How Cainiao and AliExpress Choice Shocked Everyone (1 of 2) (Tech Strategy – Daily Article)

Posted on December 20, 2023 by Prof Jeff

The biggest surprise from Alibaba’s 2023 financials was AliExpress.

Orders grew by 60% YoY in the three months ended Dec. 31.
This was mostly due to AliExpress Choice, which was only launched in February 2023.

So, what happened?

Has Alibaba’s international business unit replicated the rocket ship-like success of Shein and Temu in cross-border ecommerce?

From Alizila:

“AliExpress’ order volume jumped over 60% year-over-year for the quarter ending Dec. 31, contributing to a 44% year-over-year leap in Alibaba International Digital Commerce Group’s revenue”.
“In Spain, AliExpress was the second-most visited e-commerce platform in December 2023, according to Club Ecommerce and EGI Group.”
“In South Korea, AliExpress’s monthly active users surpassed 7 million in November, nearly double the number from a year ago, mobile market research firm WiseApp reported.”

This article is my explanation for what happened. However, this is as an outside observer (i.e., limited information).

I attribute AliExpress’s recent success to five factors:

Factor 1: The Big Re-Organization of Alibaba is Starting to Show Results

Alibaba announced a major reorganization in March 2023. They split into 6 business units (plus some other smaller stuff) and made these units more closely aligned with their own capital markets. It’s a big move and could definitely re-energize operating performance and innovation (if it works).

But re-organization was only half the equation. This move also depended on the leaders you put in charge of these business units. If you’re going to increase authority and responsibility at the business unit level, it really depends on who you give that authority to.

And throughout 2023, we saw significant changes in the leadership of Alibaba. Most notably, Joe Tsai and Eddie Wu took the helm at the group level. And at Cloud and Domestic Ecommerce business units. I have referred to this as “war time CEOs” being put in charge of the biggest business units.

However, my prediction has been that AIDC (the international ecommerce unit) will be the first business unit to show a real acceleration in performance. And Alibaba International Digital Commerce includes AliExpress, Lazada, Trendyol, and Daraz. So, I think I got that prediction right.

I argued that AIDC were already the business unit most independent from the headquarters in Hangzhou. It already had some financial struggles and had been in the process of re-igniting performance for a couple of years. And I was familiar with the leadership (Fan Jiang for AIDC with James Dong for Lazada and Daraz). These are serious seasoned executives. The business unit had an A team in place.

So, I’m patting myself on the back a bit. AIDC was the first business unit to really move their numbers.

Factor 2: AliExpress Choice Significantly Improved its Service for International Customers

How do you win as an ecommerce service on the customer side?

The most basic playbook is that you:

Offer a big selection of quality goods.
At low prices (relative to competitors).
Make the user experience easy and convenient.

And for that third convenience aspect, the biggest lever to pull is increasing the speed and lowering the cost of delivery. If you make delivery fast and cheap (free is even better), customers really like it and will buy more stuff. This has been Amazon’s biggest lever for 15 years. It’s what Amazon Prime is based on.

However, delivery becomes more complicated and difficult with cross-border ecommerce. Deliveries take longer. Think 5-14 days instead of 24 hours. And there is much more uncertainty about when things will arrive, which customers don’t like. When will my package clear customs and be delivered?

Cross-border ecommerce also means greater concerns about product quality. And with how you will deal with any problems. How do I return this if its broken?

Launched in February 2023, AliExpress Choice was an upgrade to AliExpress that solved these problems. And made delivery and other aspects of the customer experience much easier and more convenient.

So, what does AliExpress Choice do?

It is, according to Alibaba, “a premium service designed to ease cross-border shopping for merchants and shoppers”.

AliExpress is a cross-border platform business model that connects customers with merchants. In AliExpress Choice, the business is acting more like a retailer that guarantees certain aspects of the service. Specifically, AliExpress is shifting the responsibility for delivery and product quality from merchants to itself (for certain merchants and items).

By asserting more direct control, AliExpress Choice can improve product selection and quality control. It sources products from merchants and factories and shortens the supply chain.

But the biggest impact is offering faster delivery. And, very important, it can guarantee delivery times.

For example:

AliExpress and Cainiao announced a global five-day delivery guarantee program in June 2023. This was piloted in Spain (note: AliExpress does well in Spain).
As of Dec. 30, Cainiao offered its premium global five-day delivery service in the UK, Spain, Netherlands, and Belgium.

Such a guarantee is not easy.

You need to have a global logistics network that stretches from China into every neighborhood of these countries.
You need smart warehouses for exports and to consolidate parcels.
You need logistics technology. Both hardware and software.
You need data analytics and algorithms cut delivery time and improve efficiency.
And you need integration with last-mile delivery (typically the biggest challenge in terms of cost).

Basically, you need Cainiao.

You need to have been building a global logistics network for a decade. So, this is really an AliExpress plus Cainiao story.

That’s great. But it gets better.

If there’s one thing ecommerce customers like better than fast delivery, it’s free delivery. According to Alibaba:

“Products in the AliExpress Choice section are eligible for free shipping in most of its markets for purchases worth over $10, or on purchases of three items or over.”
“As of December 2023, consumers in over 20 countries, including Spain and France, are entitled to free returns on all products, and 23 countries, including Germany and Switzerland, are offered a delivery guarantee.”

