Source:Togawa Research Center

Author: Ren Tongyao

The main lines of Ali's first annual report after the reform were surprisingly clear.

In March 2023, Zhang Yong, then CEO of Ali, announced the largest organizational change in history: 1+6+N. Set up six major groups and business companies: Alibaba Cloud Intelligence, Taobao Tmall Business, Local Life, International Digital Commerce, Cainiao, and Big Entertainment.

According to the idea at the time, these companies would “face the capital market alone, mature one, and go public one”, and the split listing of Cainiao, Hema, and Yunsmart was put on the agenda for a while.

However, after half a year, Wu Yongming, who took over Zhang Yong, changed his tone. The IPOs of Cainiao, Alibaba Cloud, and Hema have been suspended one after another. Wu Yongming clearly stated in a letter to all employees that core businesses should be invested for a long time, and businesses that are not profitable should be monetized as soon as possible.

Ali quickly reduced its strategic focus to two core businesses: e-commerce and cloud computing.

For Ali, e-commerce is today's meal ticket, and cloud computing is tomorrow's ferry ticket.

In the era of rapid progress of the Internet, Ali was fascinated by building a huge, all-encompassing business ecosystem. But in this moment of turbulence, it keeps telling the inside and outside world to stay focused as much as possible.

According to the latest financial report, whether it is e-commerce that regains GMV growth rate through low prices, or the cloud business that cuts the profit of contract projects by cutting prices, they are doing the same thing --

Blood is exchanged for growth.

Taotian rejuvenates at a low price

In April of this year, during an interview with Ali Chairman Cai Chongxin, the Norwegian Sovereign Wealth Fund asked: Ali's business depends on strong consumers. What do you think of the current consumption situation in China?

Cai Chongxin's answer is twofold: First, China has a high savings rate, and households have plenty of cash. The ability to spend does exist. Second, consumer confidence is still insufficient.

In fact, it's not that people suddenly can't afford the latest iPhones or eat imported lobster; it's just 9.9 yuan of free shipping toilet paper and 6.9 yuan a dozen eggs, which seem even more attractive during this cycle. The recent popular saying goes well: “It's not that XX can't be bought, it's that XX is more cost-effective.”

Cai Chongxin made a firm statement in the interview: Over the past few quarters, Taotian Group's online GMV has hovered on the edge of a slight increase or even decline. The root cause is ignoring the user experience.

Retaining users is eligible to talk about growth, and Ali (and JD) is aware of this. Pinduoduo used soaring revenue and profits to demonstrate the power of low prices, so over the past year, Taotian has mainly done one thing — retaining people at low prices to wait for their arrival in Japan.

“Price power” was placed at the core strategy and became a huge project team covering almost the entire group, including various departments such as marketing, marketing, search recommendations, and 10 billion subsidies.

From Dai Shan to Wu Yongming, the top leaders said they wanted to make “good products, good prices, and good service” and increase the number of users.

Low-cost supplies, such as white brand goods, were the first to be introduced to Taotian. On the eve of 618 last year, Taotian completed a round of structural adjustments. The industrial center, which originally controlled all merchant resources, was split into three development departments, the “Brand Business Development Center,” the “Supermarket Business Development Center,” and the “Small and Medium Business Development Center.”

Wang Hai, the head of the “SME Development Center”, was the person in charge of Taobao's special edition. At one point, Taotte, which had 300 million active users, was marginalized, and the supply of cheap manufacturers and white cards was silently grafted into hand.

Supply was further expanded this year. 1688 announced that it will be fully purchased, and merchants will open stores and sell goods through semi-hosting. Ali did not hesitate to set aside a plot of land on Taobao to open a wholesale market.

Next, the platform's Bayonet node was greatly promoted. All departments had only one core KPI: the lowest price on the entire network.

At the 618 merchant conference in 2023, Wang Hai spoke very bluntly to small and medium-sized enterprises: as long as the price is good, there will be traffic. Subsequently, the registration requirements for merchants on the Double Eleven “Everyday Low Price” channel are: they must achieve the lowest price of the entire network and the same low price on a daily basis.

The pressure of low prices spread from big promotions to everyday life. In March 2023, Taobao released a five-star rating system for merchants. At low prices within the market, only four stars are available, and only five stars can be obtained at low prices on the entire network.

Pinduoduo next door is very familiar with this approach of supporting whomever has a lower price.

