The collapse of Alibaba’s New Retail? - Part 1: Shopping Malls & Home Furnishing
Have Alibaba's enormous offline investments paid off or been a failure?
Alibaba mascots at its Qinchengli Shopping Mall, Hangzhou, Summer 2023.
Things that caught our attention
Intime - ‘Renovating an old town’
Qinchengli - Where did the Alibaba stores go?
Home furnishing - ‘A big step from heaven to earth’
Things that caught our attention
Owing to the price war with Cotti Coffee, Luckin’s profit margin dropped 10.3% in Q4 2023. Luckin’s 2023 revenue almost doubled compared to 2022 and surpassed Starbucks China's annual revenue for the first time. In 2023, Luckin opened more than 8,000 stores, bringing the total to more than 16,000. (source) Cotti claims to have opened 7,000 stores worldwide (source), but rumours about hundreds of store closures and complaining franchisees abound. (source)
Fresh food front-end warehouse operator Dingdong Maicai reported its first (small) annual non-GAAP profitability of RMB 16.3 million. (source) The company did have to close down 38 locations in Guangdong to maintain this fragile profitability. (source)
While Rui Ma isn’t writing any articles for Tech Buzz China at the moment, she has become much more active on Twitter (X) lately. Here’s two of her recent posts:
Introduction
At the Alibaba Cloud Conference in October 2016, Jack Ma first mentioned ‘New Retail’, the seamless merge of online and offline channels. For the next four years or so, the topic featured prominently in Alibaba’s PR machine while it kicked off several New Retail projects.
Hema Xiansheng supermarkets (Freshippo).
Lingshou Tong (Integrated Retail) for convenience stores.
Co-branded ‘smart Tmall stores’ (offline stores of western brands featuring Alibaba’s technology).
Investments in offline retail, including Intime, Suning, Sun Art/RT-Mart and home furnishing businesses.
The acquisition of Ele.me for local services like meal delivery.
In case you need a little reminder of how New Retail was presented at the time, here’s part of a promo clip by Alibaba.
Source: Alizila, November 2017.
Back in 2016, Jack Ma claimed that pure e-commerce players would soon face tremendous challenges and ‘e-commerce’ would be replaced by ‘New Retail’ in 10-20 years. Little did Jack know that now, eight years later, it is Alibaba that is under pressure from new pure online players like Douyin, Kuaishou and especially Pinduoduo. Realising what had happened, in May 2023, Ma called on the company to ‘return to Taobao, return to the user, return to the internet’.
The true father of New Retail, Daniel Zhang, suddenly announced his departure as Alibaba chairman and CEO of the Alibaba Cloud business in September 2023, and the veterans Joseph Tsai and Eddy Wu took over the company's leadership.
Early February 2024, news broke that Alibaba was considering selling Intime, signalling that it was rethinking its new retail strategy launched eight years earlier. Alibaba reached out to several firms to see if they were interested in buying the network of shopping malls around the time that Joe Tsai replaced Daniel Zhang. Talks with at least one potential buyer were still continuing in January 2024. [1]
It has become obvious that the company is putting New Retail initiatives that were once presented as the best thing since sliced bread in reverse. In our August article “Whatever Happened to New Retail?” we discussed how the support of convenience stores (Lingshou Tong) had largely perished and how co-branded Tmall stores had disappeared. Now, rumours are going around that Alibaba is considering selling Ele.me to Bytedance and was looking into selling off more of its physical retail investments. Even Hema (Freshippo), the most prominent and one of the more successful New Retail initiatives has postponed plans for an IPO and might be part of that sale.
It seems Daniel Zhang’s New Retail empire is quickly collapsing …
In this series of two articles our research editor Ed Sander will explore Alibaba’s investments in offline retail that it is now considering selling. How have these initiatives fared since they were introduced around 2016-2017 under the New Retail umbrella? Has New Retail been a total failure?
In this first article, we will look at Alibaba’s investment in shopping malls, department stores and the home furniture sector. In the second article, which will follow in two weeks, we look at its attempts to modernise the hypermarket and supermarket sector.
The first section, on Alibaba’s crisis, is available to all readers. The exploration of Alibaba’s investments in shopping malls, department stores and home furnishing chains is only available to paying subscribers.
We hope you enjoy this new series.
Freya Zhang and Ed Sander, Research Editors
Rui Ma, Consulting Editor
(click on the images above for information on the Tech Buzz China team)
P.S. It’s been a year since we moved Tech Buzz China to Substack and started our new format of bi-weekly deep-dives into specific topics. We would love to hear your feedback about this new set-up. Drop us an email with your thoughts at team@techbuzzchina.com.
Crisis at Alibaba
To some, the sudden turnaround at Alibaba, including the 1+6+N break-up, the departure of Daniel Zhang and the intended sale of new retail initiatives, might have come as a shock. But looking at it from a different perspective, it was actually long overdue.
I’ve been using the slide below in keynotes for several years.
