The second-quarter results are already in from some of China’s biggest companies, including tech leaders Tencent and JD.com. And, for the first time in recent history, they didn’t look so rosy. Now Alibaba, China’s retail titan, is set to report this Thursday.
It wasn’t that long ago that all three companies were riding a wave of success. In 2015, JD.com saw average quarterly sales increases of 60 percent, and Tencent saw “sparkling” annual results with its stock surging over 20 percent across the course of the year. For luxury businesses, China’s booming e-commerce market was a land of opportunity, offering innovative ways of reaching a previously untapped market.
In 2018, however, luxury labels are increasingly cautious of partnerships with these technology giants, with some opting to invest in their own independent .cn sites and mobile apps.
As JD.com and Tencent lose some steam, will Alibaba come out on top? Here's Jing Daily’s roundup of results, with insight from financial experts, and predictions from analysts ahead of Alibaba’s announcement.
Right now, Wall Street loves Alibaba. Of the 39 analysts tracked by FactSet who cover the stock, all 39 rate it a buy, according to Marketview. The average price target is 234.62, 36 percent above current levels.
According to predictions by eMarketer, Alibaba will take the largest slice of the retail e-commerce market in China, with a 58-percent share, followed by JD.com with 16 percent.
Cindy Liu, eMarketer's forecasting analyst, commented, “It’s all about data – and Alibaba has a wealth of consumer data. We are seeing increased engagement across all of their platforms, which not only enriches the customer experience but also empowers its ad technologies in personalization.”
Tencent’s reported 2-percent drop in net profit shook the stock market last Wednesday. China’s biggest social media company said April-June profit fell to 2.59 billion (RMB 17.87 billion). This lagged behind the 2.87 billion (RMB 19.67 billion) consensus estimate of 12 analysts compiled by Thomson Reuters.
This result was blamed partly on the company’s slow-burning gaming sector, which has faced issues since March due to the restructuring of government regulations. Some of these new regulations have caused the Chinese government to deny Tencent the ability to monetize many of its top online games – including "PlayerUnknowns’ Battlegrounds," which has more than 400 million players worldwide.
For the luxury industry, Tencent attempted to push forward in the quarter with bigger investments in e-commerce platforms VIPshop and JD.com. However, in the lead-up to China’s “618” mid-year shopping festival, Tencent’s partnership with JD.com meant the company was forced to remove its flagship store on Alibaba’s Tmall less than 24 hours after the launch. JD.com is a direct competitor to Alibaba in China’s booming e-commerce market, and it seems Tencent has chosen a side.
However, it wasn’t all bad news for Tencent this quarter. According to the report, highlights included Tencent’s WeChat Mini-Program apps, which has built up a sizable ecosystem with over 200 million daily average users. Many luxury brands have taken advantage of this new way to reach consumers, with labels like Burberry, Dior, Gucci and Givenchy all releasing mini-program campaigns for last week’s Chinese Valentine’s Day.
Tencent President Martin Lau told investors, “In the area of Smart Retail, Mini-Programs helped merchants shorten in-store checkout time, facilitate order for home delivery and provide targeted product promotions via embedded links to Official Accounts. Many retailers find these capabilities extremely useful as they attempt to digitalize their businesses and engage with customers online.”
And experts seem to agree. Olivia Plotnick, global marketing manager at brand strategy agency Brandigo, told Jing Daily, “Tech giants in the West can’t even compete with the ecosystem Tencent is building within WeChat. Shares may have been lackluster, but Tencent rightfully steered attention towards mini-programs as a highlight of Q2. Mini-program stores will become the standard for e-commerce. As user acquisition plateaus, focus shifts to user retention. WeChat aims to be the app you never leave – monetization won’t be far behind.”
JD.com’s results were a mixed bag in the quarter, with the company reporting a 31.2 percent year-on-year rise in revenue to 17.86 billion (RMB 122.3 billion yuan), but failed to meet consensus estimates of 17.92 billion (RMB 22.7 billion) from 22 analysts at Thomson Reuters.
Although only a marginal miss, JD.com’s sales are usually markedly higher in the second quarter due to the company’s mid-year “618” shopping festival. According to executives on JD.com’s August 16 earnings conference call, sales dropped this year due to crossovers with national holidays.
However, according to Marie Tulloch, inbound marketing manager of Chinese marketing consultancy Emerging Communications, “One of JD’s core sales drivers – e-commerce sales festivals – have now reached the point at which consumers are beginning to be fatigued by frequency and choice of special shopping days. Once JD’s 618 festival was a big deal, but now it has become another in a growing list of shopping promotion events that seem to take over most of May and June.”
Tulloch told Jing Daily, “JD.com is not only battling Alibaba, but it is also having to contend with a growing number of specialist rivals such as Red and Pinduoduo, plus it is under pressure from cross-border e-commerce apps such as MyMM and Secoo.”
In recent months, JD.com has been busy putting forward its strategy for “borderless retail” or online-to-offline commerce. According to Tulloch, "JD.com has taken the battle for retail supremacy offline, opening brick and mortar stores, but this requires heavy investment in its fierce competition with Alibaba, as well as existing retail chains.”
Don Zhao is co-founder of borderless e-tail group Azoya. He agrees that heavy investment is what’s led to JD.com’s quarterly decline, but believes this shouldn’t be a cause for concern.
“JD.com is investing a very large sum of money in logistics because being able to deliver goods in 1-2 days isn’t something that their opponents can do consistently, and this is attractive, especially for luxury goods, where the customer experience is of utmost importance. Luxury brands such as Balenciaga are flocking to JD.com because its logistics service is unmatched in China. This means that JD.com and its luxury arms Toplife and Farfetch will be able to provide a significant amount of behind-the-scenes operational support so that brands can focus on what they do best, and that’s brand building,” he said.
Alibaba, too, has been investing heavily in online-to-offline retail, in a strategy, it has coined “New Retail.” According to Zhao, “Alibaba is seeking to pull in offline users in smaller cities who might not shop as frequently on Taobao and Tmall. But it still outsources its delivery to high-volume, low-cost logistics providers that probably aren’t as reliable. However, they are investing in luxury AI companies, which might solve the problem of online shoppers not being able to try on luxury goods.”
So is the golden period over for China’s tech giants, or are some of these declines just bumps in the road?
According to Tulloch, “Some of the gloss has gone off the big Chinese tech giants, but this is relative to previous innovation and meteoric performance. What we should be looking at is how they hold ground against each other and specialist newcomers, and their performance in new areas of business and geographic territories.”
Zhao agrees, saying, “It is more important to look at what the companies are investing in, rather than short-term fluctuations in profits, because companies can choose to invest a lot in one quarter and not as much in the next quarter, which distorts margins and profit growth. The e-commerce market is getting more and more competitive. To avoid becoming a commodity, these companies are taking steps to differentiate themselves by enhancing customer experience.”