Rakuten versus Amazon: the battle for online supremacy

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Amazon: simplifying packs

ResearchFarm’s latest report “Rakuten 2014: On course to become a genu-ine global player?”, analyses why Rakuten manages to outperform Amazon in Japan. The study identifies four key strategic differences between the two, which are driving Rakuten’s success. ResearchFarm analyst Edward Bickel says local marketplaces should study Rakuten’s operations to learn how to stay ahead of Amazon in their respective domestic markets.

Rakuten is simply not the Japanese version of Amazon despite being tagged with that label and it is clearly not a copycat company either. What makes Rakuten a legitimate competitive threat to Amazon is its quite unique business model, with a proven track record on the Japanese market, where it is highly successful and leading the market, said researchers.

The first and biggest difference between the two rivals is that Rakuten has a much more diverse ecosystem. In 2013, Rakuten grew its total domestic gross merchandise sales (GMS) by 27.6% to ¥5.1tn (€39.5bn). Rakuten’s significant credit card business generated ¥2.6tn in shopping transac-tion value, around half of total domestic GMS. Domestic e-commerce GMS grew by 19.3% to ¥1.73tn (€13.3bn) representing 33.7% of total GMS (down from around 50% in 2007). The remainder comes from its travel business which rose by 15.2% to ¥547.3bn (€4bn), e-book (Kobo), digital contents (Wuaki, Viki and Viber), telecoms and baseball. In terms of revenue, Rakuten’s highly profitable marketplace Ichiba reported strong growth to ¥137.3bn (€1.1bn), a 21% rise.

The second strategic difference and success driver is that Rakuten has linked up these services with the Rakuten Super Points, which connects all the moving parts of its ecosystem with a highly successful loyalty scheme. The points are redeemable across all the business units so a consumer can use the points earned on an Ichiba purchase to book a holiday on its travel site. The flexibility of the points system has proved popular with members reflected by the 55.4% cross-use ratio in 2013. This is something Amazon, due to its set up, legacy retail arm and indeed prime, would find very hard to offer to its marketplace sellers.

The third key difference is that Rakuten provides for a very friendly environment for its 3P sellers, said ResearchFarm.

The report identifies three factors that has put Rakuten in the driving seat over Amazon in Japan: firstly, Rakuten does not compete with 3P sellers, but rather offers high levels of personal merchant care (as the number of sellers is limited to only 42,000). Moreover Rakuten offers creative control to merchants of their web presence, leading to a marketplace with minimal standardisation. Secondly, merchants can link their online and offline channels with the Super Points, thus enabling multi-channel capabilities especially for smaller scale local independents. Thirdly, the loyalty scheme and its finance business allow Rakuten to remain far more channel agnostic than Amazon, as it also has interests in establishing an offline presence (the recent opening of the Rakuten Cafe is a perfect example). The interplay of these aspects of the business model have helped to create a much more 3P seller friendly marketplace in comparison to Amazon, who competes directly with its merchants and offers very little control, as it automates many processes and relationships.

The fourth and final difference between the two business models is that Rakuten positions itself as a premium marketplace. With an average transaction unit price of ¥5,924 (€45) in Japan in 2013, the company is leading Amazon by some distance, with Amazon’s best sellers’ average price of just roughly half at ¥3,311 in Japan in 2013.

In fact, Japan is the only major e-commerce market (with the exception of China), where Amazon is not number one, illustrating the genuine threat Rakuten would pose, if the Japanese company managed to export its business model on a global scale. Clearly, Rakuten’s emphasis on high quality merchants and products resonates well with Japanese consumers, many of who are avid premium and luxury goods shoppers.

That said, despite Rakuten’s domestic successes, ResearchFarm believe the business model cannot be easily exported abroad, as replicating its ecosystem on a global scale would require huge investment sums. Nevertheless, local players should study Rakuten’s Japanese operations carefully to understand how Amazon can be dislodged from the top in their own markets. Players like MercadoLibre in Brazil could look to Rakuten to see how it can keep Amazon chasing rather than leading.