technology debut in history; Alibaba gave stakeholders a closer look at the scale and growth of the Chinese e-commerce gigantic in an IPO brochure filed on Tuesday, 6 May 2014. Alibaba Group Holding Ltd, which commands 80 % of the total e- commerce in the world’s 2nd largest economy, is estimated to draw more than $15 billion, and could actually beat $16 billion drawn in by Facebook Inc. when it was registered in the year 2012. Although in the United States; “Alibaba brand” is not that much well known when compared with other Internet firms such as Facebook and Amazon, the Alibaba’s listing has stimulated the utmost enthusiasm in Wall Street and Silicon Valley since Facebooks’ record Initial Public Offering. Alibaba will turn out to be the largest Chinese company to be listed in America – on either the NASDAQ or the New York Stock Exchange.
Later half of this year, Alibaba will enter in a marketplace where well-known technology stocks like Amazon and Twitter have gone down during recently in a sell-off that has cautioned investors and analysts, bracing fears about mounting technology valuations. Still, Alibaba’s approximated market value has climbed up recently, to even more than $200 billion, stressing Wall Street’s excitement in taking a snap at a gigantic Chinese firm with a tremendous development. In spite of federal commission’s warning, they are anticipated to get the US approval for the IPO. Alibaba Group’s offer for what could be the leading initial stock offering in US history is cruising through Washington with few shocks. Although the federal commission has cautioned that the offering by the world’s biggest internet retailer poses “great risk” for stockholders, the response from securities regulators, Congress, cabinet secretaries and competitors has been jointly same. The Securities and Exchange Commission – the primary regulatory obstacle Alibaba must clear before raising US$20 billion, has given no signal that it will reject the stock sale that could come as early as early August, 2014.
U.S. investors in Chinese companies frequently do not relish the same securities and legitimate guarantees that they use to get when they finance in the U.S. companies. Alibaba has also cleared the US government blame by escalating the efforts to avoid pirated merchandises being sold on its websites. Contributing to Alibaba’s impetus is a frothy market – The Standard & Poor’s 500 index has doubled up over the past five years – combined with great investor curiosity in Chinese internet companies. A colleague of the US-China Security Review Commission, “Michael Wessel” last month released the report critical of Alibaba’s offer, saying that the market’s interest reminds him of the 1990s internet boom, formerly many technology stocks rushed in value. “A lot of people are eyeing with glassy-eyed eagerness at some of these enterprises,” Michael Wessel said. Alibaba was in the news at the end of 2013, when Yahoo’s 90% rise in shares over the course of a year was mainly credited to its 24% stake in the Chinese company. Alibaba has been labelled as a combination of Amazon, eBay and PayPal. And its position among the American internet firms is soon to be seen, with 11 Main testing the waters as its first introduction to American consumers.
Why is Alibaba a threat to major global e-tailers?
In 2013, Merchandise worth 1.5 trillion Yuan or $248 billion was transacted across three main Alibaba’s websites. This was done through 231 million active users across these three websites. This gross merchandise value is more than what was generated by Amazon and eBay combined. They were able to achieve this with 20,884 permanent employees, which are less than that of eBay. Also the trend is not new, Alibaba had even outpaced both Amazon as well as eBay in terms of gross merchandise value in year 2012.
According to Roger Entner, who’s a lead analyst and founder of Recon Analytics, if Alibaba will imitate that kind of achievement beyond china, than it has the capability of becoming a true global e-commerce giant. Also according to him, everyone might have thought that Amazon could achieve this, but now they have to think again Amazon as a largely flourishing company on that specific ground in the United States, however not in the world. One will also have to give credit of Alibaba’s success to Chinese customers as well, who does online shopping more than by any other customer in the world.
The success of Alibaba is also attributed to the fact that it is the most visited website globally. Retail is one such business, that is sometimes done purely on one parameter and that is price. The one who sell cheaper is the one who gains market share. Many big retail players like Costco and Amazon have led by an example that how one can bring down the prices by taking advantage of high volumes and low overheads. Walter Loeb from Forbes had shared his experience in one of his articles explaining how he visited some of these websites that were offering different categories of merchandise in home, kitchen, furniture, etc. He saw perfumes selling on sale, T-shirts, skinny dresses, and various other apparels, and found that prices were very cheap. There are a very less number of U.S. customers who are actually aware of one of Alibaba’s website, Aliexpress.com. But this is one such website that is providing very steep discounts on some of the merchandise sold by Amazon and Walmart. Miller is an analyst with ycharts.com. He undertook a survey in which he browsed through hundreds of items in brick and mortar stores, and online channels. His findings were as follows:- ItemWalmart PriceAmazon PriceAliexpress Price
KitchenAid classic 4.5-qt stand mixer$299$299$199.18
Keurig K10 coffee maker$99$95.44$48.58
There is no doubt that Alibaba has dominated online retailing in china. From a business of providing a platform for small businesses to connect with each other it has grown to other business ventures that not only allows companies to sell directly to the general public, but also enabling the public to sell to each other. Between two of its website which are Taobao and Tmall, it has generated gross merchandise value of 1.1 trillion Yuan or US$ 170 billion last year which is more than what Amazon and eBay generated combined.
