LARGEST INTERNET SERVICES COMPANY IN JAPAN From a small e-commerce company into
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LARGEST INTERNET SERVICES COMPANY IN JAPAN From a small e-commerce company into a leading provider of integrated Internet services Rakuten manages a huge portal with around 18,000 merchants and 18 million products, generating yearly revenues of around JPY350 billion ($3.9 billion) and net income of JPY35 billion (approximately $398 million). Table 1: Rakuten - key metrics, $ mln 2005 2006 2007 2008 2009 2010 Revenues 1,477.6 2,314.4 2,435.9 2,845.1 3,395.8 3,941.1 Net Income 221.5 30.8 420.1 -626.0 609.9 398.0 Assets 18,874.3 14,756.7 13,195.2 12,375.6 20,030.3 22,196.8 Liabilities 17,902.7 12,443.1 10,988.4 10,568.4 17,541.1 19,359.0 SOURCE: MARKETLINE M A R K E T L I N E Since its establishment in 1997, Rakuten has recorded rapid growth; starting as a small e-commerce company, by 2004 it had diversified into portal, auction, community, lottery and various other services and it was the second ranked site in Japan, as measured by a unique audience, with only Yahoo! having more monthly visits. In just over a decade, Rakuten has evolved into a market-leading provider of integrated Internet services. The company was founded as MDM, Inc. Rakuten Shopping Mall started operations in May the same year. In June 1999 MDM, Inc. changed name to Rakuten, Inc. Today, Rakuten's online shopping business, Rakuten Ichiba, is the largest online shopping mall in Japan (based on gross merchandise sales) and allows customers to shop for more than 18 million products from over 18,000 merchants. As part of its internationalization efforts, Rakuten Ichiba also offers international shipping. RAKUTEN CASE STUDY ML00001-042/Published 01/2012 © MARKETLINE THIS PROFILE IS A LICENSED PRODUCT AND IS NOT TO BE PHOTOCOPIED Page | 7 Market leader in Internet services Rakuten holds a leadership position in each of the businesses within the core segments in Japan. The company acts as the online shopping mall for tens of thousands of small and mid-sized businesses and handles almost one third of ecommerce transactions in Japan. Figure 1: Rankings in domestic IT-related markets SOURCE: Company filings M A R K E T L I N E Gross merchandise sales growth of 18% The company’s flagship shopping portal, Rakuten Ichiba, connects some 22,000 merchants to customers looking for a one-stop shop, for products ranging from groceries, fashion items, electronics, books to automobiles. In e-commerce segment, Rakuten Ichiba is the biggest Internet shopping mall based on gross merchandise sales (GMS), which recorded an increase of 18.1% in 2010, as compared to 2009. Top site in terms of online reservations Rakuten Travel is Japan’s top site in terms of online reservations, based on gross transaction volume (GTV). In the travel segment, Rakuten works in partnership with airlines, railroads and other transportation companies. In 2010, GTV increased by 20%, comparing to 2009. Banking membership increase of almost 15% Rakuten Bank (previously eBank) has the most accounts of any Internet-only banks in Japan. In 2010, Rakuten Bank's membership reached 138,000, increasing by 14.8%, as compared to 2009. RAKUTEN CASE STUDY ML00001-042/Published 01/2012 © MARKETLINE THIS PROFILE IS A LICENSED PRODUCT AND IS NOT TO BE PHOTOCOPIEDTHE ECO-SYSTEM OF RAPID GROWTH Development through brick and mortar businesses Rakuten started its e-commerce business with a Business to Consumer (B2C) model. First, a portal with a number of stores selling their products and /or services online was created. Affiliates had to pay a fixed monthly charge to Rakuten, regardless of what sales they made. In return, Rakuten allowed merchants to list up to 1,000 products on their virtual stores. The idea and main success factor for Rakuten was helping Japanese brick and mortar businesses that wanted to set up customized online storefronts by themselves. In early 1990s, the company began systematically undercutting prices of existing hosting services by up to 75-85% and combined this with an aggressive sales and consulting model. As a trade-off for cutting out middlemen, merchants had to pay upfront, which made it possible for Rakuten to maintain a positive cash flow. Since its launch in 1997, the company has also generated new sources of revenues by jumping into diversified business areas, which was the main factor of its fast growth. Diversified revenue stream with focus on e-commerce Rakuten's operations are diversified into several businesses, of which the e-commerce business is the most lucrative. The company’s e-commerce business generated the largest share of its revenues, accounting for 41.6% in 2010. Revenues from e-commerce business reached JPY144,082 million (approximately $1,539.1 million) in 2010, an increase of 18.1% compared to 2009. Credit card operations generated 18.2% of total revenues and banking card operations accounted for a further 9.6% and travel segment generated 6.7% of total sales in 2010. Figure 2: Rakuten's revenue breakdown by segment (%), 2010 41.6% 18.2% 9.6% 6.9% 6.6% 6.7% 6.7% 2.2% 1.5% E-commerce Credit Card Banking Securities Telecommunications Portal & Media Travel Professional Sports E-money SOURCE: Company filings M A R K E T L I N E The company’s EC Business comprises Internet shopping mall service Rakuten Ichiba), Online auction service for individuals (Rakuten Auction), e-commerce consulting service, Online book, CD/DVD purchase service (Rakuten Books), Digital contents provision service Rakuten Download), Online golf course reservation service Rakuten GORA), Online DVD/CD rental service, Internet marketing service, third-party logistics service for Internet shopping mall’s merchants, B2B business matching service (Rakuten Business). Rakuten’s Credit Card Business comprises Credit card (Rakuten Card) operations and business financing. The company’s Bank Business offers Internet banking services (through Rakuten Bank) and consumer card loan business RAKUTEN CASE STUDY ML00001-042/Published 01/2012 © MARKETLINE THIS PROFILE IS A LICENSED PRODUCT AND IS NOT TO BE PHOTOCOPIED Page | 9 Rakuten’s Portal Media Business includes: portal site service (Infoseek), Internet advertising business, student recruiting community service (Minnano-Shushoku), integrated Internet marketing business (Rakuten Research), bridal information service O-net) and video contents delivery business. The company manages portal sites, which act as the gateway to the Internet. Rakuten's Travel BusinessRakuten Travel) comprises online travel reservation services, while its Securities Business Rakuten Securitiesoffers online brokerage service. Its Professional Sports Business (Tohoku Rakuten Golden Eagles) manages a professional baseball team, planning and selling related merchandise and performing other activities. One-stop access to competitive hosting services Today, Rakuten operates with a "B2B2C" model, whereby businesses can build an online storefront on Rakuten to sell to consumers. The company's business model is based on one-stop access to a wide range of services via the Internet and aims to leverage business synergies. Its member database serves as the foundation for an integrated marketing strategy, where all services are organically linked under the Rakuten brand. The company has used its customer base to sell extra services such as credit cards, which generated $771 million in revenue in 2010, or 18.2% of total sales. Figure 3: Rakuten's eco-system SOURCE: Company filings M A R K E T L I N E The company calls its business model "Rakuten Eco-system." Rakuten plans to adjust and refine its business models to local markets as they expand overseas. Wide selection of goods and focus on sales The Rakuten's business model is popular amongst retailers, mainly due to its wide selection of goods on offer, user friendly interface, loyalty program and safe shopping service. The company sells its e-commerce services and products to retailers in the small- and medium-size enterprise (SME) market, allowing the-retailers to focus on selling rather than the technology and logistics behind the sales. RAKUTEN CASE STUDY ML00001-042/Published 01/2012 © MARKETLINE THIS PROFILE IS A LICENSED PRODUCT AND IS NOT TO BE PHOTOCOPIED Page | 10 Low level of initial investment Rakuten provides a platform for sellers and buyers to connect and handle the buying process (i.e. billing). Some items, for example books or DVDs, are offered by Rakuten itself. Rakuten monetizes through virtual real estate fees it collects from merchants setting up shop on its site, commission payments (a few percent of each retailer’s sales revenue), display ads, lead generation, fees levied on credit cards, promotion campaigns with third parties, etc. As the inventory is managed by merchants and not by the company, in Rakuten’s business model level of initial investment is low. Lower costs of rental space and business support Rakuten provides its merchants with its own software: Rakuten Merchant Server (RMS), designed exclusively for Japanese market and its characteristics. RMS allows easy edition of online store contents. Rakuten also offers its merchants lower costs of rental space compared to other online malls. Rakuten is working towards generating trust amongst affiliated merchants by keeping them informed and improving their competitive and technical abilities with the integrated marketing and support system. The company gets regular feedback from customers, about purchases they made online and conducts screening