Chinese e-commerce companies are turning to aggressive discounting and vouchers for the mid-year 618 shopping festival as they seek to revive consumer spending in the wake of the COVID-19 outbreak.
The three largest Chinese e-commerce companies — Alibaba Group Holding Ltd., JD.com Inc. and Pinduoduo Inc. — all reported slower revenue growth for the first quarter of 2020, the period that covered the worst of the pandemic. Soaring demand in some categories, such as online groceries, did not translate to better margins as logistics subsidies, commission waivers for marketplace merchants and extra costs incurred from protective equipment ate into profits.
The companies now hope that heavy discounts will spur consumers to spend more on higher-margin gadgets, apparel, makeup and beauty items to make up for losses suffered during the pandemic.
Although sales volumes have historically paled in comparison with the Singles Day shopping bonanza on Nov. 11, this year's 618 event, which runs for the first 18 days of June, could very well be an indicator of the recovery of Chinese consumption, particularly through online outlets.
The festival was initiated by JD.com as its anniversary celebration, though rivals including Alibaba, Suning.com and Pinduoduo have offered their own promotions in recent years. For JD.com, a sales boost would be well-timed with its debut on the Hong Kong Stock Exchange slated for June 18.
"Most of the e-commerce sales in China are driven from such festivals and holidays. The numbers came up pretty strong for the Women's Day festival [in March] and the recent Labour Day holidays," said Ker Zheng, marketing and partnerships manager at e-commerce consultancy Azoya.
In a move to ensure that consumers spend on higher margins items rather than daily essentials, JD.com is working with the Beijing municipal government to distribute 12.2 billion yuan worth of vouchers for electrical appliances. The company is counting on "hundreds of billions of discounts" offered at this festival to help deliver 20% to 30% revenue growth in the second quarter.
Rival Alibaba, which has said it would not "burn money" to increase sales, has pledged 14 billion yuan worth of coupons and subsidies for the 618 festival. Social commerce platform Pinduoduo said it would offer at least 100 million yuan in subsidies for every celebrity livestreaming promotion session.
Sales data shared by some of the companies has been promising so far. JD.com said sales of its air conditioner products reached 10 million yuan in the first 10 minutes of the festival, while Alibaba said sales on its livestreaming platform Taobao Live hit 2 billion yuan in the first 90 minutes after midnight on June 1.
Livestreaming has gained more prominence since the lockdown began as retailers were not able to carry out offline activities. Prior to the launch of the 618 event, JD.com announced a collaboration with short video app Kuaishou to allow shoppers to purchase directly on the app during livestreaming sessions. Pinduoduo said it sold 140 million yuan worth of products during a livestreaming session June 6 with actress Zhou Tao that drew 16 million viewers.
Slow road to recovery
The encouraging 618 figures are not entirely a surprise given the pent-up demand following the lockdown, said Charlie Chen, head of China consumer at investment bank China Renaissance. But extending those gains in the coming months will not be so easy.
"The second half of the year is not likely to see such a strong recovery," said Chen, citing the potential for rising unemployment due to slowing exports, trade tensions and fears of a second wave of infections.
The slowdown is unlikely to be seen across all categories. Analysis from Azoya, whose clients include players in the health, beauty, maternity and baby segments, show that sales in these categories have been stable over the past few months.
"It's not as bad as people make it out to be," said Zheng. "We will be fine, the health and beauty products are not very expensive at 300 to 400 yuan per transaction, unlike luxury items, it's pretty high margin and easy to ship," he added.
Noting the current Chinese domestic consumption trends, Alibaba projected 27.5% revenue growth for fiscal 2021, less than the 35% increase seen in fiscal 2020. Even then, Jefferies analysts wrote in a May 22 report that the guidance is still seen as a positive given the macroeconomic uncertainty.
Pinduoduo's business model and value-for-money proposition may be best suited to meeting consumer sentiment under the current circumstances. Since its launch in 2015, the company has focused on gaining market share in lower-tiered cities, even though this strategy has led to widening losses as its sales and marketing expenses ballooned 49% to 7.30 billion yuan for the quarter ended March 31.
A study by China Merchants Securities based on gross merchandise value and daily active user data in April and May shows that Pinduoduo was leading the recovery in the Chinese e-commerce market, followed by JD.com and Alibaba. According to its latest earnings report, Pinduoduo is rapidly gaining ground as its annual active buyers expanded to 628.1 million, closing in on Alibaba's 726 million.
It is no coincidence that both Alibaba and JD.com have launched new platforms catering to users from lower-tiered cities and followed suit with similarly aggressive marketing tactics.
"It is a capital intensive exercise that requires the e-commerce companies such as JD.com to expand logistics infrastructure in the rural areas," said Shawn Yang, managing director at investment bank Blue Lotus Capital.
Analysts believe that these pursuits present a near-term risk as the expansion would only have a modest impact on the revenue of Alibaba and JD.com.
"The margins will definitely go down because the consumption power is lower in those cities. They have to spend a lot to acquire customers, have to spend on logistics, so the amount of profit per customer is going to be lower than bigger cities," said Azoya's Zheng.
As of June 12, US$1 was equivalent to 7.08 yuan.