PYMNTS Flashback: Alibaba And ShopRunner Say “Open Sesame” To Digital Commerce

Everybody knows the ancient story of Ali Baba and the Forty Thieves. “Open Sesame” were the magic words that opened a cave where Ali Baba saw an abundance of gold treasure stolen by 40 thieves stashed inside. Ali Baba, assisted by his very capable female slave, Morgiana, played a trick on the 40 thieves who had killed Ali Baba’s brother and had also planned to kill Ali Baba. The clever Morgiana ended up boiling the bad guys in hot oil so that Alibaba could avoid his untimely fate, claim the gold as his own and live happily ever after. Lesson learned ...never, ever cross a woman when gold or valuable treasure is in the mix.

The modern story of Alibaba is far less grisly, but no less clever and powerful. Instead of a cave, the treasure is stashed online, across a variety of business units and marketplaces controlled by the Chinese internet conglomerate, Alibaba. Two such marketplaces, Taobao (consumer to consumer) and Tmall (business to consumer) processed more transaction volume in 2012 than Amazon and eBay combined ($170 billion - see graphic courtesy of The Economist). And the magic words here that have unlocked this treasure in China and will most certainly do so around the world aren’t “Open Sesame” but Alipay, the most widely used online payments system in China. Launched in 2004, Alipay now has some 800 million registered accounts - nearly 6X that of PayPal, 4X that of Amazon and 1.5X that of Apple iTunes. Instead of 40 thieves waiting to lay claim to the treasure, there are hundreds of millions of Chinese consumers who are part of its emerging middle class and now have the means, access to the Internet, smartphones and goods and a growing appetite to buy Western goods and services.

Alibaba’s been in the news a lot recently. It’s expected to IPO in 2014 with a valuation in the $120 billion range - right up there in the Facebook and Amazon strata of valuations and almost double that of eBay. It also hosted the largest single day of online shopping ever on the planet. “Singles Day,” which was on 11/11/13, is the day that lonely Chinese consumers (really bachelors since there’s a long line of men for every woman in the one-child-per-couple China) drowned their sorrows about being single by buying nearly $6 billion of electronics and who knows what else. Just to put that in perspective, that’s about six times U.S. sales volume on Black Friday last year and probably this year too. And, in October of this year, Alibaba made a whopper of an investment in ShopRunner - leading a $206 million dollar round.

We have a tendency, I think, to read all of this and think that Jack Ma has sure done a great job of tapping into the Chinese market. Except that he’s not just building a Chinese company to operate in China. Now some 20 years since its launch, the company started by a former English teacher has built and acquired the assets and the knowledge that could shape the nature of commerce in China, the U.S. and around the world.

Here are a few points that I think support my point of view and how I think ShopRunner might fit into the equation.

When It Comes To Shopping Online, Chinese Consumers Are Just Getting Warmed Up

Nineteen years after Amazon launched in the U.S. and seven after Apple introduced the iPhone, 98 percent of the U.S. population has access to basic broadband services (80 percent in their own homes) and nearly 65 percent own a smartphone. eCommerce accounts for roughly 5 percent of all retail sales in the U.S., and eCommerce via tablets and mobile devices is fueling its growth - and over a relatively short period of time. Today, it drives a little more than 10 percent of overall eCommerce volume, but that percent will only increase as “tablet commerce” goes more mainstream and digital wallets that eliminate the hassle of shopping on small devices gain traction.

We’re already starting to see evidence of that trend. Black Friday 2013 saw online sales increase 20 percent over 2012 volume, with mobile accounting for nearly a quarter of online sales and tablet commerce more than half of that. PayPal reported an increase of nearly 124 percent in global volume and 90+ percent in new customer volume. Meanwhile, the NRF is projecting an increase in physical store sales of less than 4 percent, on a much larger base, of course, but the trend lines are interesting.

Now, contrast that to China and over about the same period of time.

In 2012, it was reported that only about 43 percent of the Chinese population had access to the internet. With less than half of the Chinese population online today, to quote the President, there’s only one way to go and that is up. But, those 43 percent have enormous spending power. “Spare the rod and spoil the child” is truly the mantra of the one-child Chinese family who spare absolutely no expense on their kid. Singles, well we just saw what damage they can do in a single day, online. And, interestingly, the elderly population seems to be spending its only child’s inheritance on travel and luxury goods - one in four Chinese over the age of 50 is online regularly. Alibaba says that Chinese consumers made 83 million trips outside of China last year and spent $100 billion while traveling. Western Union’s Global Share platform, in fact, enables a prepaid provider to take cash and put it on a prepaid card so that Chinese consumers can travel to the U.S. and go shopping in our malls using a mag-stripe card.

