Alibaba Building China Delivery Net in Shift to Consumers

Story Originally Appeared in Bloomberg

In her apartment in Tibet, Lu Ping sits back and clicks an order for about 1,000 yuan ($161) of cosmetics. At the other end of China, online retailer Jian Weiqing receives the order in his office near a Shanghai airport and prepares Lu’s shipment, which will arrive in the distant province within four days.

Standing between the two is Alibaba Group Holding Ltd., the Chinese Internet juggernaut heading toward what analysts expect to be the biggest initial public offering since Facebook Inc. (FB)

After starting as a business-to-business marketplace where companies trade anything from shoelaces to steel, Alibaba has morphed into a far more consumer-focused operation. The company now gets the bulk of its sales and most of its growth selling to individuals across China, from villagers in places without supermarkets and malls to sophisticated consumers in Beijing and Shanghai seeking to avoid pollution and traffic.

“Foreign brands are just not that common here,” said Lu, who owns a hostel in Lhasa, the provincial capital of Tibet. “Online, I can get almost anything I want. And it’s so cheap” -- at least 20 percent less than department stores, she says.

Alibaba, which takes a cut of goods sold and charges retailers such as Jian to run ads on the site, says it generates about 70 percent of package deliveries in China. Consumers bought at least 1 trillion yuan in goods via Alibaba last year, a figure equivalent to almost 2 percent of China’s GDP.

Retail Engine

As Alibaba becomes a vital retail engine for China, founder Jack Ma understands he can’t keep growing without adequate distribution of the goods sold on his sites. So his next big initiative is the creation of a delivery network that can reach virtually any place in China within 24 hours.

To make that happen, Alibaba joined with five delivery companies and other partners to found Cainiao Internet Technology Ltd. Alibaba has said Cainiao will invest as much as 100 billion yuan within eight years to develop and manage a logistics network.

Though Cainiao has been vague about its plans, Cao Lei, a director at the China E-Business Research Center in Hangzhou, speculates that it will tap Alibaba’s data-crunching capabilities to help distribution companies optimize storage and delivery schedules and ensure their trucks take the cheapest and fastest routes.

“The smaller delivery companies have to join forces with Alibaba, because if they don’t they will be eliminated,” Cao said.

FedEx Rivals

Ma’s goal is to help Chinese delivery companies gain the kind of scale and efficiency enjoyed by United Parcel Service Inc. (UPS) and FedEx Corp. (FDX) in the U.S. In China, the American delivery giants are smaller than many domestic rivals because they mostly serve multinationals and charge higher prices.

“FedEx and UPS are very small players in China and cater to a different group of customers,” said Richard Tai, an analyst at consulting firm China Research & Intelligence in Shanghai.

Since Ma founded the company in his Hangzhou apartment in 1999 with only two dozen items for sale, he has expanded to 24,000 employees and marketplaces selling millions of products. The company said yesterday it was collaborating with Wasu Media Holding Co. on a set-top box connecting TVs to the Internet.

Alibaba’s earnings more than tripled to $669 million in the March quarter on sales that surged 71 percent to $1.4 billion. The company posted more revenue in the period than Yahoo! Inc. (YHOO), which owns a 24 percent stake in Alibaba, and its profit margin is wider than Apple Inc.’s.

$120 Billion IPO

Ma, whose fortune is estimated at $3.4 billion by the Bloomberg Billionaires Index, last year said he was considering an initial public offering. If it keeps its momentum, Alibaba’s operating profit could reach $4.3 billion this year, and $7.1 billion in 2014, according to Evercore Group LLC. An IPO could value Alibaba at $120 billion, Evercore predicts, which would make it the biggest tech IPO in history, eclipsing last year’s $104 billion pricetag for Facebook Inc.

Alibaba has no timetable for an IPO and hasn’t hired bankers, according to John Spelich, a spokesman for Alibaba in Hong Kong.

The company itself doesn’t sell merchandise; It provides a marketplace for online retailers that sell more than $3 billion in goods a day on its sites. The two most popular are Taobao Marketplace, which links individual buyers and sellers, and Tmall.com, which connects consumers to retail brands such as Microsoft Corp. (MSFT), Procter & Gamble Co. (PG), and Japanese clothing chain Uniqlo.

Millionaire E-Tailers

“Malls and department stores no longer attract me,” said Wang Lin, an English teacher in southwestern Sichuan province. “I just lie in bed comfortably, and I can shop around the country and even the world.”

Many Taobao store owners have become millionaires. Jian, who runs Chen Chen Cosmetic, the supplier of Lu Ping’s face creams, is one. The 38-year-old has expanded his online business from a one-man operation to a staff of nearly 50 in the past eight years. Last year, he sold more than 30 million yuan of beauty products.

“Jack Ma is really something,” said Jian. “Without him, my company wouldn’t exist.”