The e-commerce market is growing globally, but in China, the expansion is even more remarkable. Motivated by low prices and convenience, Chinese buyers have fully embraced online shopping in a country where Alibaba, Amazon, JD, and Zalando are the big players. Yet the focus is often on the world’s two largest e-tailers, Alibaba and Amazon. The media likes to present these two as rival contenders engaged in a global showdown, but the reality is far more complex, and Amazon and Alibaba are actually quite different. Each has unique features and employs different business models, so it’s important to understand their similarities, differences, and what really makes them tick.
Alibaba “accounts for more than 80% of all online purchases in China,” says Andrew Youderian from eCommerceFuel, and the Harvard Business Review exclaimed in September 2014 that the Chinese multinational company took the stock exchange by storm with the world’s biggest IPO. Given that Alibaba’s business model most closely resembles the eBay model (in which the Alibaba Group acts as a middleman encouraging transactions between seller and customer), these are impressive accomplishments.
Ming Zeng, Alibaba’s Chief Strategy Officer told the Harvard Business Review that “as technology advanced, more business functions moved online… And as we expanded our ecosystem to accommodate these innovations, we helped create new types of online businesses, completely reinventing China’s retail sector along the way.” Zeng is right when he says that Alibaba Group is reimagining China’s retail sector. In fact, everything that Jack Ma’s system does, from the use of analytics and modern technologies to the expansion of the brick-and-mortar stores, is consistently putting the group ahead of Amazon.
In retail, Alibaba’s crown jewel is Taobao: an e-commerce site available only in Chinese that is the world’s biggest online commerce company. According to Alibaba Group’s September Quarter 2018 Results, Taobao was home to 666 million monthly active users, with the number of annual active consumers reaching 601 million for the 12 months ending on September 30, 2018. Taobao operates as a fee-free marketplace (meaning that neither sellers nor buyers pay fees for completed transactions), although sellers who want to rank higher on Taobao’s search engine can pay a fee for better placement and advertising. As a general rule, Taobao is for small-to-medium sized online shops, but Alibaba also operates the site Tmall (formerly Taobao Mall), which is an e-commerce store for large international and domestic brands.
Tmall is an excellent platform for Chinese consumers who want to access international brands. In 2011, the company began a major restructuring strategy that created an uproar in China. China Law Insight reported that Tmall “suffered from a stormy protest from small vendors against its new rules,” and at the time, they mentioned that “antitrust concerns arise in relation to its suspected abuse of dominance in the e-commerce industry.”
The protests began because of the new merchant rules that ballooned the annual technical support fee and security deposits from vendors on Tmall. According to China Law Insight, under the new regulations, the annual technical support fee grew from 6,000 RMB in 2011 to 30,000 RMB and then to 60,000 RMB in 2012 (depending on the size of the B2C store). Additionally, the security deposit increased from 10,000 RMB in 2011 to 50,000 RMB and then to 150,000 RMB in 2012 (again, depending on the store size). The reality is that Tmall had to tighten its rules to increase profit margins and gradually curtail sales of counterfeit goods.
In a press conference organized by Alibaba Group on October 17, 2011, Jack Ma said, “Several governmental departments are taking joint actions to combat online infringements. China’s e-commerce keeps on growing as well. If we do not take any measures to quiet down counterfeits now, it will be hard for China’s e-commerce to achieve further development.”
Tmall matured along with the Chinese market, and today, a variety of established brands operate on the platform (e.g., Motorola, Nike, etc.), and it now has a strategic advantage over the competition because it shares consumers between Tmall and Taobao. With 20,000+ international brands and 4,000+ categories, Tmall Global is now focusing on helping international businesses expand into the Chinese market. In November 2018, “Alibaba pledged to bring $200 billion worth of international goods into China over the next five years through its platforms.” Moreover, through the Centralized Import Procurement (CIP) and Tmall Overseas Fulfillment (TOF) initiatives, Tmall Global hopes to speed up the entry of international brands into China.
Besides e-commerce sites, Alibaba Group also established Alipay: a mobile and online payment system that was initially created to protect buyers from abusive acts and practices from online sellers. Today, Alipay “has over 700 million annual active users — an increase of more than 200 million year on year,” according to Eric Jing, Ant Financial’s executive chairman and CEO.