So, that’s factor number 1. AliExpress Choice is a significant improvement in the customer experience.

According to Gary Topp, European Commercial Director at AliExpress, “the introduction of Choice represents a watershed moment for AliExpress…By delivering standout features like complimentary shipping, swift delivery and easy returns, we are cultivating stronger customer loyalty while solidifying our market presence. Looking ahead, we are dedicated to further refining the Choice offering and perpetually elevating the shopper experience,”

Factor 3: This Was AliExpress Plus Cainiao

I have long argued that Cainiao is Alibaba’s secret weapon. And their ultimate barrier to entry.

They have been aggressively building a global logistics network for 10 years. And they have been aggressively investing in technology this whole time. They have logistics and technology capabilities that only a few companies can match.

And these smart logistics capabilities increasingly gives them the ability to offer services that others cannot match. And that can be game changes for customers, especially in cross-border ecommerce. AliExpress Choice is an example of this.

I view this as a combination of AliExpress and Cainiao’s global smart logistics capabilities. I’ll go into Cainiao in detail in Part 2.

Factor 4: AliExpress Choice Significantly Improved its Service for Merchants

As mentioned, AliExpress is a marketplace platform. Pretty much everything Alibaba does is a platform. It’s their favorite business model and they are masters at platform strategy. Although CEO Eddie Wu has been talking about doing AI services.

Platforms are about enabling interactions between parties. In this case, between merchants and customers. And Alibaba’s standard strategy to enable lots of interactions is to create services and tools that empower smaller merchants. Enabling transactions between 500 Fortune 500 companies and consumers is good. But enabling transactions between millions of small merchants and consumers is a much more robust marketplace platform.

And the big opportunity in cross-border ecommerce is to provide services and tools that enable small businesses to sell to customers around the world.

That is actually more difficult. There is a reason most SMEs only operate locally or domestically. They don’t want to deal with the complexity of selling in other countries. That means dealing with customs, taxes, and regulations. It means handling the more difficult logistics and returns. And it means building a foreign customer base in a foreign market, which is daunting. There’s a reason multinational companies (MNCs) have historically been big businesses.

But platform business models are in the business of lowering coordination and transaction costs. Of enabling transactions that were not previously possible before digital technologies. And of enabling smaller businesses to do what only large businesses could do previously. My standard explanation is that AliExpress (and Alibaba.com) are in the business of turning SMEs into MNCs.

AliExpress Choice was also a big upgrade for merchants. It basically creates a one-stop solution for merchants. And shifts a lot of the cross-border responsibilities from merchants to Alibaba. It provides services for sales, payment, logistics and warehousing. It enables merchants to achieve full-scale global logistics management for worldwide shipping.

So AliExpress Choice was an upgrade for both customers and merchants. It will increase usage by both groups.

Last Factor: AliExpress Choice Is Accelerating the Network Effect of the Cross-Border Marketplace

This is the big one.

As mentioned, AliExpress is a marketplace business model. Which means you must serve two user groups. And I just detailed how AliExpress Choice has improved the service for both customers and merchants.

But this has a bigger impact. Because marketplaces have network effects.

The more customers and purchasing activity you have on the platform, the better for merchants who are selling.
And the more merchants and products available, the better the service is for customers.

By greasing the wheels of cross-border transactions, AliExpress Choice is accelerating this network effect. This is a big deal. It’s the engine of Alibaba.

Here’s how it works.

Step 1: For customers, AliExpress Choice makes delivery fast, guaranteed, and cheap (if not free).

It improves product quality and some other things. But the big lever here is improved delivery. It achieves this with:

The superior scale and capabilities of Cainiao’s global logistics network.
The superior scale and capabilities of Cainiao’s technology.
The use subsidies that make delivery cheap and, where possible, free.

Step 2: This makes the service better for customers, so they use it more.

More customers join. And customers buy more over time on the platform.

Step 3: More users and spending improves the service for merchants, which attracts more of them to the platform.

This encourages merchants to offer more products and to invest time and resources on the platform.

As most of these are SMEs in China, these can often mean more low-priced goods, which customers love. See the recent history of Shein and Temu as examples.

Step 4: More merchants and products makes it better for consumers, who will have more choices. So, they will buy more.

This takes up back to Step 1. And then Step 2 again. And so on. It’s a virtuous cycle. A network effect.

But this is a network effect that can grow globally. Most network effects only work for a while, then run out of room to grow. But connecting global customers with global SMEs cross border is almost an endless potential network effect.

***

That’s my explanation for what happened.

AliExpress Choice is a combination of the scalability and network effects of a 3P marketplace with increased 1P control in logistics and other enabling infrastructure. Smart.

In Part 2, I’ll go into Cainiao, which is a really interesting business.

Cheers, Jeff

Cainiao Is Staying Focused on Network Growth and Tech Innovation (2 of 2) (Tech Strategy – Daily Article)

Here’s the Cainiao HQ in Hangzhou.

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Jeffrey Towson 陶迅

Consultant and keynote speaker on digital and AI strategy, transformation and disruption

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