Closing Case

The Alibaba Group

The Problem

Chinese consumers traditionally have shopped at stores close to their homes, with merchants they knew, and they paid in cash. This process limited their selection of goods and services. If they wanted to find a wider selection, then they had to travel to China's larger cities.

As China's citizens have become increasingly affluent, their demand for a greater variety of goods and services has increased accordingly. However, Chinese citizens still had to travel to larger cities to satisfy their needs. Given China's huge population, there was a massive, untouched market for goods and services. The problem was how to provide Chinese shoppers with variety and convenience. Enter Jack Ma.

The Solution

In 1998, Ma and 17 colleagues started the Alibaba Group (http://alibabagroup.com), an e-commerce company that provides consumer-to-consumer, business-to-consumer, and business-to-business services through web portals. The company links its web portals through its third-party payment platform, Alipay.

Consumer-to-Consumer. Taobao (www.taobao.com) opened in 2003 as Alibaba's response to eBay. Taobao's rapid growth was the consequence of offering free registration and commission-free transactions using a free, third-party payment platform. By adopting this strategy, Taobao undercut eBay's standard 15 percent fees. The startup collected money only when sellers chose to advertise their products with banner ads and search ads and when they used Alibaba's payment tools. These strategies succeeded, and Taobao became Alibaba's largest business.

Taobao offers a vast selection of products, ranging from clothes, furniture, and packaged foods to bamboo birdcages and rental boyfriends to accompany you to a social event. Although most transactions on Taobao connect buyers and sellers within China, the site reaches international customers as well.

Business-to-Consumer. Alibaba opened Tmall (www.tmall.com), a virtual shopping center, in 2008. Tmall provides international companies with access to Chinese buyers, in exchange for 5 percent of all sales. For example, the online shoe retailer Sneakerhead.com spent 13 years trying to increase its annual revenue beyond $20 million. In 2014, the company accomplished its goal when it doubled its revenues by opening a store on Tmall. This process enabled Sneakerhead to avoid having to use the conventional brokers who were traditionally required to import goods into China. In another example, Premium Australia Foods, a startup company headquartered in Melbourne, sells delicacies such as macadamia nuts, olive oil, honey, and raisins to Chinese shoppers using Tmall, without establishing physical operations in mainland China. In both cases, Alibaba disintermediated the retail process, enabling Sneakerhead and Premium Australia Foods to retain a larger portion of their sales revenues. Combined daily sales on Tmall and Taobao can total more than $7.5 billion.

Business-to-Business. Alibaba.com (www.alibaba.com), the company's original marketplace, connects Chinese manufacturers with small businesses around the world. The portal manages sales between importers and exporters from more than 240 countries and regions. Alibaba.com developed the Chinese portal 1688.com for domestic B2B commerce.

As one example, the cosmetics retailer 100% Pure uses Alibaba.com to source key ingredients and packaging materials from wholesalers that list their products on the site. Before Alibaba, Pure managers would have to travel to China and Taiwan several times a year to meet with suppliers and negotiate contracts. With Alibaba, if one supplier is not reliable, then Pure managers can pick another supplier and shop competitively for prices.

Alibaba.com also provides a retail website, AliExpress.com, that consists primarily of small Chinese businesses that offer products to international online buyers. AliExpress has become the most visited e-commerce website in Russia.

Alipay. Alibaba's various websites are linked through Alipay (http://global.alipay.com), an online, third-party payment processor that does not charge transaction fees. Alipay serves as an escrow service, and it guarantees every transaction. Alipay creates trust in a country in which people historically have not conducted business with someone they did not know personally.

Alibaba has placed links to its Alipay service on the websites of large retailers that work with ShopRunner (www.shoprunner.com), a logistics company in which Alibaba owns a 40 percent stake. ShopRunner has formed ties with thousands of Western retail brands such as Neiman Marcus, Tommy Hilfiger, and Toys R Us to enable two-day shipping for an annual fee, a service that resembles Amazon Prime. The Alibaba links, visible only to Chinese shoppers, will allow these shoppers to receive expedited shipments from U.S. retailers.

The Results

Analysts envision Alibaba's future as one in which consumers everywhere can make purchases from retailers everywhere. Alibaba does have advantages as a global enterprise over Amazon and eBay because it facilitates such a large volume of sales into and out of China.

Alibaba does face international challenges, however. Most Western shoppers are not familiar with Alibaba's brand, where they already have relationships with retail websites in their home countries.

Alibaba also faces intense competition from Chinese companies. For example, while Tmall controls approximately 50 percent of Chinese e-commerce, JD (http://en.jd.com) has 17 percent, according to iResearch (www.iresearchchina.com). Furthermore, whereas Alibaba's e-commerce is performed primarily on desktops, JD may have an advantage in mobile commerce in a country that now has more than 500 million mobile phone users. JD stocks its own goods, and it employs a highly sophisticated delivery system. This arrangement is in contrast to Alibaba, which facilitates direct sales by other enterprises and then contracts out the delivery.

Tencent (www.tencent.com), another large Chinese e-commerce company, provides the popular communications platform called WeChat as well as a competing online-payments platform called Tenpay that is popular on smartphones. In 2014, Tencent purchased a 15 percent stake in JD, and the two companies formed a strategic partnership. They will provide a formidable competitive challenge to Alibaba in electronic commerce.

Despite the competition, by mid-2015 approximately 80 percent of all Chinese online shopping sales were flowing through Alibaba's various web portals. In 2014, the company facilitated the delivery of 5 billion packages from transactions on its retail websites. More than half of that total was sent by delivery companies in China, according to Alibaba's registration documents with the U.S. Securities and Exchange Commission (SEC). By comparison, UPS (www.ups.com) handled about 4.3 billion packages and documents that same year.

Alibaba's overall strategic direction appears to be expansion in the West, because U.S. consumers spend more money online than anyone else in the world. Ma has invested in many U.S. companies, including the ride-sharing service Lyft (www.lyft.com); Kabam, a maker of online strategy games (www.kabam.com); mobile search engine Quixey.com (www.quixey.com); and mobile messaging app Tango (www.tango.me).

In 2014, Alibaba's initial public offering in the United States raised $25 billion. In 2016, the Alibaba sites have 423 million annual active buyers and about 80 percent market share of e-commerce in China. For its fiscal year ending in March 2016, Alibaba beat sales estimates with 39 percent growth over the previous fiscal year. For that fiscal year, Alibaba reported revenue of approximately $15.7 billion.

Questions

1. Why is Alipay so important to the Alibaba Group?