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Alibaba (“Ali”) and Suning Commerce announced, on August 10 this year, that they would enter into a strategic alliance by buying stakes in each other. The dramatic “marriage” between the two old enemies was a bombshell for the e-commerce sector. In 2012, Jack Ma publicly predicted that, in the future, traditional retailers – like Suning – would be largely edged out by e-commerce companies like his. That same year, Suning Chairman Zhang Jindong declared war on Alibaba, when he said, “our arch-rival is not (JD.com) Liu Qiangdong, but (Ali) Jack Ma”. Now the two former foes have unexpectedly decided to bury the hatchet and join forces against JD.com, the titan of B2C online retailing. The question is whether their marriage for the sake of mutual interests will be a happy union. Does the often-used logic that “the enemy of my enemy is my friend” make sense in this situation?
Suning has clear reasons for befriending Ali. Despite its continuous focus on Internet strategy, Suning just got off on the wrong foot. For one thing, its self-operated B2C platform is inferior to that of JD.com as the latter has seized 60% of the market with a highly efficient supply chain system. For another, amidst a rising tide of high-profile chain store closings in recent years, Suning has shuttered some of its brick-and-mortar outlets in China’s first and second-tier cities. Its development of an O2O strategy is deadlocked. So it is desperate for more users and traffic to energize its Internet strategy. The partnership with Jack Ma may be a real fillip for Suning as it can immediately benefit from Ali’s enormous traffic .
But what’s in it for Ali? Jack Ma chose to bury the hatchet and partner with Suning as a way to implement Ali’s O2O strategy . Ali hopes to integrate and capitalize on Suning’s sophisticated logistics system, its stores that are widely spread nationwide, as well as over 5,000 after-sale service centers and service stations in China’s fourth and fifth-tier cities. According to a survey, online shoppers strongly value the speedy delivery of goods. The partnership with Suning is expected to counteract Ali’s weakness in self-run logistics, and thus greatly reduce its logistics costs. By integrating with Suning’s well-developed warehousing and logistics system, Cainiao, Ali’s logistics affiliate, will save substantial time and cost in speeding up and improving on its own construction and operations. Furthermore, by tapping into the capacity of RRS.com and Suning’s offline channels and warehousing centers across the country, Ali will be able to move faster than JD.com in gaining a foothold in China’s countryside and the fourth and fifth-tier cities. These far flung locations have been a part of Ali’s strategic focus, and penetrating them will help enhance Ali’s influence in remote areas. In contrast, JD.com, which has been largely based in first and second-tier cities, may have to spend a couple of years to penetrate these rural markets from scratch.
Nevertheless, a shadow of doubt hangs over the Ali-Suning marriage . First of all, it can be really bad news for other businesses operating on Taobao.com or Tmall.com since they are not entitled to any support from Suning’s offline infrastructure. In contrast, Suning has an added advantage. While providing consumers with hands-on product experience in its offline outlets, Suning can now better interact with consumers with its flagship storefront on Tmall.com. Backed up by Ali’s traffic and marketing support, Suning will now be a formidable competitor for other Taobao and Tmall merchants, especially those online home appliances retailers which have high per unit prices and low frequency of purchases. The mammoth challenge for Ali will be how to properly handle the relationship between Suning and these merchants. That will be a hard nut to crack.
Second, in addition to its self-built Cainiao logistics, Ali also invested in Haier’s RRS.com in 2013 and now has eyes on Suning’s logistics network. Its buying spree in logistical infrastructure has inevitably raised doubts about overlapping investment. According to some insiders, the financial performance of Cainiao has been somewhat bleak, not to mention its low utilization rate and small number of cooperative merchants.
Finally, it remains uncertain what role Suning’s enormous outlet resources will actually play in Ali’s O2O deployment. More and more consumers of 3C products and home appliances are inclined toward the model of “experience offline, purchase online”. According to the “China Home Appliances Online Shopping Research Report”, the transaction value of China’s home appliances online retailing market reached the record high of 136.1 billion yuan in the first half of 2015, registering a 64% year-on-year growth and outperforming the average growth of the online retailing market as a whole. In contrast, the sales amount and volume of home appliances posted by traditional brick-and-mortar retailers dropped. All these indicate a sharp shift of consumption habit from offline to online channels. There is no lack of precedents in this O2O connection. The US-based Bestbuy is just one case in point. Due to the homogeneity of products, consumers would first go to Bestbuy stores to experience the products they wanted to buy, and then purchase the products online at a lower price. If Ali lets matters drift in this direction, a price war could be inevitable. Or, Suning’s physical stores would descend into merely becoming JD.com’s offline experience stores.
