Monday, October 23, 2017

Lesson #279: Ali Express, The Amazon Killer You Never Heard Of

Posted By: George Deeb - 10/23/2017


& Comment

Back in Lesson #251, I talked about the U.S. based ecommerce companies being at risk to Chinese manufacturers selling direct on Amazon.  I wanted to provide a little more color on this topic, as I think I found the business that may actually be able to disintermediate Amazon itself!!

First a quick history on the evolution of ecommerce entrepreneurs, and their marketing and fulfillment platform of choice, over the years.

Phase 1:   Sell on your own site, market yourself and fulfill yourself.  That meant the ecommerce company needed to invest all the marketing dollars (and risk thereto), all the warehouse investment (and risk thereto) and all the inventory investment (and risk thereto).  Only big, well funded companies could make that work.

Phase 2:   Sell on Amazon, marketed by Amazon, fulfilled Amazon.  This meant the ecommerce company no longer has to worry about marketing risk (tapping into Amazon's huge website traffic) or warehousing risk (tapping into Amazon's huge distribution network).  They simply had to take inventory risk of funding their working capital investment and eating whatever inventory didn't sell.

Phase 3:  The newest generation of ecommerce entrepreneurs are bypassing Amazon altogether, since they take such a large fee for their marketing and fulfillment services.  Instead, they are marketing on Facebook/ YouTube/ Pinterest/ Instagram (keeping the marketing risk), sending traffic to their own "plug and play" Shopify website (which can easily be set up in a day at very little cost), with all orders fulfilled by "plug and play" Ali Express, a division of China-based Alibaba (who drop ship one-off orders directly to U.S. consumers from their Chinese warehouses.  So, here, the ecommerce company keeps the marketing risk (because it has uncovered profitable "impulse buy" or "financial arbitrage" marketing techniques through the social media sites), but no longer needs to pay Amazon a big fee for warehousing and distribution, and better yet, no longer needs to take any working capital or inventory risk, since Ali Express sells you inventory one item at a time, after it is already sold.  This is like lowering your startup costs and risks by 80%, and opening up a sea of entrepreneurs trying to figure out this model.  This is where the market is today.

Potential Phase 4.  If I were Alibaba, I would figure out how to launch an Amazon killer that aggregates U.S. consumers (no marketing risk for ecommerce entrepreneurs, like Amazon) and fulfills orders by Ali Express (no warehousing risk, like Amazon, but with the added benefit of no inventory risk, unlike Amazon).  With a little marketing effort in the U.S., maybe Ali Express becomes that solution, as nothing prevents U.S. consumers from buying direct on that site today.  That is the next evolution of where I think the market will go, and could end up being an Amazon killer in the process.

Now we know why Amazon is so focused on adding international suppliers to their site--to get prices down to international wholesale levels to stay competitive with Alibaba.  But, that still leaves Amazon saddled with their huge warehousing and distribution investment in the U.S., which Alibaba does not have.  Which explains why Amazon is so focused on same day shipping, as their core competitive advantage vs. Alibaba and all others, appealing to the U.S. consumers' desire for immediate gratification.  But, if consumers are willing to wait 2-3 weeks for their ecommerce orders to arrive from China, they may be able to save material monies, as prices on Amazon will end up higher than Ali Express when the dust settles, to cover their warehousing and distribution investment.

Food for thought, for all you ecommerce entrepreneurs out there.  It has never been easier to launch an ecommerce business.  Amazon made it easy with their Fulfilled By Amazon solutions and Ali Express has made it even easier, drop shipping direct to U.S. consumers from China, without you needing an inventory or working capital investment.  Time will tell how Alibaba ultimately plays the U.S. consumer market, potentially taking your start up investment down, closer to zero, as long as marketing arbitrage opportunities exist on the social media networks where you can get an immediate payback on impulse-buy oriented products.  Maybe Alibaba and Facebook should partner with each other here, taking Amazon off its mighty perch?

For future posts, please follow me on Twitter at: @georgedeeb.

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