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Why Alibaba Says It’s Nothing Like Amazon

Alibaba is discovering that the Chinese and U.S. E-Commerce marketplace present their own set of challenges, particularly when looking at the urban versus rural market audiences, but the Chinese E-commerce giant believes tapping into a niche market, like farmers, can help boost its online users and sales growth. Yes, Aliababa is looking to the farmers.

Alibaba CEO Jonathan Lu addressed that topic following a question during the company’s third-quarter earnings call Tuesday (Nov. 4) following an analyst’s question about the report of Alibaba’s $10 billion investment in Taobao — the company’s most successful online shopping marketplace. Lu explained that Alibaba is using its growing online marketplace to encourage those in rural areas, like farmers, to sell online. He explained that in China, 34 percent of people in urban areas use E-commerce compared to only 9 percent in rural areas. Still, he sees this as an opportunity to bring farmers online to sell products. That move would also allow farmers to have a space in the global online marketplace to sell their products, making it less important for Alibaba to target shoppers in the urban market.

Alibaba’s first set of earnings since its record-breaking $25 billion Sept. 19 IPO may be enough to support that Alibaba is on the path to keeping its stronghold as an international leader in E-Commerce sales. The number of consumers shopping on Alibaba’s online marketplace hit 307 million in the third quarter, which was an increase of 52 percent from last year’s 279 million. On its China retail marketplace, sales increased 49 percent to $380 billion and mobile active users on the mobile commerce apps hit 217 billion users. Revenue grew to $2.74 billion, a 53.7 percent increase in the quarter, and the company reported net income of $494 million. Alibaba’s mobile monetization rate also rose 1.87 percent in the September quarter from 1.49 percent the previous quarter, but this could continue to grow as Alibaba added 29 million mobile users just in the past three months.

“Mobile GMV now accounts for 35.8 percent of total GMV,” Joseph Tsai, Alibaba executive vice chairman, said during the earnings call with investors. “Alibaba is very much a mobile company.”

The value of goods sold on Alibaba’s Marketplace exceeded $90 billion in the quarter, which according to InternetRetailer, is more than the combined sales on Amazon and eBay sites worldwide. In that same article, it referenced Alibaba as the “world’s most valuable e-commerce company.”

Alibaba has eight major businesses — Taobao Marketplace, Tmall.com, Juhuasuan, Alitrip, AliExpress, Alibaba.com, 1688.com and Alibaba Cloud Computing — but most of its revenue comes from online Chinese marketplaces, Taobao and Tmall. Alibaba reported that 8.5 billion sellers use Taobao every year. Tmall features goods from more than 110,000 brands. Strong growth across those marketplaces may  set Alibaba up for success in it’s Chinese market, but growth outside of China is where the company must prove itself.

Although CNN Money led its article saying “Alibaba’s quest for global E-commerce domination is right on track,” and suggested with its headline that “Alibaba’s growth cannot be stopped,” other financial experts were quick to say that it’s too soon to praise Alibaba’s early growth. CNBC, for example, spoke with technology expert Mohanbir Sawhney, who said growing pains may be in store for Alibaba, particularly when competing outside of China.

“They have to play this game carefully. They really have to think about balancing their profits and their margins with the growth and the customer experience,” Sawhney, director of the Center for Research in Technology and Innovation at Northwestern University’s Kellogg School of Management, said in the article.

Regardless of the concerns he expressed, Sawhney told CNBC that Alibaba has proved its model, which he said could lay the groundwork for future trends in E-commerce.

“It really to me represents the next generation of E-commerce companies that really don’t have to build out as much of the infrastructure as Amazon did,” Mohan Sawhney, marketing professor and director of the Center for Research in Technology and Innovation at the Kellogg School of Management told CNBC. “Growth is very seductive. There are so many opportunities for Alibaba. They’ve got to be careful because getting into unrelated business around a movie studio or out of China is a very different ballgame.”

But branching outside of its Chinese marketplace and expanding its infrastructure could impact Alibaba’s current profit margins, Sawhney said.

“I think at some point they do have to start build out infrastructure because the good news about the Alibaba model is obviously its very asset light and hence the phenomenal profit margins, the bad news is they have very limited control over customer experience the fulfillment the logistics. I mean Amazon for all its spending has built a excellent customer experience,” Sawhney said.

Tsai spoke Tuesday (Nov. 4) on CNBC’s “Squawk on the Street” segment and addressed the comparisons of Amazon to Alibaba.

“We’ll we’re not like Amazon … Amazon’s margin is hampered by the fact that they take on inventory and they have a large costs of goods sold item, so their gross margin starts [at] a very, very low margin. Somewhere in the low teens. And in our case, we operate in a marketplace model, where the revenue we generate, coming from commissions and also online marketing services, have inherently very high margins,” Tsai told CNBC.

Still, industry experts like to make the comparison, but mostly in Alibaba’s favor. CNBC’s Jim Kramer called Alibaba “Amazon on steroids,” but said “except unlike Amazon, it’s extremely profitable. Therefore, the sky might be the limit for what any Amazon holder might be willing to pay for Alibaba in comparison.”

“Alibaba can keep growing fast for the foreseeable future,” Guo Hui, a senior analyst at TD Ameritrade, said, as reported in InternetRetailer. “He notes Alibaba accounts for 80 percent of online retail sales in China and that the Internet penetration in China is only 45 percent, well below that of many Western countries.”

Alibaba didn’t provide any future guidance, but According to Forbes, Alibaba’s fourth-quarter earnings are  expected to be Alibaba’s strongest for the year, particularly because of the Nov. 11 Singles Day, the Chinese equivalent of America’s Black Friday or China’s version of Cyber Monday, which brought in 5.8 billion worth of goods across Alibaba’s various sites — three times higher than average total U.S. spending on Black Friday and Thanksgiving.

 

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