Analysis of Net Margins
We will have a look at the net profits of Alibaba, Amazon, and eBay of 4 year periods starting from 2010 to 2013.
As it can be seen from the performance graphs of all the three firms, viz, Alibaba, Amazon, and eBay, Amazon, though it is the largest e-commerce firm in the world in terms of revenue, has not been able to generate enough for its shareholders with a substantial drop in their net profits from year 2010 and seems to be losing the race. It was probably because of its over-reliance on the retail format of inventory holding business. Though, in some of the countries like India, it has set up a marketplace model, which helps it to offer competitive prices vis- a-vis other competitors. The CAGR in net profit registered by eBay from 2010 to 2013 is 12.27 percent. The CAGR registered by Alibaba in the same period is 58.54 percent. Going by the current CAGR, Alibaba threatens eBay because eBay has reached a stage when there net income has got stuck between 2 to 3 US billion dollars. Whereas Alibaba has taken a sharp jump over the last few years, thanks to their growing internet penetration in China. Since Alibaba is a growing phenomena and because it is now going west, with its first IPO in the US market. It has all the tides moving favourably for it to beat eBay in terms of profitability.
Analysis of Revenues
While Amazon has been a market leader in terms of revenue, it is way ahead than eBay or Alibaba in that respect. It will continue to hold its forte for the years to come as far as leadership in terms of revenue is concerned. But, we have seen in the past what has happened to the companies like Nokia,
which had fallen down from the top in no time at all. By leveraging technology and offering better solutions to the customers, it does not take much time for the companies to make the customers switch brands. And who knows, that with times to come, and as Alibaba has already entered the U.S market, which is a prime market for the companies like Amazon and eBay. Any popularity of Alibaba in the U.S., can give sleepless nights to the shareholders of these U.S giants in the times to come. Below is an analysis of Revenues of Alibaba, eBay, and Amazon for the time period 2010 to 2013.
While Amazon has been growing at a CAGR of 21.46 percent for the period 2010 to 2013. And it has been able to sustain market leadership despite the competition from eBay. It is the eBay which will have to gear up its belt first, because not only its CAGR has been worst among all the three firms, currently standing at 15 percent. Alibaba could hurt eBay first, with its robust CAGR of 72.6 percent. So the most interesting aspect of this fight among E-Commerce giants is that, while Alibaba may not give direct competition to these players, as its revenue will be limited to advertising and other fees such as sales commission. But any increase in the gross merchandise value transacted on Alibaba will have a magnifier effect on the loss revenues of eBay and Amazon, and it might hurt the revenues of eBay and Amazon both and may lead to substantial downfall of the same. Thus, reducing the gap between these two firms in terms of their revenue.
How Alibaba defeated eBay in their backyard
In 2004, eBay had just entered into the Chinese market and was setting up to dictate the same. At the time, Alibaba was merely a localized Chinese firm which was helping out small and medium enterprises make business on the internet. Most of their western counterparts didn’t know that they existed. Jack Ma, in order to not to allow eBay from taking away its customers, decided to undertake a competitive strategy. He decided launched a consumer to consumer auction site. A brand new and free website was launched under the name Taobao, meant for a large array of consumer good right from cosmetics to electronics. EBay, on the other side, started to embark on its forceful campaigns to dictate the market. Soon after this, eBay decided to choke advertisement commercials from Taobao by signing special advertising rights with crucial portal such as Netease, Sohu and Sina. To worsen the blow, eBay pumped another $100 million to create “eBay EachNet” and expand its Chinese business. It also started distributing advertisements on buses, subway platforms and a whole lot of other places.
In comparison, listings of Taobao were more customer oriented as opposed to product oriented in case of EachNet. For instance, Taobao had classifications on its listing such as “Man” or “Woman” whereas EachNet was very generic and rigid with classifications such as “Buyers” and “Sellers”. At the time China had about 300 million phone users in comparison to 90 million internet users. Taobao had introduced instant messaging and voice mail for its users since mobile usage was more popular than computer usage in that time frame. It was an amalgamation of all these factors that Taobao was dominating EachNet and because it had a better understanding of the Chinese customer. It’s because of this only that its customer satisfaction levels were higher than EachNet. The satisfaction levels for Taobao and Eachnet were 77% and 62%, respectively according to a research based firm known as iResearch. The experience of sparring with eBay gave Jack Ma a tremendous sense of self confidence. He was adamant to be the best and said, “eBay might have been the shark in the ocean but he was the crocodile in the Yangtze River.” What he meant to say was he was the big fish in a small pond rather than being a small fish in a big one.