It may have taken nearly 20 years for China to get to less than half of the U.S. broadband penetration, but things are likely to move rapidly now. Online access is increasingly via smart mobile devices and Chinese consumers are buying them as quickly as handset makers can ship them. Nine out of every 10 phones purchased in China today is a smartphone, with 30 million of them sold in the month of August 2013 alone. China’s smartphone market is now three times larger than the U.S.

Both factors have contributed to the explosive growth of China’s eCommerce market - clocking a 120 percent annual growth rate according to analysts. In 2013, Morgan Stanley says it will easily blow past the U.S. numbers with something approaching $290 billion in sales, being driven by nearly half a billion online Chinese shoppers, a number that has more than doubled over the last three years, thanks to smartphones. Alibaba expects that the smartphone will become “one of the main channels” for Chinese people to shop.

Necessity Is The Mother Of Chinese eCommerce Invention

Jack Ma turned his 1995 launch of into a global internet presence that has challenged the likes of eBay and Amazon by understanding the constraints of doing business in China (and capitalizing on them) as well as the desire of Chinese consumers to conveniently access goods and services.

Chinapages, and a few years later after VC money was raised,, organized merchants into a marketplace that made it efficient for B2B buyers and sellers from anywhere in the world to transact. Ma’s initial focus was to open the Chinese market to outside buyers with an interest in buying cheap Chinese goods, but Alibaba is today a place where anyone with anything to sell can do so on the platform. Ma’s success is also attributed to his decision to standardize on English as the language of the marketplace - understanding that most of his buyers and sellers were already transacting in English anyway and that Chinese would only limit its potential. Today, over 1 billion products are listed on the site which is the 20th most visited website in the world.

Ma recognized that consumers had an entirely different need. Their universe of goods and services was limited to the handful of physical merchants that were located in big cities. Smaller physical merchants outside of the cities were inconvenient to access. And access to online merchants anywhere was also limited but for different reasons: by a lack of broadband access, by a lack of Chinese merchants on the internet, by the lack of a payment method to buy online from any merchant and by a lack of trust in the integrity of the merchandise sold by online Chinese merchants.

Taobao, launched by Alibaba in 2003, assembled a marketplace for Chinese consumers to transact, in Chinese, using a payment method that, like PayPal, kept payment credentials secure and with a mechanism for protecting buyers against getting bad merchandise (more on that later). Taobao also offers a variety of services to help Chinese merchants on this platform succeed, including merchant financing underwritten by data captured from transaction activity. The typical loan is $8,000 and book value of loans extended to Taobao merchants in 2013 is expected to reach $2 billion. Taobao merchants can also take advantage of its data dashboards to produce targeted ads, serve offers and otherwise engage consumers so that they buy more, and increasingly do so using smartphones.

Tmall opened in 2008 but with a different purpose. This online mall of retailers served an increasingly affluent Chinese consumer that wanted to buy from stores and brands that they knew. Tmall made it easy for these retailers to open a storefront and respond to that demand. It also made it possible for Western retailers, those from whom Chinese consumers increasingly want to buy from, to “be present” without owning an interest in a Chinese company. Tmall has attracted the likes of The Gap, Nine West, Adidas, the NFL, P&G, RayBan and Dell and created a How-To Guide for those interested in setting up a storefront and attracting the Chinese consumer.

But, let’s not forget here that as clever as Jack Ma is, he did have a bit of a running head start in a country with a lots of people wanting to scratch their shopping itch and many hoping to help them. The Chinese government has historically put a lot of barriers in front of foreign firms trying to do business there. Some, like KFC and Starbucks have been wildly successful. But in retail, many of those who have set up shop in China, e.g. Home Depot, Best Buy, have closed those operations for a variety of reasons. eBay acquired a Chinese marketplace only to close it up and PayPal has applied for a license to do business there, but is still waiting. So far, the Chinese government has had a big “Keep Out” sign for financial services firms. In the case of the Internet more generally, the barrier is a bit more natural as foreign firms have had a tough cracking the language barrier and cultural business customs. As a result, Ma and Alibaba had little foreign competition over the years and could focus on methodically laying the foundation for something that could eventually become a global commerce force.

Chinese Consumers Don’t Pay With Plastic But Do Pay Online

Chinese consumers aren’t exactly poster children for paying with plastic, especially if that plastic is a credit card. Credit cards weren’t introduced into the Chinese market until 1985 and 15 years later in 2000, accounted for only about 10 percent of all purchases made. But, things have ramped considerably since then.

The People’s Bank of China reports that Chinese banks issued 331 million credit cards in 2012, a 16 percent increase over 2011. At the end of 2012, there were roughly 3.5 billion credit cards in circulation in China, most of them carrying the China UnionPay logo. All told, 12 years later, those cards drove $1.2 trillion in purchase volume and now 40 percent of all purchases. Today, one in four Chinese consumers have a credit card, up 19 percent from 2011 with predictions that China will become the largest credit card market in the world over the next decade.

