A whopping fine for anti-monopoly breaches, an economic slowdown, and slowing growth in customer management revenues. China's e-commerce giant Alibaba Group Holding Ltd. has had its fair share of challenges.
While the worst may be over, Alibaba faces other obstacles that could pressure its credit profile beyond the next two years. Growth in ecommerce is stalling and competition is rising. More people are shopping online for a wider variety of goods and formats, particularly through increasingly popular short-form video platforms.
In this report, we address key investor questions on the competitive threats to Alibaba, the rating implications, and what action it is taking.
Frequently Asked Questions
Is there a risk to the rating on Alibaba?
We see little risk to the rating on Alibaba for now. The company still has a sizeable share of China's total retail spending (including offline retail), and market share losses over the past years were incremental and manageable. Moreover, 2023 is likely to be a bumper year for Alibaba. A potential consumption recovery (see "China's Earlier Policy Shift Advances Its Recovery," Jan. 18, 2023) and cost cuts could support good growth in earnings and cash flows.
We see operating cash flows recovering to Chinese renminbi (RMB) 170 billion-RMB180 billion over the next two years, up from RMB143 billion in fiscal 2022. Beyond 2023, we will monitor Alibaba's efforts to stave off competitive pressures. We could reflect competitive pressures that result in significant share loss or cash flow reductions through the stand-alone credit profile (SACP) of 'aa-'. That is not our base case for now. Our long-term issuer rating of 'A+' on Alibaba has some buffer due to limitations from the sovereign rating on China of 'A+'.
Why is e-commerce slowing and how are internet companies, including Alibaba, addressing it?
E-commerce growth is nearing saturation point; a large portion of purchases these days occur online. Rising online penetration and China's slowing economic growth are likely to weigh on e-commerce's future growth prospects. Online penetration rates for some spending categories are already reaching 40%-50%, with even higher penetration rates in the most affluent or first- and second-tier cities. To chase growth and drive more user activity on their platforms, internet companies have invested heavily in online groceries and community buying, platforms that allow consumers to purchase food and fresh goods in bulk through an organized group (see "Credit FAQ: Community Buying: China's Next Big Thing, Or Cash-Draining Fad?," Jan. 19, 2021). This spending category is potentially lucrative considering its addressable market size, high-frequency purchases, and low online penetration.
Instead, large losses have led to exits or retrenchment for most companies operating in this segment, including Alibaba. We expect Alibaba to continue to build up its capabilities in this category, though the company will likely focus on profitable growth for the next year until consumer and competitor activity picks up again, as indicated by loss reductions for its Taocaicai business.
Where do the competitive threats for Alibaba lie?
Alibaba faces intensifying competition from different angles. At one end, Pinduoduo Inc. is taking share of e-commerce spending in lower-tier cities and villages, where e-commerce spending is growing the fastest. Meanwhile, short-form video platforms such as Bytedance Ltd.'s Douyin and Kuaishou Technology are taking share in high-spending categories such as cosmetics and fashion after launching their own e-commerce operations in 2020.
Alibaba's efforts to arrest declining e-commerce growth and rising competition have led EBITDA margins to decline, particularly since fiscal 2019 (year ending March 31). This came to a head in fiscal 2022 when the company lost meaningful market share and its absolute EBITDA fell for the first time. During this period, the growth of its online physical goods' gross merchandise value (GMV) substantially trailed the growth of China's total online retail sales growth. A possible cause of the slower growth could be the surge in online community buying during the COVID period, which is not included in Alibaba's online physical good GMV figures.
However, we expect Alibaba's share losses will moderate within the next two to three years because Pinduoduo could struggle to gain further share. Other reasons that may explain Alibaba's recent share losses include temporary shifts in online spending to product categories unfavorable to the company (such as community buying) and more logistical disruptions relative to other e-commerce platforms such as JD.com. For Alibaba this would suggest some recovery in GMV, customer management revenues, and stabilization of profit margins in fiscal 2024.
What drives the success of rival e-commerce platform Pinduoduo?
Its ability to tap demand in less developed regions in China, where e-commerce is growing the fastest. QuestMobile, a data provider, estimated that nearly 60% of the users partaking in the 618 shopping festival--a discount day held on June 18--were from third-tier cities or below. This compares with the industry average of about 50%. Underscoring the difference in user base is Pinduoduo's much lower spend per active buyer.
Pinduoduo's rise to prominence in e-commerce has been rapid. The company listed on the NASDAQ in 2018 with about RMB470 billion of GMV at the end of that year. Three years later, the company grew its GMV five-fold to RMB2,440 billion and reached 80% of Alibaba's China annual active consumers (AAC) of 880 million in 2021, up from just 45% in 2017.
