Article / 18 September 2015 at 2:13 GMT

Alibaba flags new relationships for Singles' Day

China Watcher / Shanghai
China
  • In a recent talk, Alibaba spoke of the importance of investing in its logistics network
  • Singles' Day will be expanded to include offline retail, or 'omni-channel'
  • Cloud computing continues to be an important part of its business

By Neil Flynn

Alibaba presented at Deutsche Bank’s TMT conference, with executive vice-chairman Joe Tsai providing valuable insight into the recent progress of the firm. Ahead of the calendar third-quarter earnings release, which is set to be at the start of November, investors have been given a better indication as to what to expect. 

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 This year's Alibaba will expand Singles' Day to include offline retail transactions. Photo: iStock

Consumption levels affected

Tsai said that the equity market downturn has affected consumption levels on Alibaba’s platforms, so average orders per customer will be a closely followed metric in the calendar third-quarter earnings. 

During the second quarter, I posed the argument that anybody with disposable income in China was investing in the stock market; they weren’t spending it on Alibaba. As markets began to fall, it will be interesting to see how great the effect on Alibaba’s consumption levels has been, as consumers have taken money out of the stock market amid falling valuations. 

But even on a longer-term view, China is transitioning into a consumption-driven economy as opposed to an investment-driven one. The savings rate in China is very high, and consumption is 37% of national GDP, which is much lower than developed economies. As this adjusts, Alibaba will be a major beneficiary.

The company has invested heavily in its logistics network and will continue to do so. In addition to the investment in its logistics subsidiary, Cainiao, there will be major developments in same-day grocery delivery, which I fully expect will be a major revenue driver over the next few years. 

The following quarters will also allow investors to see how Alibaba is utilising its newly formed partnership with Suning, the electronics online and offline retailer. This will put a lot of pressure on Alibaba’s largest retail rival JD.com, which has traditionally been the best platform on which to purchase electronics goods. The fact that Suning has thousands of offline stores in China will allow users to view products in store, and then make the purchase online; a concept that JD.com is currently unable to do.

Singles' Day plans

Last year was the first time Western investors got a chance to experience Alibaba’s Singles' Day, albeit from the outside looking in. Singles' Day is a huge event in China, where all of the country's online retailers offer large discounts during a 24-hour time period on November 11 (11-11 looks like four single people). 

Although it was originally an excuse for friends to party at university, Alibaba took the concept and encouraged users to "spend their blues away" using retail therapy. The day has since grown exponentially; last year Alibaba oversaw RMB 57.1 billion worth of transactions (GMV) in just 24 hours.

This year, there will an increased focus on international brands. This will certainly be attractive to foreign firms as Chinese consumers typically delay their purchases until Singles' Day because they can save a significant amount of money. 

Therefore it’s a day where hundreds of millions of Chinese consumers are expecting to spend, and foreign firms will be actively trying to market and sell their products. This will also help Alibaba widen the range of products available to consumers, and hence be able to both increase average revenue per user and attract more potential users to the platform.

Finally, the firm will expand Singles' Day to offline retail, with what they call an omni-channel. This means that if a user goes into an electronics store, they can experience a product, and then make a purchase online. This concept of combining the online and offline shopping experience is a major reason for the investment in electronics store Suning.

Barron’s article rebuttal 

On Tuesday, I provided a counterargument to a Barron’s article that was published over the weekend and widely picked up by investors. During the conference, Tsai stated that the article was based on erroneous information that, if corrected, invalidates the arguments it was trying to put forward.

Expectations high for cloud computing

In the previous earnings release, cloud computing was given a separate line on the income statement, which indicates the company’s expectation of the potential size of the business. In terms of revenue, cloud computing generated $80 million for the firm in the second quarter alone, in an industry that is still relatively underdeveloped in China.

The real benefit to users will come from the ability to share data across difficult business lines. As Alibaba builds out its range of services, cloud computing allows businesses to effectively build a strong back-office data system. In China, most firms don’t have the physical back-office infrastructure in place that one would expect from a developed Western firm, so they are able to leapfrog the technological progress and go straight into cloud technology.  

– Edited by Gayle Bryant

Neil Flynn is a China watcher based in Shanghai. Follow Neil or post your comment below to engage with Saxo Bank's social trading platform.

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