Alibaba Is Bringing Luxury, Fast, to China’s Middle Class
On a cold day in April, a group of New Zealand fishermen set out to harvest 50,000 large oysters from the waters of the South Pacific.
Once collected, the briny mollusks were transported to processing facilities, packaged four to a container, sealed in chilled polystyrene containers affixed with bright labeling and put on planes to China.
Over the next three days, the oysters traveled thousands of miles to 67 cities across the Chinese mainland. There, they were shipped — still alive — by an army of deliverymen to the homes of thousands of shoppers who had ordered them using Tmall, a website operated by Alibaba, the sprawling Internet empire on the verge of an initial public offering that will most likely value it at about $160 billion.
It was a logistical feat, transporting oysters from the seabed to the doorsteps of more than 30,000 customers. But it was more than an exercise in supply-chain management.
For Alibaba, it was part of a continuing effort to make the instant gratification of global e-commerce accessible to China’s expanding middle class. If the biggest Internet company in the world’s most populous nation succeeds, it will make everything from culinary delicacies to flashy luxury goods available with a few keystrokes.
The degree to which Alibaba can deliver on this promise will help determine how much the company is ultimately worth and to what extent it can open up the enormous Chinese market to both global retailers and small businesses in search of growth.
“It’s a huge opportunity for international sellers to tap into that market,” said Victor Anthony, an analyst at Topeka Capital Markets. “Particularly as the Chinese consumer’s wallet size is increasing all the time.”
The Chinese middle class, those earning from $9,000 to $34,000 a year, is poised to balloon over the next 10 years. More than 75 percent of China’s urban consumers will fall into that demographic by 2022, according to a recent report by McKinsey & Company. In turn, demand for luxury goods and exotic foods like oysters is set to surge.
“The evolution of the middle class means that sophisticated and seasoned shoppers — those able and willing to pay a premium for quality and to consider discretionary goods and not just basic necessities — will soon emerge as the dominant force,” the report said.
Even now, nearly 600 million people in China are using the Internet. “It is a huge market, nearly double the population in the United States,” Mr. Anthony said.
And Alibaba already dominates the online lives of Chinese shoppers. Tmall, its upscale website where brands sell directly to consumers, hosts portals for big companies like Microsoft, Lego and Puma.
“Alibaba is working really hard to attract a higher-end customer,” said Kelland Willis, an analyst at Forrester Research.
Taobao, an Alibaba website that is the equivalent of eBay, offers millions of listings, many of dubious provenance. Together, these two sites account for 80 percent of Chinese e-commerce. And that scale makes Alibaba’s reach irresistible to international brands hoping to reach Chinese consumers.
“There is a massive opportunity for us,” said Daniel McKinnon, head of global brand protection at New Balance, the Boston-based sneaker company. “Alibaba is already larger than Amazon and eBay combined, and their market penetration is still relatively low.”
Seeking to take advantage of Alibaba’s scale, New Balance is among the global brands that have opened a dedicated shop on Tmall. The online store provides a secure way for New Balance to sell authentic goods to Chinese consumers willing to pay full price and gives customers the confidence that they are not buying counterfeits.
Early success with the Tmall shop has helped make China the fastest-growing market for New Balance, and Mr. McKinnon said sales on the site were brisk.
Such efforts might also make a small dent in the growing trade deficit with China. The United States imported $440.4 billion worth of Chinese goods last year and exported just $121.7 billion to China, according to the Census Bureau. That resulted in a trade imbalance of $318.7 billion with the country, the highest ever, according to the bureau.
But like many other big companies, New Balance continues to struggle with counterfeits on Alibaba sites. Mr. McKinnon said that more than 200,000 fake New Balance products were for sale on Taobao. And in recent months, more counterfeits have been appearing on Tmall as well.
What is more, Alibaba does not make it easy for New Balance to remove counterfeits from its sites. Mr. McKinnon said he was required to flag each individual counterfeit listing he wanted removed, an impossible task with so many fakes for sale. “I don’t have time,” he said. “I could do it 24/7.”
Alibaba has become more active in enforcing counterfeits on Tmall in recent months as it seeks to protect that site as a trusted marketplace. And in an apparent quid pro quo, Mr. McKinnon said once New Balance established a shop on Tmall, Alibaba appeared more eager to remove listings for knockoff sneakers.
Yet counterfeits remain rampant. On Taobao and AliExpress, the English-language version of the site, myriad fakes of all shapes and sizes are evident. An imitation Rolex can be had for $9. A fake Gucci bag goes for $36.
This has led to some disputes between big brands and Alibaba. This summer a group of luxury brands including Yves Saint Laurent and Gucci sued Alibaba, contending the company was enabling counterfeiters. The suit was quickly withdrawn, and the companies pledged to work together, but the episode illustrated simmering tensions between luxury retailers and Alibaba.
Elsewhere in the Alibaba empire, however, the partnerships are more harmonious. On Tmall, authentic Prada handbags are available for authentically sky-high prices, including a peach-colored leather satchel for $2,900.
Over all, Mr. McKinnon said the experience with Alibaba had been a good one for New Balance, giving the company access to millions of new consumers. But the fight against counterfeiters will be a constant struggle. “Alibaba knows this remains a huge issue,” he said.
In the same way that Tmall offers Chinese consumers access to real luxury goods, not knockoffs, it is offering imported foods like the New Zealand oysters in a bid to allay persistent concerns about food safety.
“There are so many concerns with safety,” said Keith Schneller, director of the United States Agriculture Department’s trade office in Shanghai, who helped organize the sale of some produce and seafood through Tmall. “Is it real? Is it fake? When we work together and can provide an endorsement, it gives the Chinese consumers a little more confidence.”
One example of this cooperation took place last year, when Alibaba teamed up with the United States government to sell cherries from Washington State through Tmall.
As the orders came in, workers at the Sage Fruit Company in the Yakima Valley began plucking cherries from trees and took them to a processing plant. There, they were sanitized and cleaned and boxed for shipment to China.
Overnight, instructions came in from Tmall with precise delivery requests, telling Peter Verbrugge, owner of Sage Fruit, where to send his harvest: Shanghai, Guangzhou or Beijing. Then in the morning, several tons of cherries were on trucks headed for the Seattle-Tacoma International Airport.
One long flight later, the cherries were retrieved by Alibaba representatives in China and sent out for delivery to cities across the country.
Chinese consumers got a taste of a quintessentially American summer fruit, and for Mr. Verbrugge, flush with cherries after a bumper year, the surge of demand was a welcome way to offload excess inventory.
“Any opportunity we can find to have access into those developing markets is a great avenue,” Mr. Verbrugge said.
Other fresh food promotions by Alibaba have included blueberries from Chile, tulips from the Netherlands and 50 tons of Alaskan seafood worth more than $1 million.
“Many consumers are untrusting of the food they can buy in China,” said Ms. Willis of Forrester. “Being able to buy certified imported products installs some trust in the customer.”
Alibaba declined to comment on the programs because the company is in a quiet period ahead of its I.P.O. But in a promotional video posted online, the company highlighted the booming appetite for foreign goods.
With growing demand in China for imported products, the company said in the video that Tmall had been building its fresh food platform through a series of joint promotions with foreign trade offices.
Earlier this year, when Tmall sold the oysters, Mike Arand, New Zealand’s trade commissioner in Shanghai, ordered some for himself, longing for a taste of his homeland.
His package arrived less than 72 hours after he had placed his order. When he opened the box, he was happily surprised to find a small knife, a rubber glove and a lime, along with instructions on how to properly shuck an oyster.
“They were very good,” he said. “And they got here quite fast.”
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