Alibaba + Lazada: Who Wins, Who Loses?

The Makati Central Business District in the Philippines. Image source: Wikipedia

The Philippines got its first big dose of e-commerce news this year when Alibaba announced its $1 billion investment in Lazada.

In Manila, I interact with two different worlds. I say “worlds” because the way they look at the future can’t be further apart.

The first is the new world of young founders, and there are increasingly more of them. The second is the old world of traditional businessmen, tycoons, and mid-level executives.

The new world thinks in growth, scale, and value. The old world thinks in payback periods and 30-year government concessions.

The new world sees companies such as Amazon, Alibaba, and Lazada as platforms.

The old world sees them as “online malls.” Though a tempting description on a surface level, it also completely misunderstands the underlying philosophy of their business models.

The new world sees the platforms to be in the business of creating infrastructure. The old world views them to be in the business of simply selling stuff on a website.

It’s worth noting the difference between the two worlds because Alibaba’s acquisition of a controlling stake in Lazada signifies the beginning of a new era for e-commerce in Southeast Asia. It’s been more than three months since the deal was announced, so Alibaba is in the process of digesting and scaling Lazada, possibly its most complex acquisition to date.

Members of the old world typically sound confused on exactly what this means for their businesses. So, to lay it all out, here are the winners and losers of an Alibaba-backed Lazada.

The 6 Winners

1. Traditional merchants. As Lazada increases the share of gross merchandise value from third party brands listed on its marketplace to more than 70%, expect it to be more aggressive in signing up new merchants of all shapes and sizes. This gives merchants an additional sales channel — plus the extra incentive of Lazada subsidizing shipping and promotions — without the traditional retail overhead of real estate and salespeople. The new trend we’ve seen in 2016: as traditional merchants see their e-commerce volume grow, it’ll start to make sense for them to invest in their own dedicated brand.com online stores as they get solid data on their products’ e-commerce GMV.
2. Independent online sellers. The past three years have given us an explosion of new mobile-first and online-only brands. They usually start selling on Instagram first, and then complemented by pop-up stores in various parts of the city. As Lazada scales, I believe it’ll start optimizing its marketplace take rate to attract these small brands. The result: another easy go-to-market channel for products, especially those that can compete on price.
3. Last-mile couriers and delivery agents. To keep up with growth in deliveries, Lazada will have to increasingly rely on independent last mile couriers to complement its in-house logistics and delivery fleet. In my last few purchases, deliveries to Makati were made by an independent courier contracted by Lazada. Orders get transferred from a central warehouse to distribution hub in Makati City, where a van picks them up and delivers to the end customer. According to my courier, the van’s owner gets paid P3,000 a day to deliver a minimum of 35 orders per day. The logic? In addition to tapping additional and flexible capacity, couriers who know the ins and outs of local streets are more efficient in a country where Google Maps isn’t so accurate.
4. Facebook & Google. With the additional dry powder from Alibaba, expect to Lazada to continuously ramp up its marketing spend, benefitting both Facebook and Google who both command the lion’s share in online advertising revenues. Though it probably won’t be as aggressive as a % of GMV versus previous years, the absolute numbers that Lazada spends on digital advertising would likely trend upwards. Facebook in particular just hit more than $1 billion in quarterly revenue from Asia Pacific, vs $431 million in the same quarter last year.
5. Service providers. This includes the whole gamut of freelance photographers, content writers, digital marketers, and channel managers who are growing specialized skills in e-commerce. When I first started selling stuff online 5 years ago, these skills were hard to find. Today, it’s easier than ever to find people who know how to build and manage a brand’s e-commerce presence. As the industry develops and brands start taking their e-commerce seriously, expect to see demand to increase for Magento and Shopify developers, product managers, operations & logistics managers, and data analysts.
6. Exporters. Sooner than you probably can imagine, expect Lazada to innovate on cross-border e-commerce, creating the regional distribution network to allow an accessories designer in Cebu, or a shoemaker in Marikina to sell directly to customers in other Southeast Asian countries. Eventually, it’ll be interesting to see how Lazada can provide market access to China by connecting its merchants to the massive Taobao and TMall customer base.

The 4 Losers

1. New malls. Word on the street from major tenants is that new malls are increasingly finding it hard to meet expectations. The could be a combination of many factors, from lower density and catchment in new locations to cannibalization of nearby malls. As Lazada scales, the calculus of non-food tenants in opening in new mall locations will change as the platform becomes a more viable sales channels. With less demand for space from tenants, expect a slow shift to retail formats more immune to e-commerce, such as community malls like Citymall, or convenience stores. According to a friend in retail: “Mall operators will push back strongly, as they threaten the non-renewal of tenant leases in existing, major malls if they don’t play game in opening up in new malls — something that has been industry practice, but may attract the attention of the new Philippine Competition Commission.”
2. Department stores. Department stores are an extremely tough business to enter these days. For instance, Ayala & SSI had to sell their Wellworth joint venture to Metro Retail. The business will get tougher as department stores realize they’ll have a much tougher time competing with Lazada on selection. Consider a possible future: Amazon is on track to sell more apparel than industry giant Macy’s.
3. Sub-scale mass market e-commerce players. E-commerce is a race to scale. In a relatively small market like the Philippines, the power law suggests that only 1 player will dominate 80–90% of the general merchandise e-commerce market. We already see that with OLX in classifieds. And in the past several months, we’ve seen probable challengers like Ensogo, Groupon, Shop.ph, and Marketa all crash and burn.
4. Local manufacturers. Will Alibaba’s direct involvement in Lazada accelerate the flood of cheap imports from China? Quite possibly. The Chinese economy is slowing down, and Chinese sellers will be hungry for new markets. Anecdotally, friends in retail and imports already speak about the flood of cheap Chinese goods beings smuggled into small towns in Northern Luzon.

What about the SM Store’s partnership with Lazada?

You can look at that in two ways. On one hand, SM gets an easy way to enter e-commerce and access a proven customer base. On the other hand, you don’t see Walmart partnering with Amazon, for obvious reasons.

In the long term, it’s a big risk, for the simple reason that Lazada gets to own all the data about SM: its customers, who they are, where they live, their contact details, and what they buy. With Alibaba’s help, Lazada can now bring in directly competitive products from China, undercutting retail prices. There’s a reason that Indonesia’s Matahari Mall opted to aggressively build its e-commerce in-house.

Ironically, another Rocket company, Zalora, could be a big casualty. Alibaba’s entry could mean more cheap apparel and clothing coming in from China, which any Divisoria shopper would be familiar with. With Zalora more dependent on cheap private label apparel, it’s heading for a collision course with Lazada’s fashion business. It was quite clever for Zalora to quickly and quietly divest its Thailand and Vietnam businesses in a fire sale: these two countries are the closest to the Chinese border.

Will it be an invitation for Amazon to dip its toes — sorry, Amazon doesn’t dip its toes; it does a cannonball dive with a huge splash — in the region? I’ll tackle that in a future post.