Earnings Preview: Alibaba invests in need for speed
- Delivery speed is important for online retailers and JD.com is faster than Alibaba
- The gap between PC and mobile monetisation rates has been closing
- Mobile only contributed to 30.11% of revenues - still lower than PC
By Neil Flynn
Alibaba reports its calendar second quarter (fiscal first quarter) results before the opening of the markets on Wednesday, with investors looking to pay close attention to the conference call, after the firm recently announced its biggest ever deal.
The growth of mobile will also be a key issue for investors. Despite strong growth in mobile contribution to revenues, the mobile monetisation rate declined, although this was likely a seasonal issue. Here are the four key points for investors to watch for.
On Monday, Alibaba announced a $6.9bn deal with domestic ecommerce platform Suning, which will see both firms take equity stakes in each other. Suning is known as an electronics retailer, and the partnership will help Alibaba to rival its biggest competitor JD.com, which was originally an electronics retailer until Tencent acquired a stake in the firm, and grew its product range. Suning is an interesting company because along with its ecommerce platform, it has around 1,500 brick and mortar stores.
Alibaba has previously made noises about combining online and offline shopping experiences, but has so far failed to do so. Its previous intention was to allow users to view the location of a particular seller in order to collect their purchased product in person.
However, this was met with disapproval by sellers, as the perfectly legitimate retailers didn’t want their warehouse locations being made public due to security fears, and the less-legitimate sellers not wanting their locations being shared for obvious reasons.
The Suning deal will likely allow users to choose to collect their items in store, which is actually a valuable feature. If a user is at work, it is difficult to time when the courier will deliver a product, and if it is particularly expensive, there is a security risk in either leaving it outside your front door or with building reception. Likewise, a lot of convenience stores now allow couriers to drop off a parcel, in order for it to be picked up in the evening, but this is far from a flawless plan.
The deal itself was met with some surprise by investors, so it will be important for management to fully discuss this during the earnings conference call. Alibaba doesn’t need to expand its own electronics retail platform, so it will be integral for management to discuss the O2O benefits of the deal.
Expansion of the O2O platform
The Suning partnership is part of Alibaba’s wider push into offline to online (O2), which is the key theme for Chinese tech firms in 2015 in the same way that mobile ecosystem was the key buzzword in 2014.
One of the key problems for online retail is that its difficult to actually view a product before making a purchase. Whilst this may not be important for small purchases, consumers typically don’t make large purchases without being sure about what they are buying.
The Alibaba-Suning tie up will likely see users being able to visit Suning stores to view a product that they are interested in, and then making the purchase online. But having a brick and mortar store also allows for users to easily address problems with the product. If it is broken, damaged or needs repairing, it is quite frankly a pain to send it back to an online retailer, whereas being able to visit a local Suning store would be much more convenient.
Alibaba also invested into the O2O platform Koubei during the quarter, which will help to expand its food delivery network. O2O has been key for Chinese online retailers in 2015, and culminated in Baidu pledging to invest RMB20bn into their own O2O platform in order to compete with Tencent’s Dianping.
While I don’t expect such a large commitment from Alibaba, management will certainly discuss the industry. Along with Tencent, it was quick to invest into the industry, having acquired a stake in one of the largest firms, Meituan. The investment into Koubei perhaps suggests a passive entry into the industry, as it allows established players to leverage themselves on Alibaba’s huge ecosystem.
Investment in Cainiao
Alibaba has been investing into its logistics subsidiary Cainiao in order to expand and improve its existing logistics network. This is a two-pronged strategy, because it is integral that ecommerce firms expand their presence in China’s western and more rural areas.
This is because these areas have very little access to online or brick and mortar stores, and the huge product range that online retailers can offer would see a notable rise in transactions. Secondly, firms have been further expanding their logistics networks in major Eastern cities, such as Beijing and Shanghai in order to offer next-day and same-day delivery.
At the end of July, Alibaba offered same-day delivery for its grocery business in Beijing as a trial run and management will be keen to discuss this. It paints a roadmap for the industry as a whole because it is inevitable that within 12 months, major Chinese cities will have access to same-day grocery delivery, meaning that large brick and mortar supermarkets will be redundant, as they simply haven’t embraced technology and home delivery.
JD.com has recently invested $700m into brick and mortar supermarket chain Yonghui Superstores with the intention of expanding their grocery delivery business, so Alibaba’s management will be keen to develop their own infrastructure.
From personal experience, JD.com will almost always deliver products quicker than Alibaba will, and this has caused JD.com’s active customer base to grow quickly. Alibaba needs to continue its investment in its logistics infrastructure in order to correct this, because as the two firms become ever-similar, the smallest details will likely be key to consumers choosing which platform to shop on.
Further growth in mobile
One of the surprises from the prior earnings release was mobile contributing to more than half of all transactions, with analysts expecting around 45%. This is important because its mobile ecosystem has been developing well, and the 50.67% contribution to transactions is higher than the industry average.
However, mobile only contributed to 30.11% of revenues, as the mobile monetisation rate is lower than that of PC. This has historically been true because of the long-term investment in PC monetisation strategies, and the rather rapid expansion of mobile as a means to shop online. The gap between PC and mobile monetisation rates has been closing, but we likely won’t see parity for another 18 months.
In the calendar first quarter, there was a decline in non-mobile, mobile and blended monetisation rates. However, the quarter covered the seasonally slow Chinese New Year period, which was particularly worse than prior years due to its timing in late February. Investors should be expecting to see a notable pickup in all monetisation rates in the calendar second quarter.
-- Edited by Adam Courtenay
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