- Alibaba expects to double its GMV to 6 trillion yuan by 2020.
- They have an iron hold on the retail e-commerce industry in China.
- Retail e-commerce industry grew 33.3% from 2014 to 2015, with 20% annual growth through 2020 projected.
Though a lot of people tend to think of Alibaba (NYSE:BABA) as the Chinese version of our very own Amazon.com, both the companies operate on vastly differing operating models. Amazon is more of a hands-on e-tailer and likes to keep control over nearly everything from buying and selling goods, staying in control of logistics, building warehouses and even threatening to open thousands of stores to help its grocery push. Alibaba, on the other hand, is more of a technology platform that enables buyers to meet sellers, while taking on a supervisory role when it comes to shipping.
Both High-growth but Vastly Different
The difference in the operating models can be seen clearly in the operating margins and revenues of both companies. Amazon’s highest annual operating margin in the last ten years stands at 4.6%, while Alibaba has stayed consistently above the 25% level during that time. On the revenue front, Amazon’s trailing twelve months sales are around $127 billion dollars, while Alibaba has barely scratched $18 billion dollars.
But the one common thread that unites them is e-tailing, as the objective of both companies is to get us to stay right where we are and order things as and when we wish. While Alibaba has strictly stayed put in the Chinese market, Amazon took control of the U.S. market, while expanding its footprint all over the world. And both the companies have grown their top lines more than tenfold in the last ten years. Fortunately for both of them, the double-digit growth rates that both of them have been enjoying so far are showing no signs of slowing down.
Alibaba’s stranglehold on the Chinese market is so strong that even Amazon, with all its money, time and energy, has not been able to expand its reach in the country despite entering the market nearly a decade ago. One of the main reasons for Amazon’s failure in the Chinese market is the size and scale of Alibaba. With the company’s Gross Merchandise Volume (GMV) expected to double from the current 3+ trillion yuan to 6 trillion yuan by 2020, if you are a Chinese seller, you just cannot afford to sit outside Alibaba’s ecosystem because that's where all the buyers are.
With Alibaba becoming the de facto choice for sellers in China, all other platforms become secondary. Interestingly, this is the same advantage that Amazon enjoys in its home market, where companies like Walmart and Costco, despite having a strong store footprints and enough money are not able to pivot towards an e-tail model and attract new customers away from Amazon. But there’s a significant difference between the two: in Amazon’s case, it’s the buyers, not the sellers, that are hooked onto the platform. The end effect, however, is essentially the same.
Both these companies are going to be the kings of their home markets for an indefinite period of time. Alibaba has now perched itself at the top of the Chinese market, and it will be extremely hard to dislodge them from that spot, even if the competing company is as innovative as Amazon.
Also Read: Alibaba Stock Is Due For A Correction Now
The e-commerce market in China has grown at a breathtaking pace in the last ten years, and in all likelihood the growth will continue in the near future, allowing Alibaba to grow even further. China’s e-commerce volume now stands at $581.61 billion as of 2015, a 33.3% jump from 2014. As such, that volume is now larger than total online sales in the United States, and it will continue to growth at a CAGR of 20% until 2020. And the growth they experience will become part of their regular revenues because the bulk of online shoppers in China are urban, educated and young - the last of these being the key to sustained revenues.
With a bright future ahead of them - an exclusive hold over the largest e-commerce market in the world - it’s easy to see why Alibaba makes an ideal target for any long-term investor. There may be some valuation concerns at this point, but with the long growth runway in front of them, there's still a significant margin of safety for investors.