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An in-depth review of Alibaba’s business strategy from its fiscal earnings report

By ESC Editorial Team, about 1 month ago Business
An in-depth review of Alibaba’s business strategy from its fiscal earnings report

On January 30, 2019, Alibaba announced its third quarter earnings report. The net income reached $4.50 billion, up 33% from a year ago. Although the pace of growth was slower than expected, the robust increase in annual active consumers (636 million active consumers per year and 699 monthly active mobile users) mark the company’s dominance in the Chinese market and its potential for profitability. Alibaba’s shares rose 6.34% at the end of the month following this report.


Let’s take a look at how the report reflects Alibaba’s effort to drive new growth from new areas and its strategies behind the four major business units.


While the e-commerce space in China is considered saturated, Alibaba’s user acquisition performance is satisfactory with 33 million new buyers this quarter. Over 70% of the revenue is from third-and-lower tier cities. The international user is also a decisive driver of growth. Alibaba’s investment in local e-commerce platforms worldwide, such as Turkey’s Trendyol and Southeast’s Lazada, has produced positive results; they generated revenues of $849 million, an increase of 23% over the previous year. 


As a record-breaking e-commerce event, the Double 11 Global Shopping Festival contributed to Alibaba’s strong year-over-year growth. It created a Gross Merchandise Volume(GMV) of $30.8 billion, delivered 1 billion users and attracted over 180,000 brands to participate in the promotion. Encompassing online videos, local services, cross-border commerce, and offline retail, Double 11 has gone beyond an online shopping festival; it is a comprehensive integration across all of Alibaba’s businesses and demonstrates its powerful capabilities in terms of logistics infrastructure and digital payments.

 

Source: Alibaba Group


Alibaba’s framework comprises four business units, namely Core Commerce (e-commerce, New Retail, Cainiao Network (a Chinese logistics company launched by Alibaba Group), Ele.me (online food delivery platform) and so on), Cloud Computing, Digital Media and Entertainment, and Innovation Initiatives and Others.


Core Commerce


The data show that this segment’s revenue was $14.96 billion. Although Core Commerce continues to account for the bulk of Alibaba’s revenue, its share has dropped from 95% to less than 70% since 2014. Retail marketplaces, Taobao, Tmall, Cainiao, and Hema (Freshippo), etc, can be regarded as the foundation for Alibaba and also as the main source of cash flow. The enhancement of the search engine and user recommendation system, once monetised, will result in a higher income gain in the near future.


Tmall’s leadership position in the B2C market continued. Consumer goods, apparel, and home furnishing with fast turnaround are the categories with the most significant increase in GMV. The other two parts– Cainiao Logistics Network and local life services- each account for 3.8% and 4.4% of total revenue, respectively. (Note: In December 2018, the food delivery platform Ele.me was combined with Koubei, a local services guide.)


As for the strategy behind these segments, Maggie Wu, CFO of Alibaba, said Core Commerce investment mainly went to Ele.me, Lazada, New Retail and Tmall, and the rank also matched their investment priority. 


Cloud Computing


Cloud Computing revenue grew 84% to $962 million. Although its cloud business has not yet made any profits, Alibaba believes that China’s cloud market is still at an early stage. The primary focus is on providing advanced data technology and intelligence to the entire market and empower in market participants such as financial organisations and logistics companies with the technology and data in marketing and logistics. In other words, the cloud offerings might not bring many immediate earnings for its parent and long-term growth is likely to depend on future size and market share.


Digital Media and Entertainment


Alibaba’s media and entertainment business includes the UC web browser, Youku & Tudou, Ali Sport, Ali Music, and Tmall Box. The loss is mostly due to the spending on self-produced digital content and copyright. Digital content and local consumer service are in high demand in China; Alibaba’ strategy is to gain a lead in the market. “We help merchants, brand partners and advertisers to build their brands and enhance customer loyalty by providing an ecosystem that integrates marketing, advertising and sales capability,” said Daniel Zhang. That might be another reason why Alibaba’s Taobao launched a standalone short-video app: Besides the challenges from TikTok, providing merchants with another marketing channel can further increase user engagement of the core business.


In conclusion, core commerce is Alibaba’s primary source of revenue and continues to evolve, while other businesses are also growing at a rapid pace to drive the expansion of core commerce.

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