Pinduoduo's success, particularly in lower-tier cities, lies in three advantages: (1) cheap merchandise, (2) socializing e-commerce, and (3) its partnership with Tencent Holdings Ltd. Cheap merchandise and the company's strategic partnership with Tencent attract new users to its platform, while the socializing functionality has stimulated further growth by leveraging the social networks of existing users.
Is Alibaba's relaunch of its Taobao Deals app too little too late?
Maybe. Alibaba has not sat idly amid Pinduoduo's rapid growth. In 2020, it launched a revamped version of Taobao Deals--an online retail platform for cost-conscious consumers. However, Pinduoduo's position in the thrift e-commerce segment could be too established for Alibaba to dislodge. Taobao Deals will likely face an uphill battle similar to that of Alibaba's Ele.me's efforts to unseat Meituan as China's leading food delivery company.
Pinduoduo has a much larger user base than Taobao Deals, nearly rivaling Alibaba's own China commerce user base. As of the March quarter in 2022, Pinduoduo had 881.9 million active buyers (the last reported figure), which compares with Taobao Deals' 300 million AACs, as of March 31, 2022. Taobao Deal's user growth is also slowing considerably. Though Alibaba no longer discloses Taobao Deals' latest AAC, the last reported AAC in the fourth fiscal quarter of 2022 grew 7% quarter on quarter compared with 17% quarter-on-quarter growth in the third quarter of fiscal year 2022. Meanwhile, Pinduoduo grew strongly in the June and September quarters of 2022.
On the other hand, Pinduoduo may face a tough task over the next two to three years, given the already-high user penetration. To maintain strong growth, Pinduoduo will need to increase user spending by expanding product categories or branded products sold on its platform and increase its share of higher-income users, such as those in higher-tier cities. Achieving these goals could require Pinduoduo to grapple with the strengths of Alibaba's Taobao and Tmall platforms.
Why are short-form video platforms a competitive threat for Alibaba?
It's all about their growing popularity. Kuaishou Technology and Douyin are the two largest short-form video platforms in China. The platforms launched in 2011 and 2016 respectively, and as of June 2022, they had 680 million and 400 monthly active users (MAU). They represent the biggest challenge for Alibaba at the other end of the e-commerce spectrum. Whereas Pinduoduo is taking share from the cost-conscious consumers' purchases of everyday goods and unbranded products, Kuaishou and Douyin are growing share by attracting impulse buyers who splurge on fashion, cosmetics, and niche or so-called long-tail products.
Over the past six years, short-form videos platforms have attracted hundreds of millions of users. The user base and user time spent on such platforms have surged, and Chinese internet users now spend nearly 35% of their online time on short-form video platforms, the most time spent among app categories. Short-form video platforms can monetize user attention through advertisements and by selling products directly through their live streaming platforms.
As a result, among the top six e-commerce platforms, Douyin's and Kuaishou's combined GMV share has surged from less than 2% in 2018 to 10% in 2021. This represents a more than eight-fold increase in GMV size in less than three years (see chart 8). This rise likely benefited from a low base; we expect such growth to moderate as e-commerce penetration among its users increases.
Where does the power of short-form video platforms lie?
In attracting lots of (young) eyeballs over lots of time. Kuaishou and Douyin launched their e-commerce operations in earnest only recently; Douyin began its e-commerce operations in 2018. So the runway for growth remains long. And as the largest e-commerce platform in China, Alibaba could be the most affected by their expansion.
Short-form video platforms are attractive to advertisers and merchants for several reasons:
- They have the largest user base among entertainment platforms by MAU.
- Users spend most of their time on short-form video platforms (see chart 9).
- Short-form video platforms, particularly Douyin, hit the demographic sweet spot of a young user base that are the future consumer base for brands.
- Short-form video key opinion leaders and their user-generated content are highly engaging and can often be more effective in selling or advertising consumer products, particularly for the more profitable long-tail or fashion-related consumer products.
On the other hand, short-form video platforms face a ceiling for their e-commerce business. Users flock to short-form video apps mostly for entertainment. Short-form video platforms that push too much e-commerce content risk alienating users.
- China's Earlier Policy Shift Advances Its Recovery, Jan. 18, 2023
- Credit FAQ: Community Buying: China's Next Big Thing, Or Cash-Draining Fad?, Jan. 19, 2021
Editor: Lex Hall
Designer: Halie Mustow
This report does not constitute a rating action.
S&P Global Ratings Australia Pty Ltd holds Australian financial services license number 337565 under the Corporations Act 2001. S&P Global Ratings' credit ratings and related research are not intended for and must not be distributed to any person in Australia other than a wholesale client (as defined in Chapter 7 of the Corporations Act).
|Primary Credit Analyst:||Clifford Waits Kurz, CFA, Hong Kong + 852 2533 3534;|
|Secondary Contact:||Cathy Lai, Hong Kong (852) 2533-3569;|
|Research Assistant:||Sam Lee, Hong Kong|
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