Alibaba Faces Fresh Threat From Rivals

Alibaba Group Holding Ltd. dominates the Chinese e-commerce market, but it increasingly is watching its back, thanks to a swarm of industry newcomers.

The clearest threat is from JD.com Inc., a longtime rival. Indeed, in China their rivalry has earned the nickname "the great cat and dog war"—referring to the respective mascots of Alibaba's Tmall website and JD.com.

Alibaba's maneuvers to keep the Uniqlo brand of basic-fashion clothing selling well on its own platform illustrates the stakes involved on what is now the world's biggest online retail market, with 2.82 trillion yuan ($441 billion) in transaction volume last year.

During the past several months, Alibaba and other shopping sites have tried to snag high-profile brands with exclusive contracts or product launches, demanded vendors on their sites offer deep discounts, and sniped at each other in the media and in speeches.

In late April, Alibaba founder Jack Ma made a personal pitch to Tadashi Yanai, the head of Uniqlo's parent company, Fast Retailing Co., Asia's largest apparel maker. Fast Retailing had recently started selling its popular Uniqlo line of clothing on JD.com, and sales were brisk. Mr. Ma and his team told Mr. Yanai that if Uniqlo increased its loyalty to Alibaba's platform, Alibaba would drive more traffic and sales to Uniqlo's shop there, according to people familiar with the discussions.

In July, Uniqlo left JD.com's platform, saying a presence on JD.com wasn't in line with its e-commerce strategy.

JD says the departure must have been "based on something other than performance" because demand was strong. Uniqlo declined to comment further.

Alibaba has roughly 80% of all Chinese online shopping sales flowing through its sites. That dominance is underpinned by Alibaba's massive online bazaar, Taobao, which hosts roughly eight million sellers, many of them individuals. JD.com's equivalent, called Paipai, is much smaller but doesn't disclose its exact number of sellers.

But in the fastest-growing segment of the market, composed of sales from bigger online businesses and malls such as Alibaba's Tmall, Alibaba's share was 58.6% in the first quarter of 2015—roughly the same as the previous year—while JD.com has climbed to 22.8% from 19.2% a year earlier, according to iResearch.

Alibaba says that the amount of business transacted on all its retail sites, 2.44 trillion yuan in the year ended in March, is larger than that of the next five biggest players combined.

Yet Alibaba concedes that competition is intensifying. More niche players are vying for Chinese Internet spending, from Jumei International Holding Ltd., a Chinese online seller of beauty products, to electronic discount fashion retailer Vipshop Holdings Ltd., and Yihaodian, a Chinese Internet grocery store that in July was taken over by Wal-Mart Stores Inc.

Stiff competition "is just the nature of the business, especially in China," Alibaba Executive Vice Chairman Joseph Tsai said during an interview. "The market is so big and the potential prize of winning is so attractive, you have a lot of entrepreneurs as well as capital backing them."

The competition is becoming tougher as China's economy cools. Alibaba on Wednesday posted lower-than-expected revenue of $3.26 billion for the quarter ended in June, amid challenges that include a maturing business and an expensive move into mobile, though it also cited one-time items.

Last week, Alibaba took aim at the area where JD.com is strongest, electronics, by paying about $4.5 billion for a 20% stake in Chinese electronics retailer Suning Commerce Group Ltd.

Alibaba has signed agreements in recent months with more than 160 labels that it expects will drive more than 30 billion yuan in transactions in the coming year to its online shopping mall. At least 20 of those brands and retailers, such as outdoor wear maker Timberland and sporting-goods store chain Decathlon, plan to sell their wares exclusively on Tmall.

"We are concerned" about Alibaba's exclusive deals, said Haoyu Shen, chief executive officer of JD's Tmall equivalent, JD Mall. "We don't think it's in the brand's interest to do that."

Mr. Tsai said brands sign exclusive deals with Alibaba because they know "we can move their product."

The rivalry has waxed passionately at times. Last year, Mr. Ma said JD.com would "eventually be a tragedy"—remarks he later apologized for. In a May speech, Alibaba's retail marketplaces president, Jeff Zhang, said that "as long as Alibaba does something, [JD] will immediately do the same," referring to initiatives to target rural markets, sell abroad, get into cloud computing and Internet payments.

One office in JD's Beijing headquarters is festooned with red banners, including one that reads "Fight, fight, fight to the end, just to be No. 1!"

JD also has played off Chinese regulators' recent crackdown on counterfeits and fraud on e-commerce sites—problems that have plagued Alibaba and others—saying it can better guarantee that its merchandise will be genuine, partly because it handles its own inventory.

In July, the company's billionaire founder, Richard Liu, called JD "China's online shopping platform of choice for those who value authenticity and quality," in what some saw as a backhanded swipe at Alibaba.

Unlike Alibaba, JD.com buys goods from suppliers and sells them directly to consumers. It also runs a marketplace where brands sell goods and pay commissions to JD.com. Alibaba doesn't actually sell products, but instead connects buyers and sellers, and earns money through advertising and other services it offers to millions of merchants and individuals using its marketplaces.

One high-end Italian brand opted to open a storefront on JD.com rather than Tmall because JD gave a written promise to keep counterfeit and gray-market versions of two of its brands off the site, said a consultant to the brand.

JD.com says it protects brands' intellectual property regardless of whether they list on its site.

Alibaba's main pitch is the huge amount of sales its sites draw.

Earlier this year, Alibaba persuaded Swedish sportswear brand Fjallraven to list exclusively on Tmall, in exchange for a promise to drive more traffic to its shop. Fjallraven had previously been on JD.com and other Chinese sites.

"We got some good conditions," including more visibility on the site and reduced prices on advertising, said Lin Mingwen, general manager in China of Fenix Outdoor, Fjallraven's parent. Mr. Lin said he expects a fivefold increase in Fjallraven's online sales in China this year compared with last year.

Before that deal, Fjallraven had to price its products lower on Tmall than elsewhere online in China to be able to join the site's big promotions, Mr. Lin said. Now that Fjallraven is exclusively on Tmall, the brand has more flexibility on how it prices its products, he said.

Alibaba says that it doesn't have a general policy requiring goods to be priced lower than other e-commerce platforms.

Peter Landers and Eric Pfanner contributed to this article.

Write to Kathy Chu at kathy.chu@wsj.com and Gillian Wong at gillian.wong@wsj.com

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(END) Dow Jones Newswires

August 17, 2015 08:15 ET (12:15 GMT)

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