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amazon on tmall2Amazon has launched a storefront on Alibaba’s e-commerce portal. So why would Amazon would be willing to partner with one of its biggest competitors?

The companies themselves haven’t been providing much detail on the reasons. In an interview with Alibaba’s news site Alizila, Amazon China VP Niu Yinghua said the company is partnering with Alibaba’s Tmall to “develop new sales channels.” An Alibaba spokeswoman said Tmall seeks out new partners, adding that “we welcome Amazon to the Alibaba ecosystem, and their presence will further broaden the selection of products and elevate the shopping experience for Chinese consumers on Tmall.”

amazontmallAmazon said it plans to sell more than 1,000 imports, including footwear, food, beverages, kitchen products and toys on Alibaba’s Tmall marketplace, and its sister site Taobao, which together reach 334 million active buyers. Last week, the store was expected to launch in April, but the portal has been live already for a few days.

Visitors to the site are greeted with two splashy images, one red with the words “It’s Day 1,” written in English. A second yellow image shows a box of items exploding that come together to form the iconic Amazon smile. In one version, women’s shoes dominated the page, with ads for name-brand food, toys and home goods following.

UPDATE: Due to the time difference, an Amazon spokeswoman in China sent over this message after the story was published.

“Ultimately it’s about being customer obsessed” she said. “The set-up of Amazon International Brands Flagship Store strengthens our position as the go-to agent for vendors who want to bring high quality and authentic international brands to China. And we want to make those available to any Chinese customer. Therefore it makes sense to offer them on multiple distribution channels.”

There are a few reasons why Amazon decided working with Tmall was worthwhile, even though the company continues to invest heavily in a competing Chinese-language site of its own.

China’s too big for Amazon to be happy being a small player

First off, Alibaba’s scale and scope far outreach Amazon’s efforts to date in China.

Alibaba’s sites reach close to 80 percent of the Chinese population, whereas Amazon.cn reaches far less, about 10 percent, according to figures compiled by comScore. (See chart below.) In 2012, Amazon ranked only fifth among retailers in terms of gross merchandise volume (GMV) in the country. Meanwhile, China is gearing up to be a significant e-commerce market, with spending projected to hit $1 trillion by 2018, according Emarketer.

Amazon ranks as the eight largest retailer in China based on unique visitors in 2014. (Chart: China Internet Watch)

Amazon is not only a retailer, it’s also a logistics powerhouse

Another reason that the move makes sense is because Tmall doesn’t exactly compete with Amazon on all levels.

Tmall.com is only a marketplace, which means retailers must find their own way to store and ship merchandise to customers. Logistics is one of Amazon’s strengths, and it has already built out a network of warehouses in China. It also offers same-day and next-day delivery services in more than 1,400 cities and counties in China, as well as 5,000-plus self-pickup locations.

In that way, a partnership with Tmall is more like Amazon selling merchandise on eBay — still a big deal, but not entirely crazy.

TmalllogoAmazon vs. Tmall

While Amazon is making its products available on Tmall.com, it isn’t necessarily going to make it more attractive for consumers to shop there. First off, the selection of items for sale will be far more limited, and second, prices appear to be higher.

A quick search reveals that a can of Blue Diamond almonds costs CNY38 on Amazon.cn, but the same product costs CNY44 on Tmall, representing a difference of one U.S. dollar.

The slightly higher prices suggest that Amazon may be passing along fees associated with participating in the marketplace to the customer. An Alibaba spokeswoman confirmed Amazon is paying the same fees as other merchants, which includes commissions and other annual technology and service costs. Often, retailers also elect to pay more for marketing to ensure its products get good placement on Tmall.com.

During this soft launch phase, Amazon will be offering some perks on Tmall, including free shipping and discounts on some products. Going forward, it will also participate in other Tmall marketing activities, such as loyalty points programs and discounts when certain spending limits are hit. On both Tmall and Amazon.cn, customers can check out using Alibaba’s Alipay, which is one of the most popular and secure ways to pay online in China, so there’s no benefit to shopping on Tmall in terms of payment options.

Also by participating in Alibaba’s Tmall marketplace, Amazon will get its brand in front of more Chinese consumers, and study their behavior on a larger platform. Last year, Amazon launched a store for its Kindle e-reader on Tmall. Amazon likely examined that data to make an informed decision on launching a much broader test.

Tmall expands globally

Amazon’s potential success in generating additional sales through the Tmall platform is unknown. A lot of it can be dependent upon how much money Amazon is willing to spend on marketing.

So far, other U.S.-based retailers have been optimistic about the opportunity to work with Tmall. The marketplace hosts a number of other well-known U.S. brands, such as Burberry, Vans, Costco and Blue Nile. As recently as December, Costco said it was planning to expand more heavily into China after it sold $3.5 million worth of goods over a 24-hour period on Tmall.

Some of those brands are participating in a new Tmall Global initiative that promises access to the Chinese consumer. However, some brands have begun to question whether the extra effort is worth it and say sales are not living up to expectations.

It is important to note that Amazon is not participating in the global program, which sees a fraction of the traffic that other Alibaba sites receive. Instead it will be posting products for sale on the company’s main Tmall site, which is far more mature and has less restrictions.

Bottom line: Upon closer examination, this news is not as surprising as it might sound.

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