What Alibaba's Success Means for U.S. Retailers

Who would've thunk it.

A company that sells barf bibs, Buddha-shaped pears, a portable fat-freezing machine and inflatable walking-on-water shoes that was started by a poor Chinese schoolteacher who first used the internet while visiting the U.S. in 1995 and is nicknamed "Crazy Jack" by reporters had an initial public offering last week that now ranks as the world's biggest at $25 billion.

Of course, I'm talking about Alibaba, China's biggest online commerce company.

Should U.S. retailers be afraid of Alibaba's power? What will become of online retail stalwarts like Amazon.com, Overstock.com and eBay? And will smaller retailers have to worry about Alibaba now in the same way they do about Amazon.com eating into their market shares?

Before we answer those questions, here's a quick overview of Alibaba:

• Alibaba is the eighth most-visited website in China, and gets 80 percent of its revenue from Chinese retail sales, mostly through the Taobao and Tmall sites. (These marketplaces are inaccessible if you don’t know the Chinese language, but there’s also Alibaba.com, an English site for sales between importers and exporters in more than 240 countries). Alibaba generated $248 billion in online sales last year alone, and its websites boast 231 million active buyers, placing 11.3 billion orders a year.
• Alibaba isn't like Amazon. It doesn't have warehouses for all those orders. Instead, it acts as the middle man, connecting buyers with sellers (often small businesses with no other way to reach an audience of that size). The company gets a commission from some larger retailers as well as selling ads and search placement.
• Alibaba is a Chinese company, but is incorporated in the Cayman Islands and will list on U.S. markets — an unusual setup. China has prohibitions on foreign ownership, which means U.S. investors don't actually own the company's Chinese assets. Instead, they own a Cayman Islands company called Alibaba Group Holding Limited. The structure is risky and may even be illegal under Chinese law.

So, back to the question at hand: What does Alibaba mean for U.S. online retailers? According to analysts discussing the news on FoxNews.com, first and foremost, it means more competition in the online retail space, which means good things for smaller retailers, said Kosha Gada, principal in the media and retail practices of global management consulting firm A.T. Kearney. “This will enable small businesses to have a platform to reach consumers, which is a good thing on a macro level. It will have a trickle down effect to consumers," she said.