Over the past several years, fashion brands have flocked to China in search of new consumers as growth in Western markets leveled off. With a population of more than 1.3 billion, including 430 million middle-class consumers eager to spend, China presents a value proposition too intriguing to ignore.
But with control of China’s e-commerce concentrated in the hands of very few players, cracking the online code can pose uncomfortable and unfamiliar challenges to Western companies accustomed to a Western approach to conducting business. And now, one fashion brand has learned the hard way that if you don’t play by Alibaba’s rules, the Chinese commerce giant will make you pay.
An Associated Press (AP) investigative report cited an unnamed but apparently well-known U.S. apparel brand that saw sales plummet as much as 20 percent on Tmall—the Alibaba-owned online marketplace that commands 51.3% of the Chinese e-commerce market as of Q2 2017—after declining to sign an exclusive agreement to sell on the platform. Two brand executives told The AP that after their company participated in a major sale on archrival JD.com—which trails with 32.9% market share—Alibaba punished the fashion label by blocking traffic to its Tmall.com storefront.
On top of not being allowed to be part of big sales on the site, the brand’s products fell out of Tmall’s top search results and its ads disappeared from high-value prominent placements, the executives said. One described the incident as a “clear manipulation of traffic” and a “clear punishment.”
There’s big money at stake for Alibaba and for brands. First, there’s Alibaba’s staggering reach as it serves more customers than the entire population of North America and claims to have generated roughly $550 billion in sales across its platforms last year, more than total online sales in the U.S. It’s Amazon, on steroids.
Co-founder Jack Ma has said he expects Alibaba to become the fifth largest economy in the world and there are signs it’s on track to achieve this goal. Just look at Alibaba’s Singles’ Day sales, which topped $25 billion in 2017—far outpacing the $14.5 billion brought in on Thanksgiving, Black Friday and Cyber Monday combined.
In China, Alibaba’s Tmall and JD.com are the Amazon and Walmart rivalry writ larger, earning the nickname “great cat and dog war” for their respective mascots and entrenched quest for supremacy in a lucrative consumer market that Western brands increasingly rely on for growth. While Tmall is better known for fashion and JD.com made its name in electronics, the companies have been expanding into each other’s territory and are locked in a tit-for-tat battle that sees each investing heavily in artificial intelligence, blockchain, brick-and-mortar and more to expand their influence and market share. That ongoing enmity, however, is prompting questions over Alibaba’s potentially coercive tactics to lure brands away from JD.com.
According to the AP report, American Apparel and Footwear Association members, consultants in China and policymakers all have expressed concerns over how Alibaba conducts business and strives to stifle the competition, especially amid the looming threat of a Sino-U.S. trade war that could deepen an existing trade imbalance.
In a statement to the AP, Alibaba denied accusations of coercion, stating that it operates in “full compliance with Chinese laws.”
China’s regulatory environment muddies the waters on whether Alibaba’s tactics meet the threshold of illegality. Anti-monopoly laws specify that companies dominant in a market cannot require exclusivity “without justification,” and a regulation enacted three years ago prohibits e-commerce players from preventing brands from taking part in promotions on other platforms. The Alibaba contracts obtained by the AP seem to indicate the company demands terms that fly in the face of these regulations.
The Alibaba news could temper Western interest in expanding to China, as it controls so much of the online playing field there and long has been one of the primary ways for brands to test the waters in the world’s third largest economy. However, Western brands have begun to show a willingness to eschew Alibaba’s Tmall and strike out on their own—or with more “niche” partners. In October, Marc Jacobs launched its sole authorized Chinese e-commerce flagship on vip.com, following in the footsteps of fellow high-end brands Diesel, Versace and Roberto Cavalli.