Written By: Susan Smithfield – Corporate Finance
Alibaba has single-handedly given China’s hundreds of millions of consumers direct access to manufacturers, eliminating retailers and distributors in the process. This has resulted in lower prices, a wider choice of goods for customers and, above all, an opportunity for businesses to sell their products across the country.
The growth of the company is quite remarkable. In 2015, it registered $485 billion in e-commerce sales, giving it an 80-percent share of China’s $603 billion market. The potential for increased volumes on its platform is massive. More than 680 million Chinese are online and are increasingly switching over to buying goods from e-commerce sites.
In June this year, Alibaba issued its first annual revenue forecast, saying that it expects a 48-percent increase in the current fiscal. The company’s founder, Jack Ma, a former English teacher, has said that he is targeting a $1 trillion gross merchandise volume (GMV) by 2020. By 2036 the number of customers is expected to touch 2 billion.
Launched as a B2B site.
The year 1999 saw Alibaba get its start as a business-to-business site, which connected foreign companies to Chinese manufacturers. A few years later, Jack Ma realised the potential of the Chinese consumer market and invested Alibaba’s profits in Taobao, a C2C platform that met with immediate success.
Soon there was a demand for a B2C site, and the group created Taobao Mall, which gained wide acceptance from Western consumer brands as well as local manufacturers. The site has launched several innovative features including live video-streaming to enhance user engagement. Its mobile platform is wildly successful with consumers, who launched it an average of seven times a day in June. More than 20 million reviews and comments are posted on it every single day.
A world record for sales in a single day
Alibaba’s Singles’ Day, also referred to as Double Eleven, held on November 11 every year is an indicator of the size and potential of the market. The 2015 sale resulted in goods of a value of $14.3 billion being sold in a single day. This figure dwarfs the $1.35 billion achieved on Cyber Monday, a comparable event in the US. To ensure that the products sold on China’s Singles’ Day are delivered on time, Alibaba and its associates use 1.7 million workers, 400,000 vehicles, 5,000 warehouses and 200 planes.
There is an interesting reason for selecting November 11. The day is not a traditional Chinese festival but was initially promoted in 2009 as an “anti-Valentine’s Day”. November 11 is composed of four singles, and the day that was first targeted at the country’s singletons has rapidly become a Chinese institution. Last year, Chinese Premier Li Keqiang’s representative called Jack Ma to congratulate him on the event. The celebrities who promoted China’s Singles’ Day in 2015 included film stars Daniel Craig and Kevin Spacey.
The largest IPO ever
In 2014 Alibaba issued shares at $68 each, raising a total of $21.8 billion. On the first day of trading, the shares spiked 36.3 percent in value, leading to banks releasing their overallotment option and raising the initial public offering (IPO) size to $25 billion. In a unique twist, the largest seller of Alibaba’s shares was not the company itself but Yahoo, an early investor in the company. Yahoo sold a total of 140.3 million shares, raising a tidy $9.5 billion for itself.
Shareholders have been well-rewarded with the price currently at over $90. In the latest June quarter, revenues rose by a healthy 59 percent on a year-on-year basis. This is the strongest growth since the company’s listing on the New York Stock Exchange.
Is Alibaba unstoppable?
With its stranglehold on the e-commerce market in China, the company’s future seems assured. It has also been making a series of strategic acquisitions with the excess cash that its business operations generate. In November it acquired Youku Tudou Inc., a Chinese company that provides online videos. The Alibaba Group also bought a mobile food-delivery app, Ele.me, for $1.25 billion. A Singapore-based e-commerce startup, Lazada Group, was purchased for $1 billion.
But Alibaba does face some nagging issues. In the past, the company has been accused of allowing counterfeit products to be sold on its platform. This has irked Western brands, and many of them have raised complaints about this problem. Jack Ma has not helped matters by saying that often fakes “… have a better quality, a better price than the real product …”. Additionally, the US Securities and Exchange Commission is looking into the e-commerce giant’s accounting methods and the reporting practices for its Singles’ Day sales.
Although these problems may slow Alibaba down a little, it will definitely continue to dominate the e-commerce landscape for many years into the future. There is no other company that receives in excess of 12.7 billion in orders every year and has more than 8.5 million active sellers on its platform.