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THE ALIBABA GROUP AND ONLINE TO OFFLINE (O2O) SALES 1

Xiaoqian (Vivian) Chen wrote this case under the supervision of Professors Neil Bendle and Xin (Shane) Wang solely to provide
material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation.
The authors may have disguised certain names and other identifying information to protect confidentiality.

This publication may not be transmitted, photocopied, digitized or otherwise reproduced in any form or by any means without the
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Copyright © 2015, Richard Ivey School of Business Foundation Version: 2015-07-10

On September 18, 2014, at an initial public offering (IPO) price of US$68 2 per share, China’s Alibaba
Group (Alibaba) raised a whopping $21.8 billion on the New York Stock Exchange (NYSE), making it
the largest IPO in U.S. history. This was just the beginning of the investor craze — shares began trading
just before noon the next day at $92.70, a 36 per cent jump from the IPO price. That put Alibaba’s overall
valuation at almost $22.8 billion, more than Amazon and eBay’s valuations combined. The next Monday,
an additional 48 million shares were released, and that boosted the offering value to $25 billion. Alibaba
Group thus claimed the title for the world’s largest IPO in history. 3

After the record-breaking IPO had been completed, Alibaba’s chief executive officer (CEO) Jack Ma and
his team set their sights on achieving the next big thing in the rapidly evolving e-commerce industry. In
2006, Alibaba had started developing its online-to-offline (O2O) business — estimated to be worth a
trillion dollars in the age of the mobile Internet. With the sector’s rapid growth in the 2010s, Alibaba
faced stiff competition from Tencent, the other Internet titan in China, which was determined to seize the
same O2O pie using a fundamentally different approach.

ALIBABA GROUP

Company Overview

Alibaba was a Chinese e-commerce company that operated domestic and international marketplaces and
provided Internet-based services. As the mother company of China’s largest wholesale, consumer-to-
consumer (C2C) and business-to-consumer (B2C) marketplaces, it was the largest e-commerce player in
China, responsible for over 80 per cent of the nation’s online sales. Under the mission of “making it easy
to do business for everyone, anywhere,” Alibaba aspired to create a highly integrated, sustainable eco-
system where manufacturers, merchants and consumers could sell and buy in the most efficient manner.
The aims of the company were ambitious. For example, CEO Ma hoped that Alibaba could last at least
102 years so that it would become one of the few companies in history to span three centuries. 4

Alibaba was founded by Ma in 1999 in Hangzhou, capital city of Zhejiang province, where many
entrepreneurial ventures had started. A former English teacher, Ma went to the United States in 1995 and
became fascinated by the idea of the Internet. After a few failed entrepreneurial attempts, he successfully
created the website Alibaba.com with 17 friends in 1999. The website was a business-to-business (B2B)

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marketplace that helped connect Chinese manufacturers and entrepreneurs with clients globally. In 2000,
Japanese telecom and Internet giant Softbank invested $20 million into the one-year-old Chinese e-
commerce company. Five years later, Yahoo invested $1 billion into Alibaba in exchange for 40 per cent
of the ownership, 5 bringing with it its expertise in advertising, search and consumer market knowledge,
which was of paramount importance to Alibaba’s marketplace businesses.

Alibaba’s China Retail Marketplaces

In 2003, Alibaba launched Taobao Marketplace (Taobao) as a C2C e-commerce platform, at a time when
China’s Internet user population was growing rapidly. By 2015, Taobao was handling over 95 per cent of
the country’s C2C market gross merchandise volume (GMV). Alibaba became synonymous with online
shopping in the country. Its key proposition was value and variety, and buyers could find almost
everything from common merchandise to long-tail, i.e., low volume, items. The site had over 8.4 million
sellers and enjoyed an average of 100 million daily unique visitors in June 2014. The large base of buyers
attracted more sellers, and the concentration of sellers provided more competitive pricing and variety to
buyers, forming a virtuous circle and, hopefully, making Taobao Marketplace a sustainable business.
Taobao was Alibaba’s signature property. In fiscal year (FY) 2014, Taobao generated $189 billion in
GMV, accounting for 70 per cent of Alibaba’s total China Retail Marketplaces GMV 6 (see Exhibit 1).

Tmall.com (Tmall) was launched in 2008 as a B2C marketplace to serve Chinese consumers’ growing
appetite for branded products. It was the largest B2C platform in China with 57 per cent market share.7 It
had over 110,000 brands, with more being added regularly, and featured numerous retailers, 8 including
big names such as Apple and Burberry. The platform allowed brands to directly interact with consumers
(or through authorized distributors) so that they had control of the supply and their brand images. Because
the suppliers tended to be highly reputable, products on Tmall generally featured better quality and
customer protections compared to Taobao.

Juhuasuan.com (Juhuasuan) was spun off from Taobao Marketplace and became an independent group-
buying platform in 2010. It was a flash sales website that offered deep discounts in a variety of high-end
merchandise and local services and was the second most trafficked group-buying site in the world after
Groupon. 9 The majority of Juhuasuan sellers were Tmall merchants. Through the site, they were able to
clear excessive inventories and help their cash flows. Juhuasuan also acted like a marketing platform and
a high-volume traffic driver for the Taobao and Tmall marketplaces. All transactions on Juhuasuan were
eventually completed on one of the two marketplaces, and the GMV generated from traffic through
Juhuasuan was thus reclassified into that of Taobao or Tmall.10

The three domestic retail marketplaces targeted different consumers, yet they were highly integrated as a
network to strengthen Alibaba’s leadership in the Chinese e-commerce industry. The network started with
Taobao, the online destination that had become part of Chinese people’s daily habits. Taobao to the
Chinese was not only a shopping website but also a product search engine and price comparison tool.
Since users searching on Taobao already had a strong likelihood of purchase, Taobao was well-positioned
as an online portal that funneled its massive volume of traffic to other platforms and thus increased the
conversion rates across platforms. This was done through, for example, shared advertising where Tmall
stores always showed up as top search results on Taobao.

