Even as Amazon.com (NASDAQ:AMZN) celebrates the incoming smartphone bomb and Goldman Sachs adds the stock to its conviction list (where no one ever gets convicted), the wheels are already in motion to bring Amazon.com what is probably its greatest challenge ever.
I am talking about Alibaba landing in the States. Much like Normandy, this is Amazon.com's D-Day. And it's fitting that it happens at a time where Amazon.com is being seen as acting like the Nationalsozialistische Deutsche Arbeiterpartei with its suppliers.
Alibaba is no simple threat to Amazon.com. Alibaba is the largest e-commerce company in the world, and the most profitable as well. It dominates e-commerce in China, using an e-commerce model which is similar to Amazon.com's 3P (third party) model, but does not include Amazon.com's sprawling - and unprofitable - warehouse network.
Three reasons why the threat is immense
There are three main reasons why the Alibaba threat cannot be underestimated. These are:
Alibaba is much cheaper for the suppliers
This is very easy to understand. Selling through Amazon.com is expensive. A supplier can pay anywhere from 10-50% of its revenues to Amazon.com for countless commissions, and these keep going up year after year.
Amazon.com needs to charge this much for two reasons:
3P selling is a wonderful business for Amazon.com. It's thus a tremendous threat if that business - which has been winning against eBay (eBay) due to its outstanding customer service, is somehow threatened.
Alibaba is that threat. Where Amazon.com can charge 10-50% of a supplier's revenues to present its products to the customer, Alibaba is going to charge just 3.5% -- including payment. And this won't be any promotional event, either. This is simply how Alibaba operates in China, Alibaba is tremendously cheap and makes its money through volume. And unlike other Amazon.com competitors, Alibaba is impossible to squeeze out of the market due to its massive profitability even at low commission rates.
3P is the most profitable segment for Amazon.com
Both from Alibaba's profitability and from eBay's profitability, we know that 3P selling is highly profitable. It's thus entirely likely that for Amazon.com, too, this segment is highly profitable. If Amazon.com then shows poor overall profits, this just means that the rest of Amazon.com beyond 3P probably runs at a loss.
It stands to reason, then, that any threat to the most profitable segment Amazon.com carries is a large threat to Amazon.com itself.
Many of Amazon.com's 3P sellers supply themselves at Alibaba properties!
It gets worse. If we go through seller's forums we can find a very interesting tidbit. Namely, that many of those sellers supply themselves using Alibaba's properties and then resell these wares through Amazon.com and eBay.
With Alibaba coming to the U.S. this means an intermediary might be cut out from the selling chain. This might in turn enable suppliers to present lower prices to the final customer, which will attract traffic towards Alibaba's property through the fame of being cheaper.
This is not a theoretical threat
I had previously written about how Alibaba coming to the U.S. was a major threat to Amazon.com and eBay. At that time, it was all theoretical. Alibaba had not yet opened any store in the U.S.
This all changes today. 11Main.com is Alibaba's entry into the U.S. market, and it is about to open! Not only is it about to open, but it will open before Alibaba's IPO and concurrent free publicity.
The threat has arrived. It's no longer theoretical. This is the D-Day and the troops are about to disembark from the landing ships.
Alibaba is about to open an online store in the U.S. This store will be massively cheaper for suppliers to sell in, when compared to Amazon.com or eBay. With Alibaba's resources there's a high likelihood that this store will erode the 3P business of Amazon.com and eBay.
The 3P business is probably Amazon.com's most profitable (or maybe even the only business that's profitable beyond books). Any threat to this business is a huge threat to Amazon.com, and the incoming smartphone bomb is not going to change that for sure.
Disclosure: The author is short AMZN. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
This article was written by
Portuguese independent trader and analyst. I have worked for both sell side (brokerage) and buy side (fund management) institutions. I've been investing professionally for around 30 years.
I have a Marketplace service here on Seeking Alpha called Idea Generator that's focused on real-time actionable ideas based on valuation and catalysts. The Idea Generator portfolio has beaten the S&P 500 by more than 51% since inception (2015).
I trade futures, stocks from the long and short side, forex and options. . I can be reached at paulo.santosATthinkfn.com.