Alibaba plans to use Singles’ Day shopping frenzy to lock in market dominance for years

Alibaba (BABA) generated $1 billion in gross merchandise volume in just the first three minutes of the Singles’ Day shopping event in China today. By the end of two hours the sales volume was just shy of $12 billion. The company’s Alibaba Cloud unit processed 325,000 orders per second at the peak during the first hour.
 
But this huge volume of sales on a holiday, started as a celebration for China’s unattached, isn’t the big story for Alibaba today. (Singles’ Day is a bigger shopping day than either Black Friday or Cyber Monday in the United States.) The company has planned to use the holiday to lock in its dominance of China’s retail sector for years. If Alibaba reaches its goals, overseas competitors such as Amazon (AMZN) can kiss good bye to hopes of breaking into the domestic Chinese market.
 
In the weeks before Singles’ Day Alibaba sent an army of its workers out across China in an effort to lock the country’s 600,000 mom-and-pop stores into the Alibaba ecosystem. Alibaba’s workers showed the retailers how to connect to Alibaba using an app called Ling Shou Tong, meaning “connect retail.” Store owners were offered advice on what merchandise to stock and how to build the most attractive displays. But the big hook was the ability of Alibaba to eliminate the need for these stores to do business with middlemen to order and manage inventory. Instead these stores can take orders on the Alibaba app and Alibaba will then ship goods directly from Alibaba warehouses to the stores. The company is also working to convert 100,000 retail stores into “smart stores” where inventory is shared among brand retail outlets and customers can get orders shipped to their homes (using, no surprise, Alibaba’s logistics service.)
 
This effort amplifies other Alibaba retail efforts such as its Hema supermarkets and Intime department store that combine, in the case of Hema, a supermarket, restaurant, and fulfillment center on a single technology platform.
 
In Alibaba’s scheme of things, all purchases, of course, would go through the company’s Alipay network. And most sales would be through Alipay on mobile devices (In the first two hours of Singles’ Day, 91% of that $12 billion in gross merchandise volume went through Aliapay on a mobile device such as a smartphone.)
 
As much of a juggernaut as Amazon may be in the U.S. market, the company can only dream about this degree of control over all parts of the retail experience.
 
It’s likely that Alibaba will see growth in sales volumes decline for this year’s Single’s Day from the 32% year over year growth of 2016 to a more modest growth rate of near 20%. After all, as huge as China’s market is it’s not infinite and the company isn’t without domestic competition.
 
But watching this Singles’ Day, I’m reminded of a case study I read in business school that pointed out that the ability of Japanese tire makers to lock competitors out of the domestic Japanese market was a key contributor to the success of those tire makers
in attacking overseas markets.
 
Alibaba still has huge challenges (and opportunities) to win significant market share in economies outside of China. But locking up the domestic market is a very important step in making the conquest of overseas markets possible. (Don’t think, for a moment, that Amazon doesn’t know this too. The company just faces a different and bigger challenge in locking up the more diverse and open U.S. economy than Alibaba faces in China.)
 
Alibaba is a member of both my long-term 50 Stocks and 12-18 month Jubak Picks portfolios. Amazon is a member of my 50 Stocks portfolio.
 
Full disclosure: I own shares of Alibaba in my personal portfolios.