Trust between sellers and buyers online was an important growth driver for e-commerce platforms, especially
in China where business regulations were less extensive than in countries such as the United States and
Canada. As a result, Alibaba established a series of policies to self-regulate its marketplaces, including
payment escrow services, sophisticated rating systems, protection funds and credibility-based search ranking.

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These helped alleviate Chinese consumers’ fear and so increased the level of online shopping. This also
strengthened the Alibaba brand and was designed to make the system robust and scalable.

International and Wholesale Marketplaces

In 2010, as part of its international expansion, Alibaba launched AliExpress, a site that served retail
consumers outside China. It provided overseas shoppers with access to a wide range of goods from China
at competitive prices while helping expand the consumer base for Chinese manufacturers. 11

Alibaba.com and 1688.com were its wholesale platforms. 12 Since its inception, Alibaba.com had grown
into a global wholesale trading platform connecting buyers from over 190 countries with sellers based in
manufacturing nations such as China, Thailand, India and even the United States. 13 Its other key pillar,
1688.com, served as a wholesale channel for merchants doing business on Alibaba’s retail platforms to
source from China at competitive prices.

Alipay

Wholly owned by Alibaba, 14 Alipay was China’s largest third-party online payment service provider and
the major payment method on Alibaba’s marketplaces, settling over 78 per cent of Alibaba’s GMV in the
year ended June 2014. 15 Alipay provided an escrow service where it held the payment and only released it
to the sellers when the buyer confirmed purchase satisfaction. This policy reassured consumers that their
transactions were safe and protected them from false advertising on the company’s marketplaces. This
further boosted consumer online shopping confidence in China.

Debuted as a payment method on e-commerce platforms, Alipay became an important destination on its
own through its mobile version called Alipay Wallet. Although regarded as the Chinese version of
Paypal, Alipay Wallet was very different from the latter in its front-end consumer experience. 16 While
Paypal only showed up in the last step of a transaction as merely a payment option, users could go to the
Alipay Wallet and search for such things as travel deals, flights and movie tickets and pay for them within
the application (app). This all-in-one presentation freed people from waiting in line to pay their utility
bills or buy their movie tickets, as was common in China, a country that used to be inconveniently low-
tech compared with the Western world.

As of June 2014, Alipay had over 300 million registered users in China, including 100 million on Alipay
Wallet, and handled 80 million transactions per day, among which 70 per cent came from platforms other
than Alibaba’s. Enjoying such wide popularity, Alipay looked to lead a digital finance revolution in
China. It aspired to become a full-fledged, data-driven platform where businesses could deliver tailored
smartphone ads and promotions based on Alipay data collected from an individual consumer’s shopping
history. Besides facilitating payments, Alipay also offered other financial solutions, including money
market accounts, fund transfers, credit card repayment and microfinance. Ma saw great potential in
Alipay and expressed interest in taking it public in the next few years. 17

ALIBABA’S MONETIZATION

Advertising-Driven and Asset-Light

Alibaba described itself as “marketplaces as a platform for third parties” 18. It was a middleman between
sellers and buyers, and its revenue could be categorized into buckets 19 with the largest being online
marketing services (see Exhibit 2).

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Marketing revenues from Taobao and Tmall comprised the biggest portion of Alibaba’s revenues. In 2014, this
segment contributed 59 per cent to the company’s total revenue. Alibaba offered two types of marketing
services, both applicable to Taobao, Tmall and the two wholesale sites. The first one was Pay-for-Performance,
which allowed Taobao and Tmall sellers to bid for keywords in an online auction system on a pay-per-click
basis. It worked in a similar way as search engine optimization, and the fact that the searches were closed to
external search engines allowed Alibaba to charge a premium. The other type, Display Advertising, enabled
sellers to bid in real time on a pay-per-thousand impression basis and place their ads on various places in
Alibaba’s platforms. This was mostly used for promotions and new product arrivals. 20

Commissions on transactions were the second largest revenue source, accounting for 24 per cent in 2014,
up from 19 per cent in 2013. They were collected from sellers on Tmall and Juhuasuan based on a
percentage of GMV for transactions settled through Alipay in the respective marketplaces. In addition to
marketing services fees and commissions, Alibaba also charged for storefronts, store value-added
services, memberships and so on, but these made up a smaller portion of the revenues.

Alibaba’s costs to generate this revenue included primarily payment processing costs, traffic acquisition
costs to third-party marketing platforms and website operation fees. By not engaging in direct sales or
holding inventory as Amazon did, Alibaba saved on product costs and achieved higher operating margins.
The third-party model, versus Amazon’s first-party model, kept sourcing risk to the minimum and
allowed for more financial flexibility.

CHINA, WORLD’S LARGEST E-TAILING MARKET

Positive Growth Outlook

In 2013, China surpassed the United States as the world’s largest online retail market, with GMV of over
$296 billion. 21 Currently contributing 10 per cent to the overall retail GMV in China, online retail was
expected to grow at a compound annual growth rate of 30 per cent; by 2020, it was predicted to equal that
of the United States, Japan, the United Kingdom, Germany and France combined today. 22 The enormous
growth of Chinese online retail was primary driven by rising disposable incomes, mobile Internet
penetration and the absence of a strong nation-wide offline retail network.

Consumer spending as a percentage of gross domestic product in China stood at 36 per cent in 2013, which,
when compared with over 60 per cent in many developed countries, showed huge growth potential. China
was undergoing a shift in the structure of its economy from an export/manufacturing-oriented model to a
consumption-driven one. With these changes, policy-makers were working to increase the level of social
protections, bringing reforms to consumer finance sectors and driving employment in the service sectors.
There was also a remarkable increase in disposable incomes across the country, at 7 per cent above inflation
in urban areas and 9.3 per cent in rural areas in 2013. Higher incomes and better education among younger
generations made Chinese consumers more tech-savvy, discerning and quality-focused than they ever
were. 23 This boosted their spending on branded products and quality services.

