Alibaba’s 11main.com venture in the USA: Lost in Translation

Christopher Tang

In September 2014, Alibaba's initial public offering raised US$25 billion, world's biggest IPO in the history.  At the same time, it B2B Market place continued to grow in China and B2C Tmall continued to be the king of B2C online retailers in China.  During the first quarter of 2015, Tmall’s quarterly revenue was RMB600 billion (US$97 billion) and it enjoyed over 60% of the online retail market in China.   Flushed with cash and propelled with momentum, it is natural for Alibaba to enter the online retailing industry to challenge Amazon and eBay.   If Tmall works so well in China, then it should work in the US.  Right? 

On June 11, 2014, Alibaba launched 11 Main, an online retail site for unique goods and crafts produced by local American businesses.  Instead of operating as an online retailer who buys and owns inventories, 11 Main operates like Tmall: it provides an online platform for smaller merchants to sell their (American branded) products in key categories such as fashion, home, tech, toys and jewelry (Figure below). As of early April, 11 Main listed over 2,000 merchants and processed 1.3 million orders, compared with 1,000 sellers and about half a million orders when it began operations in June 2014.

Just after one year in operation, Alibaba decided to sell U.S. website 11 Main to rival online marketplace OpenSky.  Is Alibaba pulling the plug too soon?    I don’t think so.  I think Alibaba learned quickly that, even when you are the Prince of e-commerce in China, you can become the pauper in another country.  Here is why.

Unlike China, the B2C online retail market in the U.S. is getting saturated.  The online market platform such as 11 main is essentially a 2-sided market business: it sells to the merchants and it sells to the customers.  Within one year since the launch of 11 main, I think it failed to offer lower price or better value that US customers demand, and it failed to provide the service that US merchants expect.  Here are underlying problems.

1. Higher retail price.  According to a report by Time (http://time.com/money/2918438/should-you-ditch-amazon-and-ebay-for-alibabas-11-main/), the retail price for the same product offered by 11 main is higher than Amazon. 
2. 2.      Higher shipping and handling fee.  Because 11 main is only an online portal, it does not own inventory and 11 main does not manage the merchant’s inventory.  In many instances, it is the merchant who ships directly to the customer who ordered the product online.  Without efficient logistics system in place, the shipping and handling fee is usually high.  For example, I clicked on a merino wool polo shirt that cost $80, and I was surprised to learn that the shipping and handling fee was over $25.  When many Amazon Prime customers can get free shipping, why would they buy the product from 11 main?
3. Limited product assortments.  As a start-up, it is understandable the assortments will be limited.  However, in many cases, most of the brands are unknown to most American consumers.  Unless you are looking for unknown American brands for higher price, 11 main is not the site you would visit.
4. Limited after sales service.  Because 11 main is only an online portal, the sales is actually between the merchant and the customer.  As such, tracking your order is problematic, and the returns policy varies across different merchants.  On top of that, because there is little sales history, there is no rating about the product, no customer review about the merchant, etc.  Why should a customer take extra risk to buy from an unknown merchant especially when Tmall was caught selling counterfeits in China?

What can we learn from 11 main’s failure?  I can think of a key lesson: without a retail ecosystem that can provide better service to customers and merchants, there is little chance to beat Amazon or eBay.  Keep in mind, Amazon offers a hybrid model: it sells its own inventory as a retailer, and it sells other merchants’ products via powered by Amazon. 

What can Alibaba do to establish a stronger presence in the US?  I suspect Alibaba has learned its lesson from 11 main and now rethink about its focus in the US.  Specifically, Alibaba is keenly aware of the fact that Chinese consumers are skeptical of products made in China or sold in China, and they are willing to pay a higher price for genuine products with good quality.  As such, Alibaba should focus on helping more US merchants to sell their products in China by using its Tmall platform.  However, there are some questions that Alibaba would need to address.  (1) Who should own the inventory?  (2) Where should the inventory be located (US or China)?  This is an important issue because it affects cost (custom duties) and time (delivery).  (3) Who should provide the after sales service in China? 

Knowing Alibaba’s entrepreneurial spirit, I am confident it will learn the American way very soon.