In 2021, it was already clear what the impact of Pinduoduo and Douyin e-commerce had been on Alibaba’s market share. When comparing 2013 to Goldman Sachs’ forecast for 2025, it looked even more dramatic.
Existing market players like Alibaba had seriously underestimated the threat of Pinduoduo. When it launched some eight years ago, it was dismissed by most existing players, just like Temu is dismissed by some now (take learnings from what happened in China, folks!).
While especially known for white-label products popular with the ‘sinking market’ of lower-tier cities and lower-income groups, Pinduoduo eventually managed to get brand products on its platform and penetrate other cities and income groups. By 2023, e-commerce companies hurriedly changed their strategies and were falling over each other trying to offer the same low prices as Pinduoduo. As they say in China, first, other internet companies dismissed Pinduoduo, then they paid attention to Pinduoduo, and now they all want to be Pinduoduo.
When Pinduoduo temporarily overtook Alibaba in market value at the end of November, it came as a shock to many. When people expressed their feelings about it on Alibaba’s intranet, Jack Ma responded: "Excellent. Please give me more constructive comments and suggestions. Especially innovative ideas. I believe that everyone in Alibaba today is watching and listening. I firmly believe that Alibaba will change. All great companies are born in winter. The era of AI e-commerce has just begun, and it is an opportunity and a challenge for everyone. I would like to congratulate PDD on its decision-making, execution and efforts in the past few years. Everyone has been awesome, but those who can reform for tomorrow will be awesome. And organisations that are willing to pay any price and sacrifice are respected. Back to our mission and vision, Alibaba people, come on! Partner Jack Ma." [2]
Considering how clear the signs already were in 2021, it is remarkable how long it took for Alibaba to take action. Well, it’s not like they just sat and waited. They tried to use their lesser-known daily deals platform Juhuasuan and launched Taote as a counter-attack to Pinduoduo, but they haven’t had the desired result.
Meanwhile, elsewhere in the company, new retail initiatives were costing Alibaba billions. But in May 2023, Jack Ma’s patience had seemingly run out. Formerly retired but still a large shareholder and decision-maker in the company, the founder called the top managers of the domestic e-commerce division (‘Taotian’) in for a meeting. Jack used examples such as Nokia and Kodak to stress the severe threat that the domestic e-commerce business was under. He mentioned how companies can go from being the industry benchmark to death in 6 to 12 months. And it could happen even faster in the internet industry. [3]
Jack told the team that the methodologies for Alibaba’s success no longer applied and should be changed quickly. In his opinion Taotian (the name used for the combined Taobao and Tmall units) needed to flatten its organisation and return to Taobao, return to the users and return to the internet.
What did Ma mean by those three returns? To understand this, we must first explore how Taobao and Tmall developed in the 2010s.
Diverting traffic
Alibaba’s initial success had been largely built on Taobao, which was launched in 2004 as a defensive strategy against eBay at a time when Alibaba was primarily an international B2B sourcing platform, alibaba.com. The way Alibaba, the ‘crocodile in the Yangtze’, defeated eBay, the ‘shark from the ocean’ is well documented in books like The House That Jack Ma Built and the documentary Crocodile in the Yangtze.
But Taobao (淘宝) was never a big generator of revenue. It was only after 2008’s launch of Tmall (天猫, Tian Mao), a B2C platform exclusively for brands and their authorised resellers, that the money started pouring in in the form of commissions and advertising.
When Taobao and Tmall became independent units in 2011, Daniel Zhang thought they both could have different business models. Taobao would earn advertising fees, while Tmall would earn sales commissions. But the rise of the mobile internet made it difficult to separate the two. In 2014, Alibaba turned Taobao into the most used shopping app in China, but while Tmall had its own app, it was nothing more than a subset of what was available on Taobao. There was no incentive for consumers to install a second app with fewer products. [4]
After the 2014 IPO, Alibaba started setting up business development departments in various countries, searching for brands that eagerly wanted to sell their goods to Chinese consumers through Tmall Global, the inbound cross-border section of Tmall.
The income of Taobao + Tmall consists of ‘customer management income’ (advertising fees) and commissions over merchants' turnover. The ratio between the two has been 2:1 for many years. After the third quarter of 2020, Alibaba only reports the sum of the two. It has, however, been reported that 70% of total income comes from Tmall brand merchants. [4]
As far as traffic distribution between Taobao and Tmall was concerned, the highest ROI would win, and this was the commission by brands on Tmall. Meanwhile, small merchants found it harder and harder to sell their goods on Taobao. Some went to try their luck elsewhere, like on Pinduoduo. Tmall squeezed out the Taobao merchants, and the richness of products decreased. [4]
At the meeting, Jack Ma mentioned how the company’s advertising platform, Alimama, had made easy money by selling traffic on Tmall to brands. But Alimama had originally been launched to enable even the smallest merchant to buy and sell advertisements on Taobao. [3]
Consumption upgrade, consumption downgrade
Another reason why Tmall received priority among the platforms was that Alibaba was convinced that the country would see a continued ‘consumption upgrade’, with disposable incomes increasing and more and more consumers going for high-quality goods by trustworthy brands, both domestic (Tmall) and international (Tmall Global).
