Alibaba revenues slow as Macy's signs to push into China
- Summary:
- Alibaba's gone from being Wall Street's poster child to being eyed with caution by investors. Will deals such as a tie-up with Macy's be enough to turn things around for the Chinese firm?
It doesn’t take much - or long - to go from being Wall Street’s golden child to being rusty round the edges to as e-commerce giant Alibaba just found out.
A few months ago, the Chinese firm was riding the wave of the biggest IPO in US stock market history and its TMall marketplace was being talked of in terms of being a major threat to the likes of Amazon.
Flash forward to this week and despite a doubling of quarterly profits, there’s enough underlying bad stuff to give Wall Street a hefty dose of the jitters. From a high of $120 a share in November, the company’s now running at around $73.
The main problem is revenue growth, now running at its lowest rate in three years, but here the firm is a victim of its earlier success as growth rate was still 28% to $3.26 billion. The official reason for the slowdown:
- Suspension of online ticket sales via its lottery business Caipiao after a regulatory crackdown on online gambling.
- Lower fees from Alibaba’s group-buying and flash sales site.
- The transfer of its small-loans business to its financial affiliate.
- Nervousness about the state of the Chinese economy.
Profit for the second quarter actually doubled to $4.97 billion, but this doesn’t present the complete picture as this is mainly a side effect of the de-consolidation of Alibaba Pictures.
There are some positives to highlight though, particularly in the area of mobile growth. Executive vice chairman Joseph Tsai said:
In the June quarter this year, we achieved 307 million monthly active users on our mobile commerce apps, which is a net increase of 18 million from March and a 63% year-on-year increase from the same period last year. Our monetization, our mobile revenue from China retail marketplaces was nearly RMB8 billion, representing year-on-year increase of 225%.
The firm has also signed a significant new alliance with bricks-and-mortar electronics retail chain Suning in China. Tuning has more than 1,600 stores in 289 cities. The alliance is two-fold: Alibaba will invest US$4.6 billion for 19.9% in Suning, and Suning will establish an online flagship store on Tmall focusing on consumer electronics, home appliances and baby products. Tsai explained:
The strategic implications of this partnership are three-fold. First, Suning's online store on Tmall will offer an extensive selection of high-quality consumer electronics products, providing an unparallel shopping experience on Tmall. This reinforces Tmall as the premier platform for brands and retailers that wish to establish their online presence and direct engagement with customers.
Second, Suning has an extensive nationwide logistics and after-sales service network with 65 national and region distribution centers, 353 city forwarding centers and over 1,700 last-mile delivery stations. This covers almost all of the 2,800 counties and townships in China as well as over 3,000 after-sales service locations and over 5,000 affiliate serving partners in 320 cities.
This extensive network will tap into the intelligent data network of our logistics affiliate, Cainiao, and offer logistic services to customers on Tmall. With this partnership, we will enhance our consumer experience, as customers can expect to receive their orders in as fast as two hours.
Third, because of the large user base on our mobile commerce apps, we are able to leverage this customer base and data technology to bring the right customer to the right store location at the right time.
In addition, consumers can have an in-store experience to try products and enjoy after-sales service, while ordering and making payment and appointments on a mobile device in a seamless offline-to-online experience. Our strength in mobile makes Alibaba the best partner to work with in terms of offline retailers, such as Suning, to develop the omni-channel strategies.
Cloud growth and Macy's
The firm’s cloud computing business is also going well in the domestic Chinese market where Alibaba is the market leader. Overall cloud revenues tripled during the quarter, according to CEO Daniel Zhang:
The acceleration of our cloud computing business during June quarter was driven by an increase in the number of our paying customers as well as an increase in their usage of our cloud computing services, including more complex offerings, such as content delivery networks and data services.
In addition to having the most comprehensive service offering in China, our cloud business has a growing and a diversified customer base across public and private industries, including e-commerce, financial services, gaming and many others.
Another significant development is Alibaba’s announcement that Macy’s China Limited, a joint venture between Macy’s and Chinese retailer, Fung Retailing Limited, will launch an online flagship store on TMall Global. Having an iconic retail brand signed up on an exclusive basis is a big tick in the box in Alibaba’s on-going competition with rival JD.com to bring US firms onto Chinese online marketplaces.
Macy’s CFO Karen Hoguet explained:
Macy’s China Limited will be led by Kent Anderson, a longstanding Macy’s Executive who was the Founder and long time President of Macy’s.com. No physical stores are planned for China at this time, but maybe considered in the future based on our experience in eCommerce.
Our game plan is to start small and use a test and learn approach as we move forward. We also believe that by increasing the presence of Macy’s in China, we will actually help our business here as well both with the Chinese tourists as well as Chinese residents.
We're not going into this thinking we know all the answers and that's why we're taking sort of a test and learn approach because we know the Chinese consumer is different both in terms of merchandized taste but also how they interact online and so again we're going in with an open mind and not assuming we know all the answers.
My take
Wall Street giveth, Wall Street taketh away. With Alibaba’s share price now perilously close to its $68 IPO level, the great expectations of massive revenue growth that were the norm a few months ago, now seem a long time ago. With the Chinese economy subject to major global concern, Alibaba will be scrutinised very closely in the weeks and months to come.