All About Alibaba: What Brands Need To Know

Four Things To Watch, From the Chinese E-Commerce Giant's Massive Ad Business to Its Fight Against Fakes

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Inside Alibaba's headquarters in Hangzhou, China.
Inside Alibaba's headquarters in Hangzhou, China. Credit: Nelson Ching/Bloomberg

It's no exaggeration to say Alibaba has revolutionized the lives of China's consumers. Offering one-stop shopping for everything from toothpaste to cars, it's responsible for 80% of China's e-commerce market, which is already or soon to be the world's biggest. In the second quarter of 2014, Alibaba sold more than Amazon and eBay combined.

In cities across China, deliverymen with scooters piled high with Alibaba parcels dart through the streets. A consumer in far-flung western China -- someone who has maybe never owned a computer or browsed in an Old Navy, Burberry or Apple store – can use a smartphone to discover those brands and buy them. (All three brands opened storefronts on Alibaba's virtual mall, Tmall, this year.)

Alibaba's initial public offering might be the biggest ever in the U.S., possibly raising more than $21 billion. (The company's roadshow for investors kicks off this week, while shares are expected to start trading next week on the New York Stock Exchange).

Like rival internet giant Tencent, it offers a huge range of services in China, from a taxi-booking app to banking. And the company is expanding internationally, testing the waters in the U.S., too.

For brands, there have been benefits and challenges to setting up shop on an Alibaba platform in China. Here's what marketers need to know:

Alibaba has its own ginormous ad business

"Imagine basically all the digital media models you can think of -- at least all the ones I can think of -- ad words, display ads, retargeting, whatever," said Alex Misseri, senior VP-retail and commerce for Razorfish in Asia-Pacific. "The interesting thing is they do it all inside their own platforms."

When Alibaba filed to go public in May, it didn't say exactly how much it earns from ads, but it listed online marketing services first on its list of revenue streams.

Most people seeking to buy something don't go to China's biggest search engine but search directly in Alibaba's sites, Mr. Misseri said.

As a result, he said, most clients who have a storefront on the Tmall marketplace invest more ad money inside the Alibaba ecosystem than outside of it.

It still has work to do to fight fakes

Counterfeit goods are a big problem in China, and Alibaba has cracked down on them, spending more than $16 million yearly to fight them. Fakes are "a cancer we have to deal with," Alibaba founder Jack Ma said last year.

Still, dubious products abound: Log onto Tmall, search for Zara and what comes up is a copycat fast fashion brand called Zara Kara, which uses the same fonts and visual cues as the Spanish retailing giant. Zara's owner, Inditex, is planning a presence on Tmall, and it will be interesting to see how Zara Kara fares then. (Inditex declined to comment.)

Alibaba has two main platforms, Taobao, a consumer-to-consumer site, and Tmall, a business-to-consumer site. While fakes pop up on Taobao, Tmall requires sellers to pay a deposit that they lose if they sell counterfeit goods. But the reality of navigating the Alibaba system is that shoppers seamlessly dart back and forth between the two sites without necessarily knowing it.

"A lot of Chinese consumers don't realize the difference between Tmall and Taobao, though if you read (the company's) messaging you think everybody knows the difference," said Mark Tanner, the Shanghai-based founder and managing director of China Skinny, a marketing and research agency.

Despite Alibaba's efforts, "I personally think they could be doing more do get rid of fakes," Mr. Tanner said. He added that there's a tension between "getting so much traffic from shoppers wanting cheaper things, who are very price-sensitive, and also wanting to keep the anti-fakes people happy. If suddenly all the fakes were off the platform, a lot of shoppers would go somewhere else."

Many luxury giants are still wary

When Burberry opened a Tmall storefront this year, it was seen as a breakthrough victory for Alibaba's ambitions to have more luxury brands on board. But Burberry's debut, at least, wasn't jaw-dropping. In the initial 18 days, the Burberry Tmall site sold over 132 products, but 32 of them were returned, according to the L2 think tank. No pricey items, such as bags or trenches, were sold, it said.

Some high-end brands have been troubled by the fakes issue. Kering, the owner of Gucci, Yves Saint Laurent and Bottega Veneta, filed a lawsuit in July against Alibaba claiming the company was responsible for trademark violations. It later withdrew the suit, and the companies said they are working together on intellectual property protection.

There are other issues too: Tmall is seen as a place for budget consumption, and luxury shoppers are often looking for a dazzling shopping experience. Luxury shopping is often done during trips abroad, where prices are cheaper.

It sparked a revolution of grassroots brands

On the other end of the spectrum from prestige brands are "Taobrands" springing up expressly to exist on Alibaba's platforms. Some started as consumer-to-consumer stores on Taobao, or supplied bigger brands, then gradually established their own names, said Ying Mu, corporate branding manager for Shanghai-based Labbrand.

"They really represent a new type of innovation and grassroots culture in China," she said. Some of them have quite a strong grasp of branding and consumers' desires.

Yunifang sells mineral clay masks, which it has tied to ancient Chinese stories and traditions, Ms. Mu said. And a cute brand called Three Squirrels, launched in 2012, offers special gift packages for holidays and is now the top-selling nut brand on Tmall thanks to its "strong brand concept, visuals and great customer reviews," she said.