What You’ll Learn
- I said that Alibaba is a no-brainer. Here’s further reasons why.
- Deeper explanation of Alibaba’s potential growth thanks to Amazon.
- The differences between BABA and JD.
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Last time, I wanted to get to the valuation, but that will have to wait a little. First, I’ll address the reoccurring questions that came up.
As background, in case you missed the original article, I’m providing our “inside opinion” based off of what I have witnessed and heard with my own ears on the ground in China.
Our business trips usually start at Hangzhou (north east area of China), where Alibaba’s (NYSE:BABA) HQ is located, and we travel down through the cities via plane, train, bus and taxi in a zig zag, stopping at factories and meeting with various suppliers until we near Shenzhen (near Hong Kong, south east of China). It’s not just the big cities we visit, we are in the trenches of small cities and rural China to inspect factories, quality, process and of course, the people we’ll be working with.
The important context is that this is not a research paper or an investigative piece.
What I’ll hit on are the two asked questions from the article.
- How Alibaba and Amazon (AMZN) help each other in business
- Alibaba vs. JD.com (JD)
Alibaba vs. Amazon? or Alibaba ❤️ Amazon?
“I didn’t understand why as Amazon grows their market, it automatically gives Alibaba free business.” – Question from reader
I’ll start with international growth opportunities. The main bread and butter is still from domestic sales, but I see a lot of international growth still to come – thanks to Amazon.
In fiscal 2018, the international commerce retail business grew 94%. That’s mainly for AliExpress and Lazada.
Actually, let me take one step back and also thank Facebook (FB) and Shopify (SHOP) for the growth.
Because the dropshipping online stores that pop up are flooding in sales for AliExpress.
The process is this:
- Create a simple Shopify store
- Pay $50 for a logo
- Slap on a label
- Post ads on facebook
- Find a winning ad and pour money into that ad until everyone else catches on
Not a sustainable business, but it works. AliExpress shows that it works.
It’s so mainstream and big that it made it onto the WSJ. Here’s the article that came to mind.
To simplify it further, it looks like this.
Shopify -> Facebook -> AliExpress
I bring this up because it’s the same thing with Amazon.
With the Amazon international marketplaces, the supply chain is now:
Amazon -> Alibaba.
Anytime Amazon opens a new market, sellers jump on board and look to source products. And there’s only one place – Alibaba.com.
Recently, Amazon started FBA (Fulfillment By Amazon) in Australia and new sellers in Australia are looking to get on board early.
So far, Amazon FBA is offered in 13 countries, and the list is growing.
The 3 biggest markets so far is USA, UK + Europe, Japan.
What readers didn’t understand in the first article was how Alibaba benefits from Amazon’s growth.
So let’s use the same BBQ gloves examples as last time.
Here’s the results of “BBQ gloves” from Amazon’s UK website.
Here’s Alibaba’s listing.
Amazon Australia is fairly new, but let’s check out the same BBQ gloves.
As Amazon grows, all I can hear is Jack Ma sending a note reading “Thanks Jeff.”
Now, not every product is from Alibaba.
- Big brands and companies that sell directly.
- Resellers – who buy wholesale and sell at retail prices.
- Retail arbitragers – who buy items on clearance from retailers and mark up the price on Amazon.
But the point is, the surge in Amazon’s ecommerce sales is largely due to the exponential growth of 3rd party sellers and products.
Here’s an overlay of the total revenue growth with the growth of North America sales.
Alibaba vs. Amazon isn’t correct.
It’s Alibaba ❤️ Amazon.
Alibaba vs. JD
The most popular question.
“And what do you think of JD competition?” – Reader’s question.
Seeing how the majority of revenue for both companies come in the form of domestic online sales, it’s an important question.
My short answer is:
“Think of JD like Walmart/Amazon. Their focus is B2C, buying wholesale, inventory management, fulfillment and logistics.
