Alibaba wants to charge ahead, while JD.com wants to stay stable

In the fierce competition in the e-commerce field, Alibaba and JD.com have shown different development strategies. Alibaba pursues scale expansion, while JD.com focuses more on profit growth. The competition between the two major manufacturers reflects their unique strategic vision.

Alibaba seeks scale, JD.com seeks profits.

On August 15, e-commerce giants Alibaba and JD.com released their respective second-quarter financial reports on the same day. There are two points worth noting.

First, the revenue of the two giants has stopped growing. Alibaba has seven major businesses, and its overall revenue increased by 3.88%. The only lagging business was Taobao Group, its main business; JD.com has always had a large revenue scale because it is mainly self-operated, but its revenue increased by only 1.2% this quarter.

Second, the two companies’ profits are in different directions, reflecting that they have embarked on different development paths.

JD.com has always emphasized low prices, and after 618, it continued to launch the "JD Super 18" event, but this quarter's net profit attributable to the parent company hit a record high since Q1 2023, reaching 12.6 billion yuan, a year-on-year increase of 92%. The more price wars are fought, the more profits are made. The financial report explains that the low prices are not based on subsidies, and the overall gross profit level is stable.

Alibaba's net profit attributable to shareholders of the parent company fell 29% year-on-year to 24.269 billion yuan. On the one hand, some businesses, such as international business, are still losing money in exchange for growth. On the other hand, the "customer management income" of Taotian Group, its core profit source, has stagnated.

To this end, Alibaba has already laid the groundwork and announced the adjustment of the charging policy for all merchants on Taobao before the release of the financial report. The purpose is to show the market:

1. In the future, we will no longer pursue absolute low prices but emphasize GMV. 2. By introducing more small businesses and redistributing traffic, user management income will increase and monetization efficiency will be improved.

Overall, Alibaba is desperately pursuing scale, and some of its businesses are still growing rapidly; JD.com has become a "profit expert", but at the cost of losing some room for imagination - the subsidiary group is too dependent on the main business, and its development prospects are questionable.

Facing the relentless pressure from competitors, which of Alibaba and JD.com’s methods is more effective? There is no answer yet.

1. The income of e-commerce big brothers has stopped growing

This quarter's financial report reveals a cruel fact: Alibaba's revenue grew by 3.88% and JD.com's by 1.2%. The two e-commerce giants have stopped growing. However, their rivals are still catching up. Pinduoduo's revenue in Q1 2024 increased by 130.66%.

Let’s first look at Alibaba. Its revenue for this quarter was 243.236 billion yuan, which is the lowest revenue growth rate since Alibaba announced the “1+6+N” organizational structure adjustment in 2023.

Alibaba's revenue sources are divided into seven parts, with Taotian Group (e-commerce business) being the main force, accounting for 42.81% of revenue. Others are international digital business (accounting for 11.06% of revenue), Cainiao (accounting for 10.12% of revenue), Alibaba Cloud (accounting for 10.02% of revenue), local life (accounting for 6.13% of revenue), big entertainment (accounting for 2.11% of revenue) and others (accounting for 17.75% of revenue).

Alibaba's revenue from major businesses in Q2 2024

The biggest change occurred in the "big brother" Taotian Group, whose revenue fell 1% year-on-year. This revenue had increased by 4% in the previous quarter, but it fell instead this quarter.

In terms of breakdown, the core profit source, customer management revenue (which can be understood as advertising + commission), increased by only 1%. This is probably what Alibaba is really worried about. As a result of Alibaba's previous low-price strategy, advertising and commission costs have stopped increasing.

Here we need to explain that previously Tmall usually charged sellers both advertising fees and commissions, while Taobao only charged sellers advertising fees without commissions. Therefore, Taobao and Tmall used to rely more on traffic revenue and were more willing to sell traffic to large merchants.

However, as traffic becomes more and more expensive, and small and medium-sized businesses actually respond more actively to low-price strategies, the platform's traffic needs to be tilted towards these businesses, which has affected customer management income.

The solution proposed by Alibaba is to adjust its charging policy, announcing that starting from September this year, it will charge a "basic software service fee" of 0.6% of the order transaction amount for all Taobao merchants, cancel the annual fees of 30,000 and 60,000 yuan charged only to Tmall merchants, and refund the annual fees paid for 2024.

After this adjustment, Taobao merchants will also be charged commissions, covering a wider range. At the same time, the path of relying on traffic revenue will be changed to increasing the GMV scale and benefiting from it, hedging the trend of declining purchase volume.

Second, direct sales and other revenue (Tmall Supermarket, Tmall Global and other direct sales businesses) decreased by 9% year-on-year.

The reason for the decline in the growth rate of this part of revenue is easy to understand. In the past, the emphasis was on low-price strategies, and well-known brands had strong price control capabilities, which affected direct-sale e-commerce companies that mainly sold big brands. Alibaba executives said that Taobao's contraction of direct-sale business was an active choice because this type of model may not be efficient.