At the end of March 2006, Taobao had successfully overtaken eBay EachNet to become the undisputed champion in China’s consumer market. Taobao’s market share stood at 67% in comparison to EachNet’s paltry 29%. Jack Ma proclaimed,” The competition is over and it’s now time to claim the battlefield.” On December 20, 2006 Meg Whitman, CEO of eBay travelled to Shanghai to be a part of a press conference in order to announce a fresh joint venture with Beijing’s internet based company called Tom Online that dealt wireless multimedia services. Actually it was merely saving face on its ouster from the Chinese online auction market. EachNet was dissolved and they left the auction business, usurped by a company with humble billings and limited experience. The example set by Alibaba serves as a learning curve for foreign multinationals on how to behave in the Chinese market.
What EBay did wrong was that they failed to grasp the differences between the business and cultural environments of China compared to the west. EBay had appointed a German manager to herald Chinese operations along with bringing an American chief of technology officer. None of them knew the local language or how the market functioned. This was the folly of eBay had committed. Erroneous moves like advertising online in a country where internet usage is sparse only made their case worse in China. EBay assumed that just because they had created a formidable brand identity in the US, China would be no different. They also shied away from customising products and services according to the needs of native customers instead, opted for a more generic worldwide standard policy which was at odds with the local customers.
The road to success may not be a walk in the park for Alibaba
Government control on the internet infrastructure:- Alibaba is mainly reliant on the internet infrastructure in china. This means they are dependent on Chinese government. In their filing of the IPO, they have stated that almost all the access to the internet is built through state – owned telecommunication companies under the organisational control and regulatory supervision of Ministry of industry and information technology of china. Also, the national networks in china are connected to the internet through state controlled international gateways, and these are the only channels through which a domestic user can connect to the internet outside china. They may not have contact with alternative networks in the occurrence of failures with china’s internet infrastructure. Apart from lack of alternatives, accessing through steadfast bandwidth could be a problem, and it is difficult to know how much the company might have to pay for what access in the future.
Censorship:- As per the findings of some of the companies in west, there are ample restrictions on content in china. And because Alibaba is such a huge market with its mega user base, it’s a challenge for Alibaba to implement such restrictions. The company will have to supervise its website for content or items that is presumed to be obscene, socially destabilizing, defamatory or superstitious, and services that are illegal to be sold online and swiftly take appropriate action. The company may be accountable for unlawful business activities of its customers or users, and it is not always easy to tell what might bring down the hammer.
The challenge of expanding globally:- One big advantage that Alibaba has got is that it has access to finance, good relations with the government, and over and above talent pool. Such advantages were unrivalled by other players. In spite of having such advantages in the local market they were not able to perform equally well in the markets outside their domestic market. The point is that the concept of Alibaba is more suited to the Chinese customers and like any other firm, they will also face the same kind of challenge when they will expand internationally. Samsung, which is one of the most successful conglomerates in Asia, has successfully expanded globally. Up to 1993, they had not tasted much success as an electronic and appliance making company in the world.
Only then the chairman of Samsung had come forward and gave a direction to the company to start from scratch in whichever country of the world they enter into. Since, then it took more than 10 years for the company to develop local product, market and sales strategies and finally become the company that it is today. Someone expecting Alibaba to implement that process in a short period of time will have to be disappointed. In the past few years Chinese companies have adopted the strategy to expand internationally by investing in start-ups. For example Tencent has invested in multiple companies like Kakao Talk, Kamkord, Snapchat, plain vanilla games, and Weebly. But no matter what size of investments are involved there is no alternative to learning the actual internal workings of the culture and market of that specific country.
Facing the Reality: – The story of Alibaba is nothing but what we have seen as a trend in the business of on-line retailing across the globe. The trend is that e-commerce is a business that is dominated only locally. Amazon and EBay have dominated in their backyard in America, Rakuten had dominated in their home market in Japan, Flipkart has dominated in their home market in India, Gmarket has dominated in Korea, and similarly Alibaba has dominated in China. Another example is Vente Privee in France.
Having seen the above trend, there are a few exceptions also that exists. Like eBay fetches half of its international revenue from Germany and the U.K. On the other hand, Amazon, from its overseas sales receives 40 percent of its business, which also came down from 40 percent due to the competition from local competitors only. The consumers belonging to different countries have got different tastes. No matter even if they are geographically closed, the consumer’s taste varies from country to country. The e-commerce firm targeting a particular population will have a local advantage but at the same time they bear the risk of reduced ability of the company to succeed in the international market.