Alibaba: Growth, Challenges In China's E-Retail Trade

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When Jack Ma founded the Chinese e-commerce company Alibaba in 1999, one of his stated goals was to build a company that will last for at least 102 years so that it would span from the 20th to the 22nd centuries.

That kind of long-term thinking helped make Alibaba a powerhouse in Chinese e-commerce. It also attracted investment from Silicon Valley, including an earlyYahoo ( YHOO ) investment.

"Products, technology and marketing -- what Alibaba has done is a great combination of all three. That's why they're the No. 1 player in a market like China," said Guru Gowrappan, who, as a Yahoo employee, worked on the team that invested about $1 billion in Alibaba in 2005.


Yahoo's $1 billion investment equalled a 40% stake in Alibaba that year.

Now Alibaba is the leading e-commerce site in China, valued at close to $195 billion, according to data from research firm PrivCo.

Alibaba, which plans an IPO on the NYSE sometime this year, handles as much as 80% of the nearly $290 billion in annual e-commerce sales in China, according to International Strategy and Investment Group research.

Not An EBay Or Amazon

Alibaba operates Taobao.com, an online marketplace in the vein ofAmazon.com ( AMZN ) oreBay ( EBAY ).

Alibaba also runs Tmall.com, a business-to-consumer site, and Alibaba.com, which handles some international and business-to-business sales.

The company has managed to stick a finger into every facet of online sales in China, says Gowrappan.

"I think we'd do it an injustice if we compare them to Amazon and eBay -- I think they're far bigger than that," he said recently. Gowrappan is now chief operating officer at Quixey , a U.S. search firm for which Alibaba led a $50 million funding round.

Beyond Alibaba and its 80% share of China's e-commerce market are a spate of smaller competitors in China, includingE-Commerce China Dangdang ( DANG ) andJD.com ( JD ).

Consumers and the broader environment of offline retailers are still discovering online sales and shopping. The e-commerce market is by all accounts growing quickly, but over-the-Web sales are still only a small fraction of all retail transactions, according to data from iResearch.

Just 9.1% of all retail transactions are expected to take place via the Web in 2014. That's up from 7.9% in 2013 and is forecast to jump to 11.5% by 2016.

In the U.S., by comparison, online transactions are expected to account for 60% of all retail by 2017, according to Forrester Research.

As e-commerce sales rapidly expand to a broader portion of China's population, the biggest threat to Alibaba is brick-and-mortar retailers with brand names that consumers recognize, "particularly those establishing online marketplaces," says Alibaba in a U.S. regulatory filing. That's an advantage that the online-only Alibaba will have to grapple with.

Smartphones Gaining Faith

Another big trend in China is the adoption of mobile phones.

Many of them are landing in the hands of users who haven't before had Internet access.

Unlike the U.S., where PCs and laptops preceded smartphones, China is a land where users are entering the online world as mobile-first users.

Even so, Chinese consumers are only now beginning to trust their mobile phones enough to make purchases with them, says Thibault Villet, co-founder and CEO of Glamour Sales, an e-commerce company that partners with about 1,100 brands to sell luxury goods in China.

Technology marketing firm IDC forecasts more than 450 million smartphone sales in China for 2014. Many of the buyers will be new to mobile and will be shopping online for the first time, says Villet. In the U.S., most online shopping is still done via a PC or laptop. Those devices are old school by comparison and not as widely used in China.

"What's happening nowadays is that most of the e-commerce business is shifting very rapidly to mobile," says Villet, who is French but has lived and worked in China for 16 years.

China's Social Scene

Social media is also increasingly driving e-commerce sales in China. Many Chinese consumers depend on social networks for product photos or reviews, says Villet.

Alibaba has moved to capture that traffic by making large investments in social networking.

Alibaba in April 2013 invested $586 million inWeibo (WB), one of China's leading social networks, with some 144 million active users.

ThatTwitter ( TWTR )-like network in turn integrated an Alibaba button into user posts. The button allows shoppers to buy goods from Alibaba without even navigating away from Weibo.

And the Alibaba-Weibo partnership is expected to continue evolving with new features. Alibaba poured an additional $486 million into its Weibo investment -- bringing its stake up to 30% at the time of Weibo's U.S. initial public offering in April 2014.

A Hotly Anticipated IPO

Hangzhou-based Alibaba in early May filed U.S. regulatory paperwork for its IPO. Analysts expect the company to sell about $16 billion worth of stock.

Its market capitalization conservatively pencils out between $150 billion and $180 billion. Many have placed it above that level.

Alibaba is in its pre-IPO quiet period and declined to comment for this story.

The company, and Chinese e-commerce in general, have plenty of room to grow, according to data compiled by research firm Statista.

Chinese business-to-consumer e-commerce sales are expected to jump 63.8% this year, placing China in the top global growth spot.

India is expected to post the next-quickest growth at an expected 31.5%. The U.S. comes in at 7th at 11.8%, according to Statista.

Just 46% of the population in China is now online, according to data released by the official China Internet Network Information Center. That's vs. 83.2% in the U.S. and 88.9% in U.K., according to IDC.

"So, obviously, there is still a big online growth possibility," says Glamour Sales CEO Villet.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: YHOO , AMZN , EBAY , DANG , JD

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