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Asian e-commerce giants Alibaba and Rakuten: a comprehension of their key operational parameters

The e-commerce came into existence in the year 1994 and has ever since grown to the present USD 1800 billion industry globally. The growth came on the back of increasing internet users’ base and increasing consumer preference for purchasing goods online, owing to the ease of shopping. The e-commerce industry in Asia accounts for 52% of the global e-commerce industry and has mirrored the overall growth in the global e-commerce from 1994.

The healthy growth of the Asian e-commerce industry has led to many new entrants competing for a bigger market share. Alibaba of China, the world’s biggest e-commerce company and Rakuten of Japan dominate the Asian e-commerce market. Alibaba and Rakuten both are an online marketplace operators, these companies do not own the products under the transaction, they act merely as facilitators between buyers-suppliers and earn commission income from the transactions. However, Alibaba has grown exponentially over the past 4 years, Rakuten’s growth has been comparatively slower during the said time frame. In this blog, Televisory attempted to discover the reasons for such a stark contrast in the growth trend amongst the players.

Over the last four years, despite having higher lead time compared to competitors who operated with the fulfilment centres, annual active customers count and Gross Merchandise Value (GMV) exhibited an increasing trend for Alibaba and Rakuten. However, the growth has been much higher for Alibaba as compared with Rakuten and as of December 2015, Alibaba’s total active customers were almost four times than that of Rakuten. Moreover, over the same time frame, Alibaba’s active customer base increased at a CAGR of 36.5% to 407 million (2015), whereas Rakuten’s active customer base increased at a muted CAGR of 9% to 106 million.  The significant growth in annual active customers for Alibaba was attributable to a healthy growth of the internet users at a CAGR of 8.1% over 2011-15 in China, the most populous country in the world and Alibaba’s primary market. The internet penetration in China increased to 51.3% (2015) from 38.3% (2011) resulting in 706 million internet users as compared to 114 million internet users in Japan. The increase in annual active customers led to an increase in transaction counts and thus, resulted in increasing the revenue with a CAGR of 40% for Alibaba and 2.5% for Rakuten, during the phase. Rakuten’s lower revenue growth in contrast to Alibaba was ascribed to already high internet penetration in Japan (below is the graph of the internet penetration), relatively less active customer growth, stiff domestic competition and depreciation of YEN against the USD, with a CAGR of 14.8%.   

Source: Televisory’s Research

Source: www.Internetlivestats.com 

Source: www.Internetlivestats.com

The gross merchandise value of Alibaba and Rakuten increased in the past four years with a CAGR of 45% and 27 % respectively. Alibaba continued with a higher GMV than Rakuten during this period. Alibaba’s higher incremental growth in GMV was due to the increase in the income of the middle class, an increase of active customers, increase the breadth and depth of products offered, transactions and increase in brand awareness. As high GMV was a result of increased transactions, active customers, a company also realises more revenue. Therefore, both Alibaba and Rakuten were at the top in their country in terms of GMV and annual active customers.

The GMV per active customer saw a mutual increase for the companies over the 4-year period, owing to high GMV growth compared to growth in active customers. Further, one significant point was the growth of GMV per active customer was higher for Rakuten in comparison to Alibaba. A high growth for Rakuten was more due to increased transactions, therefore, the GMV from existing customers was more than the new customers. 

Source: Televisory’s Research

Source: Televisory’s Research

Alibaba and Rakuten operate with the marketplace model, both does not store inventory. Additionally, Rakuten’s marketplace model is slightly distinct from Alibaba’s since Rakuten derives its revenue from deposits, annual user fees and sale commissions charged from retailers who use their platform. Alibaba’s site Tmall, has a similar business model as Rakuten. In addition to this, Alibaba’s largest website Taobao operates as a marketplace which does not charge fees for completing transactions. Alibaba generates advertising revenue from active sellers who pay to rank high on the company’s internal search engine. Thus, due to different business models, Alibaba continued to have lower revenue as a percentage of GMV compared to Rakuten in the four-year period.  Rakuten’s revenue as a percentage of GMV declined in the time frame as a result of discounts and rebates offered to buyers and sellers to increase business in the face of intense competition, whereas the same decreased marginally for Alibaba as a consequence of its Tmall site which had the identical business model of Rakuten.

Source: Televisory’s Research

The revenue of Alibaba and Rakuten registered a CAGR of 40% and 2.5%, respectively between 2012-15. A higher revenue growth for Alibaba was due to increased GMV, increased transactions and active customers, in spite of lower revenue as a percentage of GMV, Alibaba continued to have higher revenue compared to Rakuten which had a higher transaction commission.

Source: Televisory’s Research

The below graph, depicts the profitability analysis for Alibaba and Rakuten, from 2012 to 2015.  Alibaba continued with a higher EBITDA margin in contrast to Rakuten. Although the entity had a similar business model, Alibaba reported better EBITDA margins owing to less G&A, employee expenses and advertising as a percentage of revenue from Rakuten. Furthermore, Rakuten witnessed a decline in its EBITDA margin owing to stiff competition from domestic e-commerce players and retail participants whereas Alibaba saw a decline in recent years because of heavy expenditure in mobile technology to address the shift of consumers. 

Source: Televisory’s Research

Source: Televisory’s Research 

Source: Televisory’s Research 

The two e-commerce firms, Alibaba and Rakuten operate with a marketplace model, but with different business strategies to serve their customers. They act as a middleman between buyers-sellers and do have an advantage on the cost front, but lead time is more as a product takes more time to reach to a customer in comparison to the companies that sell directly from the fulfilment centres. The price of a product and the time it takes to reach a customer are equally important when looking for active customers, transactions count and GMV. As smartphone and internet users continue to expand in the populous nation of China, Alibaba has a domestic untapped market, particularly in tier 2 and tier 3 cities. On the other hand, due to the saturation of the internet users’ in Japan, Rakuten has opportunities to expand globally and the company is accomplishing this through acquisitions in international markets. 

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