Update 8/17/2017 10:50 am central: BABA shares jump 5% this morning after nearly doubling profits and reporting a 56% increase in revenue growth. It is also worth noting that the largest increase came from cloud computing with 96% year-over-year growth. Alibaba now have a total of 529 million active mobile users on their platform each month. This company is a force to be reckoned with. We think it’s only a matter of time before BABA challenges AMZN in the US, on their home turf.
Alibaba Wants to Dominate the Globe
Jack Ma and his company, Alibaba, want to dominate the retail market across the globe, and that is no secret. He has set lofty goals and is focused on hitting them. This includes hitting $1 trillion in gross merchandise value by 2020 and serving 2 billion customers by 2036. “If a company can serve two billion consumers, that is one-third of the total population of the world,” Ma told about 400 investors at its annual investor day event in Hangzhou, China earlier this year. He also said, “If a company can create 100 million jobs, that is probably bigger than most governments can do. If a company can support 10 million profitable businesses on its platform, this is called an economy.”
Currently, he has already completely taken over the Chinese market, the second largest in the world. But, to hit those sky-high goals, he will have to set his sights on an already crowded US market.
Who is Alibaba and how they are different than Amazon?
Most people tend to think of Alibaba as the “Amazon of China” but that is a popular misconception. While they are both major online retail powerhouses, Amazon is a seller of goods for the most part. Alibaba is more of a middleman between businesses and consumers.
Specifically, Alibaba has a diverse network of websites and online businesses, each focused on being a facilitator of transactions. Their main site, Taobao, is like eBay except there are no fees assessed on the transactions. Alibaba makes money by charging sellers to rank higher on the search engine listings (like Google Adwords). Tmall is another of Alibaba’s core businesses, which focuses on larger brands, like Nike and Apple. Tmall makes money from the deposits, fees and commissions from retailers that use the site. Altogether, BABA’s sites have 423 million annual active buyers and almost 80% market share of online sales in China.
Alibaba has utilized this leverage to become a player in the financial world with their version of Paypal called Alipay. It acts very similar as it allows a user to have recourse if goods are not delivered, etc. They have even started working with a micro-lending business that lends to individual borrowers as an alternative to going through banks.
Jack Ma believes Alibaba is different than Amazon
In Ma’s words, “The difference between Amazon and us, is Amazon is more like an empire — everything they control themselves, buy and sell. Our philosophy is that we want to be an ecosystem. Our philosophy is to empower others to sell, empower others to service, making sure the other people are more powerful than us. With our technology, our innovation, our partners — 10 million small business sellers — they can compete with Microsoft and IBM. Our philosophy is, using internet technology we can make every company become Amazon.”
Amazon will compete with Alibaba in the “marketplace” arena
Amazon is already well on its way to being an ecosystem here in the United States. They offer more services every day to members of their Prime program. Their supply chain innovations have allowed some of their more popular products to be delivered to prime customers within hours. Amazon also provides small businesses with access to online customers that they normally wouldn’t have gained on their own.
Does Amazon have a weakness in their business model?
Small businesses have noted some worries and conflicts of interest when selling 3rd party products on Amazon. Price competition is the primary concern from Amazon. Amazon has made a fortune with their own branded products, Amazon Basics. These products compete directly with other sellers in the Amazon Marketplace, their own 3rd party seller ecosystem. From the words of Chris Poad, director of seller services in the UK, “I would never apologize for the fact that part of Amazon competes with our sellers,” Poad says. “I think competition raises standards, it forces both Amazon and sellers to raise their game. Amazon is just a seller; it happens to be the biggest seller.”
James Dunford-Wood, from e-commerce data specialist Ometria, shares his concerns: “Amazon is a big beast that is trading on its own behalf as well as offering small and medium-sized retailers a shop in their store. There is no guarantee they won’t take advantage, and in some cases, they probably have. They can sell on their own account and they can see what is selling and what is not and that puts [Amazon] in a powerful position.”