Daniel Zhang started as CFO of Taobao in 2007 and established Tmall, where brands would sell and advertise goods. Consumer confidence was high when Zhang first became CEO and later chairman of Alibaba Group, so the company continued to bet on ‘consumption upgrade’. [5]
Alibaba wasn’t wrong. Between 2014 and 2018, the YoY growth rate of non-food CPI climbed from 0.5% to 2.5%. [6] Based on the logic of consumption upgrading, Daniel Zhang promoted the integration of online and offline retail, incubating Hema, investing in Sun Art Retail and acquiring Ele.me. [7]
But things took a turn for the worse at the end of 2018, when the YoY growth rate began to decline. In 2019 it fell to about 1%. Alibaba failed to see how the consumer market was changing. At the end of 2019 Daniel Zhang still said in an interview: "We firmly believe that China's future economic growth must be consumption-driven and experience-driven. China now has about 300 million middle class, and within five years, this number will double." [6]
Trade frictions, the pandemic and economic malaise have stagnated the growth of the middle class, and people have shifted from luxury lifestyles to inexpensive and practical consumption. [5] A member of the Lianshang Senior Advisory Group recently described what happened in the last few years as follows: [8]
The middle class upgraded their consumption leading to price increases for luxury goods.
As the middle class’s earnings weaken, consumption downgrades, outlet and discount stores benefit.
Those who could once afford branded products have been downgrading to white-label products.
Those who used to buy white-label products are facing job instability, unemployment, etc. This leads to further loss of consumption power and reduced purchase frequency of white-label products.
Alibaba’s management misjudged the consumption upgrade. It trends and kept investing in new retail and missed the opportunity to tap into the ‘sinking market’ of lower tier cities that Pinduoduo broke open. Meanwhile, in 2020, Douyin stopped providing e-commerce traffic to Taobao and launched in-app e-commerce. By now, 98% of the brands that sell on Taobao and Tmall also sell on Douyin. Together, the GMV of Douyin and Pinduoduo is more than half of Alibaba’s GMV. [5] The rest is history.
Was it ignorance or arrogance?
Alibaba’s challenges are largely related to the side effects of the policies that were rolled out under Daniel Zhang, who became CEO in 2015 and chairman in 2019. This is not to say that he is solely to blame for the company's current troubles though. After all, in 2016, Jack Ma took every opportunity to promote New Retail as the only sensible future for both online and offline businesses.
Zhang worked at Alibaba Group for 16 years and helped build the company to annual sales exceeding one trillion dollars, making it the most valuable company in China for a while. But during his time, Alibaba also ignored the changes in consumption and let its challengers grow rapidly until they became a real threat. But although he failed to suppress Pinduoduo, the people at Alibaba still think Zhang is “a person that is smarter and more diligent than you”. [5]
Return to Taobao, Return to the Users, Return to the Internet
So, arriving in 2023, Jack Ma told the Taotian managers to return to Taobao, return to the users, return to the internet.
‘Return to Taobao’ refers to changing the priorities between the Taobao and Tmall platforms. Returning to Taobao means getting back to the roots of the company and supporting small and medium businesses while giving the consumers a richer offering of inexpensive goods. Traffic should flow more in the direction of Taobao again. In April, the Taotian division had already reorganised into three Industry Development Departments: [4]
Richness: discovering inexpensive products and expanding more individual businesses. The department included Taobao clothing, trendy toys, pets, jewellery, etc., Taote, domestic wholesale platform 1688 and other businesses. On May 10th, this department was renamed Small & Medium Enterprise Development Center.
Brand: Basically Tmall: apparel, sports and outdoor, fast-moving consumer goods, consumer electronics, mobile Tmall, Tmall International and other businesses.
High-frequency: Tmall Supermarket, Taocaicai, Taoxianda, fresh food and other businesses.
‘Returning to the user’ is something that already started in 2022, when Alibaba announced it would no longer be using GMV as an indicator of its success and had stopped sharing sales details of Double 11. Instead, it would start prioritising user experience and retention. KPI’s shifted from Annual Active Consumers (AAC), which was already peaking, to Daily Active Users (DAU) for app stickiness, and repurchase rate. After being temporarily overtaken by Pinduoduo, Taobao’s DAU in March 2023 reached 377 million. [3]
‘Return to the Internet’ has raised the most questions, but its meaning has become clearer in the past few months. Under Alibaba’s New Retail, the company has invested heavily in offline assets and infrastructure. It now wants to roll back some of its New Retail initiatives and sell assets like Intime, RT-Mart and maybe even Ele.me. The main focus of the company should once again be online business.
In the rest of this article and the upcoming second part, we will explore Alibaba’s steps into offline retail, its attempts to implement New Retail and where these companies stand now.