Spending money for the future, Alibaba increases investment in e-commerce and cloud.
Text | Peng Qian
Editor | Qiao Qian
Alibaba has witnessed a long-awaited high growth in users.
The information disclosed in its Q3 financial report and earnings call shows that 88 VIP has reached 46 million, achieving double-digit growth year-on-year in a single quarter; the order volume has achieved double-digit growth, driving the continuous growth of GMV; Double 11 exceeded expectations, achieving "strong growth".
In terms of revenue, Alibaba Group's overall revenue increased by 5% year-on-year. Among the sub-businesses, international business still achieved a high year-on-year revenue growth of 29%, ranking first in growth rate; benefiting from the summer campaign, local life achieved a 14% year-on-year revenue growth, ranking second in the sub-group in terms of growth rate; the growth rate of Cainiao has slowed down, and both Alibaba Cloud and Taotian have single-digit growth.
In terms of profits, except for Taotian and international business, which are still making large-scale investments, leading to a 5% year-on-year decline in the group's overall adjusted EBITA, the losses of other sub-businesses are continuing to narrow. Alibaba Cloud even achieved an 89% year-on-year growth in operating profit.
The overall change is not significant, but the user and GMV data are impressive, causing Alibaba's US stock to rise nearly 4% before the market opened. However, after the earnings call, Alibaba's stock price turned from rising to falling, mainly due to market concerns about the continuous decline in its profits for two consecutive quarters.
Stabilizing the E-commerce Market and 88 VIP
Before the earnings call, Alibaba's stock price first rose by nearly 4%, which is largely based on the positive information about user and GMV growth released in the financial report.
Due to the adjustment of the "low-price strategy" after 618, Alibaba has ushered in a long-awaited high growth in users. Especially, the number of 88 VIP in the core user group climbed to 46 million in Q3, making it the largest e-commerce paid membership system in China. Looking at it more broadly, this is also the largest e-commerce paid membership system in the current consumer field - Sam's Club, which has been highly praised in China in recent years, had only about 5 million members as of the end of October last year.
36Kr learned that by May this year, the number of 88 VIP reached 36.27 million, with an average annual contribution of more than 60,000 yuan per person. The GMV generated this year is expected to be more than 2.3 trillion yuan, accounting for more than a quarter of Taotian's GMV. Executives also revealed at the earnings call that the overall repurchase rate and retention rate of 88 VIP are also increasing.
The rapid growth of 88 VIP is related to the overall strategy of Taotian. Since the beginning of this year, Taotian has increased its capital investment in 88 VIP, offering free shipping for returns in some categories, regularly issuing large consumption coupons and full-reduction coupons for 88 VIP, while lowering the entry threshold for 88 VIP, canceling the core standard that "Naughty Value needs to reach 1000", and setting a more flexible payment standard, such as adding an 88 VIP monthly card with a first-month fee of 8.8 yuan to encourage non-88 VIP users to convert into this membership system.
Before the release of the financial report, Taotian just completed the Double 11 promotion. According to the official statement, 88 VIP contributed more than half of the transaction volume of this Double 11. The high activity of 88 VIP also brings GMV growth. Wu Yongming evaluated it as "strong growth" at the earnings call and emphasized that "the performance of Double 11 exceeded the expectations of merchants and the platform".
An employee of Taotian also told 36Kr that the internal expectation is that 88 VIP can still continue to grow, because many users with high ARPU values have not yet purchased 88 VIP. On the basis of continued investment and subsidies, Taotian will further stratify users, initially dividing them into 6 levels, in order to accurately target more high-net-worth individuals.
In addition to operating high-value old users, retaining new users is also an important issue for Taotian. In September this year, Taotian officially connected to WeChat payment. According to the analysis of investment banks such as Goldman Sachs, the potential user increment space is still very large, and it can bring at least several million DAU growth. Wu Yongming said: "We hope that after medium and long-term investment, these users can remain on the platform, and we hope to obtain an increment that matches our current GMV share from these users."
However, it should be pointed out that the boosting effect of GMV growth on Taotian's revenue and CMR (Customer Managed Revenue) is still relatively limited. In the quarter, Taotian's revenue increased by 1% year-on-year to 98.99 billion yuan, slightly down compared with the previous quarter; Taotian's CMR increased slightly, with a year-on-year growth rate of 2%, while it increased by 1% year-on-year in the previous quarter.
At the earnings call, analysts also mentioned that while Taotian Group is experiencing growth in user volume and order volume, it is facing the challenge of a decline in the average transaction value per customer. Alibaba executives said that they will continue to optimize policies and improve the user experience to address this challenge, such as providing subsidies for categories such as clothing, beauty, and 3C, and Taotian will continue to make continuous investments to improve the user experience.
