by Duncan Clark
Alibaba’s e-commerce edge is also honed by another of its websites, Tmall.11 If Taobao can be compared to a collection of scrappy market stalls, Tmall is a glitzy shopping mall. Large retailers and even luxury brands sell their goods on Tmall and, for those customers not yet able to afford them, build brand awareness. Unlike Taobao, which is free for buyers and sellers, merchants pay commissions to Alibaba on the products they sell on Tmall, ranging from 3 to 6 percent depending on the category.12 Today Tmall.com is the seventh-most-visited website in China.
In Chinese, the site is called tian mao, or “sky cat.” Its mascot is a black cat, to distinguish it from Taobao’s alien doll. Tmall is increasingly important for Alibaba, generating $136 billion in gross merchandise volume for the company,13 closing in on the $258 billion sold on Taobao. Alibaba earns almost $10 billion a year in revenue from these sites, nearly 80 percent of its total sales.
Tmall hosts three types of stores on its platform: flagship stores, run by a brand itself; authorized stores, set up by a merchant licensed to do so by the brand; and specialty stores, which carry the goods of more than one brand. The specialty stores account for 90 percent of Tmall vendors. More than seventy thousand brands, from China and overseas, can be found today on Tmall.
In the Singles’ Day promotion on Tmall, the most popular brands included foreign names such as Nike, Gap, Uniqlo, and L’Oréal as well as domestic players such as smartphone vendors Xiaomi and Huawei, and consumer electronics and home appliances company Haier.
Tmall is a veritable A to Z of brands, from Apple to Zara. Luxury brands also sell on the website, although they are careful14 not to cannibalize sales in their physical stores. The presence of Burberry on the site is a sign that Alibaba is no longer just about cheap goods.
U.S. retailers like Costco and Macy’s are also on Tmall, part of a drive by Alibaba to connect them along with other overseas stores to customers in China. Costco’s Tmall store drew over 90 million visitors to its site in the first two months.
Even Amazon is on Tmall, selling imported food, shoes, toys, and kitchenware since 2015. Amazon has long had designs on the China market but has had to settle for just 2 percent of it.
In addition to Taobao and Tmall, Alibaba operates a Groupon-style15 site called Juhuasuan.com.16 Juhuasuan is the largest product-focused group-buying site in China. Buoyed by the huge volume of goods on Alibaba’s other sites, it has signed up more than 200 million users, making it the largest online group-buying site in the world. Together, Taobao, Tmall, and Juhuasuan have signed up over 10 million merchants, offering more than one billion individual items for sale.
Alibaba’s websites are popular in part because, as in the United States, shopping online from home can save time and money. More than 10 percent of retail purchases in China are made online, higher than the 7 percent in the States. Jack has likened e-commerce to a “dessert” in the United States, whereas in China it is the “main course.” Why? Shopping in China was never a pleasurable experience. Until the arrival of multinational companies like Carrefour and Walmart, there were very few retailing chains or shopping malls. Most domestic retailers started as state-owned enterprises (SOEs). With access to a ready supply of financing, provided by local governments or state-owned banks, they tended to view shoppers as a mere inconvenience. Other retailers were set up by real estate companies more concerned with the value of the land underneath their store than with the customers within.
A key factor in the success of e-commerce in China is the burden of real estate on traditional retailers. Land is expensive in China because it is a crucial source of income for the government. Land sales account for one-quarter of the government’s fiscal revenues. At the local government level they account for more than one-third. One prominent e-commerce executive summed it up for me: “Because of the way our economy is structured, the government has a lot of resources. The government decides the price of land. The government decides how resources are channeled, where money is spent. The government relies too heavily on taxes and fees associated with selling land. That almost destroyed the retail business in China, and pushed a lot of demand online. They deprived offline retailers of the opportunity to benefit from rising consumer demand—which they effectively channeled to e-commerce players.” Successful brick-and-mortar retailers—from department stores to restaurants—suffer from success: If they bring in lots of customers to their store, they can expect a hefty rent hike when their lease is up for renegotiation.
As a consequence, there has been far less investment in marketing, customer service, human resources, or logistics in China’s traditional retail sector than in the West. The result? China’s retail market is highly fragmented and inefficient. In the United States, the top three grocery chains account for 37 percent of all sales. In China, they account for just 7 percent. The largest department stores in the United States represent 44 percent of total sales in that segment. In China? Just 6 percent.
Despite massive construction of shopping malls, supermarkets, and corner stores, China’s offline retail penetration is still extremely low. For every person in China there are only six square feet of retail space, less than one-quarter the space in the United States.17
China will likely never close the gap. Why should it? Traditional retail is hardly a paragon of efficiency. With the burdens of inventory and rental costs, offline stores are rapidly losing sales to online players in many product categories.
In China today, some shop owners are too busy taking care of customers online to bother with those who actually wander into their store. Many vendors in China have simply dispensed with the shop entirely: Why rent an expensive space that is only open at most half of every day when your Taobao storefront is open 24/7?
