Quarterly earnings reports from Chinese e-commerce giants Alibaba and JD.com due this week will be closely watched as a barometer of consumer sentiment in the world's second-largest economy.
Together, the two companies account for about 69 percent of revenue in China's e-commerce market, according to DBS estimates, and have faced increasing competition in recent years from low-cost platforms such as PDD Holdings Ltd.'s Pinduoduo and ByteDance-owned Douyin.
Chinese consumers are turning to discounts and low prices as they become more cautious about spending in the wake of the coronavirus pandemic amid slowing economic growth and a decelerating real estate sector. Alibaba and JD.com have responded to the trend but risk cutting into their profit margins.
This low-price battlefield poses a challenge for Alibaba's Tmall and JD.com, which have traditionally sought to move up the consumer value chain by selling increasingly premium products such as Apple's iPhones, Estée Lauder skin care and Tiffany & Co. jewelry, but are now being forced to offer a wider range of cheaper products to defend their market and stave off market share loss.
“As long as consumers remain highly cost-conscious, these policies are likely to further slow revenue growth and reduce profit margins,” said S&P Global analyst Cathy Lai, adding that both Alibaba and JD.com are expanding further into generic goods, a strength of Pinduoduo.
“Alibaba cannot ignore PDD, but it cannot stave off the competitive threat by fully adopting a PDD strategy either. JD.com is in a similar position,” she said.
“Under the user-first strategy, Taobao and Tmall Group have proactively and aggressively invested in product supply, competitive pricing and quality service to meet the demand of consumers from all walks of life,” Alibaba's Taobao and Tmall Group said in a statement in response to a Reuters request for comment.
JD.com did not respond to a request for comment.
Last year, Alibaba's platforms and JD.com pledged to spend billions of yuan on subsidized discounts and coupons for regular sales events.
The efforts have had mixed results: In the September-December quarter of last year, which includes Alibaba's biggest annual sales festival, Singles' Day, revenue from Alibaba's Taobao and Tmall Group rose just 2% year-on-year, while JD.com's rose just 3.6%.
Analysts expect Alibaba's overall sales to grow 5.3% year-on-year in the March quarter, while JD.com's sales are up about 6%, according to LSEG data. Sixty-five percent of Alibaba's domestic e-commerce sales increased year-on-year, broadly in line with growth trends in recent quarters.
By contrast, PDD Holdings' revenue grew 123% in the December quarter, but that figure includes fast-growing international platform Temu and domestic platform Pinduoduo, which generates most of PDD's revenue.Douyin, which does not regularly disclose sales data, is expected to grow 60% in 2023, according to estimates by research firm eMarketer.
Chinese e-commerce companies are once again entering a period of deep discounting, with a major mid-year “618” sale – named after JD.com's founding date of June 18 – starting at the end of May.
Jack Roizen, managing director of China consulting at Digital Luxury Group, said that in addition to the current competitive environment facing Alibaba and JD.com, brands are spending more on livestreaming on sites like Douyin rather than sites like Tmall.
Roizen said continued discounting would “kill” profits for brands such as beauty makers L'Oreal and Estee Lauder, which get 30% to 40% of their sales in China from e-commerce.
“At some point, brands will realize they're not making money. [on low-price platforms],” He said.
“But instead of missing out on the opportunity to compete as a more premium, more upscale, more reliable platform, [Alibaba] “We've decided to go all out with more discounts, more promotions, guaranteeing the lowest prices, everything. To me, it's a race to the bottom.”
Alibaba is due to report results for the quarter ended March on Tuesday, while JD.com is due to do so on Thursday.
By Casey Hall and Sophie Yu, edited by Christian Schmollinger
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