Nevertheless, he added, Amazon must tread carefully because it needs the support of retailers. “They do provide a new marketplace and provide access to a very big audience of shoppers, so maybe it is a quid pro quo.”
Where does Alibaba fit in?
Alibaba may have an opening in the US market if they can get their foot in the door. It would create much needed competition for Amazon, if they can successfully launch their online ecosystem in the US. Amazon’s sellers may be attracted to significantly larger shares of the profits that Alibaba’s ecosystem could provide. Currently, these sellers utilize Amazon to reach customers they otherwise couldn’t. But what if they had a choice?
Alibaba seems like exactly the type of business that could be the answer to many companies who are currently getting “Amazoned.” Right now, Amazon is eating companies for breakfast that can’t compete with their scale, technology and data. But, if BABA could set up a US network that could allow each company to become their own “Amazon,” then they could potentially turn the tables.
Currently, to compete directly against Amazon, a company must create their own online store with its own web address. They have their own inventory management systems, software, online marketing, cloud computing, and so on. In addition, they must advertise the site to let people know it exists. These are just the basic requirements to enter the ecommerce market.
Just imagine the amount companies could save if they could bring their technology up to speed with the likes of Amazon without making a huge investment. If only there was a company that focused on being the middleman between buyer and seller, instead of trying to crush/replace/undercut the seller.
What else does BABA bring to the table?
With a company the size of Alibaba, their options are virtually limitless. I could see Alibaba maximizing resources across the entire partnership network. Seasonal companies that spend money on year-round retail space could benefit. They could use their stores as pickup locations or as shipping points in exchange for a fee from BABA. This would allow BABA to quickly garner some physical space in the US without investing in Brick and Mortar.
Alibaba could turn the tables on Amazon. While Amazon is currently trying to be all things to all people, BABA could leverage existing companies’ infrastructures to offer similar services. This would likely be at a lower cost to sellers and consumers. Additionally, sellers would benefit by having more control of their brand and a bigger piece of the profits.
Jack Ma has built the Alibaba empire on this very principle. As more companies get run over by Amazon, they will be looking for any kind of helping hand, even one from China.
BABA has already hinted at US Expansion
To me, the time seems right for BABA to make a splash into the US. Ma did hint at creating 1 million US jobs during a meeting with Trump earlier this year. Following the meeting, Trump said, “We had a great meeting, and a great, great entrepreneur, one of the best in the world, and he loves this country, and he loves China. Jack and I are going to do some great things.”
Alibaba repeated this sentiment in an official company statment, “Alibaba will create 1 million U.S. jobs by enabling 1 million American small businesses and farmers to sell American goods to China and Asian consumers on the Alibaba platform.”
Michael Evans, president of Alibaba Group, also hinted at US expansion at Vanity Fair’s 2016 New Establishment Summit in San Francisco in the fall. “I believe that … foreign technology companies will be successful in China. I also believe that Chinese technology companies, including Didi, probably Alibaba, will be successful in the U.S. and Europe. But that is the challenge and the most difficult parts of globalization for us.”
While Ma and Alibaba are certainly taking the public angle of helping sell American goods in China, I think Alibaba may be planning a potential US acquisition which would give them an immediate foothold to start growing US operations, such as Target.
Alibaba, Amazon and “New Retail”
Years before the Amazon acquisition of Whole Foods, Jack Ma coined the term “new retail”. He defines it as “the integration of online, offline, logistics and data across a single value chain.” He truly believes he can make every company become Amazon. This is huge to me! By leveraging the BABA ecosystem, they could provide companies with cheaper ecommerce and inventory management services. Additionally, Alibaba’s financial, inventory, marketing, and data services could provide even more cost savings.
Over the last couple years in China, Alibaba has been making acquisitions and partnerships in brick and mortar businesses, such as grocery stores, retail malls and mall operators. They even own shares of YUM China (KFC, Pizza Hut, etc). It’s obvious that he still sees value in physical locations, which makes me think there is the same potential in the US.
