Alibaba vs Amazon: Business Model, Strategy & Future
Today, Alibaba & Amazon are two of the most powerful eCommerce companies in the world. While it may look like they're competing against each other, but the fact is they aren't. They're different from each other in many respects. This article is exactly about discussing those differences.
Revenue, Profit & Valuation
As per stats, following are the revenues, profit & valuation figures of Alibaba & Amazon in 2019:
Alibaba
Revenue = $ 56 billion, Profit = $ 13 billion & Valuation = $ 479 billion
Amazon
Revenue = $ 232 billion, Profit = $ 11.50 billion & Valuation = $ 1 trillion
On paper, it seems like Amazon is way ahead of Alibaba. But, look at the profit figure of Amazon. Alibaba is generating more income than Amazon with just $ 56 billion sales. That's amazing. Later, in this post, I'll be digging deep & finding out why Alibaba's margin is better than Amazon's.
Personality
Both Alibaba & Amazon are owned by people who're popular & have their own distinct personalities.
Jack Ma
Jack Ma is the one of the co-founders of the Alibaba group. If you're someone who's active on social media sites, then you must have heard of him. He's is the real rags-to-riches success story & his motivational speeches are quite popular on the internet.
Born in Hangzhou, China, Jack Ma started learning English at an early age. He even attended college(after failing in the entrance exam for 4 straight years) with English as a base subject. Due to his proficiency in English, he started his career as a tour guide for international travellers. After that, he served as an English teacher at a local university. Thereafter, he applied to Harvard Business School & got rejected (10 times!). He then went on to apply for 30 different jobs & was rejected by all (including the KFC).
During his struggling days, he once visited to the US & there he discovered that there's a bright future for internet businesses in China. Later, in 1999, he saw a market gap in the Chinese trading eco-system & launched Alibaba. And, the rest is history, as we say.
Jeff Bezos
Jeff Bezos, the world's richest person, is the founder of Amazon. After serving as a hedge fund manager at an investment firm, he founded Amazon as an online book store in 1994. Thereafter, he diversified Amazon & entered into other categories. Today, Amazon, is the world's largest online retailer in terms of revenue.
Alibaba Subsidiaries
Alibaba is a group company that controls many individual internet businesses (known as subsidiaries).
Here's a list of Alibaba's subsidiaries:
- Alibaba.com
- Lazada
- AutoNavi
- Taobao
- Tmall
- Alipay
- AliExpress
- 1688.com
Alibaba.com is the B2B platform that connects Chinese wholesale suppliers & manufacturers with the global wholesalers/retailers. Whereas Lazada is a B2C eCommerce company being operated in south-east Asian countries like Singapore, Philippines, Indonesia, Malaysia, etc.
AutoNavi is a map navigation software just like Google Maps.
Taobao generates 80% of the revenue for Alibaba. It's a B2C eCommerce marketplace that connects small business owners in China with consumers in China. Tmall, on the other hand, is the marketplace that connects global brands like Zara with consumers in China.
AliExpress is a B2C marketplace that connects Chinese wholesalers & retailers to global consumers. Whereas AliPay is a payment wallet for Chinese consumers (similar to PayPal).
1688.com is the B2B marketplace that connects Chinese factories with Chinese wholesalers & retailers. Most sellers on Alibaba.com buy their goods from 1688.com. But, please note that 1688.com website's display language is Chinese.
As you can see, Alibaba's subsidiaries are focused on serving different kinds of users, all somewhat related to eCommerce.
Here's a graphic representation of Alibaba's subsidiaries:
Amazon Subsidiaries
Like Alibaba, Amazon also holds many individual companies as follows:
- Amazon.com
- Audible
- Amazon Web Services
- Whole Foods
- Zappos
- Alexa
- Amazon Prime
- Amazon Pay
- Kindle
Amazon.com is a B2C marketplace & retailers that connects retailers with consumers. They've presence in more than 16 countries like UK, Canada, Australia, India etc.
Audible & Kindle are digital sound & writing solutions respectively. Whereas, Amazon web services is a cloud infrastructure company.