amongst the merchants. Cross-merchant loyalty program The company offers loyalty program called "Rakuten Super Points". Its members are incentivized to use various company services in all aspects of everyday life. Buyers receive points for purchases from any Rakuten merchant, which they can redeem for discounts at any other merchant. This makes customers keen to buy via Rakuten rather than a merchant’s independent website. RAKUTEN CASE STUDY ML00001-042/Published 01/2012 © MARKETLINE THIS PROFILE IS A LICENSED PRODUCT AND IS NOT TO BE PHOTOCOPIED Page | 11 CHAPTER 3 VISION OF BOARDLESS E-COMMERCE Maturing Japanese market means revenues will stagnate in the long term So far, Japan still provides Rakuten with attractive growth; as the e-commerce market is still expanding, the online retailer is able to take share away from bricks-and-mortar shops. Figure 4: Rakuten’s e-commerce market share in Japan, JPN billion SOURCE: Company filings M A R K E T L I N E However, companies in Japan, whether they are online or street retailers, need to consider factors influencing the market in long term. With the rapidly shrinking birthrate and aging population, Japan faces a difficult future suggesting, the market will continue stagnate in the long term. RAKUTEN CASE STUDY ML00001-042/Published 01/2012 © MARKETLINE THIS PROFILE IS A LICENSED PRODUCT AND IS NOT TO BE PHOTOCOPIED Page | 12 Increasing competition from international retailers is pressuring margins in Rakuten's home market Diversification into a range of online businesses has allowed Rakuten to attract more consumers by offering everything under one roof and facilitated the company's growth. However, the company generates most of its revenues from Japan and it is becoming increasingly difficult to maintain its profit rate operating only domestically, as the market reaches its saturation. Within the Japanese market, there are also strong competitors present: i.e. Amazon or Yahoo, benefiting from well established brand names and providing both B2C and C2C services internationally. They can utilize their economies of scale to compete more efficiently. Figure 5: Rakuten vs. Amazon Rakuten Amazon Date of establishment 1997 1994 IPO 2000 1997 Number of employees 7,119 33,7 Sales from Japan ($ mln) 3,457 2,432 Total sales ($ mln) 3,941 34,204 Market capitalization ($ bn) 10.7 98.5 Alexa Japan rank 74 103 Main markets Japan US, Canada, France, Germany, UK, China, Japan SOURCE: Datamonitor Research M A R K E T L I N E Amazon, for example, has strong position in Japanese market, proving that foreign web companies can enter this country successfully. Amazon’s parent company doesn’t break down sales figures on a country level, but it is estimated the Japanese subsidiary rakes in roughly 10% of Amazon’s total sales and income. While in general, Amazon’s US site basically serves as a design blueprint for all their sites worldwide, additional investments were made in Japan: including more distribution centers and new categories of items. Also, it is it’s possible for Japanese retailers to open an online shop on Amazon since 2006. Rakuten sees overseas expansion as crucial to securing its further growth. RAKUTEN CASE STUDY ML00001-042/Published 01/2012 © MARKETLINE THIS PROFILE IS A LICENSED PRODUCT AND IS NOT TO BE PHOTOCOPIED Page | 13 World’s largest Internet service company According to company's mission statement, "Rakuten's goal is to become the world's biggest Internet service company". In order to realize this, it is necessary for the company to develop its business on a global scale. Figure 6: Targets of the Rakuten Group federation strategy SOURCE: Company fillings M A R K E T L I N E At the end of 2010, the company was operating in 6 different countries. According to Rakuten's strategy, the company aspires to increase this number to 27 countries in the near future, raising the share of gross transaction volume generated abroad from 7% to 70%. Expansion in Asia-Pacific with travel business Rakuten started its expansion with selected markets in Asia-Pacific. In 2004, the company acquired online hotel-booking operations - MyTrip.net - from Hitachi Zosen Corp. MyTrip.net was later merged with Rakuten Travel, Inc. Rakuten Travel is active in Korea and Thailand amongst others. Rakuten was also a significant shareholder in Ctrip, a Chinese travel site; however, it sold its shares in in August 2007. Development through strategic partnerships Aside from its acquisitions, Rakuten is also expanding through online mall operation partnerships. Its first overseas shopping mall was launched in Taiwan in 2008. In 2009, the company formed a capital and business partnership with TARAD.com, the operator of Thailand’s largest ecommerce, with over 2 million members. In 2010, the company