INTERNET: Alibaba Begins Taobao Clean-Up
Bottom line: Alibaba’s clean-up of its Taobao marketplace is likely to last for the next year, and could see growth in trading volume on the platform fall by about half of current levels to the 15-20 percent range.
Two months after a scandal erupted over high piracy rates on one of its main websites, e-commerce leader Alibaba (NYSE: BABA) has moved to address the problem with the expulsion of 26 merchants from its popular Taobao C2C platform. Alibaba’s description of the campaign shows the company is still avoiding the word “piracy” in its discussion of the clean-up, reflecting the sensitivity of the situation. But the larger question is just how many merchants will ultimately be expelled from Taobao, and what that will mean for Alibaba’s top and bottom lines.
A look at Alibaba’s latest quarterly report shows just how important Taobao is to its core e-commerce operations, which account for the lion’s share of its business. Sales on Taobao, a marketplace where consumers purchase goods from small businesses and other consumers, were worth nearly 500 billion yuan in gross merchandise value (GMV) in the fourth quarter of last year. That translated to a hefty 63 percent of GMV on all of Alibaba’s e-commerce sites.
The importance of Taobao to Alibaba’s overall business came into focus during the scandal, which saw the State Administration for Industry and Commerce (SAIC) release a report in January saying nearly two-thirds of the goods sold on Taobao were fakes. Alibaba was quick to point out the sampling size in the SAIC’s survey was quite small and unscientific, and the SAIC ultimately toned down its sharp criticism of the company after some high-profile sparring.
But the bottom line is that even if the prevalence of piracy on Taobao wasn’t as bad as the SAIC’s survey showed, the problem was still a major issue that needed to be resolved on the site. Now that the war of words if far enough in the past, Alibaba appears to be starting to tackle the problem with this new initial clean-up that has seen it remove 26 sellers from Taobao, according to the latest reports. (Chinese article)
Alibaba is avoiding the word “piracy” in its official discussion of the move, saying that the 26 merchants were removed for “violations of principles of doing honest business”, the reports say. Alibaba mentions bribery in its description of the principles that were violated, and even indicates that some of its own employees may have taken money in exchange for offering advantageous treatment to some Taobao sellers.
This high-profile removal seems like the launch of a broader campaign that is likely to go on for the rest of the year and maybe even into 2016. Taobao is home to thousands of sellers, meaning this initial batch of 26 is just a tiny fraction of the total community. Accordingly, I would expect to see many many more sellers kicked off the site in the months ahead. Of course the larger question is just how many sellers will be evicted, and what the impact will be to the volume of sales that take place on Taobao.
For simplicity sake, let’s suppose that the SAIC’s figures were hugely overstated and that trading in fakes accounts for just a third of transactions on Taobao rather than the two-thirds in the government report. If Alibaba aggressively went after the pirates and weeded out just half over the next year, that would equate to a loss of about one-sixth of the trading volume on Taobao. Since GMV is currently growing at about 35 percent on the site, that means the growth rate could be cut by about half to the 15-20 percent range.
That kind of growth rate certainly isn’t as exciting as the bigger one, and could bring some much-needed realism back to Alibaba’s stock and its longer-term prospects. We should also note that the growth rate could return to previous levels again after the clean-up is finished, which could take about a year. At the end of the day, I still believe that Alibaba is a strong company with potential to become a global e-commerce leader, even if this recent setback shows it still needs to improve some of its standards.
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