Alibaba is often heralded as the Amazon of China, and in terms of online retail dominance, it is. The business models of the two businesses are however very different. Indeed, Alibaba doesn’t consider itself an ecommerce company at all.
Seeking to support rather than compete with small business
Firstly, the positioning of each company is significantly different. While Amazon looks to sell the majority of its products directly to the consumer, competing with other smaller brands, Alibaba simply acts as a platform connecting merchants and consumers as well as larger brands and retailers.
As Alibaba’s founder Jack Ma explains: ‘the difference between Amazon and us is Amazon is more like an empire — everything they control themselves, buy and sell... we want to be an ecosystem.’
Making money out of a fee free platform
Model monetisation is also very different. Amazon’s direct sales business is equivalent to an online supermarket - buy low sell high - and sales through its third party platform are levied with a percentage sales commission. In contrast, Taobao (one of Alibaba’s key assets) uses an advertising model more similar to google as the core means to monetise their seven million active sellers.
This is a viable source of income, as unlike in the West where the online shopping experience is separated in terms of the search site (e.g. Google), the ecommerce site (e.g. Amazon), and the payment platform (e.g. Paypal); Alibaba caters to the entire online shopping experience. Consequently, Alibaba’s user engagement metrics are well beyond Amazon’s, providing far greater scope to customise searches/advertising, driving significantly higher conversion for merchants.
Expanding the addressable market
The third contrast is the way in which each company is scaling its capability in the everyday goods market, a key focus for both firms. While this space is characterised as having low individual item prices, the high frequency, lower cyclicality and better customer stickiness of this space makes it an attractive profit pool. Amazon has waded in with AmazonFresh and their own brand ‘AmazonBasics’ to cover simple goods ranging from batteries to cat litter.
Alibaba is taking an alternative approach. With the proportion of commerce online in China at approximately 15 per cent, already double that of the US, they are now emphasising a ‘new retail model’. This stresses digitally transforming the remaining 85 per cent of retail done offline.
For instance, Alibaba has been rolling out its Hema stores, a chain of so far ~20 stores in China which aim to serve customers living within 3km of the store. Using only the Alibaba app users can either order fresh food for home delivery, or go to the store themselves. This is proving a very successful means of creating a quick footprint in local communities, and is a concept that Alibaba wants to franchise out across China in the future.
The consequence of being different
The effects of these contrasting business models are starting to show – for the most part in Alibaba’s favour. Its ecommerce operations have a vastly higher operating margin, a far lighter supporting infrastructure, and demands less investment as sales grow.
Additionally, relative to Amazon, Alibaba’s sales are far less dependent on the site’s growth in gross merchandise value (the amount transacted on the platform). Instead, Alibaba’s sales opportunity is far more a function of their ability to eat further into client ‘cost pools’.
In 2018 for instance, ecommerce sales will likely experience roughly double the growth rate of the actual gross merchandise value, and even with company sales virtually doubling over the past two years, the proportion of sales to gross merchandise value transacted (the ‘take-rate’), is still under half Amazon’s third party platform, suggesting scope to increase rates further.
Going forward, both businesses will continue to innovate and evolve. One key leg to both their strategies is developing beyond commerce, for example finance or media. In many of these new spaces they boast a long-term structural advantage due to their low customer acquisition cost, ability to scale fast and vast client data pool providing greater scope to customise the user experience. Outside consumer services, Amazon and Alibaba are also advancing into corporate pockets. Already the companies compete for marketing, channel and logistics spend, but are investing heavily to eat into enterprise IT budgets via cloud services, an opportunity with phenomenal future growth prospects.
Ultimately, while these companies serve the same market and have similar aspirations, they are fundamentally different in their approach to online retail. Historically, the two firms have done well to steer clear of direct confrontation, however, with the pool of under-served structurally attractive ecommerce geographies swiftly shrinking it is only a matter of time before the models collide. For investors, the question is no longer simply whether to hold these companies or not, but additionally how do other portfolio companies adapt to a fast changing commercial landscape. This will continue to create a deeply diverse range of opportunities and risks within emerging markets, making the market an increasingly attractive hunting ground for active investors able to anticipate and position to profit from change.
Charles Sunnucks is assistant fund manager on the Jupiter Global Emerging Markets team.
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