Chinese e-commerce giants face delicate balance between discounts, profit

By Casey Hall

SHANGHAI (Reuters) - Quarterly earnings reports from Chinese e-commerce giants Alibaba and JD.com this week will be closely watched as barometers for the mood of consumers in the world's second-largest economy.

Both firms, which combined account for about 69% of China's e-commerce market revenue, according to DBS estimates, have faced increasing competition in recent years from low-cost platforms, such as PDD Holding's Pinduoduo and ByteDance-owned Douyin.

Chinese consumers are seeking discounts and lower-cost shopping because of their cautious attitude toward spending after the COVID-19 pandemic amid lower economic growth and the slowdown in the property sector. Alibaba and JD.com have responded to this trend but they risk lower margins by doing so.

This low-cost battleground presents a challenge for Alibaba's Tmall and JD.com. Both have traditionally sought to move up the consumer value chain by selling increasingly premium products, such as Apple iPhones, Estee Lauder skincare and Tiffany & Co jewellery, but are now forced to defend that space while also offering a wider array of cheap products to stem market share leakage.

"As long as consumers remain highly cost-conscious such policies are likely to further slow revenue growth and erode profit margins," said S&P Global analyst Cathy Lai, adding that both Alibaba and JD.com are moving more into the unbranded goods territory that has been Pinduoduo's stronghold.

Alibaba "cannot ignore PDD, but nor can it quell the competitive threat by wholly adopting PDD's strategy. JD.com is in a similar position," she said.

“Under its user first strategy, Taobao and Tmall Group proactively and aggressively invested in product supply, competitive pricing and quality service to meet all tiers of consumer demands," Alibaba's Taobao and Tmall Group said in statement responding to Reuters request for comment.

JD.com did not respond to a request for comment.

Last year Alibaba's platforms, as well as JD.com pledged billions of yuan to subsidise discounts and coupons across regular sales events.

That effort resulted in mixed returns. In the September to December quarter last year, which included the year's biggest sales festival of Singles Day, revenue at Alibaba's Taobao and Tmall Group increased only 2% year-on-year while JD.com rose only 3.6%.

For the March quarter this year, analysts expect overall revenue at Alibaba, 65% of which is generated by its domestic e-commerce arm, to grow 5.3% year-on-year while JD.com will rise by about 6%, according to LSEG data. That is roughly in line with growth trends in recent quarters.

In contrast, PDD Holdings revenue grew 123% in the December quarter, though this figure includes its fast-growing international platform, Temu, as well as domestic platform Pinduoduo, which generates the vast majority of PDD's revenue. Douyin, which does not regularly disclose sales data, was tipped to grow 60% for 2023, according to research firm eMarketer's estimates.

China's e-commerce companies are again entering a major discounting period, with weeks-long sales for major mid-year event 618, named for the date of JD.com's founding on June 18, to begin at the end of May.

Adding to the current competitive environment facing Alibaba and JD.com, brands are spending more on live-streaming on sites such as Douyin and away from sites such as Tmall, said Jacques Roizen, managing director of China consulting at Digital Luxury Group.

The impact of the continuous discounts will "kill" the profits of brands such as cosmetics makers L'Oreal and Estee Lauder, which garner as much as 30%-40% of their China sales from e-commerce, Roizen said.

"At some point the brands are going to realize that they're not making any money (on low-price platforms)," he said.

"But instead of taking the opportunity to counteract as a more premium, elevated, trustworthy platform, (Alibaba) decided to double down on discounts and promotion and guaranteeing the best price and all that stuff. To me, it's a race to the bottom."

Alibaba will report earnings for the quarter ending in March on Tuesday and JD.com on Thursday.

(Reporting by Casey Hall, Additional reporting by Sophie Yu; Editing by Christian Schmollinger)