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Watch Out Amazon, Here Comes Rakuten!

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A Godzilla-sized Japanese retailer may be about to shake up e-commerce in the US, Europe, and China.

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There's a strong possibility that, unless you live and shop in Japan, you've never heard of Rakuten. But there's an equally strong possibility that within a decade, this voracious e-commerce behemoth will become unavoidable in most major markets, including the US, Europe, and China.

In the last couple of months, the company, Japan's largest e-commerce business with sales last year of $13 billion in that country alone (and record pre-tax profits in the first quarter of this year of $6 billion, up 39%), has gone on an intensive buying spree as part of a plan to take itself global and become a viable international challenger to Amazon (AMZN) and eBay (EBAY).

It's spent over half a billion dollars since the spring, first purchasing Buy.com in the States and then swallowing up PriceMinister.com, a leading French e-commerce site, this July. Both cost around $250 million each. It has also launched a $50 million joint venture with Baidu (BIDU) China's biggest search engine company.

While some observers wonder if these are the actions of a cash-rich company buying up whatever it can overseas simply because it's run out of expansion options in its home base, Rakuten CEO Hiroshi Mikitani said in June that these purchases in the US, Europe, and China are "the start of our evolution into a global enterprise."

In Japan, Rakuten is almost ludicrously dominant, successfully straddling several Web-based markets, with its crazily cluttered home page the fifth most popular site in the country. One in every three Japanese citizens is a registered Rakuten member.

Founded in 1997 initially as a B2B2C company which offered online service and sales functionality to third-party merchants, it's expanded aggressively and successfully into on-line auctioning (its auction house is the country's third largest), on-line travel (its hotel reservations site is number-one in its market), the online portal and search engine Infoseek Japan, ranked 20th among all Japanese sites, a stock brokerage, Japan's biggest e-bank, a personal credit service and credit card owned by two million people, a popular on-line ticket service, the third-ranked blogging platform in the country, and, because why the hell not, the Tohoku Rakuten Golden Eagles, a major Japanese baseball team.

Still, the company's core business is straightforward on-line shopping. It currently offers something like 160 million products, ranging from heavy construction equipment to the latest Uniqlo fashion ranges to fresh organic fruits and vegetables.

Can Rakuten translate its Japanese success to overseas markets? Consider, for instance, that crazy patchwork home page -- acceptable to most Japanese customers, but anathema to any North American consumer. The company seems aware of this issue. Its English-language page, though still clunky, is considerably less chaotic. And, crucially, it isn't just blindly gobbling up its purchases. With both Buy.com and PriceMinister, Mikitani was careful to make deals that left management intact; the PriceMinister purchase included a clause that keeps PriceMinister's founders, including CEO Pierre Kosciusko-Morizet, at the company for at least the next five years. "Part of what we are buying is management," said Mikitani.

As part of its commitment to becoming a truly international e-commerce titan, the Japanese company controversially announced this spring that all its formal meetings and communications will now be conducted in English. It's not the first internationally minded corporation to do this -- see Finnish cell-phone company Nokia (NOK) or French power giant Total -- and such plans have been in the works since at least 2007, when it first rolled out that less-cluttered English-language version of its home page. Currently, the company offers English service on its travel site and its international shipping page, and Google (GOOG)-translated item pages. Not the height of sophistication, perhaps, but still evidence of a much more international mindset than most of Japan's other major websites and retailers.

Currently, Rakuten only generates around 10% of its profits outside of Japan. Mikitani, who founded Rakuten after leaving the Industrial Bank of Japan, claims he wants to get that number up to 50%, at least. He's actively seeking more European purchases and plans to be operating within four other countries by the end of this fiscal year, and hopes to be operating in 27 countries by the end of this initial expansion push.

But he'll be facing equally huge competition. In China, Rakuten's competition isn't just other international interlopers but local powerhouses such as e-commerce company Taobao, with its 120 million users. Elsewhere, well, Amazon.

Yet Rakuten and Mikitani have already successfully taken on Amazon in Japan, where the American company's subsidiary runs far behind Rakuten in scope of operations and revenue. Do they have a chance once they leave their home turf, baseball team and all, behind? The ensuing clash will be, at the very least, entertaining to watch.

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No positions in stocks mentioned.
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