Whole Foods is an organic foods super-mart chain that was acquired by Amazon in 2017. Similarly, Zappos is a shoe & clothing store that was acquired by Amazon in 2009.
Amazon Prime, as you may be aware, is a subscription-based entertainment services that's similar to NetFlix. Prime subscribers also get some additional benefits like Prime Now (Same-day delivery) & FREE shipping on Amazon.com.
Like Alibaba's AliPay, Amazon Pay is also a wallet service by Amazon. Whereas, Alexa is all about smart devices similar to Google's Home.
Alibaba's Business Model
Alibaba's business model is quite fascinating. The crux of their model is to function just like a pure-play marketplace. In other words, Alibaba follows the 'asset-light' model.
Being asset-light means not owning any major assets, just facilitating the transaction & letting the players on the both side do their work.
Alibaba isn't interested in dictating the terms of shipment, customer service or experience. They do only one thing (connecting sellers with buyers) & they do that very well.
Here's how a typical transaction happens on Alibaba/AliExpress/Taobao:
Step 1) A buyer searches for products on Alibaba's websites
Step 2) The buyers finds the product she was looking for & checks its various elements like shipping time, shipping mode, shipping method, packaging, payment, seller trustworthiness factors, ratings, reviews & then decides to checkout securely using Alibaba's checkout system. If required, the buyer can also chat with the seller directly & request for any additional product information.
Step 3) Seller on receiving the order prepares for its shipment & dispatch (via its own network of logistics agents or companies).
Step 4) The buyer receives the product within the stipulated time. In case the buyer requires support, she can directly contact the seller.
Interestingly, Alibaba doesn't cut sales commission or transaction fees from the sales proceed of its sellers. Instead, they earn most of their revenue from sellers in the form of ads fees. Sellers can buy keywords & rank higher in the search results (just like how Google AdWords functions).
In short, Alibaba doesn't collect any fees from the sellers & buyers for selling/buying or using their platform. Instead, it generates its revenue from seller ads.
What separates Alibaba from Amazon is the fact that Alibaba doesn't own or controls the fulfilment or the customer experience part of the eCommerce system. As a buyer, you've to agree to the terms of the sellers. The number of days of shipment, the time of delivery, warehouse, packaging, customer support, etc. is taken care of by the sellers themselves. Alibaba just provides a safe & trusted platform to connect buyers with sellers. That's it.
Alibaba's model explains the reason why their operating margin is better than Amazon's. When you don't own warehouses, fulfilment centres, customer support centres, etc. then your cost obviously drops down. This is also the reason why Alibaba has just 100,000 employees as compared to Amazon's 750,000.
Where Amazon itself tries to control/sell all products, Alibaba's aim is to create many independent Amazons.
Amazon's Business Model
Unlike Alibaba, Amazon behaves more like an online retailer than a marketplace. Sure, it has got millions of sellers on its platform but Amazon also lists its own products. Amazon is generally interested in owning & selling fast-moving goods.
Also, Amazon has bought stakes in some of the largest sellers like CloudTail.
Amazon FBA is a fulfilment service offered by Amazon to its sellers. Under this program, all that sellers have to do is send their stock to Amazon, thereafter stock management, order management, dispatch & customer support are taken care of by Amazon itself.
Amazon charges FBA fees from sellers for using its FBA services. Products that are fulfilled by Amazon are marked as "Fulfilled By Amazon" on the product pages. FBA products are given preference by Amazon in the search results. And, buyers also trust FBA products more than seller-fulfilled products. Amazon prime subscribers generally get FBA products without any shipping fee. FBA products are known for its fast delivery.
Here's how a typical transaction flows on Amazon:
Step 1) Buyer searches for a product on Amazon
Step 2) Buyer shortlists the product, adds it to the cart & proceeds for checkout.
Step 3) Sellers dispatch the product from her warehouse OR Amazon dispatches the product from its FBA warehouse
Step 4) Seller's logistics partner OR Amazon delivery person delivers the product to the customer. In case, the customer requires support, she can contact the Amazon customer support centre or the seller.
