Chinese Internet giant Alibaba (BABA) just completed the biggest initial public offering in history. Next step for the combined eBay (EBAY), Amazon (AMZN) and Google (GOOGL) of Asia? Invade the United States and take on the local Internet giants, obviously.
Not so fast – Alibaba isn't trying to beat Amazon or eBay head on, but by surrounding them from around the edges. Instead of targeting the U.S., the company plans to take its e-commerce platform strategy to emerging markets around the world, where the customer base and retail network more closely resemble its home market.
Alibaba finished its $25 billion IPO last week, pricing at $68 a share. Trading at close to $88 a share on Tuesday, the company has a stock market value of $216 billion, about the same market capitalization as Amazon and eBay combined. Alibaba founder Jack Ma stands as the richest man in China, thanks to his stake in the company.
How Alibaba differs
How does Alibaba differ from U.S. Internet retailers? Unlike Amazon, Alibaba doesn’t sell goods itself directly to customers and therefore doesn’t own its own warehouses and distribution networks. Without that vast, local infrastructure in this country, Alibaba would have a hard time taking on Amazon or other U.S. companies with similar facilities such as Walmart (WMT) or Staples (SPLS). JD.com (JD) is the Chinese online retailer that uses the Amazon model.
Alibaba is a lot more like eBay, matching buyers and sellers in an online bazaar, providing a reliable payment system and taking a cut of each transaction. But Alibaba also gets a big chunk of its revenue (maybe over half) from sellers paying to advertise and appear in paid search listings on the site. But in the United States, eBay, Amazon and other retailers are on the reverse side of the search advertising equation, trying to get their listings prominently displayed on Google and even paying for sponsored listings.
Alibaba is looking at modest opportunities in the U.S., expanding cross-country trade flows. It already helps cherry farmers in Washington and fisherman in Alaska sell to Chinese consumers. The much bigger play for Alibaba is in faster-growing markets with less developed physical retail ecosystems, such as Brazil and China. Currently, about 10% of Alibaba's revenue comes from its international unit, but sales are increasing rapidly, up 32% in the second quarter. Chinese e-commerce revenue grew even faster, jumping 45%, as Alibaba pushes into more rural areas where there is less competition from physical stores.
Brazil is one of the fastest growing e-commerce markets in the world, after China. The country has a growing middle class eager for shopping bargains in Chinese-made goods, while its retail economy remains fragmented, with millions of small merchants like those Alibaba targets in China. Alibaba opened a Portuguese e-commerce site last year, integrated a locally dominant payment form known as Boleto and, this year, signed a delivery logistics deal with Brazil's state-owned postal service, Correios.
As a result, Alibaba’s site attracted 12 million Brazilian visitors in July, almost ten times the traffic from the same month last year, according to Comscore. That's also several times more traffic than eBay garnered.
Not a sure bet
Alibaba’s global play is no sure bet, however, because the company has unique advantages at home it won’t necessarily bring to overseas markets. As mentioned above, a huge amount of Alibaba’s China revenue comes from merchants paying to advertise on the very websites where they list their goods for sale. That works because Alibaba has so many consumers and sellers already using its website. But Google and other search sites are much more prominent in emerging markets beyond China that don’t restrict the offerings of foreign companies to the same degree.
And there are other risks to Alibaba’s strategy. Top mobile messaging services such as Tencent (TCEHY) are adding e-commerce features, pitching sales to consumers who are already spending the bulk of their time using smartphone messaging apps. And the lack of warehouses could become a weakness if competitors find a better way to deal with China's complex logistical issues.
Still, the model continues generating huge profits – $2 billion last quarter – for now. And savvy expansion to emerging markets could give Alibaba’s growth another boost.