Meanwhile, the American tech company Amazon just surpassed Walmart as the largest retailer in the world, and the number of Americans subscribed to Amazon Prime reached 100 million in 2019, mostly thanks to the consolidation of the company’s annual membership benefits. These impressive accomplishments are likely why experts want to see Amazon as Alibaba’s direct competition, but despite their equally stratospheric growth, the two platforms operate different growth engines and business models. The biggest difference is that Alibaba operates more as a middleman that connects consumers to sellers while Amazon manages two separate programs: Amazon Vendor Central and Amazon Seller Central, with the latter transforming the seller either into a third-party or first-party partner.
Through the invite-only program named Amazon Vendor Central, sellers grant Amazon ownership of their inventory which will later be advertised and sold directly from the e-commerce platform. In other words, Amazon buys merchandise at a wholesale price from the seller and then sets a higher price before selling it to the consumer. Through the Amazon Seller Central program, sellers maintain full control of their inventory while Amazon operates as the middleman between seller and buyer.
By stocking products and creating an inventory, Amazon is forced to operate warehouses, which comes with exorbitant costs and logistically complex operations. In contrast, Alibaba doesn’t have these issues, letting it achieve higher operating margins. Apart from the separate programs that give sellers more flexibility, Amazon also wins points with American consumers because of its subscription-based business model known as Amazon Prime. The Prime account charges customers recurring fees and offers access to services and products like same-day shipping, free streaming movies and music, and more.
Additionally, the U.S.-based company operates a digital wallet platform: Amazon Pay. However, the mobile wallet is struggling to achieve market success and still isn’t a serious competitor to Alipay. But, in a 2016 interview with PYMNTS' Karen Webster, Amazon’s VP of External Payments, Patrick Gauthier, said that 33 million consumers from 170 countries use Amazon Pay, and sellers using Amazon Pay have seen sales growth “with Amazon [Pay] customers [from] 10 to as much as 33 percent higher than with non-Pay Amazon customers.”
Amazon also founded Alexa: a voice-activated virtual assistant that’s one of Amazon founder and CEO Jeff Bezos’ most remarkable accomplishments. In 2018, Amazon reported a profit of $3.03 billion, or $6.04 per share, up from $1.86 billion and $3.75 per share over the same quarter in 2017. And according to Bezos, “Alexa was very busy during her holiday season. Echo Dot was the best-selling item across all products on Amazon globally, and customers purchased millions [of] more devices from the Echo family compared to last year.”
Now let’s take a closer look at the most important differences between Alibaba and Amazon:
In 2018, Alibaba’s 11.11 Global Shopping Festival achieved a record, earning over $30.8 billion in sales during the 24-hour shopping marathon — even reaching the $1 billion mark in an amazing 1 minute and 25 seconds. The 2018 event easily surpasses the spending of any Western shopping event and was called “the biggest shopping day of all time.” By contrast, in 2019, Amazon sold $7.16 billion worth of goods on Prime Day, up 71% from 2018’s $4.19 billion in sales. Digital Commerce 360 says that while Amazon doesn’t communicate gross sales, it mentioned that over 175 million products were sold during the two-day shopping extravaganza, which was held July 15-16, 2019. It’s clear that Alibaba’s 11.11 wins this contest, however, it’s worth mentioning that the 11.11 event is 2.5 times bigger than Black Friday and Cyber Monday put together.
Hendrik Laubscher writes for Forbes that while both Amazon and Alibaba “offer brands opportunities to generate sales... one is focused on self-enrichment (Amazon) while the other offers a gateway to a platform that is aimed at mutual opportunity and success (Alibaba).” Laubscher points specifically to data collection, and his focus falls on how the platforms use their data. Laubscher adds, “Amazon famously does not share data with third-party sellers or brands as Amazon wants to generate revenue and compete with their partners. Alibaba, on the other hand, shares this data with brands to empower them to make more sales on the Alibaba platform.”
Alibaba is essentially empowering its partners by giving them all the means to succeed, while Amazon is stringent with data sharing because they see their partner brands as competitors. Furthermore, Alibaba engages its customers through gaming and interactive shopping experiences while Amazon is limited in its customer engagement programs. “As Alibaba is a platform business, the better partner brands do, the better Alibaba does as interests are aligned,” says Laubscher.