As you can see, Amazon follows 'Asset-Heavy' model. That means it owns assets across the eCommerce eco-system to control & deliver the best experience to its customers. Amazon owns warehouses, delivery vehicles, customer support centres as a part of this 'asset-heavy' model.
Unlike Alibaba, Amazon earns its revenue mostly from sellers' commission. That means sellers have to pay a part of their sales proceed to Amazon. Amazon also sells keywords ads to its seller. Amazon doesn't collect any fees from the buyers.
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Alibaba's strategy is to empower Chinese sellers & make them reach to as many buyers as possible. The core objective is to facilitate global (with China as a base) & domestic (China) eCommerce seamlessly.
With a tight grip on the Chinese market, Alibaba has positioned itself well. And, given the capital strength (backed by Soft Bank), Alibaba is no mood to allow any outside company like Amazon to enter the Chinese internet market.
In fact, Amazon has lost the war against Alibaba in China. In 2019, Amazon announced that its closing its domestic marketplace business in China to focus more on other emerging markets like India. However, Amazon continues to serve Chinese consumers through its program called Amazon Global (buying from US, UK, Germany, etc. Amazon stores).
Alibaba understands its Chinese customers better than Amazon. They know how to market & position so as to gain market share in China. In fact, Taobao alone accounts for 80% of the online sales happening in China. Where does Amazon stand a chance?
Alibaba also goes big on marketing on special events like singles day. As per a stat, Alibaba sold a record $ 66 billion worth of goods on singles day, 2019. Whereas, Amazon hasn't been so aggressive with marketing & product categories.
Its also a well-known fact that the Chinese government supports & encourages local Chinese businesses over international companies. In fact, that's also one of the reasons why Facebook & Google couldn't enter China.
To conclude, Alibaba strategy seems to be to hold their grip on their biggest strength i.e. Chinese market & continue functioning with its 'asset-light' business model.
Amazon Strategy
Amazon's strategy is pretty simple & straight-forward. They want to be known as a global leader in eCommerce. Amazon is already doing well in 16 other countries & plans to expand more.
With its flagship FBA program, Amazon is willing to control & connect almost all points of an eCommerce eco-system. In other words, its obsessed with being the mammoth internet retailer with a strong focus on customer experience.
Amazon is doing well in its home country i.e. USA. The US customers are quite different from the Chinese customers in terms of needs & wants. While a US customer gives more importance to product quality, delivery speed & experience, a Chinese customer is more interested in a store that showcases a wide category of products with cheap prices.
Amazon failed in China because it didn't take Chinese customers' preferences into account. Simply copying & pasting the US strategy in China won't work.
Why Is Alibaba More Profitable Than Amazon?
Alibaba is more profitable than Amazon because it follows the 'asset-light' model. With minimum interruption, it simply connects sellers with buyers. That's it. Whereas, Amazon functions more like an online retailers with complete control of orders, fulfilment, dispatch & customer experience.
Also note that, the cost of running business operations in USA is lot higher than running similar business operations in China.
The Future of Alibaba
Alibaba is not as ambitious as Amazon. All it wants is to empower Chinese sellers & connect them to local & global buyers.
With that in mind, I see Alibaba entering into new internet businesses in China & South-East Asia. But, as far as, global expansion like Amazon or entering new non-internet verticals is concerned, I don't see that happening.
Alibaba seems to be positioned well & already showing strong operating margin. And, Alibaba isn't a type of company that will hamper its margins for extra-ordinary growth or ambition.
Yes, they'll play safe in future.
The Future of Amazon
Whereas, Amazon is an ambitious company with dreams to "change the world". In fact, their subsidiary "Blue Origin" plans to make space travel affordable to common man.
As far as eCommerce is concerned, Amazon wants to expand fast into other countries. At the same time, its also innovating & investing hugely in sectors like AI, drone delivery, machine learning, etc.
And, not to forget, its ambition to even expand into non-internet verticals (like whole foods, blue origin, etc).
I don't see this aggression halting anytime soon. Amazon is a type of company that's ready to sacrifice short-term margin for future growth & innovation.
Yes, they'll continue taking risks in future.
Vishal Gupta