Alibaba Group Holding Ltd (NYSE:BABA) has been compared to Amazon.com, Inc. (NASDAQ:AMZN) and eBay Inc (NASDAQ:EBAY) before, but which company’s path will it follow? Amazon has found nothing but success, while eBay has fallen on hard times.
So how can Alibaba be more like Amazon than eBay? Bernstein analysts believe it boils down to doing its own fulfillment.
Comparing Alibaba and eBay
In his report dated Sept. 19, 2014, Bernstein analyst Carlos Kirjner noted some similarities between eBay’s and Alibaba’s Marketplace businesses. The ideas are very similar and turned out to be quite profitable. They simply built websites to match up sellers with buyers, thus creating value online for both sellers and buyers.
The business model also scales very well, as eBay started in the 1990s. At that time, according to Kirjner, “eBay’s Marketplaces had all the characteristics of a fantastic Internet business.” He added that it did become “a very good business” but that the company just didn’t live up to its potential or the expectations of investors.
Where eBay went wrong
The first thing he thinks eBay should have done is built infrastructure to handle fulfillment for its sellers and buyers. He believes that the company’s current management wants to be able to offer a service that’s similar to the fulfillment by Amazon service.
It allows third-party sellers to store their products at Amazon’s fulfillment centers and pay fees for storage, as well as packing and shipping those items to their customers. Because of this service, he thinks Amazon’s Marketplace is growing faster than eBay’s and either is or will soon by bigger by gross merchandise volume
Second, he suggests that eBay should have been more focused on technology, noting that in the early years, the company was mostly a marketing company. Because of this path, he said the company hindered its own ability to keep up with changes and challenges in technology, like search, infrastructure and feature development.
And third, he suggests that eBay should have “tried harder” to pull big brands onto its platform. If the company was unsuccessful with that, then he said it should have created its own ecommerce business that would coexist with its marketplace and focus on the categories in which scale is important. Of course Amazon started with ecommerce and added the marketplace later.
How Alibaba can learn from Amazon (and eBay)
The analyst further said that while eBay missed all of these opportunities, Alibaba doesn’t have to. He notes that the Chinese ecommerce company has a “massive lead” over all others in China, including competitor JD. He thinks Alibaba can not only defend its lead but possibly also extend it.
He believes that Alibaba will end up building its own fulfillment infrastructure across China, similar to how Amazon has done in the U.S. He expects the company to use China Smart Logistics, which is its joint venture with 14 logistics companies.
Kirjner projects that building up this infrastructure in the next five to ten years will probably only be “a small fraction” of the company’s cumulative free cash flow during the time. He also said it’s questionable just how much capital Alibaba would have to lay out because its partners may provide capital or the venture could raise debt or get capital from third parties.
Will Alibaba provide delivery services too?
The analyst doesn’t think Alibaba will build out delivery infrastructure like JD has done in China. Instead, he expects the company to work with its current logistic partners for “last mile delivery.” He based his view on something Vice-Chairman Joe Tsai said in the company’s initial public offering video. Tsai seemed to emphasize how complex it would be to manage “last mile delivery” for their packages.
As far as competitor JD’s delivery service, he doesn’t think that it’s scalable and isn’t sure whether it offers enough of a competitive advantage compared to third-party delivery companies. However, he says if JD ends up being successful in this area, it would still be possible for Alibaba to go down this path as well. In addition, he thinks Alibaba would be the most well-positioned company to build a nationwide delivery network similar to United Parcel Service, Inc. (NYSE:UPS), only in China.
Kirjner also notes that Alibaba already has one thing eBay missed in the past, and that is major brands on its Tmall online property.
