Sometimes it’s easier to buy than build. And buying is easier when the thing for sale is in distress.
On April 12 Chinese e-commerce giant Alibaba announced it will invest $1 billion in Lazada, an Amazon-esque e-commerce site that covers all of Southeast Asia. The funding, which values Lazada at $1.5 billion dollars, comes in the form of a $500 million direct investment and a $500 million share purchase from existing investors. Alibaba will become Lazada’s controlling shareholder after the deal.
The transaction couldn’t have come at a better time for Lazada, which is struggling to turn a profit. It’s also convenient for Alibaba, which is looking to expand its reach beyond China.
Lazada, which launched in 2012, generated $191 million in sales in the first nine months of 2015 (the latest numbers available). Rapid growth, to be sure, but at a cost—it recorded a $233 million operating loss during the same period:
“They are losing more money per transaction than you can possibly imagine,” says Adrian Vanzyl, CEO at Ardent Capital, a venture capital firm that invests in e-commerce startups in Southeast Asia (and also oversees aCommerce, a logistics company that works with Lazada). “You figure customer acquisition is about $40 to $50 per person. The numbers just don’t work out. This is a massively money losing operation.”
Lazada was launched by the Rocket Internet holding company, which is no stranger to losing money. The Berlin-based conglomerate takes the business models of established internet firms, creates copycat businesses, and sets them up in untapped markets across Asia and Latin America. It aggressively finances these startups to build market share, with profitability as an afterthought. If the companies can be sold to growth-hungry investors before profits become an issue, then the model serves its purpose. (Rocket says the sale of its Lazada stake to Alibaba represents a 15-times return on its initial investment.)
For Alibaba, acquiring Lazada marks an easy route to global expansion. The company currently makes 83% of its e-commerce revenues from within China, but CEO Jack Ma says he hopes to boost sales abroad to 50% in the future.
As part of the deal’s terms, Alibaba has the right to purchase the Lazada shares it does not already own after a 12-to-18 month period. That will put Lazada’s management under pressure to prove they can deliver profits. Otherwise, they could be replaced by their new owner—after all, there are few operators in the region with more e-commerce knowhow than Alibaba.
“If they can now start putting in the right processes and inventory management and reduce customer acquisition costs and go profitable—then they have the Amazon of Southeast Asia,” says Vanzyl.