Open sesame

Alibaba’s initial public offer of $25 billion, the highest amount ever raised from equity markets, is possibly the most striking manifestation of the shift in retailing from brick and mortar shops to virtual marketplaces in recent times. This growth in online retail will be the highest in emerging markets such as China and India because of population and the demographic advantage. According to Forrester Research, while the growth of e-commerce in mature markets such as Japan, South Korea and Australia will be less than 15 per cent over the next few years, China and India are expected to grow between 25 and 60 per cent. Alibaba has been able to harness this demand in China to sell goods worth $296 billion in the 12 months ending June 2014. Rosy estimates of future growth are based on the fact that there are over 600 million internet users, of which only half shop online. This potential is even higher in India. Of 240 million internet users, less than one-fifth buy goods from online retailers. With the number of internet users in India projected to double by 2020, e-commerce activity is set to surge. That global investors are aware of this possibility is reflected in Flipkart’s continued fund inflows, most recently at a value of about seven times the merchandise sold on its website. In contrast, Alibaba has valued its offer at just two-third the gross merchandise value.

But Alibaba’s popularity has taken some doing as well. Its founder Jack Ma has created a business model that caters to the demands of individuals as well as small businesses, both within and outside China, and deftly worked around various regulatory hurdles. Alibaba’s popular websites Taobao Marketplace, Tmall.com and Juhuasuan are designed to cater to every kind of customer, from one scouting for discounts to the quality conscious buyer of branded goods. The retailer has also ensured a high level of profitability by deriving its revenues mainly from advertising and commissions. Even as the two online retail giants of the US, Amazon and eBay, struggle to show profits, Alibaba has more than doubled its revenue over the last two years and multiplied its profits more than five times.

Indian e-commerce companies are yet to reach Alibaba’s mind-boggling scale. Flipkart notches a mere $1 billion sales in comparison. As the Indian consumer takes the first tentative steps in buying goods online, it is up to the companies to win his/her loyalty through efficient delivery at competitive prices. While the logistics network remains a hurdle — something the Government must address — companies need to be more aggressive in reaching out to the non-English speaking population. As Alibaba entrenches itself in the portfolio of US investors, it will make them more aware about the prospects of e-commerce companies in emerging economies such as India.

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