In 2014, mobile shopping was already responsible for one-third of the country’s online shopping
market 24 (see Exhibit 3). With the fast roll-out of wifi and 3G/4G services in China, strong adoption of
smartphones and the falling price of data plans,25 mobile Internet usage was expected to experience
substantial growth with a positive influence on online retailing.

China’s underdeveloped offline retail infrastructure presented substantial expansion opportunities for
online retail. Bricks-and-mortar retailing was highly fragmented and no truly nation-wide chain had yet to
emerge. In 2013, retail space per capita was 0.6 square metres in China, compared with 2.6 square metres

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in the United States.. The top 20 physical retailers represented only 12 per cent of the market, compared
with over 40 per cent in the United States. The vast geographic span, inadequate public infrastructure in
many cities and wide income disparity between inland and coastal China made it costly and less
rewarding for retailers to establish a national presence. Online marketplaces, thus, had a pronounced
impact as they filled the gap by offering people in lower tier cities 26 an easy access to a wide selection
they previously could not enjoy unless they took a shopping tour to the nearest metropolitan city.

Logistic Challenges

Delivery played a critical role in consumer experiences with e-commerce companies. The logistics and
express industry in China was less than 20 years old27 and suffered from inadequate warehouse space and
obsolete technology. Still in its early stage of development, the industry was highly fragmented with over
35,000 courier companies, 28 and competition made the margins extremely thin. Aside from that, facing
the surging volume brought by the popularity of online shopping, many companies had to sacrifice
quality to meet the demand. Frequent parcel losses, thefts or mishandling of goods sent to consumers
tarnished the brand image of e-commerce companies that partnered with them. The highest quality service
providers were often concentrated in big cities as a result of inadequate network infrastructure in lower
tier areas.

This lack of ideal options somewhat undermined the development of e-commerce companies, especially
as the number of online shoppers was growing the fastest in lower tier cities. As a result, some e-
commerce players built their own central warehouses and delivery teams to try to ensure customer
satisfaction. In 2013, Alibaba formed a joint venture with major delivery and logistics firms in which it
held a 48 per cent stake. The new company, called Cainiao Networks, aimed to address the logistics
bottleneck by aggregating the technology and network strengths of the participating firms. The goal was
to create a robust and scalable network in China that could support “30 billion RMB worth of daily online
shopping transactions.” 29

O2O BUSINESS

O2O involved finding customers online and directing them to brick-and-mortar stores. 30 It was a new
form of e-commerce that had been growing dramatically since the early 2010s. On the front end,
consumers browsed products or services online and paid for them, after which they were directed to
physical stores to pick up the product or enjoy the service (see Exhibit 4). Afterwards, they could share
their experience on social media or provide direct feedback to businesses. On the back end, businesses
gathered transaction-related data through online payment systems to improve logistics efficiency,
optimize marketing campaigns and conduct customer relationship management (CRM). This process —
from search and payment, to redemption and sharing on social media and all the way to back-end
information management — formed a complete, scalable O2O system.

Traditionally the Internet industry monetized its offerings through advertising and value-added services,
such as video games, and the entire process stayed online. O2O, in comparison, featured a longer value
chain that extended from online to offline scenarios. It leveraged the huge traffic and data analytics
capability inherent in the Internet (the “online”) to enhance efficiency and profitability of traditional
physical industries (the “offline”), particularly in the service sectors. The online payment component
made O2O measurable and allowed the system to conduct more accurate big data analytics that further
enhanced business efficiency and marketing performances. O2O also played an important role in driving
foot traffic for retailers by converting the rapidly increasing online population to consumers in one of two
ways. The first way featured coupons, deals or new production information being “pushed” to the user’s

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mobile phone to trigger a shopping behaviour, while the second way “pulled” consumers in through
search engine results of various types.

The extension of the value chain required an integrative ecosystem approach where online and offline
resources reinforced each other. Once the ecosystem was established, it allowed the business to scale at
relatively low cost.

Alibaba’s O2O Strategy

Alibaba was the most successful player in China’s O2O landscape as it was the closest to completing an
“O2O ecosystem” even when compared to fellow Internet titans such as Tencent and Baidu. 31 Its map
services and quick response (QR) codes migrated offline needs to online and conducted traffic to various
platforms that connected consumers with offline merchants. The platforms facilitated information flow
while Alipay enabled the cash flow to finish the transactions. This ecosystem was established both
organically and through proactive acquisitions and strategic investments.

O2O Integration onto Existing Platforms

Alibaba’s O2O roll-out started in 2006 with the launch of Taobao Life on Taobao Marketplace32 to leverage
the mother platform’s sound reputation and enormous volume of traffic. It provided information and dealt
with a wide range of local lifestyle services, including car maintenance, movie tickets, housework services
and wedding planning, to name just a few. Customers on the platform received a QR code or transaction
serial number via text message, which they then presented to merchants for redemption. Consumer spending
on local lifestyle services was both stable and of high aggregate volume, which made it an ideal place to
start when building a loyal consumer base and merchant network for O2O.

In 2012, Juhuasuan and Alipay formed a partnership with Focus Media to develop a mobile shopping
service that would boost traffic for all the parties involved. 33 The service allowed Alipay App users to
scan QR codes on Focus Media’s advertisement screens and be redirected to Juhuasuan to purchase the
advertised product immediately. 34 Alibaba combined its rich consumer base with Focus Media's extensive
advertising network in major Chinese cities and thus extended its business from online to offline to tap
strong consumer spending power.

New Mobile Platforms — The Information Facilitator

Perhaps the greatest opportunity for O2O was in mobile commerce. 35 Because mobile enjoyed higher
engagement levels, it allowed more communication moments, thus becoming a better advertising platform
and traffic driver. In addition, consumers looked for immediate answers for specific needs and had a
higher propensity to immediate purchase when visiting mobile sites compared to when they used their
desktops. 36 Already handling 86 per cent of China’s mobile GMV, 37 Alibaba leveraged its dominance in
mobile shopping and created new mobile platforms to expand its O2O business. Each added value by
facilitating information flow and increasing transaction efficiency in a specific sector, or a “transaction
scenario” in the terminology used by O2O firms. By the end of 2014, Alibaba had tapped into traveling,
wedding services, taxi-hailing and hospital preregistration, among other sectors, where efficiency had
been an issue for years. The most noticeable examples were Taodiandian and Kuaidi Dache.

