What now, Alibaba?

Having acquired a loyal following, Meilele departed Taobao and set up its own B2C platform. This was subsequently complemented by an offline presence, and now the company has close to 150 showrooms nationwide, allowing customers to sample the goods before they buy them as well as offering home design and renovation services.

Meilele has since been through two rounds of venture capital funding and issued a convertible bond. It is one of a host of vertical retail plays, often incorporating an online-to-offline (O2O) element that have attracted VC funding in recent years. They are seen as the key to securing a loyal customer base in China's notoriously disloyal e-commerce universe and ultimately building sustainable brand value. Like Meilele, some of these vertical retail plays were born on Taobao but now they are essentially trying to take market share from it.

It would take a lot more than this to sink the Alibaba juggernaut, fresh from its $21.8 billion IPO, which is generally expected to claim the title of largest share offering ever when the overallotment option kicks in. Alibaba is China's leading e-commerce player with platforms covering B2B, B2C and C2C. Its three retail marketplaces - Taobao, Tmall and Juhuasuan - generated a combined gross merchandise value of RMB1.5 trillion ($248 billion) from 231 million active buyers and 8 million active sellers in 2013. Alibaba recorded a net profit of $1.99 billion in the second quarter this year, while it posted of $2.54 billion in revenue, up 46.3% year-on-year.

What Alibaba does not reveal is the revenue and profit breakdown for each of its business units. The company has big plans to consolidate its market leading business at home, push further into mobile offerings and expand overseas. It may achieve all these goals, but will it do so on the same terms that helped shape its rapid ascent?
Taobao was essentially able to set the marketplace rules for e-commerce in China due to a lack of competition. Customers weren't necessarily happy about delivery services but they used the service anyway; vendors didn't like the assertiveness on payment and return policies, or being squeezed on fees, but they had little option but to play ball.

But Alibaba does not control the entry point globally, while domestic online retailers have discovered there are other ways of reaching the customer. Mobile platforms in particular are a great leveler.

Alibaba is aware of these issues and acknowledges most of them in its IPO prospectus (admittedly, in a 43-page chapter that covers everything from unpredictable exchange rates to inscrutable regulators). The company highlighted the risks posed by failing to adapt to the rapidly evolving consumer behavior on mobile devices, the challenges it may face when entering new markets, and the fact that revenues would suffer if third-party buyers and sellers transacted their business directly rather than through an Alibaba e-commerce platform.

Referring to the emerging vertical online retailers that are posing a challenge to Taobao, one GP describes Alibaba as "an elephant with wolves all around it." However, this elephant is still large enough to forge new paths for itself through the e-commerce jungle.

Alibaba was cash rich before the IPO but now it has even more capital-raising tools at its disposal. The company has already shown its willingness to make acquisitions in order to diversify its business. Alibaba, Baidu and Tencent Holdings represent the top-tier of Chinese internet companies, but they are all aware of fate that befalls those that fail to stay consumer-relevant as well as the challenge posed by ambitious second-tier players.

The sector has its incumbent giants, but it remains a mercurial creature.

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