The "big brother" Taotian Group performed poorly, but its other businesses were remarkable. The international digital business led by Jiang Fan had the fastest revenue growth, reaching 32%, and Cainiao, which provides express logistics services for this business, also saw a revenue growth of 16%, ranking second. Local life, including AutoNavi and Ele.me, also performed well, with an increase of 12%.

Let’s look at JD.com again. Its revenue this quarter was 291.4 billion yuan, a year-on-year increase of 1.2%, which is also the lowest growth rate since 2023.

JD.com mainly operates its own business, and its business model is mainly to make a profit from the price difference. It is expected that its revenue will have a ceiling. What is more worthy of attention is the trend behind the changes in the revenue of different types of goods in JD.com's commodity revenue.

JD.com’s merchandise revenue in Q2 2024

This quarter, JD.com's core category of "electronic products and household appliances" revenue fell 4.6% year-on-year, while the growth rate of this revenue in the same period last year was 11.36%.

JD.com CFO Shan Su explained in the financial report that this was affected by the high base last year. Last year's financial report mentioned that during the 618 period in 2023, JD.com's home appliance and home furnishings will fully upgrade the old-for-new service and launch greater discounts to attract consumption.

Chen Li, a senior practitioner in the e-commerce industry, pointed out that the overall decline in home appliance sales is also related to the sluggish real estate market and the broader consumer environment, and the rise and fall of the data also matches the trend of the rise and fall of retail sales data.

In contrast, the revenue from “daily necessities” has begun to improve significantly.

Most daily necessities are low-profit categories, but they are purchased frequently, with an increase of 8.7% in Q2 this year. At the same time, JD.com’s earnings conference call also emphasized that supermarket revenue in this part of revenue achieved a double-digit year-on-year growth, which is expected to become a key engine for the group’s growth.

2. JD.com seeks profit, while Alibaba seeks scale

Let's look at the ability to make money. This quarter, Alibaba's net profit was 24.269 billion yuan, a year-on-year decrease of 29%; JD.com's net profit was 12.6 billion yuan, a year-on-year increase of 92%. Behind the increase and decrease are the different strategies of the two companies: Alibaba seeks scale, while JD.com seeks profit.

After a year of promoting subsidies and low prices, why is JD.com still making such high profits?

In the financial report, CFO Shan Su explained that JD.com continued to improve its price competitiveness through supply chain capabilities and investment, rather than relying on subsidies. Thanks to this, JD.com's gross profit margin increased significantly by 137 basis points year-on-year to 15.8% in the second quarter.

During the earnings call, JD.com CEO Xu Ran said that this quarter's profits were mainly due to the improvement in gross profit margin brought about by improved supply chain efficiency, including the increase in the proportion of third-party business, changes in the category mix, and the increase in category profit margins through improved efficiency.

From this we can draw some information. On the one hand, although JD.com's low-price strategy continues, it does not completely rely on high-cost subsidies. On the other hand, JD.com can further negotiate prices with upstream suppliers through its supply chain capabilities and increase the profits of its self-operated business.

Specifically for JD.com's three major businesses, JD Retail remained profitable, JD Logistics' profit increased by 328%, and new businesses (Dada, JD Industrial Development, Jingxi and overseas businesses) turned from profit in the previous quarter to loss, "but the new business is not large, and the loss did not drag down the market," Chen Li said. According to the financial report, new business revenue accounted for only 1.5%.

In addition, JD.com reduced its administrative expenses by 3.6% this quarter, saving a lot of management costs and helping to ensure profits.

JD.com's profit of major businesses in Q2 2024

In general, the market has always been worried that subsidies will eat into JD.com's profits, but JD.com's subsidies do not mean that the platform is directly burning money. The increase in gross profit margin, the assistance of JD.com Logistics and the effective control of costs have enabled JD.com to achieve its goal of increasing profits.

Compared with JD.com's pursuit of profits, Alibaba is still pursuing growth in scale.

Wu Yongming's most important task in his return is to focus on the main business and personally lead Taotian. Taotian's revenue growth rate was negative this quarter, but Alibaba emphasized that this quarter, Taotian's online GMV grew by high single digits year-on-year, the order volume grew by double digits year-on-year, and the number of 88VIP members exceeded 42 million.

This is also the reason why Alibaba will implement new policies for merchants starting September 1, and recently announced that it will change the traffic distribution system from last year’s “five-star price power” back to distribution based on GMV.

Zhuang Shuai, founder of Bailian Consulting, analyzed that Alibaba adjusted the original fixed fees to dynamic fees based on GMV. On the one hand, this was to motivate internal employees to help merchants increase their GMV, thereby increasing Taobao's GMV.

On the other hand, it reduces the fixed annual fee costs of merchants, lowers the entry threshold for small and medium-sized merchants, and improves the platform's commercial performance.

In the short term, Taotian may be able to obtain more revenue from the increase in merchants' GMV transactions, but in the long term, this model may increase Taotian's internal financial pressure.