But, shopping online is and has always been a challenge for Chinese consumers. Even today, 75 percent of them still don’t have a credit card and a decade ago, that number was close to 90 percent. Those that have credit cards, have cards bearing a UnionPay logo which are not, by and large, accepted outside of China, in either a physical or online environment. And, then there’s the matter of trust. Chinese consumers don’t trust that sellers will ship them the merchandise that they’ve ordered. Without a credit card to pay online, Chinese consumers had no choice but to use their bank account which they were uncomfortable doing with a seller they didn’t know and/or having money taken from their account without any recourse if the item was not to their satisfaction.

Enter Alipay.

Alipay was launched in 2004 and is often described as the Chinese PayPal. It’s one of three third-party “digital payments” providers in China. (The other two are UnionPay online and Tenpay, which is operated by Tencent, the big dog of Chinese Internet firms.) With its 800 million customers, Alipay owns nearly half the online transactions in China. But, there’s a bit of a twist that makes how it operates very different from Paypal.

Like PayPal, Alipay is a digital account that registers a funding source (usually a bank account) to that account and enables payment online by keeping the payment credentials concealed from the seller. But unlike PayPal, Alipay actually escrows the funds until buyer and seller have agreed that that the transaction has been completed and the buyer is satisfied.

And, as a result, Alipay has had no trouble getting consumer and merchant adoption and is why it is most widely used online payment system in China. It is reported that 60 percent of the parcels delivered in China are from one of Alibaba’s enterprises. Alipay accountholders can also conduct offline transactions such as pay bills.

So, 5 pages later and with a little context, here’s how I think things could get very interesting.

Alibaba and its team knows its Chinese consumer really, really well. They’ve had 20 years to understand their preferences, track their patterns, monitor their spend. They know, for example that these consumers spent nearly $3.5 billion dollars buying baby products, apparel and luxury goods from US and European websites outside of China last year. They also know that Chinese consumers are the world’s largest travel and tourism spenders, racking up more than $100 billion in travel bookings last year. (The U.S. market, by comparison, was ~$80 billion). They know that roughly two-thirds of Chinese consumers shoppers use their smartphones to browse or buy products - and nearly 75 percent of the more affluent consumers do. And that nearly 60 percent of those consumers say that being able to buy online from a retailer will increase their spending at their brick and mortar locations. And that most Chinese consumers don’t have Visa, MasterCard, American Express or Discover cards in their physical or virtual wallets, and that only 10 percent of Chinese consumers buy from a specific retailer (as compared to 76 percent of U.S. consumers who do).

Alibaba is starting to capitalize on these insights.

Alipay inked a deal with UATP in early November that gives those travel-crazy Chinese consumers the ability to pay for travel bookings using their Alipay accounts. UATP is the payment system used by nearly every major airline, hotel, travel agency and rail system in the world. This deal, according to Alipay, puts “nearly all of the world’s major airlines and hotels within Alipay’s reach” - not to mention their 800 million Alipay accounts.

Then, we’re starting to see a handful of sites today in the U.S. start to accept Alipay, including Gap, Travelzoo, GoDaddy and peerTransfer that enables tuition payments for international students.

Alibaba also just launched a cloud-based service that makes it easier for banks to enable online payment via Alipay. Ju Baopen (which means treasured garden in Chinese) is an expansion into financial services which will allow China’s 2,000+ regional banks to connect more easily to Alipay, minimizing their reliance on outside systems integrators and maximizing the number of Chinese consumers that will ultimately have Alipay accounts.

And, then there’s ShopRunner and Alibaba’s sizeable investment in it a couple of months back. I have to laugh when I hear people describe ShopRunner as an Amazon Prime challenger competitor because it offers free two-day shipping. Then, again, that’s probably just fine with CEO Scott Thompson who’d probably prefer that people not really understand the power and potential of this “two-day free shipping” enabler.

Let me give you my take.

ShopRunner is a consumer/retail network that creates a digital account that consumers can use at retailers that accept ShopRunner. It uses two-day free shipping as bait for merchants and consumers to get on board. Like Amazon Prime, getting a ShopRunner account costs consumers $79 a year.

ShopRunner is positioned on the product page of a retailer’s web site as an button with language to “sign in or sign up” for two-day free shipping - usually where the consumer sees how much not free shipping adds to the cost of the purchase. If a site visitor is a ShopRunner member, signing in activates a pop up window where billing and shopping options can be confirmed or changed, a second click places the order. ShopRunner says that purchases with the retailers that offer it double for those retailers during their first four months as network members and 70 percent of those who buy from those retailers are new customers for them. Can you spell “incremental???