Nature abhors a vacuum and in China the Internet is filling the voids created by a legacy of state ownership and state planning. That’s why shopping online in China is even more popular than in the West. Jack summed it up: “In other countries, e-commerce is a way to shop; in China it is a lifestyle.”
Taobao opened the door to online shopping in China, and Tmall has widened it even further. Taobao’s early adopters were young, digital natives, but increasingly their parents and grandparents are buying online, too. As the mix of people buying online has broadened, so has the mix of products. The most popular items on Alibaba’s sites are shoes and clothing, ranging all the way up from socks and T-shirts to dresses costing tens of thousands of dollars. The day after the country’s biggest television broadcast, the Spring Festival Gala on China Central Television, the dresses worn by the celebrities—or approximations of them—are already on sale on Alibaba’s sites. Many storefronts feature photos of people—including the merchants themselves—modeling a wide range of body sizes to make it easy to buy online. Customers know that if the clothes don’t fit, or are defective, they can return them without charge.
Groceries are another popular category because, as Jack explained, “supermarkets in China were terrible; that’s why we have come out on top.” Already more than 40 percent of Chinese consumers buy their groceries online as compared to just 10 percent in the United States. In 2014, online grocery sales in China grew by half. Offline, they grew only 7 percent. Tmall offers grocery items in more than 250 cities in all but six of China’s thirty-two mainland provinces, typically at cheaper prices than in a supermarket. Alibaba already offers next-day delivery of refrigerated items in more than sixty cities and also features a wide range of imported foods. Working with the Washington State Apple Commission, Alibaba secured more than eighty-four thousand individual orders for apples that were picked, packed, and freighted to customers in China within seventy-two hours, amounting to 167 metric tons and equivalent in volume to the capacity of three Boeing 747s.
Young mothers are a key customer base for Alibaba. James Chiu, a representative from the Dutch infant formula company Friso, which was showcased by Alibaba on Singles’ Day 2015, said that for young mothers in China, “e-commerce is not a channel, it’
s a lifestyle, an ecosystem.” The group sold almost $10 million worth of products on Singles’ Day by 6 A.M. alone, more than their 2014 total.
Computers, communication products, and consumer electronics are popular items on Taobao, as are household goods, from hair dryers and microwave ovens to TVs and washing machines. Here the impact on offline retailers has been especially dramatic. On Singles’ Day, Alibaba’s sales of home appliances regularly exceed half of the annual sales of the country’s largest consumer goods retailers. In August 2015, Alibaba acquired 20 percent of retailer Suning for $4.6 billion. Selling electronics and white goods as well as books and baby products, Suning operates more than sixteen hundred stores in almost three hundred cities. The deal with Alibaba, part of the growing “omni-channel” or “online to offline” (“O2O”) trend, means that even if customers go to Suning merely to test out a product, the company can capture some of the revenue when they buy the item online.
Alibaba sells automobiles online, too. General Motors brands Chevrolet and Buick both operate stores on Tmall, where they also market interest-free auto loans, a critical competitive tool in a market that is already GM’s largest. Automobiles are a popular category on Singles’ Day, as buyers can expect to score discounts as well as beneficial payment terms. Real estate is another category. The superrich can browse lists of entire islands for sale in Canada, Fiji, or Greece.
Taobao is famous for offering all sorts of outlandish items, too. One university student gained notoriety for offering earrings that feature dead mosquitoes—like the insects, each pair is unique. Another vendor even sold bottled farts online.
Taobao isn’t just about products. Customers can also buy services, too. Artists and musicians find commissions on the site. The sheer variety of services on offer provides a revealing insight into China’s fast-changing social mores. Young men can hire a fake girlfriend to attend social events, or outsource a breakup with their real girlfriend to a specialist on Taobao. Wives worried about a straying husband can subscribe to a counseling service offering techniques to fend off a mistress. Busy young urbanites can hire surrogates on Taobao to visit their parents. To overcome a chronic lack of donors, Alibaba’s group buying site, Juhuasuan, even teamed up with sperm banks in seven provinces to entice qualified donors with an offer of more than eight hundred dollars. This is the going rate offline, but with the power of online marketing more than twenty-two thousand men had applied within forty-eight hours.
Feel-good items such as cosmetics and jewelry are popular items on Taobao, too. Merchants are drawn to the category for commanding some of the highest margins for any product sold online. Today an estimated 42 percent of skin-care products in China are sold online, a number boosted by the wide availability of goods sold by merchants who have found a way to circumvent high import duties.
Counterfeit goods are thought to be the world’s largest illicit industry, more profitable by some estimates than the drug trade. Sales by merchants of pirated goods on Taobao helped boost the early popularity of the website and continue to be a bone of contention for brand owners. China’s fake goods can be so high quality that they defy detection even by legitimate manufacturers, made by “extra shift” production runs in the same plant as the real items, typically using leftover materials. As workshop to the world, China is a big part of the piracy problem. But as it becomes the world’s largest consumer base, it has to be part of the solution, too.
