Alibaba Group Holding Ltd. is taking a new approach to boosting sales online: paying its customers to cut their prices.
China’s biggest e-commerce company plans to spend 300 million yuan ($47 million) on summer promotions for goods ranging from iPhones to televisions to air-conditioners sold through its Tmall. The website, which operates a marketplace similar to EBay Inc. (EBAY)’s, is subsidizing its vendors’ deals for their customers.
“They are taking money out of their own pockets and helping clients slash their prices to steal users from 360Buy,” said Michael Clendenin, managing director of research company RedTech Advisors. “It’s a very aggressive move.”
Under the program, which is focused on electronics, vendors on Tmall can apply to the Alibaba unit for subsidies to make up for discounts. Alibaba may also pay rebates straight to consumers.
Luring shoppers to Tmall is a key part of Chief Executive Officer Jack Ma’s plan to tap into booming online sales in China. Alibaba is seeking debt and equity financing to help fund its planned $7.1 billion share buyback from investor Yahoo! Inc. (YHOO)
“Today people think of Alibaba as an e-commerce company, an Internet empire,” Ma said in a June 7 interview in Beijing. “It’s not an empire, it’s an ecosystem.”
Ma said the company could sell shares in an initial public offering within five years, adding that he is confident Alibaba can withstand new challenges. His Chinese e-commerce rivals, he said, have mostly copied American Internet business models.
“Copycats never survive,” he said.
Tmall accounted for 37 percent of Chinese business-to-consumer e-commerce in the first quarter, more than double the 17 percent held by 360Buy.com, the No. 2 player, according to research company Analysys International. Suning Appliance Co. (002024), Tencent, and Amazon.com Inc. (AMZN) each have about 2 percent, the researcher said.
“Alibaba is probably in the best position right now of anybody - they have the platform in place, and the critical mass of eyeballs,” said Ben Cavender, an analyst at China Market Research Group in Shanghai, which advises retailers.
China has more consumers buying online than the U.S., and the value of the country’s e-commerce market may triple, to $364 billion, by 2015, Boston Consulting Group predicts. With more Chinese consumers shopping online, RedTech expects e-commerce to account for 5.3 percent of the nation’s retail sales this year versus 4.9 percent in the U.S.
The ability of online retailers to offer cheaper prices may help them attract cost-conscious consumers as China’s growth weakens, said analyst Cavender. China’s economy expanded 8.1 percent in the first three months of this year, the fifth quarterly deceleration.
“Even if there is an economic slowdown, you’d expect the e-commerce companies will be affected less than the brick-and-mortar stores,” Cavender said.
Success for Alibaba will increase pressure on chains such as Suning and Gome Electrical Appliances Holding Ltd. (493), which are revamping their online businesses to retain customers amid sliding earnings and share prices as e-tailers keep gaining.
Suning says it will offer new products on its Yigou e-commerce site and step up promotions. The company also has a 200 million yuan program to reimburse price differences for customers who find cheaper deals elsewhere.
And Gome has agreements to sell products on the website of E-Commerce China Dangdang Inc. (DANG), China’s biggest Internet book seller. Gome last month said spending on its online business may hurt profit margins. The retailer has agreed to sell 40 percent stakes in its Kuba and Xinruimei e-commerce units to a company controlled by its founder, Huang Guangyu.
“We are feeling the white heat of competition from traditional and online retailers,” Gome Chief Financial Officer Fang Wei said in a conference call.
Gome’s two e-commerce sites, Coo8.com and Gome.com.cn, have advantages over online-retailers in procurement, logistics and delivery, the company said via e-mail.
Gome rose 1.8 percent to HK$1.11 in Hong Kong trading today. The retailer’s stock has declined 38 percent this year, while Tencent, China’s biggest Internet company, has jumped 45 percent. Shares of Dangdang are up 20 percent and Suning’s shares have risen 4.2 percent in Shenzhen this year. Alibaba and 360Buy.com are closely held.
Alibaba’s net income jumped seven-fold to $237 million in the quarter ended Dec. 31, compared to a year earlier, according to a regulatory filing by Yahoo last month. Revenue rose 88 percent to $1.02 billion, according to the filing.
The company is the second-biggest generator of online advertising revenue in China, behind only search engine Baidu Inc. (BIDU), thanks to sales of keywords and banners, according to Analysys.
Alibaba’s business model is similar to EBay, the world’s biggest online marketplace. 360Buy.com and DangDang more closely resemble Amazon by focusing on selling goods themselves rather than hosting external vendors.
Alibaba is more profitable than rivals because it doesn’t stock merchandise itself, according to RedTech’s Clendenin. That means Alibaba has less risk of a squeeze on profit margins from a price war.
“They are essentially just an online real-estate company, selling space on their servers,” Clendenin said. “It doesn’t take any inventory risks.”
While Alibaba’s original consumer marketplace, called Taobao, lets small businesses sell to consumers for free, Tmall serves larger companies and charges fees and takes commissions. Dell Inc. and Fast Retailing Co. (9983)’s Uniqlo clothier are among the brands that use Tmall to reach higher-end Web shoppers.
Competitors have responded with their own investments in online sales. Tencent, China’s biggest Internet company, said it plans to spend $1 billion on its e-commerce unit. 360Buy.com and DangDang are expanding their marketplace divisions in tandem with their main online retail operations. And 360Buy.com said it will offer a 1 billion yuan promotion program for consumers.
“The financial strength of Alibaba means they are in a position to invest in marketing their various platforms,” said Chen Shousong, an e-commerce analyst at Analysys in Beijing. “They are going to be doing what they can to fight off the competition and build a big lead.”
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