Saturday, 30 August 2014

Will Alibaba steal the retail prize?

In the race to win the world's first, truly online marketplace, Chinese e-commerce giant, Alibaba, promises a boon to consumers around the globe who for the first time will be able to buy anything from anywhere in the world in a frictionless, cross border commerce, a development which should depress and standardise prices around the globe. It will mean, for example, that consumers will no longer have to tolerate paying the widely different prices for the same item, such as Apple products. They can effortlessly source from the cheapest, national market and their payments are 100% secure through Alipay. But what will it mean for bricks and mortar shops and what, if any, are the major, long-term risks to the supply chains and meeting consumers' desires?

Alibaba may not be as well known in the West as other e-commerce outfits like Amazon and EBay but all that is about to change as it seeks a US$20 billion IPO on New York's Stock Exchange. In some ways the Chinese parvenu already outranks its western rivals like, for example, in the volume of merchandise sold through its various properties which hit $248 billion in 2013 compared with only abut one half and one third of that from Amazon and EBay respectively. At facilitating 5 billion package deliveries from transactions on its retail web sites it surpassed UPS's 4.3 billion packages and documents. The scope of product offering through Alibaba's tailored sites also leaves it competitors looking highly vulnerable. Apart from all the usual everyday household items like food, clothing and furniture, some of the more bizarre products include an animatronic dinosaur, MRI scanners, rental boyfriends and, for those overawed by political panjandrums, a life-size Vladimir Putin wax figure.

The implications from all this are that once people know just what is effortlessly available out there from anywhere in the world it will likely boost international trade, leave more money in buyers' pockets through cheaper products, which can then be spent on even more goods, but at the same time it sounds the death knell for all those manufacturers and suppliers who are relatively uncompetitive or for whatever reasons do not have the law of comparative costs working in their favour. As reported by this writer 30 years ago it will also hasten the disappearance of high street shops as online shopping takes the retail market by storm. In Britain, for example, forecasts suggest that within five years some 40% of all shops will disappear and many have already done so. In theory, traditional bricks and mortar shops could also face disintermediation by major manufacturers of food, clothing and common household items joining forces to build huge order picking centres to supply buyers' homes directly, thus cutting out all the costs incurred by retailers, but such collaboration would be difficult to achieve if past experience is any guide. Yet if they could overcome their suspicions of shared resources it would the return of pricing control to the manufacturers and end the bullying retailers place on them.

For Alibaba, the key concern will be to get its logistics right, for a lousy delivery regime resulting in many mispicks and returns will not only cost them dearly but risk permanent loss of business from irate customers. To this end, Alibaba is investing heavily in getting the logistics right. The whole issue of online shopping is also already beginning to affect how loading bays are designed and equipped to handle smaller delivery vans for home deliveries. In Britain, van sales are now booming. But what of the longer term risks over which Alibaba has no control?

These risks are both natural and human and perhaps exacerbated by the concentration of manufacturing in China which is Alibaba's most important market. China is highly susceptible to risks from earthquakes, flooding and internal political turmoil which could wreck delivery promises. There is also the global risks to communications from huge solar storms. The most obvious human risk in the Far East is martial in nature. The growing military build-up and frictions in the Far East could lead to trade boycotts, or worse, of the kind already discommoding consumers throughout Europe and Russia over the Ukraine crisis. Such risks, however, have often been part of the business scene but they are unlikely to deter Alibaba from transforming the online retail landscape for the better.