Ali is also following Pinduo's strategy of crossing the river to the end, and has successively launched a series of services on the consumer side, such as refund-only, free shipping in the Xinjiang region, and pay-as-you-go. 88vip members are also upgraded to an unlimited number of returns, with a maximum postage allowance of 25 yuan per return order, which only requires you to spend your money painlessly from the time you place the order to return the item.

This set of low cost combo punches worked very well. According to the latest financial report, thanks to a strong increase in the number of buyers and frequency of purchases, in the first three months of this year, Taotian's GMV (turnover) returned to double digit growth, reaching 93.2 billion yuan; the number of 88VIP members also increased by double digits over the same period last year, exceeding 35 million.

However, behind the low price rejuvenation, there is also a price.

Desperate housewife wants to raise a family

In fiscal year 2024, Taotian Group's revenue increased 5% year over year, but adjusted profit increased by only 3% year over year. Looking at the fourth quarter alone, the increase in revenue and profit was particularly obvious. At the same time as revenue increased, profit fell 1.4% year on year.

Low prices are the antidote to increasing revenue, and the main reason for not increasing profits.

Wu Yongming explained during a conference call in the previous quarter that Taotian Group's main revenue is two pieces:

• One is a direct-run product, that is, a product you can buy at Tmall supermarkets and Tmall International. This part is similar to JD's own operation; they all make a difference in price;

• The other part is customer management revenue (CMR), that is, commissions and promotion fees paid by Aotan merchants to the platform, commonly known as “road buying money,” which is the main source of profit for Taotian.

In fiscal year 2024, the growth rate of Taotian's customer management revenue lagged behind the growth rate of online GMV; in the fourth quarter when GMV returned to double-digit growth, CMR only increased 5% year-on-year.

Ali's explanation is that under the low price strategy, the transaction structure gradually shifts to Taobao merchants selling products with low customer unit prices. In other words, businesses that bring in growth aren't likely to advertise.

Financial reports show that revenue from self-operated businesses represented by Tmall Mall and Tmall International fell 2% year on year, and wholesale business revenue, represented by 1688, increased 20% year on year — it's clear at a glance what people love to buy now.

Unlike wealthy brand merchants, small businesses and sole proprietors are very sensitive to spending money. In order to support small and medium-sized businesses, Taotian is already taking the initiative to reduce merchant costs. For example, the tool “Business Counselor,” which used to cost money, is now open for free.

Taobao, which does not draw commissions from store C, also naturally earns less commission income than Tmall, and relies entirely on promotion fees to earn money.

Ali's solution was to learn from Pinduoduo and launch a marketing tool called “full site promotion”. Simply put, all traffic resources on the site are open, and no longer divided into Taobao or Tmall. If everyone rolls together, whichever has a higher ROI, it will continue until the budget is spent.

The problems faced by Taotian are complex. On the one hand, it is necessary to maintain user and revenue growth, and on the other hand, it is necessary to balance the low prices and the monetization rate problems brought about by Taobao; more importantly, if you don't have a daughter-in-law to become a wife, you have to shoulder the heavy responsibility of supporting your family.

Taotian Group has always played a role in blood transfusions, contributing to almost all of Ali's positive profits.

Sectors such as entertainment and local lifestyle are each characterized by skill and loss. Even Ali International Digital Business Group (AIDC), which is expected by the supermarket market, had a 45% year-on-year increase in revenue and was based on growing losses.

At the earnings conference call, AIDC Chairman and CEO Jiang Fan responded to investors' concerns: the increase in losses is due, firstly, to aggressive investment in emerging markets such as the Middle East and the Gulf region, and secondly, the share of the Choice model has increased.

The Choice model is similar to Temu's full hosting. The platform is responsible for all aspects of operation, warehousing, delivery, and after-sales, and already accounts for 70% of the AliExpress platform. Under the hosting model, the operating costs of the platform have increased dramatically, and TEMU next door has not yet been profitable, and has begun to develop a lighter semi-hosting model.

Taotian's adjusted profit for the last quarter was 38.501 billion, compared to -10.895 billion for non-Taotian Group. This means that Taotian must fill in more than 1/4 of the profit.

Fortunately, at this point, one of the brothers finally stood up to play.

Cloud computing problems

As another core business selected by Ali, Cloud Intelligence Group delivered good results: annual revenue increased 3% year over year, adjusted profit of 6.12 billion yuan, up 49% year on year.

Coincidentally, Cloud Intelligence is also busy making low prices. On February 29, 2024, Alibaba Cloud announced the biggest price reduction in history. The price reduction involved more than 100 products, with an average drop of 20%, and up to half off. Some media described it as “the lowest price to break through the entire network.”