Alibaba is focused on a marketplace approach of B2B, B2C, C2C, finance, fulfillment, cloud. People think they are similar, but they are different in so many ways.”
Alibaba operates Taobao, which is C2C. Similar to eBay (NASDAQ:EBAY), and 3rd party sellers on Amazon.
Alibaba’s Tmall is B2C where branded and authentic goods are sold by the companies directly to the consumers. Again, Tmall is simply a platform here. Tmall does not buy, hold or ship inventory.
JD.com is also B2C where they buy, hold and ship inventory directly. Amazon also does this by buying wholesale or creating their own Amazon Basics private label and selling to consumers.
Where JD and BABA differ drastically is their approach.
JD sees itself as a true retailer. They are a straight up vertical retailer with the best logistics network in China.
Alibaba sees itself as a marketplace and tech company.
It’s why retailers like Walmart (WMT) are partnering up with JD and not BABA.
You can see this in the way people order items. When we visit the bigger cities in China, people shop via JD.com and Tmall. JD is the place to be for fresh food and consumer electronics, whereas Tmall sells a ton with cosmetics and fashion.
Makes sense because JD is able to deliver most packages within 24 hours with hundreds of last mile small warehouse stations laid out throughout China in order to achieve spectacular delivery times. Imagine buying a fridge and getting it the same day or tomorrow.
JD’s strength comes in:
- Controlling the distribution channel
- Earning customer trust
- Speed of delivery
Alibaba is playing catch up in the logistics game for sure. As each company tries to dominate or stay dominant, these behemoths are still very active in evolving their strategies.
Again, Amazon proves to be a great example of the BABA vs. JD debate.
Amazon started as:
- A book seller
- Then a pure play retailer
- Then opened it up as a marketplace
All while relying on help from UPS (NYSE:UPS), FedEx (NYSE:FDX) and USPS.
Here we have JD as a pure play retailer, with their own logistics network. Already way ahead of Amazon in terms of infrastructure and designing their perfect system without having to rely on other companies.
They have their own 3PL division, which is seeing strong growth, but the part they miss is #3. Allowing any seller to sell on their platform.
BABA is the reverse. They started as a marketplace, now in a joint venture to create a logistics company and another to open a physical retail store.
From what we’ve learned from Amazon, online sales and traffic growth exploded thanks to marketplace sellers, and acquiring Whole Foods has opened up new possibilities of getting products into customers’ hands faster.
JD would need to integrate 3rd party sellers to clearly overtake BABA.
- Is JD willing to risk their “trust” brand by allowing 3rd party merchants to sell directly?
- How will JD handle the potential hundreds of thousands of sellers?
- How will JD adjust their streamlined logistics to keep up the same day or 1 day shipping?
BABA would need to create an equally complex and expensive logistics system to keep JD at bay.
- How can BABA be sure that Cainiao will hit their goals?
- With so many joint ventures, can they stay focused?
- How can BABA grow and protect their marketplace further as more start-ups pop up to take market share?
Plenty of questions I don’t know the answer to. But what I’m confident about is BABA’s ability to generate free cash flow compared to JD, which likely needs to keep tapping into existing or new partnerships to fund their growth.
Not something Alibaba has to worry about.
An easy way to look at this is the FCF to Sales ratio. FCF/S shows how much a dollar of sales turns into FCF.
Now check this out.
At the peak in 2016, Alibaba was converting $0.50 of every dollar into FCF.
Last year, it was 43%.
Let that sink in.
Now look at JD and Amazon.
While Alibaba was doing 43%, JD did 5% and Amazon did 3.6%.
If you dig into the margins and numbers, it clearly shows two different stories.
JD is currently taking the path of Amazon of reinvesting as much as they can. Alibaba on the other hand, has already created an internal bank and can afford to make mistakes without harming their business.
Sure JD has the bling and sexiness next to its name, but I find Alibaba to be a safer bet, with just as much upside.
Next time, finally the numbers.
Disclosure: I am long BABA, FB.