Alibaba Defines the New Face of eCommerce

Martin Veitch explores the reasons behind Chinese company, Alibaba's position at the heart of a revolution in sourcing, selling and supply chains.

There are eCommerce companies that are convenient and very useful, like Ocado for groceries, but there are only a few that have changed the world. In this last, rarefied category, we might think of Amazon.com and, increasingly, Alibaba Group. But while the first of these is a household name, mention the latter to most people and the standard reaction is likely to be either (a) a blank look of non-recognition, or (b) a joke about the 40 thieves and/or Arabian Nights. This reflects the fact that that Alibaba’s success has been more remarkable in its China homeland than elsewhere, and that its reputation outside China is primarily as a business-to-business phenomenon. But even among laggards it surely won’t be long until its name becomes synonymous with the new face of eCommerce, rapid geographical expansion and supply-chain globalisation.

In the West, Alibaba is best known for Alibaba.com and its vast B2B repository of goods that, as European head James Hardy says when we speak by phone, offers “anything, whether that’s a ton of magnesium, 100 school chairs or 5,000 fans”.

But the Group is actually a remarkable empire where the numbers alone make heads spin. There is Alipay, a PayPal-like consumer payments system that is enormous in China and has 800 million registered members. Taobao is like eBay but highly customised for the Chinese market and responsible for over 94% of all consumer-to-consumer transactions there. 60% of all parcels delivered in China stem from Taobao orders and the marketplace hosts 800 million products and 500 million registered users. Tmall.com is the Amazon.com of China, providing both Chinese and foreign brands and selling to 500 million registered users.

Explaining the Alibaba Group world requires understanding of cultural nuance. For example, Chinese buyers tend to prefer to shop from malls rather than own-brand stores or sites and even big brands pursuing sales in China tend to follow, in part because of this tendency, in part because of the difficulties of selling to the enormous Chinese market which expects a distinct experience very different to the needs of many other large markets, and in part because of the data the platform generates for participants. Cash-on-delivery, overnight deliveries in cities and seven-day return policies also make China distinctive and it’s quite common for buyers to reject goods on delivery.

It was founded as recently as 1999 but Alibaba Group’s sheer scale and reach is placing it front and centre of the fundamental changes taking place in the way we work and trade. Even mega-brands are recognising this.

“[Japanese clothes retailer] Uniqlo is increasingly big in the West and they have their own website in China but if you try to buy something you’re pushed through to Tmall,” explains Hardy.

“Western companies find it hard to replicate the user experience designed for the Chinese consumer. We also offer very high-quality data analytics through research on product pricing and responsiveness and we’re linked in to a fairly sophisticated delivery and logistics network. You can’t just take learning from other markets into this market so you have to hire or bolt on.”

A keen student of cultural, business and retail trends, Hardy has a hunch that the broader commercial movement is towards partnering, outsourcing and franchising. Based in London, he points to the success of franchises in Selfridges department stores, UK supermarket Morrisons going to Ocado for the technology and distribution of its online offering, and ASOS the web fashion online outlet that sells brands to a young audience.

“Channel dominance is becoming more important than product dominance in many markets,” he says. “Selfridges and others are becoming offline platforms where they rent the space internally; they have access to brands and the margins they get are better. My view is that the world is moving back to platforms and away from brands unless those brands are very strong.”

Alibaba Group is on a remarkable trajectory and its gross merchandise revenue of about $160bn per annum is already greater than Amazon and eBay combined. While all eyes are on Alibaba to float at some point, the focus for the Group, Hardy tells me, is expansion in international markets: Turkey, Brazil, Russia, Australia, the US and Europe all offer growth spurts. That’s crucial because, while many have contended that China will have the last word on price for a long time to come, Hardy is dubious, suggesting that the rapid rise in her middle class could give Indonesia, the Philippines or another ‘Next Eleven’ country a chance to undercut.

However, he feels this needn’t be a negative for Alibaba.

“China’s cost advantage will not last for ever; what will last for ever is international trade,” he says.

He admits that, for such a juggernaut, brand awareness is not all it might be and notes that, in a reverse of the usual way of things, that challenge is increasingly being overcome through the business pages, such is the level of interest in what Alibaba is doing.

And, while doubts remain on the Chinese line over intellectual property and geopolitical issues remain sensitive, he believes that the company is part of a tectonic and historic change in attitudes.

“There’s a huge shift in overall consumer sentiment going on, especially with respect to China and Chinese businesses. [People everywhere] are going to stop viewing them as a threat and more as an opportunity.”

He believes that shift will also transform political relationships between the US and China and others because of pragmatic sense of realpolitik will dictate that is the case. “Anytime there is an opportunity, people tend to take a more favourable view and China is where the opportunity is.”

Hardy expects organic growth from its core products but he also plays up Alibaba’s ability to drive strategic decision-making via a panoramic perspective on global commerce trends. For example, while it might seem intuitive to set up a business in India to sell to the UK, it might be that the same business idea would be better set up in the UK to sell to India. Many shibboleths will go by the wayside, Hardy believes, as globalisation changes the standard terms of doing business.

That bird’s next view of data is already revealing some interesting trends. More young people are starting businesses, and more old people too, because there are fewer jobs available and far fewer of a type that young people want to be doing while the retired elderly can spend more time on their small businesses. Hardy envisions a future of “incredible fragmentation” with many more small and medium-sized enterprises trading. He also sees the continued emergence of the so-called Sharing Economy where more of us rent software, office space, freelancers and so on.

Hardy paints a Utopian picture where it’s easier than ever to set up in business and where 3D printers let us create unique products, offshoring smashes traditional market dynamics, tax systems favour self-employment and translation algorithms create a global language.

“The size of your market is essentially becoming everybody in the world,” he suggests. “The [traditional] working world is far less attractive. The web is creating inch-wide and mile-deep niches.”

It’s certainly an environment that has helped create very modern success stories on the Alibaba platform, from the likes of Morphsuits to flip-flops maker and social enterprise Gandys and Boginabag which, you guessed it, offers portable toilet facilities.

Of course, any major disruptor from China is going to face challenges and roadblocks. The day before we speak, Alibaba has been in the news over a leaked memo stressing the need for corporate secrecy. Scaling won’t be easy either and Hardy says Alibaba’s ambition is for “a smoother rate of growth”. The market is so large and lucrative that there will be rivals: it might be Amazon, Etsy or somebody new.

But for now and probably for the foreseeable future, Alibaba is at the heart of a new global sourcing and selling upheaval that is shaking our notions of how to import and export, which markets are likely to be most attractive and the importance of brands and channels. Like the source of its name, the story of how it succeeds or fails is sure to be a thrilling tale.

 

Martin Veitch is editorial director at IDG Connect

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