As giant US IPO approaches, Alibaba’s Chinese e-commerce crown falls

By Adam Jourdan

SHANGHAI (Reuters) – (This article corrects the first paragraph of a March 17 article to reflect that Ma’s apartment had more than one room)

Alibaba’s dominant position in China’s online retail market faces its biggest challenge yet as the company, founded 15 years ago by Jack Ma in a one-bedroom apartment, prepares for a U.S. initial public offering that could value the company at about $140 billion.

In a rare twist, Alibaba Group Holdings lost market share last year while its closest rivals grew, according to Euromonitor. The market research firm predicts that China’s online retail market will triple from 2012 to more than $300 billion in 2018 as smartphone-savvy shoppers in the country buy everything from plane tickets to sneakers online.

China’s largest social media company, Tencent Holdings Ltd, is leading the revolt, merging the country’s most popular messaging app, WeChat, with its second-largest e-commerce player, JD.com.

A number of smaller rivals are also trying to take Alibaba’s lead, while established retail brands such as Nike Inc and Gap Inc are increasingly moving away from the e-commerce giant’s Tmall platform and launching their own, more distinctive online stores.

“Shopping is a social activity in China. You want to tell your friends about it, you want to recommend it — it’s a smartphone activity, and whoever has that organizational ability also has an impact on how that person shops,” said Frank Lavin, CEO of Hong Kong-based Export Now. Lavin’s company helps global companies set up stores in China through Alibaba’s Tmall.

Alibaba’s domestic e-commerce prospects are looking brighter after Ma’s company announced Sunday that it is beginning plans for a long-awaited U.S. initial public offering. It could potentially be the largest-ever IPO by an internet company, surpassing the $16 billion raised by social media giant Facebook Inc. in 2012.

Alibaba still held a solid 45.1 percent of China’s e-commerce market last year, up from 46.1 percent a year earlier, according to Euromonitor, and remains bullish on Tencent, JD.com and others as it bolsters its mobile services to keep up with China’s legions of smartphone users.

Alibaba did not respond to repeated requests for comment for this story, although the company’s executive vice president, Joe Tsai, was upbeat about the company’s e-commerce prospects in an interview with Reuters in Hong Kong last week.

Alibaba is now battling rivals on multiple fronts. Alongside JD.com, which is heading for its own $1.5 billion U.S. IPO, are well-funded vehicles such as home appliance retailer Suning Commerce Group Co Ltd and grocery retailer Wal-Mart Stores Inc. Yihaodian.

Smaller niche companies like cosmetics specialist Vipshop Holdings Ltd are also gaining traction. And as global and local brands move away from Tmall, the trend is likely to cause Alibaba’s market share to decline further, said Bryan Wang, a Beijing-based vice president at Forrester Research.

“Over the past year, we’ve definitely seen an increase in customers asking us how to leave Tmall,” Wang said.

Popular online clothing retailer HSTYLE has partially left the nest. Competing with brands like H&M and Uniqlo, it has expanded from having just a Tmall outlet to now reserving half of its sales through its own site and on JD.com and Tencent.

“As a mature online brand, we want to provide our customers with a more personalized experience,” Zhao Yingguang, founder and chairman of HSTYLE, told Reuters in an interview, describing his brand as one of the leading women’s apparel sellers on Alibaba’s platforms. “We go and sell our products where consumers are.”

Rise of rivals

Alibaba’s vast resources have helped it so far beat out weaker players like Otto Group, 139shop.com, Mecox Lane, Newegg.com and others, but the other contenders are more experienced in competing with Alibaba – and ambitious.

JD.com still trails Alibaba in second place with a 14 percent market share last year, up slightly from a year earlier. But the IPO plans and a deal with Tencent — a lesser-known brand outside China than Alibaba but worth nearly $150 billion in market value — will give it new financial and operational resources.

Tencent, meanwhile, hopes its partnership with JD.com will help it expand its presence in the “fast-growing physical goods e-commerce market,” Tencent CEO Martin Lau said in a statement. The deal also gives JD.com 225 million monthly active users of its WeChat messaging service in China.

In addition to technology leading the change, consumers themselves are developing new habits, becoming more discerning, and wanting more for their money.

“I now gravitate toward specialty stores because the service is often better than at the giant retailers, and delivery is always faster,” said Grace Lin, a 20-year-old student from Shanghai. “That doesn’t necessarily mean I use Tmall less now, but I use other stores more often.”

Lin often shops at cosmetics specialist Vipshop. The company saw revenue jump 145 percent in 2013, while customer numbers jumped 130 percent during the same period, according to a financial results conference call this month. Vipshop nearly doubled its market share to 1.8 percent last year.

Suning, a traditional electronics retailer with a strong brick-and-mortar presence, has been strengthening its online presence, as has rival Bain Capital-backed Gome Electrical Appliances Holding Ltd. Both companies have increased their market share in the past year.

Yihaodian benefits from majority owner Wal-Mart’s global name and product range, while other niche players such as Jumei and Yesmywine.com target specific cosmetics and alcohol markets.

MA vs MA

Alibaba’s Jack Ma has recently clashed repeatedly with his Tencent rival, co-founder Pony Ma — namesake but unrelated. The two internet giants’ rhetoric has grown increasingly heated as competition has raged from gaming and microblogging to taxi-app price wars and online payment systems that are now under tight scrutiny by China’s central bank.

When Tencent launched a “red envelope” feature for WeChat that let users send cash gifts via smartphone during Chinese New Year, Jack Ma wrote that it was a “Pearl Harbor attack” on his company’s Alipay payment system, referring to the surprise bombing of a U.S. port during World War II. Tencent said that more than 8 million people used the WeChat feature.

Weibo Corp., a popular Twitter-like social media platform invested in by Alibaba, filed on Friday for a $500 million U.S. initial public offering as the company looks to defend itself against stiff competition from Tencent-owned WeChat.

WeChat does pose a threat to Alibaba. In a December research report, Standard Chartered said its payments feature, known in Chinese as Weixin, combined with its widespread popularity could be a “lethal weapon” for Tencent to grab market share in mobile e-commerce.

China has some of the most active mobile internet users in the world. The number of mobile internet users in the country reached 500 million in 2013 and is expected to reach 750 million by 2017, according to data from Chinese consulting firm iResearch.

“The wind is blowing against Alibaba, and the biggest risk is the mobile sector,” said Zhang Chenhao, executive director of Gold Sand Capital, an e-commerce investment advisory firm.

“All the companies are lining up — both the Tencent school and the Alibaba school — and camps are forming,” Zhang said.

(Reporting by Adam Jourdan in SHANGHAI; Additional reporting by Jane Lee in JINAN, Paul Carsten in HONG KONG and SHANGHAI; Editing by Kenneth Maxwell)