On the surface it’s a little surprising — maybe even a bit confusing — to learn that Amazon.com, Inc. (NASDAQ:AMZN) is tapping competitor Alibaba Group Holding Ltd (NYSE:BABA) shopping site Tmall to penetrate the Chinese market that has up until this point been a tough nut for AMZN to crack.
The last thing any company wants to do feed the very beast that it will sooner or later have to fight, and there’s little doubt that AMZN and BABA will be meeting head-to-head at some point in the future.
On the flip side, considering Amazon has nothing to lose in China by opening a store on the Alibaba shopping website Tmall, why work hard when you can work smart instead?
Still, the news than Amazon has opened a Tmall store has to have AMZN investors wondering of this is a stroke of brilliance or a sign of desperation.
Amazon Is a Tmall Store Owner
The news isn’t any more complex than as described above. Amazon has opened a store at the Alibaba shopping site Tmall, which serves primarily the Chinese market, though a few neighboring countries also access the site and make purchases from it. Like any other Tmall store, and like Amazon.com’s vendors here in the United States, AMZN will pay BABA a small commission on the transactions the online store facilitates.
The product offerings available at Amazon’s Tmall store are fairly limited for the time being, but one can presume if it goes well, the number of products available will expand.
The decision to use Tmall as a sales venue comes after what could be considered a failure by Amazon to penetrate the Chinese market.
It’s largely unrecognized because the numbers are so weak that they’re meaningless. But, AMZN has had an e-commerce presence in China for a decade, and essentially has nothing to show for it. In 2013, Amazon only earned 2.7% of the country’s e-commerce business. For the sake of comparison, BABA shareholders enjoy the fact that Tmall owns about 60% of China’s e-commerce market, while JD.com Inc (ADR) (NASDAQ:JD) controls about 20% of China’s e-commerce market that Alibaba estimated at one point last year would be worth $450 billion in 2014.
And, the advent of the BABA IPO may have only spurred more traffic to the Tmall site, and away from Amazon.cn. In the third quarter of last year, Amazon reportedly only garnered 1.3% of the e-commerce market in China despite a string of efforts made in the middle of 2014 designed explicitly to further penetrate the country’s fast-growing online business-to-consumer market. Those investments in China’s e-commerce market include thirteen Amazon fulfillment centers located in that country.
Decidedly losing the war, AMZN decided if you can’t beat ’em, join ’em.
Why Can’t Amazon Beat Alibaba At Its Own Game?
It’s all academic at this point, but an idea worth exploring all the same — why did Amazon fail to catch on in China while competitors like Tmall and JD.com were able to enter the game much later and still take a commanding lead?
It’s a tough idea for U.S. companies to embrace, let alone U.S. investors, but doing business in China isn’t like doing business in the United States. U.S. multinational corporations that see a burgeoning consumer market there recognize that Chinese consumers love Western brands, but that affinity for all things American is a fickle one.
It’s a lesson U.S. electronic retailer Best Buy Co Inc. (NYSE:BBY) had to learn the hard way.
In 2006, Best Buy boldly acquired Chinese appliance and electronics retailer Five Star, certain the American way of shilling refrigerators and computers was just what the modern-era Chinese consumer was looking for. It wasn’t. Best Buy finally had to abandon its investment in China five years after acquiring Five Star, not realizing soon enough that well-polished, highly structured stores don’t appeal to China’s consumers as much as the mom-and-pop stores where prices may or may not be set in stone.
Moreover, when it comes right down to it, Chinese consumers still have a strong loyalty to brands and businesses they know are home-grown. Just ask Starbucks Corporation (NASDAQ:SBUX), which makes a point of building its coffee shops in China from the ground up to look and feel not just Chinese, but like they were built specifically for the socioeconomic status of that store’s geographic market … right down to local teas and flavors.
In other words, Amazon may have failed in China because when it came right down to it, the website and the company was blatantly un-Chinese. Nuance is everything in China.
Bottom Line for AMZN
While decision to open a store on Tmall is tantamount to conceding its initial aim of establishing its own branded presence in China, the news isn’t a reason to steer clear of AMZN shares. It may even be a reason to wade into them, as the company has dropped a hint that it’s losing interest in pouring time and money into the lost cause of making Amazon in China what it is in the United States.
Don’t get too excited, though, as it’s unlikely AMZN is going to find game-changing success in China just because it now operates a Tmall store. It’s competing with 70,000 other sellers on the site, many of which are operated by the brand-name companies themselves looking to sell their own merchandise.
In that light, Amazon would come across like little more than a middleman for much of the stores’ merchandise, meaning its products could be easy to look past at the Tmall site.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