Despite the broken bone, cloud computing is still the only business in the whole of Ali that increases revenue and profit. This is something that even Big Brother Taotian has not been able to do.

Ali's explanation for this is that project-based contracts with low profit margins have been cut.

The so-called “project contract” generally refers to the privatization deployment that domestic enterprises love. Cloud vendors tailor solutions for customers and build project teams. It is basically equivalent to a construction team that charges per person/day.

Private clouds are in high demand, but R&D and operation and maintenance expenses remain high; public cloud costs are manageable, but demand is limited.

However, from a profit margin perspective, selling standardized products is always better than customized services, which is why Alibaba Cloud's profits have soared.

Alibaba Cloud, which follows the path of publicization, is increasing public cloud adoption while cutting these fuel bottles. As a result, core products and services such as flexible computing and databases all had double-digit year-on-year revenue growth, AI-related revenue increased by three digits year over year, and the Group's overall adjusted profit also increased dramatically.

However, on the one hand, an important growth point for cloud computing in the future — the big domestic model — is still in the early stages of grounding. In the past year, Ali has invested in four AI startups, and the routine is the same as Microsoft's.

In February of this year, Ali led the B-round financing for Dark Side of the Moon. Of the $1 billion raised amount, 800 million will be provided in the form of cloud computing resources. In March, it was revealed that Ali had taken the lead in a new round of financing for MiniMax.

On the other hand, cloud intelligence groups also need time to develop, especially in the domestic market where private deployments are all the rage and public cloud renewal rates are limited. Its profitability at this stage is insufficient for AIDC or Local Life Group Peer-to-Peer Blood Transfusion alone.

AIDC's investment is still within an acceptable range. As for local life, rookie, entertainment, and various businesses packaged into “other”, loss reduction became the key word of the year.

• Cainiao, whose listing was suspended, was the first to leave the hospital. It turned a loss into a profit in the 2024 fiscal year, with adjusted profit of 1.4 billion yuan. It is the third business group to see a return of money after Taotian and Cloud Intelligence.

• Local Life and Entertainment Group cut losses by 25% and 45% respectively, but they are still among the losers. After the end of fiscal year 24, Yu Yongfu, Chairman and CEO of Local Life Group, officially handed over and stepped down.

Also leaving office during the same period were veterans Hou Yi and Lin Xiaohai. As a testing ground for Ali's new retail, Hema and Da Runfa, who are struggling to solve the law, are anxiously awaiting the judgment of fate along with many “other” businesses.

The e-commerce business is fighting against Pinduoduo, which is open every quarter, and Alibaba Cloud holds half of the tickets to the artificial intelligence era in its hands — this is Ali today.

Over the past year, Ali has tried many times to show patience with the outside world in carrying out reforms. On the night Pinduoduo's market capitalization surpassed Ali, Ma Yun left a message on the group's intranet: “Great companies are born in winter”; during a recent earnings call, Wu Yongming half-jokingly said that investors and friends seemed to be in a hurry to make money than we are.

However, Ma Yun said another sentence in his early years: Today is very cruel, tomorrow will be even more cruel, and the day after tomorrow will be beautiful, but the vast majority of people will die tomorrow night.

Maybe the future is really good enough, but until then, Ali needs to make sure that he holds his meal ticket in the midst of the wind and waves, and at least live until the day the ferry ticket is redeemed.

Reference materials

[1] Ali Earnings Report and Conference Call Minutes

[2] Zhang Yong's internal letter from March 2023

[3] Wu Yongming's internal letter of September 2023

[4] Wu Yongming's internal letter in December 2023

[5] Joe Tsai Co-Founder & Chair of Alibaba | In Good Company | Norges Bank Investment Management, Youtube

[6] How to do Double 11 “low prices every day” Taobao? , e-commerce online

[7] Taotian Group CEO Dai Shan: This year, we will make a historic huge investment in the user scale, Sina Technology

[8] Taotian Group's first battle after Ali's structural transformation: 618 fights “price power” to become the key word of the year, Huaxia Times

[9] Taobao merchants survive the fittest, new regulations are being adjusted, everything is coming too fast, E-Commerce News

[10] Ali Mama Releases Site-wide Promotion: AI Intelligent Product Selection Determines Explosion, Yibang Dynamics

[11] 1688: Full “purchase” of manufacturers with one million sources, People's Daily News

[12] Ma Yun's intranet speech on “Pinduoduo's Market Capitalization Approaching Ali”: All Great Companies Were Born in Winter, Cover News

edit/emily