Please find below an interesting article from the Wall Street Journal dealing with the challenges that Alibaba will have to face over the next few months. Indeed since its successful IPO last weekend, high expections loom for the Chinese E-commerce giant.
Through its successful U.S. listing, Chinese e-commerce company Alibaba Group Holding Ltd. became one of the most valuable technology enterprises in the world.
But the real success of Alibaba’s initial public offering will depend on whether it can keep growing without sacrificing its high profit margins of more than 40%. That means deftly shifting its business model to mobile while fending off stiff competition from Chinese rivals.
Alibaba’s shares rose 38% in their trading debut Friday on the New York Stock Exchange, giving the company a market value of $231 billion, higher than Facebook Inc. and Amazon.com Inc. The steep valuation reflects high expectations that Alibaba, which raised $25 billion in its IPO to set a global record, will continue to see strong earnings growth amid a rise in China’s middle class.
“Expectations are very high,” said Peter Luo, an associate portfolio manager at RS Investments, which bought shares in the IPO. “Now Alibaba has to deliver the growth and meet the expectations.”
Hangzhou-based Alibaba’s profit margins are already among the highest in the industry. The company doesn’t sell products itself like Amazon does. It earns a chunk of its revenue by charging merchants for advertisements on its Taobao and Tmall shopping sites. Thanks to a combination of ads and commission fees, Alibaba is more profitable than its U.S. competitors. In the second quarter, Alibaba’s operating margin was 43.4%, much higher than eBay Inc. ‘s 18% and Google Inc. ‘s 27%. Amazon had an operating loss margin of 0.1%.
Alibaba’s high margins are now under pressure as it spends heavily to adapt its e-commerce platform to mobile apps. There also is intensifying competition from Tencent Holdings Ltd. , which is stepping on Alibaba’s toes by connecting its popular mobile messaging apps with e-commerce services.
Still, Alibaba’s shift to mobile is accelerating. Active users for its mobile apps increased to 188 million in June from 136 million in December. About a third of Alibaba’s total e-commerce transaction volume of $81.58 billion in the April-June quarter came through smartphones and tablets, compared with 12% a year ago.
But growth from mobile isn’t without challenges. Alibaba conceded in its IPO filings that merchants are paying lower rates for mobile advertising than they are for PC websites, without giving specific figures.
Many merchants who use Alibaba’s Taobao and Tmall participate in auctions of search keywords. For example, when a shopper enters a keyword like “wristwatch,” part of the search results shows products from merchants who placed the highest bids for the keyword to make their product more visible. Bid prices vary according to how much merchants are willing to pay Alibaba each time a shopper clicks on their products.
Merchants generally pay 3 yuan to 5 yuan (49 cents to 81 cents) a click, said Atsushi Watanabe, a consultant at Shanghai-based T.U. Business Consulting Co., which helps Japanese merchants use Taobao. Apart from search keywords, some merchants also pay for ads that are displayed on the home pages of Taobao and Tmall.
RS Investments’ Mr. Luo said he asked Alibaba executives attending the IPO roadshow in Singapore whether its e-commerce business can be as profitable on mobile phones. Mr. Luo said Alibaba senior executives explained that if consumers spend more time using Taobao’s mobile app for product searches and shopping, merchants will start placing higher bids for mobile search keywords and mobile ads will become more lucrative.
Analysts say Alibaba is under more pressure because Tencent is connecting its popular smartphone messaging apps, WeChat and Mobile QQ, with e-commerce services. WeChat, with more than 400 million users, and Mobile QQ, with about 500 million, allow people to, for exampe, purchase movie tickets or book a taxi in addition to online shopping. Both apps are equipped with Tencent’s own electronic payment system.
Earlier this year, Tencent bought a 15% stake in JD.com, China’s second-largest e-commerce company by transactions after Alibaba, and integrated JD’s online store into its messaging platforms. Tencent also is recruiting small businesses to sell their products through WeChat.
Marco Ma, an e-commerce manager for Factory Five, a bicycle shop in Shanghai that runs an online store on Taobao, received a phone call last month from an official at Tencent’s WeChat messaging app unit who offered to let Factory Five conduct e-commerce through WeChat free of charge.
Factory Five co-founder Drew Bates said “their sales pitch was that WeChat is already an intrinsic part of people’s lives, so bolting on an e-commerce platform is just a logical step.” He said his company started selling some of its products through WeChat last month, in addition to Taobao.
Tencent approached Factory Five with the offer around the same time the bike shop was redesigning its store on Taobao’s mobile app using software tools provided by Alibaba, Mr. Bates said. But so far, Factory Five’s Taobao store generates far more sales than its WeChat store, he said.
Data so far show few signs of threat to Alibaba’s e-commerce dominance. Taobao’s mobile app accounted for 86% of China’s online shopping done through smartphones and tablets in the second quarter, according to iResearch.
But Tencent could be a threat in the future if more consumers warm up to the idea of linking social networks with commerce, Jefferies analyst Cynthia Meng said. “If people are spending so much time on WeChat and Mobile QQ, there will be little time left for other apps,” she said.
The wall street journal: “Can Alibaba Keep Growing Without Sacrificing High Profit Margins?” By JURO OSAWA, Sept. 21, 2014 3:15 p.m. ET.
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