"The original fixed charges were sufficient to ensure a stable income. After the new policy is implemented, if GMV does not increase significantly in the short term, the platform's revenue will be greatly affected," said Zhuang Shuai.

3. Alibaba wants to charge ahead, while JD.com wants to be stable

In addition to their main businesses, these two e-commerce giants have also shown different styles in other businesses: Alibaba wants to advance, while JD.com seeks stability.

Among Alibaba's other six major businesses, the international retail business led by Jiang Fan has the fastest revenue growth.

Overseas business is a territory that Alibaba cannot give up. Pinduoduo's Temu is coming in with great momentum, while Alibaba has AliExpress, Trendyol (a Turkish e-commerce retail platform), Lazada (a Southeast Asian e-commerce platform), Daraz (a South Asian e-commerce platform) and Miravia (a Spanish e-commerce platform).

Just before the release of the financial report, Lazada CEO Dong Zheng said in an internal speech that Lazada recorded a positive EBITDA in July this year and achieved profitability. Some analysts believe that this is a reflection of Alibaba's overseas e-commerce localization capabilities, and this business is also expected to be highly anticipated.

Of course, Alibaba's international business is still in the stage of exchanging losses for growth. This quarter, its losses widened to 3.706 billion yuan from 420 million yuan in the same period last year.

Cainiao, which is tied to its international business, has achieved a profit of 618 million yuan this quarter. It should be noted that Cainiao suffered a loss of 1.342 billion yuan in the previous quarter.

Smart Cloud is another highlight, with both revenue and profit increasing, especially the profit exceeding expectations to 2.337 billion yuan, a year-on-year increase of 155%. Behind this is the change in Alibaba Cloud's money-making ideas. Alibaba Cloud previously took the high-end customization route, but with the loss of some major customers and some previously popular industry customers, Alibaba Cloud began to do public cloud business.

Although this scale-up path results in less revenue, profits become more stable.

Alibaba's major business profit situation in Q2 2024

In other words, Alibaba's new business can still be successful. Under such circumstances, whether Taobao's adjustment of merchant rates can take effect will be crucial in the next quarter, and Alibaba's performance is still worth looking forward to.

In comparison, JD.com is stable but somewhat lacks vitality.

In terms of its main business, some merchants told Dingjiao that JD.com operates both its own business and third parties, which is equivalent to being both a referee and an athlete. How the traffic distribution logic is formulated and how third-party merchants set prices will directly affect JD.com's platform revenue (advertising and commissions).

The impact may have begun to appear. This quarter, JD.com's platform and advertising service revenue was 23.425 billion yuan, a year-on-year increase of 4.1%, lower than 8.52% in the same period of 2023.

Looking at JD.com's new business, it suffered losses despite being profitable overall, with Jingxi being the main variable. Xu Ran mentioned in the conference call that JD.com's new business revenue fell 35% year-on-year, mainly due to the adjustment of Jingxi's business. At the same time, Jingxi is still in the investment stage.

On May 29, "Jingxi" announced the launch of a fully managed model and changed its name to "Jingxi Self-operated". In short, merchants are responsible for production, and Jingxi is responsible for the operation, logistics, after-sales, etc. of merchants, and Jingxi earns the price difference of goods.

Chen Li analyzed that from the perspective of Jingxi's self-operated business model, its main goal is to acquire more new users in the sinking market, and it does not pursue GMV but is more concerned about the order volume. Because the team is still expanding rapidly, and the full hosting model may cause the platform to be overburdened, low-priced goods may also lead to low gross profits that are difficult to cover costs, resulting in losses.

Another big variable is Dada. JD.com changed its financial report in Q1 2024 and merged Dada into the new business. The new business now includes Dada, JD Industrial Development, Jingxi and overseas business. Dada is a hot potato. According to Dada's financial report, it lost 1.958 billion yuan in 2023 and had a net loss of 328 million yuan in the first quarter of this year.

At the same time, according to previous information, due to the high "burning of money" and incomplete localization process, JD.com will completely withdraw from the Southeast Asian e-commerce battlefield in 2023, closing the Indonesian site that has been in operation for seven years and the Thai site that has been in operation for five years, and only retaining part of the warehousing business. The reduction in the scale of overseas business has also affected the revenue of JD.com's new business.

In summary, Alibaba's new business is worth looking forward to, while JD.com's "new business" actually includes "old businesses" that are either shrinking in scale, suffering heavy losses, or heavily dependent on the main business, and there is limited room for imagination.

But this quarter's financial report already tells a story of the past. In dealing with the competition from Pinduoduo, Alibaba and JD.com each chose their own path. Who is right and who is wrong will only be known in a few years.

At the request of the interviewee, Chen Li is a pseudonym in this article.

Dingjiao (dingjiaoone) Original author | Su Qi Editor | Wei Jia This article is written by the operation author [Dingjiao One], WeChat public account: [Dingjiao], original/authorized to be published in the operation party, and reproduction is prohibited without permission.

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