Amazon & Alibaba - Here Comes The Giants

Post in Danish on Mandag Morgen 

On September 19. the IPO of China's largest e-commerce company Alibaba took place, making it the biggest initial public offering ever at $25 billion, according to sources familiar with the sale. They were listed on the New York Stock Exchange under the ticker symbol BABA. Alibaba is China's answer to eBay and Amazon, where you can buy everything from nails to a used Boeing 747 aircraft.

Some journalists and stock analysts have taken the opportunity to remind the world that the dot-com bubble we experienced around 2000 is about to happen again. But unlike the IPO's we saw back then, the companies that go public today, makes money - a lot of money.

Alibaba was founded in China in 1999 by Jack Ma a former English teacher, that then had difficulty getting funding for his business in Silicon Valley. In 2005 they managed to sell 40 percent of their business to Yahoo, that like many other tech companies are buying into new innovative services rather than creating them.

Alibaba Group accounts for over 60 percent of all packages delivered in China, which is their primary market. In November 2013 Alibaba struck all sales records on "Singles Day" - an anti-Valentine's Day for single people, where they were visited by one third of China's adult population and goods sold for $5.7 billion.

There is no doubt that Alibaba has to continue its impressive growth, which is the concern of stock analysts, since Chinese companies historically hasn't been able to conquer dominance in the West. Although Alibaba is not big in the West, small e-commerce companies have to deal with the fact that there are great players on both sides of the globe that will be knocking on Europe's door within a few years.

Amazon - The Shark of  E-commerce  The other major player is Amazon, which in many ways is similar to Alibaba - they sell everything from books, shampoo to data storage with supply, price and cheap delivery as the main factor of competition. Amazon's growth is also increasing, but unlike many of their competitors they use their revenue to constantly invest in new businesses to expand their existing Enterprise. Stock analysts consider Amazon a long-term investment, because they are building their armies to conquer the world not only today but also in the future. Amazon is controlling 26 percent of all e-commerce in the United States and 6 percent globally.

Both Amazon and Alibaba's is to e-commerce, what malls are to retailers. Their success is based on three elements. They have a wide selection of all sorts of goods, their delivery is fast and cheap, and they have algorithms to ensure that they are constantly offering the best prices in the market. Amazon invests a lot of money in customer loyalty hereunder with their Amazon Prime subscription, which gives customers access to movies and TV series and especially free delivery. They make sure to cram as many digital products as possible into their Prime subscription, which does not cost them anything besides data and access, that they also offer themselves. This ensures that their customers begin to shop at Amazon without examining alternatives - because it is convenient.

While Alibaba is strong in the East, Amazon is a leader in the American market and in parts of Europe, including Britain. It is obvious for them to take on the remaining European market, once they have rooted their dominance in their primary markets. If European e-commerce companies and global brands, should learn anything from Amazon's dominance in the United States, it is to prepare a strategy for how you will deal with Amazon or Alibaba - when they arrive.

There are two obvious choices: You can enter a partnership with Amazon or Alibaba, so your goods come from their stock and are sold and distributed from their platform. The second choice is to differentiate on not so scalable services, such as customer service and a unique user experience to concentrate on getting a small slice of the market outside of Amazon. The last alternative is risky if you are a global player, here Amazon's strategy is far more effective. Estée Lauder is an example of a brand that did not want to be on Amazon's distribution platform, but if you search on Amazon you will find thousands of Estée Lauder products, which instead are delivered through third-party distribution channels. Alibaba has the same strategy and is also a shopping window for many small merchants, that gets a spot on the global and especially Asian marketplace through Alibaba's platform.

Tech Bubble or Business Acumen? Some stock analysts and journalists are shouting "dot-com bubble", but even more sources undermines that thesis. Unlike the IPO's we saw before the dot-com bubble around 2000, the companies that go public today, makes money - big money.

It may well be that they do not pay as much in dividends, which is Apple's and Amazon's strategy, but if you want to secure a long-term investment, it is a good sign that a company is constantly investing in new innovative services that can ensure their competitiveness in the future. We have seen it with Facebook's acquisition of Instagram and WhatsApp, Yahoo's acquisition of Flickr, Tumblr and not least Alibaba. Things are moving so quickly in the technology world, so many choose an investment strategy rather than a development strategy.

European brands and e-commerce companies have at best a few years to prepare for the Internet giants' entry - which is not a long time. Building customer loyalty takes time and requires an effort in customer service, logistics, purchasing conditions, user and buying experience and a genuine commitment to customers, which the major players can't master to the same degree, because it is not as scalable as competing on price, free movies or music.

Companies need to surpass the consumer advantage of buying all goods in one place, get the best prices on the market, with free delivery and very favorable purchase terms. It's hard to compete with the conglomerates, because when you do not have free books, movies and TV series, you can offer in exchange for consumer loyalty, other original efforts must be found. To donate part of the deal for a good purpose have also been taken with Amazon Smile, where you choose what purpose you want to support. It may instead be thought leadership, where companies not only share their expertise with customers, but also sets the vision for its industry. It may also be a unique delivery, service, customer experience or sustainability that gives people a good story to tell to their friends and colleagues.

One thing is certain, Amazon and Alibaba are both looking at the globe making plans to capture new segments and markets - and no one will stand in their way.

Danish sources: My talk with Nikolaj Gammeltoft from Bloomberg at Nasdaq by covering Alibaba's IPO (in Danish):