In 2013, Taobao launched Taodiandian, a comprehensive mobile app to facilitate food ordering and
delivery. Users ordered online and paid at the restaurants through the Alipay mobile app by scanning the

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reservation QR code on the receipts (or paid online in the case of delivery). Users could also post reviews
about their experience afterwards.

Taodiandian extended the “marketplace” concept into the catering industry, providing a platform that
facilitated direct communication and transactions between restaurants and customers. More than anything
else, Taodiandian focused on attracting the participation of offline merchants to form the largest
restaurant network in China. 38 To do so, it offered a series of incentives for restaurant candidates,
including free storefront set-up, no commissions charged, data management assistance and daily
transaction clearance with the restaurant as opposed to charging on a monthly basis as many group-
buying websites would do. 39

Besides catering, Alibaba made its foray into the popular taxi-hailing industry by partnering with Kuaidi
Dache. A year after Kuaidi Dache was founded, Alibaba participated in its first round of funding and
provided the start-up with payment technology support through Alipay. 40 This turned out to be a smart
move since taxi-hailing apps were gaining rapid popularity as they eased the chronic rush-hour pain in
Chinese megacities by connecting frustrated urban commuters with taxi drivers searching for clients. In
late 2013, Alibaba took one step further and implanted the taxi-hailing app into Alipay. This allowed
users to call for taxis and pay for rides within Alipay without the need to download any additional apps.
Backed by Alibaba, Kuaidi Dache quickly rolled out to over 300 Chinese cities within two years and
claimed the title for the most-used taxi-hailing app with 54 per cent of the market. 41

Alipay — The Transaction Facilitator and the Infrastructure

Alipay served as the backbone for these O2O mobile platforms (see Exhibit 5). It expanded beyond its
traditional payment features, serving as an infrastructure in the ecosystem by developing new shopping
habits, enhancing user experience and facilitating transactions to eventually close the “O2O loop.”
Thanks to the huge consumer base and data on consumer needs, Alipay created a sustainable and scalable
business model allowing Alibaba to quickly move into a new O2O sector when it recognized unserved
consumer needs. On top of that, the embedding of Alipay into the mobile platforms used for O2O gave
the added benefit of solidifying its leadership in the third-party payment service industry where Tencent’s
Tenpay was also vying for its share of customer payments.

Map Services — A Major Portal

In 2014, Alibaba spent $1.5 billion to acquire AutoNavi, the second largest mapping and navigation
company in China; it had previously owned a 28 per cent stake in the company. By bringing AutoNavi
fully under its wing, Alibaba was keen to develop map services, seeing these as a critical prong of its
O2O strategy. According to the China Internet Network Information Center, one in every three Chinese
mobile users utilized maps to search for local commerce information, and user penetration of mobile
maps was expected to reach 65 per cent by 2015. A map service went beyond traditional navigation uses
and became a location-based search engine that covered consumers’ needs in dining, shopping and
transportation. It was also an effective way to drive transactions because a proactive search user already
had a high propensity to make the purchase.42

In 2014, China’s mobile map industry was highly concentrated, with Baidu Map handling 63 per cent of
the traffic. 43 AutoNavi was less than halfway there. Moreover, Baidu Map had over five million offline
merchants on board, while AutoNavi had none, given that its focus had always been navigation. 44 To
combat the competitive pressure from Baidu, soon after the acquisition, Alibaba migrated Taodiandian’s
offline network into AutoNavi maps to create a powerful two-way gateway between offline and online.

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Users searching for a restaurant on AutoNavi maps could directly access the restaurant’s storefront on
Taodiandian and complete the ordering process from there. Powered by AutoNavi’s technologies,
Taodiandian was able to send location-based advertisements and recommend nearby restaurant deals.

BRICK-AND-MORTAR PARTNER — NEW OPPORTUNITIES

Mobile was the most critical traffic conduit for O2O, and physical stores presented substantial mobile business
opportunities. Consumers shopping at high-end stores looked for an ambiance and unique experience that
could not be substituted by online transactions, and they were often on the leading edge of smartphone
usage. 45 To better target this group of consumers, Alibaba established a partnership with Intime Retail, a well-
known retail chain that owned 36 luxury shopping malls in China. The goal of this partnership was to construct
an open infrastructure in China that integrated digital commerce with brick-and-mortar retailing.

An important milestone for Alibaba occurred when Alipay Wallet was adopted as a payment method in
Intime Retail’s stores across China. This not only drove up the average bill size of Alipay, but also
significantly grew its mobile usage. Indeed, mobile usage currently accounted for one-third of Alipay’s
daily transactions. 46 The partners also launched Yintaibao as an electronic membership product for Intime
Retail’s members. The cards were rolled out at Taobao’s mobile app and Alipay Wallet and became the
first electronic membership cards in China’s retail industry that fully enabled registration, application,
pre-payment and payment. The number of members registered with Yintaibao during the first month of its
introduction exceeded 1.7 million, surpassing Intime Retail’s bricks-and-mortar stores’ membership that
had been gathered over the past 16 years.47

The partnership also constructed an open infrastructure that integrated digital commerce with brick-and-
mortar retailing. Tmall was granted access to Intime Retail’s offline inventory database48 so that it could
expand its portfolio of international brands and use Intime Retail’s physical shopping malls as fulfillment
hubs for online orders. Intime Retail benefited from Alibaba’s e-commerce expertise and mobile
technologies, accelerating its creation of a more engaging, omni-channel shopping experience in the stores.