The good news is that, according to the information disclosed by executives at the earnings call, some changes have occurred in the situation where the order growth rate > GMV growth rate > revenue growth rate > profit growth rate in the past few quarters. The growth rate gap between CMR and GMV in this quarter is already very small, indicating that Taotian is striving to find a balance between growth and income.
In addition, it was also clearly stated at the earnings call that the year-on-year growth rate of GMV and the take rate have stabilized year-on-year. In fact, at the beginning of September, Taotian just implemented a 0.6% technical service fee and officially launched the full-site push advertising placement tool, and their contribution to Q3 is still very limited. With these measures gradually taking effect, it can be expected that in the subsequent quarters, the growth rate gap between CMR and GMV will continue to narrow until the CMR growth rate surpasses and reaches the 10% target previously set by Wu Yongming.
88 VIP has indeed achieved impressive growth, but it must be mentioned that JD.com and Douyin have also noticed the value of these consumers. After the adjustment of the low-price strategy, the competition for high-net-worth individuals among various platforms has also intensified. During this Double 11 period, JD.com followed the example of 88 VIP and launched similar large full-reduction coupons for JD.com Plus members. Although Douyin does not have an independent paid membership system, it has also launched similar large full-reduction coupons. Pinduoduo also launched the 10-billion subsidy super double subsidy for the first time during Double 11, increasing its investment.
Strategic Losses Continue
After the earnings call, Alibaba's stock price turned from rising to falling.
As usual, Alibaba should have given some guidance for 2025 after Double 11, but the relevant information in this earnings call is still vague. This has raised market concerns about the continued decline in Alibaba's profits or the uncertainty in 2025.
The profit performance this quarter is indeed not good. The adjusted EBITA decreased by 5% year-on-year (excluding long-term cash incentives, it decreased by 4%), a larger decline than the previous quarter (a 1% year-on-year decline in Q2); the non-public net profit decreased by 9% year-on-year, lower than market expectations; and the free cash flow decreased by 70% year-on-year, from 45.2 billion yuan in the same period last year to 13.7 billion yuan.
The market has always been worried that the recovery of Taotian's GMV growth this year is achieved through subsidies. The continuous decline in Taotian's profits for two consecutive quarters with an expanding decline has obviously exacerbated this concern.
The inability to improve profits in the short term is related to Alibaba's greater investment in domestic and overseas e-commerce in the context of increasingly fierce competition.
The marketing expenses in Q3 increased by nearly 30% year-on-year, an increase of 7 billion yuan, reaching an astonishing 32.5 billion yuan, setting a new high in recent years, while the year-on-year growth rate of marketing expenses in the previous quarter was only 19%. Taotian's own investment in increasing subsidy coupons and continuous investment in free shipping for returns are the reasons for the high marketing expenses.
At the same time, the international business is still in a period of large investment. There was an operating profit loss of 2.9 billion yuan in Q3, but the loss rate has narrowed from -12.7% in Q2 to -9.2% in Q3. However, the narrowing of losses also corresponds to a slowdown in growth - the overall year-on-year revenue growth trend of the international business has slowed down to 29% (40% in Q1, 32% in Q2), and the revenue of the retail business has also continued to slow down to 35% (58% in Q1, 38% in Q2), but this number is still higher than market expectations.
With the new changes in the international situation and the intensification of cross-border regulatory risks, the "Four Little Dragons of Going Global" are now more suitable for low-key growth. In addition, Lazada has decided to shift from growth to profit. Subsequently, the international business may still maintain a stable growth and prioritize reducing losses.
The significant decline in free cash flow is related to the adjustment of some strategies of Alibaba Cloud and Taotian. At the earnings call, executives also explained: "Our expenditures related to infrastructure investment in Alibaba Cloud have increased, as well as refunds to Tmall merchants due to the cancellation of the annual service fee, coupled with other working capital changes such as the reduction in the scale of some direct sales businesses".
In order to invest more funds in core businesses, Alibaba is still shrinking sub-businesses except for e-commerce and AI. The loss of the local life group has significantly narrowed year-on-year, from 2.564 billion yuan in the same period last year to 391 million yuan, reducing the loss by 85%, approaching the break-even point; and the loss of the big entertainment business has also reduced by 11%, also approaching the break-even line.
Alibaba chooses to continue to invest in core e-commerce businesses and AI in exchange for current growth and future development. In the context of fierce competition and a difficult environment, Alibaba must make sacrifices to gain.