The past confrontation between Gome and Suning has now become a battle between the Ali-Suning alliance and JD.com. Will the marriage between Suning and Ali produce enough economies of scale to defeat JD.com? No one knows at this point.
Ali, Suning and JD.com are locked in a three-sided battle in China’s e-commerce market . Though Ali and Suning highlighted, in their public announcements, the significance of the partnership to the execution of their O2O strategy, they took an oath of partnership largely because they hope to outstrip JD.com. After all, in contrast to JD.com’s burgeoning business, Ali is suffering from shrinking sources of growth while Suning is being trapped by development bottleneck in the process of transformation.
Ali’s near-monopoly position atop China’s e-commerce markets has waned and is now being challenged vigorously by JD.com, the second largest e-commerce player. Their annual financial reports indicated that in the past year, JD.com stayed on the fast track with an annual revenue growth rate of over 60%, much higher than that of Ali (around 30%). Ali even posted negative month-on-month revenue growth in contrast to JD’s year-round positive revenue growth. In 2014, Tencent bought a 15% stake in JD.com. The number of JD.com’s new subscribers grew by 70%, about 20% of which were contributed by Tencent. The alliance with Suning may effectively offset Ali’s weakness in home appliances and 3C product retail and hence deal a deathblow to JD.com. The aggressive offensives from Ali and Suning drove JD.com into a passive position and JD.com’s share price plummeted from 33 yuan to 26 yuan on August 10, this year. The competition has become white-hot.
In fact, this tripartite confrontation is not exclusive to China’s culture. It has its western version, i.e., the “Rule of Three” which was long ago proposed by western scholars. Prof. Jagdish Sheth, an American marketing guru at Emory University, empirically tested the “Rule of Three” by using a diverse sample of more than 160 industries and concluded that 3 big companies would evolve to dominate any industry. For example, the search market has been dominated by Google, Bing and Yahoo, the game console market by Microsoft, Sony and Nintendo, and the camera market by Canon, Nikon and Sony. And China’s e-commerce landscape has been shaped by the dominant Internet service provider Ali, B2C online retailer JD.com and former traditional retailer Suning. The good news is: a fierce battle among the three most powerful players usually leads to maximization of market profits.
What is the primary objective in the mind of Jack Ma: to boost O2O business or to outstrip JD.com? Nobody knows the answer except Ma himself. Ali has kept evolving and making adjustments to consolidate its foothold amid fierce market competition. To bring order to online shopping, it increased the amount of cash deposits that small business owners should pay if they hoped to continue to run their storefronts on Taobao; and the Taobao Mall was officially renamed Tmall to highlight Ali’s emphasis on product quality. Then came the alliance with Suning. Is that a decision made under the pressure of business circumstances or with great vision and farsightedness? As an Internet services provider, should Ali make the best of mega data and cloud computing to develop its O2O business and enhance customer experience just as promised, or keep blurring its service boundaries to sink into homogeneous competition? Ali may itself still be looking for answers to these questions. The partnership between Ali and Suning will certainly boost the growth of Suning’s business, but what Ali can reap is still utterly unknown. The response of the capital market has echoed this certainty and uncertainty: the stock price of Suning rose violently by 40% in less than a week, while the stock price of Ali increased by 2% on the day when the alliance was announced but then went down continuously.
The upsurge of O2O in China has largely resulted from the fragility of the real economy and the excessively slow transition of traditional enterprises toward Internet economy. To boost healthy business development in the long run, we should try to build an O+O model which allows the coexistence of the real economy and e-commerce channels marketing. Only with a synchronized and complementary development of both online and offline channels can we better serve consumers and create maximum social value. In that regard, the September 6 announcement that Suning is joining forces with Wanda, the largest commercial property developer in China, to forge a seamless O+O operation throughout China makes a lot of sense. The battle between the three e-commerce kingdoms won’t be settled with the marriage of Ali and Suning or Wanda and Suning. The world evolves in cycles of unification, splitting and reunification. China’s e-commerce landscape is not immune and will no doubt see even more changes in the future.
Chen Lin is Assistant Professor of Marketing at China Europe International Business School (CEIBS). Her areas of expertise include Digital & Social Media, Internet Marketing and Social Media Marketing.