CHALLENGES AHEAD

Fierce Competition

The most formidable challenger to Alibaba’s O2O ambition was the Tencent Corporation.49 Although
from different backgrounds in the Internet industry, the two juggernauts soon found themselves in heated
competition in the O2O arena. Tencent had a market capitalization of around $150 billion and had been
the most valuable Internet company in Asia until Alibaba listed. 50 (see Exhibit 6).

Tencent’s goal was to offer a complete online experience for Chinese Internet users by providing a wide range
of Internet services including instant messaging (IM), media portal, micro-blogging, online and mobile games,
video streaming, etc. Its founding product, QQ, a comprehensive IM tool, had accumulated over 800 million
monthly active users (MAU) and therefore secured a vast user base for the company’s other value-added
Internet products, particularly online games, which encouraged frequent purchases of virtual commodities. On
top of that, Tencent also drew revenues from advertising on its social networking platforms. 51

Given Tencent’s success and innovation in mobile communication applications, Alibaba itself regarded
its ability to adapt to the rapidly evolving mobile commerce trend as a significant risk factor. Tencent’s
flagship mobile product was Wechat, an IM app that, according to Forbes, was “undoubtedly the most
powerful mobile app in China.” Since its introduction in 2011, Wechat had reached over 500 million
MAUs as of the fourth quarter 2014. This intimidating number was just the start — what made Wechat a

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key weapon in Tencent’s O2O business was the company’s integration of most of its value-added Internet
services to this mobile app and turning it into an all-inclusive online destination for many purposes.
Besides basic IM functions, users could read articles, share locations, access social networking
communities, subscribe to enterprise accounts and even scan QR codes on products and make payments.
In a similar fashion to how Alibaba built an integrative ecosystem through Alipay and online transactions,
Tencent constructed a powerful ecosystem around Wechat and social networking. 52

Alibaba was probably most concerned over Wechat’s payment function, Tenpay. Alipay currently
handled 48 per cent of the value of all online payments in China, followed by Tenpay at 19 per cent, but
the huge user base of Tencent’s WeChat made it an alarming threat. In early 2014, Alibaba and Tencent
entered a price war to drive traffic to their own payment platforms by bankrolling two rival taxi-hailing
apps (Kuaidi Dache by Alibaba and Didi Dache by Tencent). Both companies offered lavish subsidies to
taxi drivers and discounts to riders for using their apps. During the peak time of this “money shower,”
many taxi drivers would park their cars on the street and turn on the apps in the hopes of grabbing the
limited time offers. Although the battle didn’t create a convincing winner, 53 it was a prime example in
China of the intense competition between two leading Internet firms.

Although less dramatic, competition between the two rivals was present in many other O2O segments.
Through partnerships and strategic investments, Tencent established its own map service, retail
marketplace and group-buying website, yet the company remained overshadowed by Alibaba’s strong
presence in those areas. However, in late 2014, Tencent formed a joint venture with China’s search
engine giant Baidu and the real estate conglomerate Wanda, which owned 99 department stores in major
cities. 54 The joint venture, estimated to be worth $813 million, 55 planned to build a massive e-commerce
shopping platform integrating the three partners’ online and offline strengths in 2015, forming a
formidable challenge to Alibaba’s dominance in e-commerce and O2O business.

Offline Service Quality Concern

O2O commerce directed traffic to offline physical stores, where real consumption occurred. Only when
offline service quality and the online network developed in tandem could the model be sustainable. In
China, service quality was lagging behind the development of online infrastructure, and this was a major
reason for low customer satisfaction rates in certain O2O segments. 56 In a survey conducted in 2014 on
205 Chinese consumers in fast food restaurants, most indicated they were generally not happy to various
degrees with their interaction process with the staff. 57 Another example came from the travel industry,
which in China was widely known for having hidden charges. 58 Regulations had yet to be imposed to
standardize pricing and quality procedures in service industries. Apart from that, many independent
merchants lacked the advanced IT infrastructure needed to handle the large volume of traffic brought by
O2O and were not able to perform sophisticated CRM and inventory management practices, both
considered key to increasing consumer loyalty in the O2O loop.59

THE FUTURE

O2O was transforming the way of doing business in even the most traditional sectors. It was a potential
gold mine in the mobile Internet era. Nevertheless, facing the cutthroat competition and unique challenges
in the Chinese market, Ma and his team had a long way to go to reach the “glory of 102 years.” How
could Alibaba succeed in the O2O world?

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EXHIBIT 1: WORLD'S TOP 10 E-COMMERCE COMPANIES 2013 GMV

$300
$250
US$ GMV $200
$150
$100
$50
$-

Source: Created by authors.

EXHIBIT 2: ALIBABA REVENUE MIX

Source: Created by authors.

EXHIBIT 3: ONLINE COMMERCE STATISTICS

100.0%
80.0%
60.0%
40.0% China
20.0%
US
0.0%
2013 Internet 2013 Online 2013 Japan
Penetration(% Shopping Smartphone
of population) Penetration (% Penetration (%
of population) of population)

Source: Created by authors.

This document is authorized for use only in Danny Kim's Marketing in a Digital Age course at NUS Business School, from September 2017 to March 2018.
 Page 11 9B15A035

EXHIBIT 4: TOP 8 O2O SERVICES POPULARITY, OCTOBER 2013

Restaurants 46%
Bank/ATM 37%
Entertainment 34%
Hotel 25%
Shopping Malls 25%
Group-buy 17%
Others 15%
Taxi-booking 14%

Source: Goldman Sachs China, Internet Battles of the Internet Giants III, February 24, 2014, www.wisburg.com/wp-
content/uploads/2014/09/ 高盛
-China ：-Technology ：-Internet-Battle-of-the-Internet-giants-III ：-Online-to-offline-segment-in-
focus.pdf, accessed April 10, 2015.

