Alibaba, the new magic word in online retail

The global retail landscape is undergoing significant structural change, driven largely by developments in technology and consumer behaviour. The rapid innovation and development of the online retailer space gives unprecedented options to customers.

When thinking about online retail, most of us think of the two giants: Amazon and eBay. When discussing online payment applications, our minds automatically go to PayPal.  How could we not? These platforms are industry leaders and innovators. In the Western world, their names are synonymous with online.

"With a growing presence in the West, Alibaba has the potential to achieve unprecedented size and power."
James Stewart, Partner, Ferrier Hodgson

Come September 18, though, the world will see the initial public offering (IPO) of Alibaba, China’s big online player. Alibaba not only embodies the latest in online retail; it will also be a classic example of East meets West, but this time in an e-commerce environment.

Alibaba is an internet, e-commerce and computer software company, facilitating business-to-business (B2B), retail and wholesale trade, as well as online payments and cloud computing.

The group controls 80 per cent of China’s online market and is one of the world’s largest e-commerce players, rivalling the likes of Amazon and eBay.

In 2013, Alibaba’s gross merchandise volume amounted to $US248 billion. That’s more than Amazon and eBay combined.

The company recorded revenue of $US7.95 billion, with a net income of about $US$.56 billion in 2013. This equates to a profit margin of 45 per cent, dwarfing eBay’s 17.8 per cent in the corresponding year. Amazon, by comparison, generates significantly more revenue, at around $US75 billion, but this comes at a profit margin of just 0.37 per cent.

Click image to zoom Tap image to zoom

Alibaba’s online payment platform processed over $US150 billion in mobile transactions. PayPal processed only $US23 billion.

To add further scale, Alibaba’s business is mostly conducted in Asia. Since only 42 per cent of China’s population (564 million users) currently have internet access, there is still significant room for growth in the East. Coupled with a growing presence in the West, Alibaba has the potential to achieve unprecedented size and power.

Until recently, Alibaba was not well known outside Asia. The announcement of its forthcoming float on the New York Stock Exchange has made businesses stop and take notice, and has set tongues wagging.

Many analysts expect the e-commerce giant to write itself into US history with one of the largest technology IPOs ever, with an equity value in excess of $US200 billion and an expected capital raising of around $US26 billion.

Alibaba’s business model differs from those of eBay and Amazon. Unlike Amazon, Alibaba does not incur costs to store, deliver or distribute inventory. It doesn’t even have a distribution centre.

The group operates an e-commerce platform that brings together like-minded buyers and sellers, similar to eBay. At last count, Alibaba’s online 'community' had over 8 million active suppliers and 231 million active buyers.

Alibaba’s revenue model is supplier-centric. By levying a subscription fee, the group offers suppliers a suite of business tools to set up a virtual storefront, market products, implement search engine optimisation, recommend seller statuses, and other activities.

Alibaba has a vision: to make buying from Alibaba seamless, anytime, anywhere, on any device. It has been on a rampant acquisition strategy over the last year, investing $US3.5 billion in businesses that create synergies with its core strategy and enrich its value proposition.

Investments include cloud-based platforms, a mobile operating system with apps under development, online payment platforms, and messaging and free calling applications.

From even a small glimpse, we can see that Alibaba has taken a discerning and strategic step towards offering services that add value to the online retailing experience, viewing e-commerce as a social transaction and providing a platform that complements this view.

James Stewart is a partner and retail practice leader at Ferrier Hodgson

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

editor's picks