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Reshaping Retail on the Global Stage

To say that Amazon has shaken up US retailing is almost a cliché at this point. Looking globally, we see powerful tremors from seismic shifts in retailing driven by Alibaba in China and MercadoLibre in South America. These firms, however, aren’t cookie-cutter versions of Amazon. Whereas Amazon spent years building state-of-the-art warehouses and logistics infrastructure, Alibaba and MercadoLibre didn’t need to because they didn’t own inventory. Both firms initially had more in common with eBay, allowing merchants to sell goods on their online marketplaces.

Over time, these distinctions have blurred. Alibaba and MercadoLibre have been investing in logistics infrastructure to help ensure deliveries reach customers on time. Meanwhile, over half of Amazon’s online sales now come from higher margin third-party sellers, which list their products directly alongside Amazon’s own warehouse inventory.

Amazon—an Advertising Powerhouse

Amazon is big, and its disruptive impacts are far-reaching—just as its name implies. But it has only recently become a profitable disruptor. That change has been driven, in part, by becoming a powerhouse in online advertising. At the core of Amazon’s advertising services is a rich pool of data it keeps on the shopping habits of its estimated 410 million active users globally.

Amazon knows what customers browse for and buy and what they are willing to pay, giving them an information advantage over platforms that don’t facilitate transactions themselves. And because Amazon visitors are primarily there to make a purchase, Amazon ads convert to sales at 3.5x higher rate than Google ads.1 Going forward, our US Growth team believes Amazon’s ad revenues will remain a significant profit stream.

Amazon hasn’t had a straight line to success since going public in 1997. And that’s perfectly fine with Jeff Bezos, chief executive officer (CEO) and founder of Amazon. In his view, being a game changer requires experimentation, a willingness to fail, and a long-term orientation that means capital investments can take five to seven years to bear fruit.2 This approach has led to some surprising breakthroughs, like Amazon’s Echo smart speakers, powered by Alexa, the cloud-based voice assistant. But it’s also produced disappointments that unnerved shareholders, like the Fire Phone, and mounting losses from failed efforts to compete in China.

 Alibaba’s Retailing Ecosystem

Two years after Amazon went public in 1997, China’s Alibaba launched a business-to-business (B2B) website for small manufacturers looking to export overseas. Alibaba’s birth as an online retailing giant, however, didn’t really happen until four years later in 2003, the year eBay acquired China’s Eachnet.com. Countering eBay’s move, Alibaba quickly launched an online marketplace called Taobao, connecting fledgling merchants and small entrepreneurs with Chinese shoppers.

In just two years, Taobao’s share of China’s market of small businesses selling to consumers approached 60%, forcing eBay to close down Eachnet.com in 2006.3

Most shoppers in China didn’t own credit cards, and many were suspicious that online products might arrive as something less than advertised. Alibaba developed Alipay to resolve both issues. It creates an escrow service in which cash received for a sale isn’t released until the product arrives in satisfactory condition.

Alipay was quite lucrative as a standalone business, but it also gave Taobao a leg up over eBay, which didn’t offer an Alipay-like service. Today, Alipay processes 80% of all transactions across Alibaba’s ecosystem of online marketplaces and 60% of China’s total mobile transactions.

Taobao’s rapid growth and ability to outmaneuver eBay were extraordinary by any yardstick, and it became hugely profitable. Like eBay, Taobao didn’t own or hold inventory in expensive warehouses.

Taobao’s strong operating margins come from consumer data, and the advertising services it sells to merchants eager to stand out from the online crowd. Long before Amazon bought Whole Foods, Alibaba was investing in retail chains, including a Costco-like market called Sun Art, department-store operator Intime, electronics retailer Suning, and its own homegrown grocery chain named Hema Xiansheng.

By integrating offline and online retail, Alibaba wants to deliver products to shoppers by whatever route they prefer—ordered online and delivered home, pre-sorted for in-store pick up, or neatly displayed so consumers can touch and experience new brands in person.

Behind the scenes, Alibaba’s new retail strategy aims to digitise the entire supply chain, both online and offline, and collect more detailed consumer data. The ability to follow and analyse vast quantities of product and consumer data helps Alibaba eliminate inefficiencies with smart logistics, digital inventory management, anticipating evolving consumer trends and personalised shopper experiences.