signed a $50 million deal with the world largest Chinese-language search engine - Baidu Inc. and is aiming to develop it into the biggest B2B2C e-commerce site in China. Rakuten has also established cooperation with Indonesian media conglomerate PT Global Mediacom to launch a local ecommerce network through a joint venture. In 2011, the company launched a new shopping mall – Rakuten Belanja Online – in Indonesia. RAKUTEN CASE STUDY ML00001-042/Published 01/2012 © MARKETLINE THIS PROFILE IS A LICENSED PRODUCT AND IS NOT TO BE PHOTOCOPIED Page | 14 Aggressive push into American markets After its success in Asia-Pacific, the company started its aggressive expansion into overseas markets through a string of mergers and acquisitions. In 2005, Rakuten acquired 100% of shares in LinkShare Corporation, the company that provides ecommerce businesses with a vast pay-per-action marketing network, along with expert consultative services and patented technology In 2010, Rakuten entered the US market through the acquisition of Buy.com., one of the leading US e-commerce companies. In addition, Rakuten acquired Linkshare, a New York-based company, dealing in sales and marketing performance analysis. In June 2011, the company purchased a 75% stake in Brazil-based Ikeda, which sells e-commerce technology and services to more than 100 of the largest online retailers in that country. Rapid inroads into Europe In June 2010, the company entered European market through the $248 million acquisition of France’s PriceMinister website. PriceMinister is an online marketplace where users can buy and sell books, music, apparel and electricals. It is the most-visited ecommerce site in France, accessed by more than 11 million users a month. Outside of France, PriceMinister also has a presence in the UK and Spain. In 2011, Rakuten also acquired 80% of Germany-based Tradoria GmbH, one of Germany’s leading online e-commerce platforms, which handles 8 million products from 4,400 member stores. In September 2011, Rakuten purchased Jersey-based online retailer Play.com for £25million. Play.com is one the UK's biggest e-retailers, with estimated annual sales of about £427.4 million (approximately $660 million). It has 14 million registered users and 8 million listed products. Additionally, in 2011 Rakuten purchased an equity stake in Russian online retailer Ozon.ru. The total infusion of capital was about $121 million, divided between four buyers: Rakuten, ru-Net (an existing investor), Swiss equity fund Alpha Associates and Index Ventures. Previous investors also include Baring Vostok Capital Partners, HV Holtzbrinck Venturs and Cisco. To help get ahead in Europe, Rakuten is also planning on setting up friendly relations with luxury-goods producers. Large retailers (i.e. eBay) have faced court battles with brand owners including L’Oreal SA and LVMH Moet Hennessy Louis Vuitton SA (LVMH) over the sale of counterfeit goods by third-party merchants, leading to fines and orders to halt sales of some products. In September 2010, Rakuten and LVMH’s Louis Vuitton unit announced an alliance to work “proactively” to prevent the sale of fake goods on Rakuten’s auction sites. Similar deals with other brand owners may follow. RAKUTEN CASE STUDY ML00001-042/Published 01/2012 © MARKETLINE THIS PROFILE IS A LICENSED PRODUCT AND IS NOT TO BE PHOTOCOPIED Page | 15 Global presence As a result of Rakuten’s recent mergers and acquisitions, as of 2011, the company is present in 10 countries globally, including: Japan, China, South Korea, Singapore, Australia, New Zealand, the US, Brazil, France, Germany, and the UK. Figure 7: Rakuten’s global presence SOURCE: Company fillings M A R K E T L I N E The company is adopting English as the official group language in order to develop integrated know-how and global level of in-house communication across all its businesses and speed up the expansion process. English will be the only official language inside the company by the end of 2012, even for in house staff in Japan. Flexible business model to beat the competition Rakuten’s B2B2C business model has similarities to its main international competitors: like Amazon, Rakuten has a limited number of warehouses from where the company itself (not merchants) delivers a limited number of goods directly to end consumers. Also, the company runs its own auction service (www.auction.rakuten.co.jp), which is also reflected in eBay's strategy. However, Rakuten, unlike its competitors, plans to continue its global expansion by deploying different business models, according on each region'/country situation. The company aims to form collaborative ties with local companies in each market in order to differentiate its online marketplace from rivals. RAKUTEN CASE STUDY ML00001-042/Published 