EXHIBIT 5: SHARE OF THIRD-PARTY PAYMENT

YeePay, IPS, 3% Others,

3% 2%
China
PnR,
6%
99bill,
7%
Alipay,
UnionPay, 49%
11%
Tenpay,
19%
Online

China
Kalaka, Mobile, Others,
7% 1% 4%

Tenpay,
9%
Alipay,
80%

Mobile

Source: Created by authors.

This document is authorized for use only in Danny Kim's Marketing in a Digital Age course at NUS Business School, from September 2017 to March 2018.
 Page 12 9B15A035

EXHIBIT 6: COMPARISON OF MAJOR COMPANIES AS OF SEPTEMBER 2014

Source: Created by authors.

ENDNOTES
1
This case has been written on the basis of published sources only. Consequently, the interpretation and perspectives presented in
this case are not necessarily those of the Alibaba Group or any of its employees.
2
All currencies in U.S. dollars unless indicated otherwise.
3
Liyan Chen, Ryan Mac and Brian Solomon, “Alibaba Claims Title For Largest Global IPO Ever With Extra Share Sales,” Forbes,
September 22, 2014, www.forbes.com/sites/ryanmac/2014/09/22/alibaba-claims-title-for-largest-global-ipo-ever-with-extra-share-sales/,
accessed March 18, 2015; Myles Udland, “Alibaba Gains 38% On First Day Of Trading,” Business Insider, September 19, 2014,
www.businessinsider.com/alibaba-ipo-september-19-2014-9, accessed April 25, 2015; Leslie Picker and Lulu Yilun Chen, “Alibaba’s
Banks Boost IPO Size to Record of $25 Billion,” Bloomberg, September 22, 2014, www.bloomberg.com/news/articles/2014-09-
22/alibaba-s-banks-said-to-increase-ipo-size-to-record-25-billion, accessed March 18, 2015.
4
Ashton Lee, “How Did Alibaba Capture 80% Of Chinese E-Commerce?,” Forbes, May 8, 2014.
www.forbes.com/sites/quora/2014/05/08/how-did-alibaba-capture-80-of-chinese-e-commerce, accessed March 18, 2015; Alibaba,
Company Website, www.alibabagroup.com/en/about/overview, accessed April 25, 2015.
5
Madeline Stone and Jillian Donfro, “The Inspiring Life Story of Alibaba Founder Jack Ma, Now the Richest Man In China,” Business
Insider, October 2, 2014, www.businessinsider.com/the-inspiring-life-story-of-alibaba-founder-jack-ma-2014-10?op=1&IR=T, accessed
March 18, 2015; Alex Konrad, “Alibaba Gold: Which Investors Stand To Cash In On The Massive Public Offering,” Forbes, May 6, 2014,

This document is authorized for use only in Danny Kim's Marketing in a Digital Age course at NUS Business School, from September 2017 to March 2018.
 Page 13 9B15A035

