Amazon vs. Alibaba: A Rivalry Fueling Retail Innovation

Global marketplaces such as Amazon and Alibaba are continuing to expand their market share, both domestically and internationally. Digital marketplaces are flourishing, and consumers tend to shop on marketplaces because of the outstanding customer experience, its simplicity, reliability and efficiency. For instance, the goal of Amazon is to be the earths most customer-centric company, driving customer loyalty through its prime program, and attracting new customer by providing outstanding end-to-end services. Digital marketplaces are capitalising on technologies such as artificial Intelligence (AI), machine learning, real-time personalization to provide a seamless customer experience. The constant evolvement of marketplaces is exciting and beneficial, looking from a consumer perspective.

The endless question among retailers is still: should we establish our brand on a marketplace? Some worries when answering this question are:

  • We will not own the customer relationship
  • How do we control the customer service?
  • What about inventory and shipping?
  • The margins are so slim
  • Will our products identity be stolen?

When listing the pros and cons, it is difficult to ignore the fact that marketplaces are here to stay. Can you risk to be absent where your customers are? Maybe not, but you can still choose to ‘fight’ against the giants by focusing on building your brand, strengthening physical local presence, quick delivery and outstanding customer service. Your competitive edge against Amazon will not be on wide product selection and logistics, but rather focus on user experience, branding and local presence. By assessing your strengths as a local retailer, you quickly realize that you do not have to compete directly with the marketplaces, but instead discover your unique selling point (USP).

There is no right or wrong answer when considering whether to enter marketplaces or not, at least not at this point in time. However, I think it’s important to acknowledge the fact that marketplaces are gaining traction, and understand how they work. This may teach you something valuable, either by embracing the marketplace as an opportunity, or learn how you can “win” customers through your own channels. We will dive into the the two major marketplaces Amazon and Alibaba to understand their business models, comparison of the two, and how they have grown to become leading e-commerce players in their respective markets.

Many people are comparing Alibaba and Amazon, saying the only difference is that Alibaba is targeting the Chinese market and Amazon is mainly targeting the US. This is not the case. For brands, it is important to understand that Alibaba and Amazon is not similar, they have fundamentally different business models. They also generate revenue from partners in different ways.

Amazon Business Model

Amazon sells directly to consumers as a re-seller, and they own the inventory and supply chain of its merchandise. They run a ‘asset-heavy’ model, owning assets along the e-commerce ecosystem. Their goal is to take full ownership of the customer relationship through their Fulfilment by Amazon (FBA) service, which means retailers sends their goods to an amazon fulfilment center for them to pack, ship and handle customer service to the end-consumer. Amazon aims to generate sales through self-enrichment by ‘controlling’ the customer relationship. Amazon offers sales for business-to-consumer (B2C) and business-to-business (B2B). Another big part of their business model is their Amazon Prime subscription service, a loyalty program that gives rewards to the loyal customers who spend more. Their success with cloud computing and Amazon Web Services (AWS) have also played a crucial role and is a continuing to play an important part of Amazon’s future.

Alibaba Business Model

Alibaba acts as a “middle-man”, facilitating trade between sellers and buyers. Alibaba connects the sellers and buyers, and does not own the inventory of the merchandise sold. Their goal is to make “make it easier to do business anywhere”. Alibaba runs an asset-light model where they manage the marketplace. Alibaba relies on its partners success. As opposed to Amazon, they do not aim to completely own the customer relationship, they want to ensure mutual benefit and success by empower their partners. Alibaba operates several dedicated marketplaces tailored to different user groups, while Amazon operates a single platform.

Different platforms Alibaba operates:

Several marketplaces that Alibaba facilitate trade: https://digovation.com/2020/05/13/the-power-of-marketplaces-in-china/

Revenue Stream Comparison

According to Forbes, there is a difference between Alibaba and Amazon when it comes to the revenue stream. Alibaba generates around 86% of total revenues from its core e-commerce global operations, while this is lower for Amazon (diversified revenue stream), which makes 71% from its online retail. Since Alibaba primarily relies on e-commerce operations, it still has potential for growth in other non-core businesses, including cloud and digital entertainment. Amazon on the other hand is already relying more of their subscription services and their cloud computing (AWS). This suggests that Alibaba has a bigger growth potential than Amazon in the long term.

If we look into to the financials, the margins are higher for Alibaba compared to Amazon, as Alibaba operates with much less overhead than Amazon. Amazon is more capital-intensive as they have extensive warehouse network along with the storage costs of carrying much inventory.

Comparison Amazon and Alibaba:

High-level comparison Amazon and Alibaba

Amazon and Alibaba’s Global Ambitions

Amazon is entering new markets in Europe, and is currently operating marketplaces in six European markets. As I live in Norway, I find it interesting to follow the commerce landscape in the Nordics. We have been waiting for Amazon entering the Nordics for a while, and it is now official that they will enter Sweden. This will be a game changer for the nordic retail landscape. In general, I sense the fear of Amazon and defense mode is rapidly being displayed when people talking about Amazon. One company in Norway that looks at Amazon as an opportunity is Orkla, the largest consumer goods company in the Nordics & Baltics. Amazon has enabled Orkla to test sales of various brands without having to fight its way into expensive store shelves.

– It is incredibly exciting learning, which also generates revenue, says Jaan Ivar Semlitsch, CEO of Orkla to E24.

When it comes to Alibabas global expansion, they have marketplaces such as Tmall Global and AliExpress, targeting retailers and consumers outside of China, but with the ultimate goal and purpose of helping Chinese consumers and small businesses. Tmall Global gives Chinese consumers access to international brands, while Aliexpress gives Chinese businesses access to international consumers. The common factor is that Alibaba, either on a consumer level or a business level, brings benefit back to the Chinese society.

Amazon and Alibaba will both continue to expand their presence, and one thing is certain. Their rivalry will continue to accelerate retail innovation globally both directly and indirectly. Directly through their own development, and indirectly as companies are pushed to innovate in order to grow sales through their own channels. The ultimate question is, will you consider utilizing the established platforms in the near future?


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Sources:

https://www.forbes.com/sites/greatspeculations/2020/05/22/amazon-vs-alibaba–one-big-difference/#3bdc3b42928f

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