The time seems right for Alibaba to enter the US market
I could see potential relationships forming with American businesses looking to join forces against mighty Amazon. However, these relationships could only form after making one BIG splash, which in my opinion would be the acquisition of Target.
Acquiring Target would give Alibaba significant US operations, but there is more to this story. This acquisition also makes sense for TGT. Target’s customer base is especially susceptible to Amazon. As noted by Pymnts.com, “Target’s core demographic is the same as Amazon’s — by age, gender and income — meaning it is more exposed to Amazon than perhaps its counterparts at Walmart, whose customers are not quite so likely to be early adopters or avid digital consumers.” If Target wants to protect its affluent, valuable customer base, they must act fast.
Does a TGT acquisition make sense for BABA?
For Alibaba, they would gain square footage and real estate in the US. This would quickly put them in competition with Amazon and their new acquisition, Whole Foods (now a part of Amazon). Given that Target stores need a serious pivot from their current “middleman” status to stay alive, I really think this could happen. Also, there is already a connection as BABA recently hired Former Target HR Chief to be their head of Global Expansion. Additionally, Target already sells goods on Tmall as noted on their website, and they have recently abandoned their “store of the future” project.
If this acquisition were to happen, I would be surprised if they stopped there. Ma seems to have found a way to leverage mall relationships with their online data dominance. In the US, they should have their pick of battered mall companies. Following the recent grocery sector beat down, there are plenty of attractive names there as well. But, as we have mentioned, BABA doesn’t sell their own inventory. So, acquisition of a grocery chain would be a slight deviation from their current model.
Why this acquisition might not work
One challenge BABA would likely have to overcome is the perception (or reality) of taking away market share from America’s favorite website, Amazon. While we believe that this could be the initial rhetoric, BABA should be able to change the narrative as they communicate their mission, which is to elevate US small businesses that are getting crushed by Amazon. Additionally, many US businesses and politicians will “see dollar signs” with the potential for easy access to Chinese consumers via Alibaba.
On top of this, Chinese acquisitions of US companies are becoming more common, with even our largest pork producer, Smithfield, now being owned by the Chinese.
My Bold Prediction
My vision would be for Alibaba to give sellers a US alternative to Amazon. On that note, I see them designing a US based site that mimics Amazon in every way. In addition, I see an offering like “Prime” that might be cheaper than Amazon. However instead of Amazon having to control every area of their Prime service, Alibaba could be free to “partner” with 3rd party retailers. This is where I see Alibaba playing a role.
Imagine going to an Alibaba website and getting free stuff and discounts at all retailers who are in the network. With Jack Ma’s skills and mindset, I have no doubt that he could build the necessary relationships to mimic Amazon’s every move. Sellers would be given another option outside of getting price gouged by Amazon. On top of that, buyers would get a better experience and membership offering. Amazon has issues like shipping large packages of dog food across the country at a competitive price. Whereas, a BABA partner could likely ship it cheaper or give discounts for the buyer to pick it up at the store. By building a network with their customers in mind, I could see a movement away from the Amazon business model toward this Alibaba US model.
“The Art of Competition”
As in the art of war, if one ruler absolutely crushes everyone, then they are ripe for a rebellion from all fronts. Market participants appear to think the Whole Foods acquisition was a warning shot from Amazon. So, the time may be right for these battered companies come together in rebellion. If the “enemy of my enemy is my friend” holds true then there should be plenty of “friends” with lots of firepower to combat the Amazon behemoth. While Amazon is pushing to be the first $1 Trillion company, the 1000’s of competing companies that could come together are many times that. This could include sellers, logistics companies or any other company who is getting “Amazoned.”
Time is running out for companies in Amazon’s path. Alibaba is the only business that I see as capable of bringing these companies together in a meaningful way. Alibaba’s entry into the US market could be the catalyst that turns the tables on Amazon.
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Clint Kirby – Chief Financial Strategist
DreamWork Financial Group
Clint Kirby, DreamWork Financial Group, is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.