01/2012 © MARKETLINE THIS PROFILE IS A LICENSED PRODUCT AND IS NOT TO BE PHOTOCOPIED Page | 16 While deploying operations in new countries and areas, Rakuten will take into consideration such factors as Internet or EC penetration ratio and competitive status in the target markets. The company plans to enter the market through an EC business like Rakuten Ichiba and expand into travel, finance, and other service areas. Figure 8: Rakuten’s business models SOURCE: Company fillings M A R K E T L I N E In the initial move of EC operations, Rakuten plans to use the BtoBtoC model (Rakuten Ichiba model) as well as the CtoC model (PriceMinister model) in growth/maturity markets. The direct sales model (Buy.com model) will be implemented in emerging markets, depending on the situation of each target country or area. The company's strategy will be flexible in line with the requirements of target markets. As Rakuten Group expands, it has established development locations in Japan and abroad. It has already created Institute of Technology in New York and in Boston. The company is planning to open additional programming centers in San Francisco, India, and China. RAKUTEN CASE STUDY ML00001-042/Published 01/2012 © MARKETLINE THIS PROFILE IS A LICENSED PRODUCT AND IS NOT TO BE PHOTOCOPIED Page | 17 CONCLUSIONS Competitive advantages Rakuten’s strategy to take its operations abroad and to set up a truly global marketplace that can eventually be used by sellers and buyers regardless of their location, certainly offers room for earnings growth. Rakuten’s has several advantages over its competitors when operating within the Japanese market. It is a well trusted brand in Japan, with a vast number of subscription members. The company offers a complete e-business eco-system and a large base of merchants domestically. In Japan, Rakuten’s fast growth was facilitated by the fact that services and support for vendors were designed specifically for Japanese market and its characteristics. However, to continue with its strategy and differentiate from international competitors, who operate abroad practically in the same way as they do in their home markets, the Japanese company will have to successfully transplant its know-how to countries of different cultures. Risks ahead Global expansion also carries risks for the company, placing it into direct competition with international players, including Amazon, Yahoo, or eBay and breaking their dominance may be challenging. The recent economic crisis, except creating new M&A opportunities, has triggered a new trend among online giants: selective internationalization. The big competitors will certainly not cede markets such as Latin America, Africa, India or South East Asia. In the US and core markets in Europe, Amazon dominates. In China, Taobao already established itself with more than 120 million users. One strategy for Rakuten, instead of battling it out with international competitors in their core markets, may be focusing on untapped countries or niche segments instead.
It is a case study that need to be analyzed and summarized. THank you.
Explanation / Answer
The company was established in late 1990 and has shown a recorded rapid growth; starting as a small e-commerce company, by 2004 it was the second ranking site in Japan. The company started expansion with selected markets in Asia-Pacific, followed by acquisitions in the Americas and Europe. Rakuten goal is to become the world's biggest Internet services company. Rakuten business model is one-stop access to a wide range of services via the Internet, offering its merchants lower user fees compared to other online malls. At the moment, the company generates the majority of its revenues from Japan, holding a leadership position in each of the businesses within its core segments. While expanding beyond the Japanese market, Rakuten faces challenges; the recent economic crisis, except creating new M&A opportunities, has triggered selective internationalization among online giants. A strategy for Rakuten, may involve focusing on untapped countries or niche segments instead.
It has been a top site in terms of online reservation. It has been developed through brick and mortar businesses. It has wide selection of goods and focus is on sales. The advantages include Low level of initial investment and Lower costs of rental space and business support. Increasing competition from international retailers is pressuring margins in Route’s home market. It has expanded its business in Asia pacific with travel business. Strategic partnership played a major role in its development. It has rapid inroads in Europe. Thus have a wide global presence. It has the flexible business model to beat the competition.
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