Fintech & Ecommerce

Chinese E-Commerce Giants Face Unstable Balance Between Discounts and Profit

Alibaba’s quarterly reports will be published this week and JD.com, Chinese e-commerce giants whose performance is a kind of indicator of the condition of the world’s second-largest economy, especially in the context of reflecting the sentiment prevailing in the local consumer environment.

Chinese E-Commerce Giants Face Unstable Balance Between Discounts and Profit

The mentioned companies account for about 69% of revenue in the specified Asian country’s e-commerce market. In recent years, these firms have faced increasing competition from low-cost virtual trading platforms such as Pinduoduo, owned by PDD Holding, and Douyin, part of the ByteDance ownership structure.

Currently, the desire for discounts and cheaper purchases is fixed in the Chinese consumer environment. The corresponding behavior is due to caution in spending, which has become a kind of reaction to the consequences of the coronavirus pandemic, manifested in China in the form of a slowdown in economic growth. Against the background of the mentioned tendency, what can be called consumer confidence has significantly weakened. Amid the backdrop of uncertain prospects, spending growth is something on the verge of being possible.

Alibaba and JD.com reacted to the change in consumer behavior, but in this case, companies faced the risk of falling margins. Budget proposals in the Chinese e-commerce market are to some extent a threat in terms of the profitability prospects of these firms’ business. The companies sought to move forward along the consumer value chain by increasing sales of premium products, including, for example, Apple’s iPhone smartphones, Estee Lauder skin care goods, and Tiffany & Co. jewelry. In the context of the circumstances of the current configuration of economic reality, firms are forced to expand the range of cheap products. Appropriate actions are necessary to retain market share.

S&P Global analyst Cathy Lai says that as long as consumers are in an area of increased sensitivity to costs, the mentioned commercial strategy is likely to contribute to a continued slowdown in revenue growth and a drop in profit margins. The expert also noted that Alibaba and JD.com are increasingly moving into the territory of unbranded goods, which has been a stronghold of Pinduoduo.

Taobao and Tmall Group from Alibaba underlined that, as part of the implementation of activities following the strategy providing for a primary focus on the consumer, there was an active investment in the supply of products, competitive prices, and high-quality service to meet all tiers of customer requests.

Last year, Alibaba’s and JD.com’s platforms pledged to allocate billions of yuan to subsidize discounts and coupons during regular sales events. The result of these efforts has been mixed. From September to December 2023, which included the year’s largest Singles Day sales festival, Alibaba’s Taobao and Tmall Group revenue grew by only 2% year-on-year. A similar indicator JD.com increased by 3.6%.

Analysts surveyed by LSEG expect Alibaba’s overall revenue for the first quarter of 2024 to grow 5.3% year-on-year. They also predict that a similar indicator JD.com will increase by about 6%.

At the same time, PDD Holdings’ revenue grew 123% year-on-year in the last quarter of 2023. It is worth noting that this result includes an indicator of the functioning of the mentioned company’s international platform.

Jacques Roizen, managing director of China consulting at Digital Luxury Group, says that the practice of continuous discounts will have a devastating impact on the profits of brands such as L’Oreal and Estee Lauder. These cosmetics makers garner from 30% to 40% of their sales in the Asian country through e-commerce.

As we have reported earlier, Alibaba Plans to Invest $1.1 Billion in South Korea.

Serhii Mikhailov

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Serhii’s track record of study and work spans six years at the Faculty of Philology and eight years in the media, during which he has developed a deep understanding of various aspects of the industry and honed his writing skills; his areas of expertise include fintech, payments, cryptocurrency, and financial services, and he is constantly keeping a close eye on the latest developments and innovations in these fields, as he believes that they will have a significant impact on the future direction of the economy as a whole.