Why Alibaba May Not Become a Big Name in the US Online Retail Market

Those who are expecting Alibaba Group (NYSE: BABA) to make a major push into the U.S. online retail marketplace are going to have a very long wait. Despite its listing on the NYSE, investments in Silicon Valley, its Ali Express B2B operation and entry into the U.S. Cloud Data Center market, there is a strong possibility that the Chinese e-commerce giant will never be anything but a niche player in the North American market.

The major reason Jack Ma will stay away from mass retail in the U.S. is that the cost of entering in the market could simply be too high. The revenue from a large-scale U.S. retail operation might not justify the cost of setting up such a venture.

Alibaba has little incentive to enter the U.S. market given its success in its core market in China. Alibaba’s CFO, Maggie Wu, reported that the company’s revenues grew by 40% between fourth quarter 2013 and fourth quarter 2014 in a recent press release.

“Gross merchandise volume across our China retail marketplaces grew 49% year on year, and our annual active buyers increased to 334 million in 2014, an increase of 45% year on year,” Alibaba Group CEO Jonathan Lu said in the same press release. Those numbers indicate that Alibaba may not need the U.S. market; instead, China might provide the company all the room for growth it needs.

Why the Cost of Entering the US Market Could Be Too Steep for Alibaba

Alibaba will have a hard time becoming a major player in the North American market for one simple reason: most Americans and Canadians have never heard of Alibaba. Currently, the North Americans that are familiar with Alibaba are stock geeks, online retail enthusiasts and people that have spent time in China. The average consumer here has never heard of the company.

Some recent numbers from Statista demonstrate the problem Alibaba would face entering U.S. retail quite well. We will begin with Statista’s ranking of the 10 U.S. retail websites that attracted the most visitors in Third Quarter 2014. Those sites were:

1. Amazon (NASDAQ: AMZN), which attracted 168 million visitors a month.
2. eBay (NASDAQ: EBAY), which attracted 111 million visitors a month.
3. Apple (NASDAQ: AAPL) sites, which attracted 95 million visitors a month.
4. Walmart (NYSE: WMT), which attracted 73 million visitors a month.
5. Target (NYSE: TGT), which attracted 51 million visitors a month.
6. Best Buy sites (NYSE: BBY), which attracted 27 million visitors a month.
7. Kohl’s (NYSE: KSS), which attracted 23 million visitors a month.
8. Home Depot (NYSE: HD), which also attracted 23 million visitors a month.
9. Etsy, which attracted 22 million visitors a month.
10. Sears (NYSE: SHLD), which attracted 20 million visitors a month.

As you can see, Alibaba’s U.S. online retail operation, AliExpress, does not appear on that list. Alibaba simply has no name recognition in the United States. Ali Express cannot attract enough visitors to beat Sears.
Alibaba would have to invest a fortune in both advertising and infrastructure to gain the kind of name recognition market share that even smaller players like Kohl’s have. The growth rate for U.S. e-commerce sales might not that worthwhile; U.S. e-commerce sales in Fourth Quarter 2014 totaled $69.43 billion, a figure that grew by 14.61% to $79.57 billion. That means the total additional revenue available in the U.S. ecommerce market only increased by $10.14 billion; the room for growth might be too limited for Alibaba.

AliExpress has enjoyed some success as a digital mass merchandiser in the U.S., according to Statista. The statistics portal listed the top 10 digital mass merchandisers in the U.S. in July 2014 as:

1. Amazon, which attracted 72.53 unique visitors in July 2014.
2. com, which attracted 34.9 million unique visitors in July 2014.
3. com, which attracted 18.78 million unique visitors in July 2014.
4. com, which attracted 9.83 million unique visitors in July 2014.
5. Staples, which attracted 8.94 million unique visitors in July 2014.
6. AliExpress, which attracted 8.45 million unique visitors in July 2014.
7. com, which attracted 8.19 million unique visitors in July 2014.
8. Barnes & Noble, which attracted 5.97 million unique visitors in July 2014.
9. com (NASDAQ: COST), which attracted 5.88 million unique visitors in July 2014.
10. QVC (NASDAQ: QVCA), which attracted 5.86 million unique visitors in July 2014.

 

These figures show that Walmart’s online push is paying off, but they also indicate that AliExpress is succeeding in the B2B arena. It is managing to slowly but surely find some market share in specialty areas such as office and business supplies. This means that AliExpress is more a niche Internet retailer in the U.S., like Staples, than a mass retailer.

Alibaba vs. Walmart

The figures also show that there are three ways that Alibaba could build up a lot of market share in the USA. These strategies, all of which would require a lot of time and money, are:

1. It could slowly build up a customer base as a B2B retailer then quietly move into other spheres of commerce as it builds its reputation. Once it gains acceptance in office supplies, AliExpress could start beefing up its electronic offerings. To do that, Alibaba would have to make major investments in fulfillment centers and other infrastructure here in the U.S., much as Wal-Mart is doing.

2. Alibaba could gain instant name recognition on Main Street and customers by purchasing one or more existing e-commerce operations with a strong customer base. An obvious way to do this would be to acquire eBay, which attracted 111 million visitors a month in the third quarter of 2014. eBay might come into play when it reduces its enterprise value by spinning off PayPal. Other potential acquisitions could be Sears.com or OfficeDepot.com (which might become available when Staples acquires Office Depot).

 

 

3. Alibaba could enter into joint ventures with existing U.S. retailers. It could team up with a company like Sears, Best Buy, Target or Staples to set up an American version of its successful Tmall with a name familiar to U.S. customers. One advantage to this could be that the U.S. partner would provide the American logistics and marketing expertise that Alibaba lacks.

The interesting question we need to ask here is, would it be worth Alibaba’s time and resources to follow such strategies? My instinct says no because the potential gains would outweigh the time and expense.

Please be advised that your blogger owns shares of EBAY and conducts retail sales through both Amazon.com and eBay.