What e-commerce company books more online sales than Amazon and eBay combined, and is about to go public on a U.S. stock exchange? That would be Alibaba Group Holding Ltd.
China’s dominant operator of eBay-like online marketplaces announced over the weekend that it was initiating the process of offering its shares to the public in the United States.
“This will make us a more global company and enhance the company’s transparency, as well as allow the company to continue to pursue our long-term vision and ideals,” Alibaba said in its statement.
Alibaba executives have openly talked about the possibility of an IPO for more than a year, and the announcement signals that they were unsuccessful in winning concessions from the Hong Kong Stock Exchange. The Hong Kong exchange reportedly objected to Alibaba’s ownership structure, which gives founders unusual control of the company. Acknowledging those negotiations, Alibaba said in its statement, “We respect the viewpoints and policies of Hong Kong and will continue to pay close attention to and support the process of innovation and development of Hong Kong.”
The expected Alibaba IPO has been a hot topic on Wall Street, and analysts have projected Alibaba could be valued at between $100 billion and $150 billion when it does go public. For comparison, eBay Inc. has a market value of about $74 billion and Amazon.com Inc. $173 billion.
While still privately held, investors get a glimpse of Alibaba’s business through quarterly reports from Yahoo Inc., which owns 24% of Alibaba. In its most recent quarterly report, Yahoo disclosed that Alibaba generated revenue of $1.776 billion from July to September 2013 and that it’s highly profitable—with net income of $801 million during that quarter.
Most of its profits come from its two massive online marketplaces. Taobao, founded in 2003, is a giant online bazaar where some 7 million sellers were offering 760 million items as of March 2013, according to Alibaba. In 2008, the company created Tmall as an alternative for bigger brands that gives them their own storefronts they can control. Some 70,000 brands sell on Tmall, including such U.S.-based companies as Gap Inc., Nike Inc., Levi Strauss & Co., and, since January, Apple Inc.
Total sales on Taobao and Tmall in 2013 amounted to $245 billion, according to the newly released Internet Retailer China 500. By contrast, eBay reported total sales on its global marketplaces of $76.5 billion in 2013. Amazon does not report the total value of merchandise sold on its sites, but did report that it sold nearly $61 billion of merchandise itself, and that 40% of units sold on Amazon sites were by outside sellers. That suggests Amazon’s total gross merchandise value would be just over $100 billion and that eBay and Amazon handled about $180 billion worth of sales, well short of Alibaba’s sales volume.
One impact of Alibaba’s planned IPO is to introduce more U.S. companies to Tmall, says Zia Daniell Wigder, a Forrester Research Inc. analyst who specializes in international e-commerce. “Alibaba’s IPO is only likely to raise the profile of Tmall among other U.S. brands that have not yet launched storefronts on the site or considered a market entry into China,” Wigder says.
“Tmall has done an extremely good job of aggregating a massive audience of online shoppers in China: Their market share in the B2C space is higher than the leading player in any of the other major e-commerce markets,” Wigder adds. “Additionally, Tmall has helped streamline e-commerce for global brands in a market that’s viewed as incredibly complex.”
Another U.S. executive familiar with Alibaba, Scot Wingo, CEO of online marketing firm ChannelAdvisor Corp., raises the possibility of Alibaba becoming a major player within the United States, a scenario he calls the “Ali-pocalypse.”
Wingo points out that Alibaba has made several investments in the U.S. in recent years. It’s quietly been growing its AliExpress.com site that lets sellers, many of them in China, sell and ship directly to online shoppers in the U.S. and more than 200 other countries. Wingo says the site is attracting 6 million unique visitors a month and could be generating over $1 billion in annual sales. “I could argue that Alibaba already has the fourth-biggest marketplace in the U.S.,” Wingo says, after eBay, Amazon and Groupon Inc.
He points out Alibaba has also acquired two companies that offer selling tools for eBay sellers, Vendio and Auctiva, and is putting that technology to work in a new online marketplace it plans to launch in the U.S. called 11Main.com.
In addition, Alibaba also purchased last year eBay’s share of ShopRunner, a free shipping and loyalty program that competes with Amazon Prime. Wingo also points to Alibaba’s experience in payments through its PayPal-like payment service, AliPay. Alibaba says there are more than 900 million AliPay accounts, mostly in China, where consumers use the payment service in stores as well as online and to pay utility bills.
Wingo, whose company announced last week a partnership with Alibaba that will make it easier for U.S. retailers to sell on Tmall, says Alibaba could leverage its assets in China and the U.S. to disrupt the U.S. e-commerce arena with low prices for sellers that could in turn lead to lower prices to shoppers.
“They charge 5% versus the 10-15% charged by eBay and Amazon, and ask the sellers to pass on the savings to consumers,” Wingo says. “Will they do this? I have no idea. Could they? Absolutely.”
However, an e-commerce consultant and former Alibaba employee doubts Alibaba is focused today on entering the U.S. market in a big way. “Alibaba’s international strategy is more focused on bringing more international brands and retailers to its platform like Tmall to sell to Chinese consumers,” says Julia Zhu, founder and managing director of Observer Solutions, an e-commerce consultantcy based in Washington, DC. “The focus here is still the Chinese market. For example, Alibaba recently launched Tmall International aiming to attract brands and retailers outside China to sell to Chinese directly from overseas. They believe there is huge demand for international products among Chinese consumers.”
Zhu doubts Alibaba presents an immediate threat to U.S. e-retailers, and says it would have a hard time competing with the likes of Amazon, given the differences in consumer preferences in the U.S. versus China and Alibaba’s lack of a supply chain built to bring goods to the U.S. But the IPO could have some effect, she adds. “It perhaps will help Alibaba to build trust and partnership with brands here in the U.S. and thus better serve its goal of bridging the gap between the needs of Chinese buyers and foreign vendors.”
A Chinese e-commerce analyst says that the fact the IPO will take place in the U.S. is the most important part of the weekend’s announcement. Mo Daiqing of the China E-Commerce Research Center notes that Alibaba is not technically a Chinese company because it’s registered in the Cayman Islands. Since China does not allow foreign companies to sell shares in China, Hong Kong and the U.S. were the main options.
She says the Hong Kong deal fell through because that stock exchange does not permit different classes of shareholders, a setup that allows Alibaba chairman Jack Ma and other key insiders to control the company. She notes that after the IPO Alibaba will have the right to buy back the 24% of the company’s stock that’s owned by Yahoo, which could give Ma and his co-founders even greater control. Japanese technology company SoftBank Corp. also owns 3% of Alibaba.
Despite its dominant position, Mo notes that Alibaba is coming under greater pressure from competitors. In particular, JD.com, the No. 1 retailer in the China 500, has recently formed an alliance with Tencent, a major provider of online games and messaging services in China, and those two companies represent a real threat to Alibaba. JD.com booked 2013 web sales of $18.2 billion and Tencent’s Yixun.com another $2.5 billion. Alibaba is not ranked in the China 500 because it does not sell merchandise itself, rather providing other merchants online shopping portals in Taobao and Tmall. Yixun.com is No. 5 in the China 500.