ShopRunner has a deal going with American Express (which has a minority stake in ShopRunner) to waive the $79 annual fee and automatically register a consumer’s Amex card to the ShopRunner account. That’s pretty darn clever since now ShopRunner can deliver an affluent cardholder base to ShopRunner merchants, as a further inducement to get them into the ShopRunner network, who based on their metrics, will spend more and will be new customers to their establishments. Can you spell merchant value-proposition????

Speaking of the network, ShopRunner is also an online mall. (You can now release the thought that I asked you to hold earlier.) Today it has nearly 100 merchants, including Neiman Marcus, more than 1 million members and a run rate that will exceed $1 billion across the network. When a member logs onto, they can see all of the participating merchants and what offers they have available. If they see something they like, they click thru to the merchant’s site and shop away, checking out with their ShopRunner credentials that automatically append any offer or promotion offered and free two-day shipping. A few acquisitions that ShopRunner made provide a receipt and purchase management dashboard, as well as a same-day pick up option in some cities.

So, just like a physical mall that has a physical structure that makes it efficient to actually shop at individual retailers where brand and customer relationships are preserved, ShopRunner has established an infrastructure to do that same thing, except digitally. Instead of hawking free shipping, ShopRunner is delivering customer acquisition, engagement and incremental sales, wrapped around a convenient way to pay that preserves the relationship that the merchant has with the retailer since they are actually shopping on the retailer’s site. That puts any comparison to Amazon about as far away as you can get.

Back to Alibaba now. One of the things that Alibaba wants more than anything is to have places where Alipay accountholders can shop using Alipay. They’ve said in public interviews that Alipay customers would buy more if they had more places to use their accounts, which they recognize and emphasize is increasingly outside of China, because that’s where their consumers want to shop. If I were connecting all of the Alibaba dots here, and I have absolutely no inside knowledge here, I might be inclined to suggest that we have the makings of a nice ShopRunner retailer-centric mall for Chinese consumers to visit and buy from using their Alipay accounts. ShopRunner today includes the great luxury brands that appeal to Chinese consumers, like Neiman Marcus which has a strong interest in tapping into the Chinese consumer - last year they purchased Chinese fashion site Glamour Girl. With Alipay as a payment option, ShopRunner also has a potentially attractive value proposition for retailers who wish to reach Alipay’s 800 million consumers but who don’t want to go to the trouble of setting up a storefront in Tmall. And, ShopRunner can enable all of this on behalf of these retailers by preserving retailer brand affinity. Can you spell “lots of incremental customers?”

Sure, there are logistics to work out about acceptance and the logistics associated with shipping to China, but I have a feeling those things aren’t the long pole in this tent. Now, I know what you’re saying, but these sites are in English so that wont work? Well, a few things here. Reports say that there are now 300 million Chinese studying English and that soon schools will be introducing English in kindergarten. Managers under the age of 40 will soon be required to learn English. College and high school students are taught English now and many TV shows and movies shown in China are in English. There is an insatiable appetite on the part of the Chinese for learning the English language, and I would imagine that the correlation between those with the means and the access to shop online also know enough English to navigate online shopping. Plus, shopping has its own universal language - brand names and pictures! My guess is my Chinese counterparts know NeimanMarcuslish well enough to find Prada or Valentino or Gucci even if they can’t write or speak a lick of English.

Who’s to say if what I’ve speculated is anything more than a more contemporary version of the Ali Baba fairy tale, minus the 40 thieves being boiled in hot oil, of course. But, my big takeaway from looking at Alibaba is a topic that was the subject of our first panel at The Innovation Project 2013. It was led by Al Gore who had just published his new book, The Future, which was all about the great potential of the Internet (no jokes please about how he invented it..) to democratize the world around a number of things, including commerce. We’re seeing proof of that everywhere now, enabled by smart mobile devices that put the world, literally in the palms of our hands. Alibaba and its enterprises are using the intersection of the internet and smart mobile devices and the cloud and technology to expand the commerce opportunity for Chinese citizens, first in their country, and soon anywhere in the world. 2014 is going to be an interesting year for many reasons, not the least of which is to see how the Alibaba IPO unfolds and what impact that event will have on commerce globally.

What do you think?

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The How We Shop Report, a PYMNTS collaboration with PayPal, aims to understand how consumers of all ages and incomes are shifting to shopping and paying online in the midst of the COVID-19 pandemic. Our research builds on a series of studies conducted since March, surveying more than 16,000 consumers on how their shopping habits and payments preferences are changing as the crisis continues. This report focuses on our latest survey of 2,163 respondents and examines how their increased appetite for online commerce and digital touchless methods, such as QR codes, contactless cards and digital wallets, is poised to shape the post-pandemic economy.

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