Speaking at a fair for online merchants in Guangzhou, Jack once18 addressed these concerns: “Are there any counterfeit products [on Taobao]? Of course there are. This is a complicated society. Taobao itself does not make fake products, but Taobao is providing some degree of convenience for those who make fake products. Taobao is a digital platform.” Jack then urged the merchants who sell genuine products on Taobao to unite, enforce regulations, and kick out the merchants who sell fakes, telling them: “We keep track of all of you who make and sell fake products. You will be punished.”
But Alibaba’s efforts have not always convinced brand owners. In November 2011, the same month that Baidu was removed from its list, Taobao was added to the “Notorious Markets List”19 published by the Office of the United States Trade Representative (USTR), America’s chief trade negotiator. Inclusion on the notorious markets list not only threatened to damage Alibaba’s reputation with merchants, but also complicated its plans for an IPO. In response, the company ramped up its efforts to weed out the largest traders of counterfeit items from Taobao, prompting a number of them to form an “Anti-Taobao Alliance” and march on Alibaba’s offices in Hong Kong in protest. Alibaba also raised the bar for vendors selling on Tmall, increasing service charges and deposits, a move that triggered an angry response from thousands of merchants who accused Taobao of monopoly practices and marched on Alibaba’s headquarters in Hangzhou.
To appease the USTR Alibaba also ramped up its lobbying efforts20 and in December 2012 Taobao was removed from its list—although a number of U.S. software, clothing, and shoe manufacturers have continued since then to push for sanctions against Taobao to be reimposed.
As the perennial tensions over piracy highlight, the sheer volume of goods on sale on its platforms means Alibaba has to strike a delicate balance between serving the interests of consumers and merchants as well as protecting its own reputation. Binding Alibaba even closer to buyers and sellers is the second edge of the iron triangle: logistics.
The Logistics Edge
On Singles’ Day 2015, orders placed on Alibaba’s websites generated 467 million packages, requiring more than 1.7 million couriers and four hundred thousand vehicles to deliver the goods. China today has a veritable army of couriers. On foot, bicycles, electronic bikes, trucks, and trains they are the unsung heroes of the country’s e-commerce revolution.
Chinese consumers spent more than $32 billion on package deliveries in 2014. The number increased by more than 40 percent in a year. But the volume is set to grow dramatically in the years ahead: On average less than one package per month is delivered for every person in China.
Without the low-cost delivery that the courier services provide, Alibaba would not be the giant it is today. To survive in a cutthroat industry, some of the courier firms have adopted clever methods to keep costs at rock bottom. In Shanghai, for instance, couriers shuttle back and forth on the subway, passing packages over the barriers to one another to avoid buying multiple tickets.
But none of these couriers are employed by Alibaba itself. Most of the packages in China are delivered by private couriers. Where for-profit delivery services have yet to be rolled out, mostly in the countryside, China Post handles the rest.
In 2005, Alibaba approached China Post, proposing to work together on e-commerce. But, chief strategy officer Zeng Ming recalled, Jack “was laughed at. They actually told him to stick to his own business. They didn’t believe in express delivery.” China’s courier companies saw the same opportunities that prompted companies like Wells Fargo to launch their own private parcel delivery and banking services during the California Gold Rush in the mid-nineteenth century, in response to the inefficiency of what was then the United States Post Office. In China, the e-commerce gold rush has stimulated the rise of more than eight thousand private courier firms, of which twenty major companies stand out.
Alibaba’s home province of Zhejiang is home also to most of China’s largest courier companies. They play a critical role in delivering goods all over the country. Over half of the package delivery market in China is carried out by just four companies, known as the “Three Tongs, One Da”: Shentong (STO Express), Yuantong (YTO Express), Zhongtong (ZTO Express), and Yunda. Remarkably all come from the same town, Tonglu, not far from Hangzhou. More than two-thirds of their business comes from Taobao and Tmall. Together with two other smaller delivery companies they are often referred to as the “Tonglu Gang.”
The Tonglu Gang along with a company called SF Express21 have played a major role in Taobao’s success. ZTO cofounder Lai Jianfa
described the relationship: “Delivery companies are a propeller. We are the strongest force driving Alibaba’s fast development.”
Alibaba has invested together with these companies and others in a firm called China Smart Logistics, or “Cainiao.”22 The combined hauling power of the fifteen logistics partners in Cainiao is staggering. Together they handle more than 30 million packages a day and employ more than 1.5 million people across six hundred cities.23 Cainiao is building a propriety information platform that knits together logistics providers, warehouses, and distribution centers across the country. Alibaba owns 48 percent of Cainiao, which, with the involvement of the Tonglu Gang and other self-made billionaires from the province, gives the company a distinctively Zhejiang flavor.24 The Zhejiang-born billionaire Shen Guojun25 is a major investor in Cainiao, and served as its inaugural CEO. Fosun, best known overseas for its purchase of Club Med, is a 10 percent shareholder. Fosun’s chairman, Guo Guangchang, is also a native of Zhejiang. In December 2015, Guo was apparently detained for questioning by the Chinese authorities before being released several days later with no explanation, causing a sharp decline in Fosun’s share price.