www.forbes.com/sites/alexkonrad/2014/05/06/alibaba-gold-which-venture-investors-are-backing-the-massive-public-offering, accessed
March 20, 2015; In 2012, Yahoo sold about half its stake back to Alibaba for $7.1 billion. Today, Yahoo is Alibaba’s second biggest
shareholder holding 22.6 per cent of the shares, after Softbank which owns 34.4 per cent. Brian Womack and Mark Lee, “Alibaba Buys
Back 20% stake from Yahoo for $7.1 Billion,” Bloomberg, May 21, 2012, www.bloomberg.com/news/articles/2012-05-21/alibaba-buys-
back-20-stake-in-itself-from-yahoo-for-7-billion, accessed June 9, 2015.
6
Gross merchandise volume is the total value of merchandise sold over a retail platform in an established time period before
deducting fees and expenses; it is sometimes also referred to as gross merchandise value. See “Market Share of Leading C2C E-
commerce Platforms in China in 2013,” Statista, www.statista.com/statistics/225875/market-share-in-c2c-online-shopping-in-china,
accessed April 4, 2015; Unique visitors refers to the number of distinct individuals requesting pages from the website during a given
period. This can be compared to visits that will count frequent visitors more than once. (This is not from the SunTrust Report.)
Techopedia Dictionary, www.techopedia.com/definition/1611/unique-visitor, accessed June 9, 2015; Robert S. Peck, Rodney A.
Hull, Matthew Thornton, SunTrust Robinson Humphrey, The Alibaba Report, October 29, 2014.
7
“Market Share of B2C Online Shopping Websites in China in 2nd Quarter 2014,” Statista,
www.statista.com/statistics/323115/market-share-of-b2c-online-retailers-in-china/, accessed April 4, 2015.
8
Alibaba, op.cit.
9
Alibaba SEC F1 Filing, May 6, 2014, www.sec.gov/Archives/edgar/data/1577552/000119312514184994/d709111df1.htm,
accessed April 14, 2015.
10
Chi Tsang, Joyce Ju, Alice Cai, HSBC, Global Research, Alibaba Company Report, November 11, 2014.
11
Alibaba, op.cit.
12
The Chinese pronunciation of 1688 resembles that of Alibaba, and thus the name.
13
Alibaba, op.cit.
14
Alibaba spun off Alipay in 2011 in order to comply with ownership regulations for payment-service firms issued by China’s central
bank in 2010. Alipay is now affiliated with Alibaba through Ant Financials, a firm owned by Alibaba’s executives. Alipay was not part
of the company that listed on the NYSE in Alibaba's IPO.
15
HSBC Global Research, op.cit.
16
Christina Larson, “Alipay Leads a Digital Finance Revolution in China,” MIT Technology Review, January 26, 2015,
www.technologyreview.com/news/534001/alipay-leads-a-digital-finance-revolution-in-china, accessed April 6, 2015.
17
Melanie Lee, “Chinese Shoppers To Shop Cashless at Stores With Alipay Wallet,” Alizila (Alibaba’s official e-commerce commentary
site), November 15, 2013, www.alizila.com/chinese-shoppers-shop-cashless-stores-alipay-wallet, accessed April 8, 2015; HSBC Global
Research, op.cit.; Gerry Shih, “Alibaba Affiliate Alipay Rebranded Ant in New Financial Services Push,” Reuters, October 16, 2014,
www.reuters.com/article/2014/10/16/us-china-alibaba-idUSKCN0I50KJ20141016, accessed April 7, 2015; Paul Carsten, “Alibaba’s Ma:
Alipay Unit ‘Will Definitely Go Public,’” Business Insider, November 11. 2014, http://uk.businessinsider.com/r-alibabas-ma-alipay-unit-
will-definitely-go-public-cctv-interview-2014-11?r=US, accessed April 7, 2015.
18
Alibaba SEC F1 Filing, May 6, 2014.
19
Robert S. Peck, Rodney A. Hull, Matthew Thornton, SunTrust Robinson Humphrey, The Alibaba Report, October 29, 2014.
20
This is the major difference in revenue model between Alibaba and e-Bay. The latter is largely commission-based.; HSBC Global
Research, op.cit.; Alibaba SEC F-1 Filing, op.cit.
21
Frank Tong, “China Officially Passes the U.S. in E-commerce Internet Retail,” Internet Retailer, May 29, 2014,
www.internetretailer.com/2014/05/29/china-officially-passes-us-e-commerce, accessed April 1, 2015.
22
Richard Dobbs, et al., “China’s E-tail Revolution,” McKinsey Global Institute, March 2013, www.mckinsey.com/insights/asia-
pacific/china_e-tailing, accessed March 29, 2015.
23
Colin Tan, Deutsche Bank Market Research, Alibaba Group Report, January 12, 2015; Eunice Ku, Dezan Shira & Associates, “An
Overview of China’s Retail Industry,” China Briefing, April 16, 2014, www.china-briefing.com/news/2014/04/16/overview-chinas-
retail-industry.html, accessed April 13, 2015; Sue Feng, “Nielson: Changing Chinese Shoppers Reshape China’s Retail Landscape,”
November 7, 2014, www.nielsen.com/cn/en/press-room/2014/nielsen-71-percent-of-top-tier-chinese-consumers-choose-cards-over-
cash-as-preferred-payment-method-for-everyday-spending1.html, accessed April 13, 2015.
24
China Internet Watch, “Over 60% Purchased on Mobile During Chinese New Year 2015,” February 26, 2015,
www.chinainternetwatch.com/12503/cny-2015-mobile-shopping, accessed March 30, 2015.
25
Goldman Sachs China, Internet Battles of the Internet Giants III, February 24, 2014, www.wisburg.com/wp-
content/uploads/2014/09/高盛-China：-Technology：-Internet-Battle-of-the-Internet-giants-III：-Online-to-offline-segment-in-
focus.pdf, accessed April 10, 2015.
26
Euromonitor International, “Alibaba Group Holdings Limited,” www.hsprod.investis.com/shared/v2/irwizard/sec_item_new.jsp
?epic=alibaba&ipage=9812765&DSEQ=1&SEQ=173&SQDESC=SECTION_PAGE, accessed April 10, 2015; Alibaba SEC F-1
Filing, op.cit.; Chinese cities are categorized into tiers based on their economic development, taking into consideration GDP, public
and transportation infrastructure and other factors. First-tier cities refer to the most developed metropolitans such as Beijing and
Shanghai. The lower the tier, the less developed the city. Nevertheless, cities in lower tiers can have populations in the millions and
represent promising economic potential thanks to rapid urbanization in China.
27
Qi Wang, “E-Commerce Companies Building Warehouses Themselves”, WangYi Tech, August 2, 2011,
http://tech.163.com/11/0802/14/7AF87PO500094L5O.html, accessed April 12, 2015.
28
Iris Mir, “Logistics Revolution in China: Will Delivery Companies Deliver?,” CKGSB Knowledge, June 24, 2013,
http://knowledge.ckgsb.edu.cn/2013/06/24/china/logistics-revolution-in-china-will-delivery-companies-deliver, accessed April 13, 2015.
29
Mui-Fong Goh, Chee Wee Gan,”China’s E-Commerce Market in 2014: The Logistics Challenges,” AT Kearney,
www.atkearney.be/documents/10192/5274810/Chinas+E-commerce+market-+The+Logistics+Challenges.pdf/76119ca8-ce91-464e-
b8da-b9ad301586a3, accessed April 13, 2015; Alibaba SEC F-1 Filing, op.cit.; Wang Shanshan, “Alibaba Tries Team Approach in Bid to
Build Logistics Network,” Caixin Online, June 6, 2013, http://english.caixin.com/2013-06-06/100538230.html, accessed April 12, 2015.
30
“Why Online2Offline Commerce Is a Trillion Dollar Opportunity,” Tech Crunch, August 7, 2010,
www.techcrunch.com/2010/08/07/why-online2offline-commerce-is-a-trillion-dollar-opportunity, accessed February 20, 2015.

This document is authorized for use only in Danny Kim's Marketing in a Digital Age course at NUS Business School, from September 2017 to March 2018.
 Page 14 9B15A035

