Alibaba (NYSE:BABA), the top e-commerce player in China, recently invited smaller U.S. merchants to sell products to other businesses on its Alibaba.com B2B (business-to-business) platform. Alibaba previously only allowed U.S. companies to buy products from merchants on the platform.
U.S. companies will need to pay a flat membership fee of about $2,000 to launch their stores on Alibaba.com. Amazon (NASDAQ:AMZN), for comparison, charges third-party sellers monthly fees for each listed item. Let's take a look at why Alibaba wants to help smaller U.S. businesses tap into China and other markets.
Looking beyond China for growth
Alibaba's core commerce revenue rose 51% annually last year and accounted for 86% of its top line. That's a robust growth rate, but its core Chinese market, where over 95% of its sellers are located, is struggling with an economic slowdown exacerbated by an ongoing trade war.
Alibaba is expanding its ecosystem overseas to offset that slowdown. It expanded Alibaba.com into countries like Brazil, Canada, and India, and it serves a growing list of countries with its AliExpress platform for overseas buyers. It also owns a majority stake in Lazada, the biggest e-commerce player in Southeast Asia.
A third of Alibaba.com's B2B buyers are based in the U.S., many of whom are merchants who resell Alibaba's products to American buyers on platforms like Amazon. Many products are significantly cheaper on Alibaba's platforms when ordered in bulk, and merchants can usually still profit from a sale after paying delivery and custom fees.
Alibaba hopes that inviting U.S. merchants to set up B2B shops will help double the platform's number of international brands to 40,000 within the next three years. Opening its doors to overseas merchants could also help Alibaba keep pace with its top rival JD (NASDAQ:JD), which lets Chinese buyers make overseas purchases with JD Global; and Amazon, which recently shuttered its Chinese marketplace but continues to sell products from U.S. merchants to Chinese buyers.
But will this invitation move the needle for Alibaba?
Alibaba's Tmall already hosts dedicated shops for big brands like Abercrombie & Fitch, Ralph Lauren, and Tiffany & Co., but those consumer-facing stores shouldn't be confused with Alibaba.com, its B2B marketplace for linking businesses to manufacturers, wholesalers, and distributors. It also shouldn't be confused with Taobao, its consumer-to-consumer (C2C) marketplace.
However, Alibaba remains on the U.S. Trade Representative's notorious blacklist of companies accused of selling counterfeit goods. That reputation could greatly reduce its appeal for U.S. merchants, especially when its rival JD wasn't placed on that list.
That's likely because JD takes ownership of the products it sells and delivers products via its first-party logistics network. Alibaba only facilitates transactions instead of taking on inventories, then relies on third-party couriers to fulfill those orders. Simply put, Alibaba uses a less capital-intensive business model than JD's, but it's far more vulnerable to unscrupulous sellers.
Smaller businesses that sell less well-known products could also struggle to stand out on Alibaba.com without significant marketing investments. Those expenses -- along with the $2,000 sign-up fee, delivery fees, and other unpredictable expenses (like rising tariffs and the depreciating RMB) -- could greatly diminish its appeal.
The bottom line
Alibaba's strategy makes sense, but it probably won't win over many smaller businesses in America. The fees are high, the trade war is still raging, and Alibaba's affiliation with counterfeit goods hurts its credibility -- even though those accusations target Taobao instead of Tmall and Alibaba.com. Therefore, it's a predictable way to counter JD and Amazon, but it probably won't significantly boost the company's core commerce sales anytime soon.