Alibaba Group Holding Ltd. (NYSE: BABA), long the dominant e-commerce player in China, is facing a growing challenge from domestic upstart JD.com Inc. (NASDAQ: JD). Although the companies have both been in operation for more than a decade, the competition broke into an open and sometimes acrimonious rivalry in 2015 as JD.com expanded its share of the Chinese online shopping market and continued to make inroads into new and important market niches, including housewares, cosmetics and apparel.
Alibaba remains king of the Chinese e-commerce hill, posting a 54% share of the business-to-consumer (B2C) market in the third quarter of 2015. However, the figure is down from 61.4% in the fourth quarter of 2014. In comparison, JD.com gained market share in the same period, from 18.6% in the fourth quarter of 2014 to 23.2% in the third quarter of 2015.
Alibaba and JD.com are founded on two fundamentally different business models, although there is substantial and growing operational overlap between the companies. Alibaba operates much like eBay, offering several e-commerce platforms that third-party consumers and businesses can use to buy and sell products. Revenue from these platforms, which include Alibaba.com, Tmall.com and Taobao.com, largely derives from platform fees, advertising fees, sales commissions and order fulfillment services.
JD.com, in contrast, is founded on the Amazon.com e-commerce model, selling merchandise direct to consumers from warehouses across China. It even operates its own national shipping network with a last-mile delivery component to ensure fast, reliable order fulfillment across the country. Much like Amazon.com, JD.com also provides the means for third parties to sell products on its platform and utilize its delivery fulfillment infrastructure.
Accusations Fly on Singles' Day
The rivalry between Alibaba and JD.com spilled out into the open in the run-up to China's 2015 Singles' Day, a kind of anti-Valentine's Day celebration held annually on Nov. 11. Singles' Day reigns as China's biggest shopping day of the year, much like Black Friday in the United States. Billions of dollars in online sales are up for grabs on the day, and the stakes are high for e-commerce companies across China.
JD.com took two public actions against its rival in the week before the holiday. First, it filed an official complaint with the State Administration for Industry and Commerce, a Chinese regulator, accusing Alibaba of illegally barring sellers on its platform from using rival platforms to make holiday sales. The business practice was specifically banned by new regulations taking effect in October 2015. In a separate action, JD.com also sued Alibaba for what it characterized as false advertising in relation to its same-day delivery abilities, an area in which JD.com enjoys an operational advantage.
While the accusations have yet to be settled as of February 2016, they marked a new highly public stage in a rivalry that continues to heat up. Both companies went on to produce strong results on the day. Alibaba reported gross merchandise volume of $14.3 billion on the day, up nearly 53% from the year prior. JD.com announced that the day's gross merchandise volume grew 140% from the year prior. The company does not report exact figures for Singles' Day sales.
The Future Fight
Amidst a fierce fight for online customers in China, Alibaba and JD.com both continue to grow at a rapid pace largely driven by an expanding online shopping sector. However, sector growth has been slowing since 2013, a trend that analysts expect to continue in the coming years. The Chinese market research firm iResearch expects annual growth in online shopping to slow to 20% by 2018, down from nearly 60% growth in 2013 and more than 37% in 2015. As growth slows, expect the fight for market share to ratchet even further.
One trend worth watching is the shift toward B2C sales in online shopping. According to iResearch, B2C sales accounted for just 25% of online shopping revenue in 2011, with 75% of sales arising from consumer-to-consumer transactions, Alibaba's bread and butter. In 2015, B2C sales are expected to exceed 50% of overall sales for the first time, reaching an estimated 68% by 2018, a near complete inversion of the 2011 breakdown. This trend is driven substantially by the increasing importance of product quality, product authenticity and customer service in China's maturing online shopping sector.
JD.com is well-positioned to benefit from this trend because it handles the vast majority of sales in-house, allowing it to control product quality, exclude counterfeit goods and deliver consistent customer service. It also owns a vast and growing national order fulfillment network to handle its direct sales, offering same-day delivery in more than 130 districts and counties and next-day delivery in more than 860 districts and counties.
Perhaps significantly, JD.com has also developed a reputation for dealing in authentic goods, especially among international brands. In 2015, JD.com launched an international sales platform and increased efforts to persuade international brands to use its platforms and order fulfillment services to reach Chinese consumers. Alibaba, on the other hand, has gained substantial attention from international trade officials and brand owners for the availability of counterfeit goods on its e-commerce platforms. While the fight for China's online shoppers figures to be an interesting battle, both Alibaba and JD.com are well-positioned for continued growth and success.