AP reported yesterday, based on informal conversations with people at an unnamed U.S. clothing company, that Alibaba (BABA - Free Report) had penalized it for not agreeing to its exclusivity deal. This resulted in a 10-20% drop in the retailer’s revenue.
Since Alibaba is the leading online shopping platform in China, such agreements might come across as high-handedness, anti-competitive and not in the interest of consumers.
Alibaba has responded by saying that exclusivity deals are commonplace in China. Assuming that he’s telling the truth (and he might be because earlier complaints with the government have fallen on deaf ears and Alibaba has continued as always), maybe we should take a look at the Chinese ecommerce market in a hunt for the reasons why this might be the case.
China’s Ecommerce Market
The Chinese ecommerce market is perhaps the most mature, so it is vibrant, innovative, highly competitive, unique and driven by trends that may not have started to play out in other markets.
Chinese shoppers today have more to spend and are spoiled for choice, making them more discerning, concerned about authenticity and bored. So they are always on the lookout for new experiences, brand interactions, technology integration and personalized offers. While they remain concerned about the security of online payment systems, most are likely to still use them for online transactions (PWC report). This in itself guarantees competition.
The PWC report also says that despite Alibaba’s leadership position, only a very small percentage of Chinese customers shop exclusively on Alibaba. They are far more likely to spread purchases between Alibaba, other etailers and in-store.
Moreover, since shopping is a social experience in China, the Chinese have a strong propensity to use mobile phones and social media channels to buy things. So they may stick with a platform for some things and just as easily move to another for something else, depending on what their social circle is doing.
Retail store space being prohibitively expensive, this has worked out well for retailers, with most expanding their businesses by going online.
China has moved on from the online-to-offline (O2O) model experience to omnichannel fulfillment, and today, the craze is “New Retail.” The concept was coined by Alibaba’s Jack Ma in 2016 and in his words means “the integration of online, offline, logistics and data across a single value chain.” The company’s shopping environment across both the Tmall and Taobao platforms and its physical presence (through its own stores and through agreements with brick-and-mortar retailers) therefore incorporates not just shopping but also entertainment: videos, livestreaming, virtual reality, games, competitions, fashion shows, communities and key opinion leaders (KOLs).
KOLs are an advanced stage of social commerce where Internet celebs endorse products on behalf of brands and their fan bases follow quickly. As may be expected, it’s particularly effective in cosmetics, garments and shoes (also luxury items). So if you’re selling a premium cosmetics brand, a big platform like Alibaba for example would be able to hook you up with a relevant KOL who could drive users to your brand.
All this is very advantageous for global brands as they can leverage an online platform’s strengths to quickly reach more customers. Chinese laws only allow international retailers to operate through online stores, store fronts or through a marketplace like Alibaba or JD.com (JD - Free Report) , effectively pushing them to these platforms to drive sales.
On Dec 27, 2017, the draft PRC ecommerce law was published that more or less legalized the current system of operation of ecommerce companies. But some specifications are encouraging-
The first is that going forward, all online retailers are required to register with the Administration for Industry and Commerce (AIC) and obtain a trade license, whether they operate ecommerce marketplaces, have an ecommerce website, an ecommerce storefront on any digital platform or are simply sellers in a marketplace built by somebody else. This may be expected to reduce the number of counterfeit items on sale by making it difficult for wrong doers to abscond. It can also make things difficult for smugglers. Intellectual property protection may therefore get easier.
The second is a mandate to ecommerce platforms to adopt network security technology and knowhow and specify contingency plans in case of a cybersecurity incident.
The third is a mandate on the protection of customers’ data so they can now search for, edit or delete any personal information or deregister entirely.
International retailers are still required to enter into 50-50 JVs to do business in China (55% in the Shanghai free trade zone). It’s therefore much easier for them to use an online marketplace. The Chinese government also encourages this because it earns from the excise duty and Chinese ecommerce firms make some money out of it.
Yes it’s true that exclusivity deals may not be the way some international brands want to go. But to survive in a market like China, you have to keep the government happy. And the government is happy as long as imported goods are routed through a Chinese company so they are easy to track and collect on, and Chinese companies get a share of the sales.
Even the recent ecommerce law is sweet on companies like Alibaba and JD, so taking them on will be a little bit like taking on the government. The good news is that these are advanced ecommerce platforms and sticking with them for China sales may not be such a bad idea.
Alibaba has a Zacks Rank #3 (Hold). Other companies in the space that are worth buying include Zacks #1 (Strong Buy) ranked Amazon (AMZN - Free Report) and IAC Interactive (IAC - Free Report) or #2 (Buy) ranked Boohoo (BHOOY - Free Report) and ASOS PLS (ASOMY - Free Report) . You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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