In 2018, Alibaba’s Gross Merchandise Value (GMV) was around $768 billion while Amazon’s GMV was $239 billion, and despite charging higher operating fees and sales commissions, Amazon still can’t keep pace with Alibaba, who wins even in this category by a significant margin. If Amazon is serious about increasing revenues, it should reduce associated fees instead of raising them. In April 2018, Amazon raised fees for third-party sellers in select categories like apparel, accessories, handbags, and sunglasses. According to the e-commerce analysis company CPC Strategy, for apparel, “sellers will pay 17% of the total sales price, with a minimum fee of $1.00 per item.” And for shoes, handbags, and sunglasses, “sellers will pay 15% on items with a total sales price up to $75, and 18% on items with a total sales price greater than $75, with a minimum fee of $1.00 per item.”
Amazon failed in China, a market dominated by Alibaba Group and JD.com, and earlier this year, it shut down its Chinese e-commerce business. Right from the outset, Amazon struggled to attract Chinese consumers with its Prime subscription model since the benefits Prime offered (fast delivery and discounts) don’t differentiate it from local competitors. Essentially, Chinese companies offer free shipping on all products, while Amazon required customers “to hit minimums of 59 yuan to 200 yuan ($8.79 to $29.81), depending on whether the item was Prime eligible.”
On top of that, Business Insider mentions that Amazon’s mobile app design has flaws and lags behind those of Chinese competitors. As Shirley Lu, an analyst for Euromonitor Internationalsaid in an interview with Business Insider, “66% of digital purchases were made through mobile phones in 2016, amounting to $450.3 billion in sales, and that is expected to grow going forward. Amazon's app, however, seems to be missing the mark in China as it is bland and bare, while competitors' apps are more colorful and festive, which may appeal more to Chinese consumers.”
Conversely, Alibaba has been eyeing the U.S. market lately. In July, the group announced that their platform is now open to small U.S. businesses who want to sell globally. This brings a unique opportunity to American sellers who want to expand to China, India, Brazil, and Canada — countries that are all served by Alibaba. Furthermore, Tmall Global is now available in English “in an attempt to double the number of international brands on the platform to 40,000 in the next three years.”
We predict that Jack Ma’s American dream will meet some resistance from U.S. consumers, but brand loyalty is lower in the United States as compared to China, and those consumers are open to new brands if they offer better value, lower prices, and a better selection than local products.
In their September 5, 2014, filing with the Securities and Exchange Commission (Washington, D.C. 20549), it is stated that Alibaba’s founders started the company “to champion small businesses, in the belief that the Internet would level the playing field by enabling small enterprises to leverage innovation and technology to grow and compete more effectively in the domestic and global economies. Our decisions are guided by how they serve our mission over the long-term, not by the pursuit of short-term gains.” This decision to focus on small sellers and consumers instead of pursuing short-term gains stands in sharp contrast to Amazon’s approach. Moreover, the spirit of partnership and the ability to serve customers is something the founders considered crucial to the success of Alibaba, and this spirit of partnership was formalized under the name Lakeside Partners in 2010.
In a 2014 CNBC interview, Jack Ma again emphasized the group’s commitment to small players. “Today what we got is not money, what we got is trust from the people. Millions of small businesses, so many shareholders, I am very honored and so excited because when you see these shareholders the responsibility I’ve been thinking about the next five to ten years how I can make sure these shareholders are happy.”
By contrast, eCommerceFuel points out that Jeff Bezos “is notorious on Wall Street for continually investing in the future of his company at the expense of providing short term returns/profits to shareholders.” Additionally, Andrew Youderian mentions that Amazon is “alienating suppliers, content partners, and publishers in their pursuit” of getting the best price for the Amazon customers, and the company has been criticized for its treatment of third-party sellers who are struggling to stay relevant on the platform.
As illustrated, both Alibaba and Amazon have strengths and weaknesses, and while Alibaba is a titan in China that enjoys an in-depth understanding of the Asian-Pacific market, it’s a different story for the e-tailer in the American market. In fact, the U.S. has been a tough nut to crack for foreign companies so far. Given the ongoing trade war and President Trump’s anti-China rhetoric, it’s safe to say that traditional approaches won’t work anymore; thus, Alibaba needs to solidify its reputation in the Western hemisphere.
On the other hand, Amazon should learn from Alibaba about how to embrace a “partnership” mentality and build a stronger connection with sellers and business partners. Their win-at-all-costs mantra is a destructive approach that doesn’t work with younger generations that are into socially conscious consumption. It’s an adjustment that would surely serve them well in the long run.