31
“China’s O2O Market: The Path to Success is Not Uni-directional,” PR Newswire, April 8, 2013, www.prnewswire.com/news-
releases/chinas-o2o-market-the-path-to-success-is-not-uni-directional-201906281.html, accessed March 30, 2015.
32
Compiled by iResearch China Consulting Division,” An Overview of the O2O Strategies by Baidu, Alibaba, Tencent (BAT)”
January 1, 2013, http://wenku.baidu.com/view/4258790e6c175f0e7cd137f0.html?re=view, accessed March 30, 2015.
33
Shaohua Gao, “Focus Media, Juhuasuan, and Alipay Form an Alliance to Enter the O2O Arena” Xinhua News, July 5, 2012,
http://jingji.cntv.cn/20120725/119506.shtml, accessed June 9, 2015.
34
Gao, op cit.
35
Goldman Sachs China, op.cit.
36
Feng, op.cit.
37
R.J. Hottovy, “Conservative Pricing Creates Opportunity for Wide-Moat Alibaba,” MorningStar, September 17, 2014,
http://ibd.morningstar.com/article/article.asp?id=665621&CN=brf295,http://ibd.morningstar.com/archive/archive.asp?inputs=days=14
;frmtId=12,%20brf295, accessed April 9, 2015.
38
Yuhang, Gui “Alibaba’s True Intentions Behind Foraying into the Catering Sector” 21st Century Business Review, December 25,
2013, www.21cbr.com/html/topics/201312/24-16502.html, accessed April 2, 2015.
39
Xuan Song, “How Far Can Taodiandian Go On Alibaba’s O2O Map” Sohu Tech, Mar 27 2014
http://it.sohu.com/20140327/n397281455.shtml, accessed April 2 2015.
40
“KuaiDi Dache, China’s Leading Mobile Taxi Booking App, Secures US$600 Million Investment from SoftBank Group, Alibaba
Group and Tiger Global,” Business Wire, January 14, 2015, www.businesswire.com/news/home/20150114006367/en/KuaiDi-
Dache-China’s-Leading-Mobile-Taxi-Booking#.VS96NEJ5efQ, accessed April 7, 2015.
41
“KuaiDi Dache, China’s Leading Mobile Taxi Booking App, Secures US$600 Million Investment from SoftBank Group, Alibaba
Group and Tiger Global,” Analysys International, January 15, 2015, http://uk.reuters.com/article/2015/01/15/ca-softbank-
idUKnBw146367a+100+BSW20150115, accessed April 7, 2015.
42
Sarah Rabil and Brian Womack, “Alibaba Agrees to Buy AutoNavi in $1.5 Billion Map Deal,” Bloomberg Business, April 11, 2014,
www.bloomberg.com/news/articles/2014-04-11/alibaba-agrees-to-buy-autonavi-in-1-5-billion-mapping-deal, accessed April 7, 2015;
China Internet Network Information Center, Statistical Report on Internet Development in China, www1.cnnic.cn/IDR/Report
Downloads201411/P020141102574314897888.pdf , July 2014, accessed June 9, 2015; Goldman Sachs China, op.cit.
43
China Internet Network Information Center, op.cit.
44
Goldman Sachs China, op.cit.
45
Paul Mozur and Esther Fung, “Alibaba to Pay $692 Million for Stake in Intime Retail,” Wall Street Journal, March 31, 2014,
www.wsj.com/articles/SB10001424052702304157204579472243618362248, accessed March 31 2014.
46
Lee, op.cit.
47
Intime Group Press Release April 8, 2014, www.prnewswire.com/news-releases/alibaba-group-invests-hk537-billion-in-intime-
retail-to-fuse-offline-and-online-shopping-253670601.html, accessed on April 7, 2015.
48
Ibid.
49
Mishkin, op.cit.
50
Paul Mozur, “Tencent’s Market Cap Rises Above $150 Billion,” Wall Street Journal, March 11, 2014,
http://blogs.wsj.com/digits/2014/03/11/tencents-market-cap-rises-above-150-billion/, accessed April 10, 2015.
51
Whenever a user interacts with a system, it records an event with a unique ID number. MAU is the number of unique users
interacting with the system during the course of one month.; “Tencent’s Worth: A Chinese Internet Firm Finds a Better Way to Make
Money,” The Economist, September 21, 2013, www.economist.com/news/business/21586557-chinese-internet-firm-finds-better-
way-make-money-tencents-worth, accessed April 10, 2015; Tencent Official Website, www.tencent.com/en-us/ps/adservice.shtml,
accessed April 10, 2015.
52
Jason Lim, “Wechat, One of the World’s Most Powerful Apps”, Forbes, May 19, 2014,
www.forbes.com/sites/jlim/2014/05/19/wechat-one-of-the-worlds-most-powerful-apps, accessed April 10, 2015.
52
Lim, op cit.; “Number of Monthly Active WeChat Users from 2nd Quarter 2010 to 1st Quarter 2015 (in millions),” Statista,
www.statista.com/statistics/255778/number-of-active-wechat-messenger-accounts/, accessed April 10, 2015; Complied by
iResearch China Consulting Division, op.cit.
53
“Statistics and Facts About Online Payment in China,” Statista, www.statista.com/topics/1211/online-payment-in-china/, accessed
April 9, 2015; Mishkin, op.cit.; The two companies plowed a total of $325 million in the battle that lasted for six months. Eventually,
they decided to end the war by merging the two taxi-hailing companies to form a dominant player in China.
54
Jonathan Kaiman, “China’s Dalian Wanda Group Teaming Up to Create Huge E-commerce Platform,” The Guardian, August 29,
2014, www.theguardian.com/business/2014/aug/29/dalian-wanda-group-ecommerce-baidu-tencent, accessed April 10, 2015.
55
“Wanda Teams With Tencent, Baidu to Challenge Alibaba,” Bloomberg Business, August 29, 2014,
www.bloomberg.com/news/articles/2014-08-29/wanda-teams-with-tencent-baidu-to-challenge-alibaba, accessed April 10, 2015.
56
Jie Qi, “O2O Development Hit Its Bottleneck as the Capital Market Cooled Down” China Business Journal, July 9, 2012,
http://news.cb.com.cn/html/business_13_7110_1.html, accessed April 10, 2015.
57
Qingqing Tan, Ade Oriade and Paul Fallon, “Service Quality and Customer Satisfaction in Chinese Fast Food Sector: A Proposal
for CFFRSERV,” Advances in Hospitality and Tourism Research, 2014, www.ahtrjournal.org/admin/dosyalar/6/30_53.pdf, accessed
April 10, 2015.
58
China State Information Center, “Current Situation and Problems of China’s Tourism Industry,” July 14, 2014,
www.sic.gov.cn/News/455/3135.htm, accessed April 15, 2015.
59
Shufang Yang, “O2O: the Unavoidable,” Beijing Business Today, August 7, 2014, www.iyiou.com/p/12713, accessed April 10, 2015.

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