In the first part of our China e-commerce series (here), we examined the 20-year evolution of China's e-commerce sector from inception to the present, in addition to discussing key future trends that are expected to shape the country's e-commerce landscape over the coming years.
Next, we explored and analyzed each of China's three main e-commerce market players (i.e. Alibaba, JD, and Pinduoduo) in detail as part of individual company series (below):
Lastly, to conclude our China e-commerce series, we summarize and present each company side-by-side in this article for a business model and financial comparison, as well as discussion of future trajectory and challenges.
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Business Model and Overview
In the following table, we provide a qualitative summary of each company's core business model, along with a snapshot of key e-commerce and financial statistics that are explored in subsequent sections below.
We note that while JD and Pinduoduo are more or less entirely focused on the domestic Chinese e-commerce sector, Alibaba has a more diversified (albeit e-commerce dominant) business model where China retail commerce only accounts for 65% of the Group's total revenue (see here for further details). While it would be more accurate to evaluate Alibaba against its peers by zooming in specifically on the Group's China retail segment, such segment-specific data is not always readily available. For the purposes of this article, we include Group-level data as well as segment-level data where possible. We recommend referring to Alibaba (Part 3) for further information on Alibaba's segment breakdown.
Note: "1P" refers to direct selling whereas "3P" refers to third-party selling via a platform
We also note that Alibaba's fiscal year ends in March, whereas JD's and Pinduoduo's fiscal years coincide with the standard calendar year. Typically, this would require calendarization of results for a more accurate financial comparison. However, we present our analysis below without calendarizing Alibaba's metrics, since: (1) our goal is to compare the three e-commerce companies on a broader level rather than to obtain extremely precise numerical estimates for valuation, and (2) as will be clear throughout the article, the three companies' financial metrics differ substantially from one another to an extent that we don't think calendarization would have a meaningful impact on the resulting economic interpretation.
In this section, we focus on three fundamental e-commerce metrics: the number of annual active consumers (AACs) that make purchases on each platform, the gross merchandise value (GMV) of goods transacted via each platform, and the average GMV per AAC which captures the average dollar amount spent on a platform by each active consumer.
Pinduoduo Has The Highest Number of AACs, But Can This Last?
The number of AACs on Pinduoduo's platform has more than tripled over the 2017-2020 period to exceed JD in 2018 and Alibaba's China retail segment in 2020. Of course, as we have brought up previously in our Pinduoduo series, Pinduoduo has been relying heavily on various marketing strategies and particularly cash concessions (see Pinduoduo (Part 2)) to fuel user growth, and the question still remains as to how effectively Pinduoduo will be able to retain users once the platform cuts down on such incentives.
Alibaba's Strategy of Targeting the Average Consumer Seems To Be Winning
Alibaba outshadows its competitors in terms of both the total GMV transacted by users and the average GMV spent per active consumer. In 2020, the total GMV transacted on Alibaba's China retail platforms (namely Taobao and T-Mall) was 2.5 times the amount transacted on JD and almost four times the amount transacted on Pinduoduo, while the average Alibaba consumer spent 1.64 times more than the average JD user and 4.3 times more than the average Pinduoduo buyer the same year. It can be said that the relative success of Alibaba's predominantly middle-market commerce strategy perhaps reflects the rising emergence of China's middle class over the past two decades.
Is JD Stagnating?
Compared with its peers, JD seems to be growing at a noticeably slower rate both in terms of number of AACs and GMV transacted. JD's penetration rate is also substantially lower than Alibaba's and Pinduoduo's, an observation which can be explained by the company's primary focus on higher premium products which may not as yet appeal to a very large percentage of the Chinese population. As China's income levels continue to rise, however, we believe there is reason for JD's penetration rate to keep on increasing, although a more interesting question is whether or not JD will be able to increase its per user spending to exceed Alibaba's in the future.
Next, we extend the GMV data to calculate market share values for each of the three companies. Each company's market share is computed as the total GMV transacted on the company's platform divided by the combined GMV of all three companies.
Alibaba Dominates But Concedes Its Lower End Market to Pinduoduo
Alibaba dominates in terms of market share, although the Group's share of the market has gradually declined from almost 75% of the market to just over 60% during the 2017-2020 period. At the same time, Pinduoduo had a small but growing market share that increased from 3% of the market to 15%. The opposing trends exhibited by Alibaba and Pinduoduo could be the result of Alibaba's purging of what the Group considered to be sub-par sellers who ultimately migrated to Pinduoduo (see here), and/or the result of Pinduoduo's marketing and concession strategies that could have diverted more price-sensitive consumers from making certain purchases on the Alibaba platform (see here).
JD's Market Position Remains Stable
In contrast to its peers, JD maintained a consistent and moderate 24% market share throughout recent years. This is probably best explained by the (relatively) niche market nature of JD's core focus on 3C (computer, communication, and consumer electronics) and consumer durable products, which are sufficiently high in value to generate a moderate market share in spite of JD's low penetration rate, and generally do not coincide with the popular product categories purchased by consumers on Alibaba and Pinduoduo.
Of course, the disadvantage to JD's relatively segmented market is that the company could face limited growth potential unless it can compete successfully with Alibaba and Pinduoduo on other (generally lower premium) product categories. Additionally, given that JD handles the shipping and delivery process in-house, the question arises as to how JD will be able to effectively control costs in order to make it economically worthwhile to deliver lower value goods with higher order frequencies across a broader geographical region.
We now compare the three companies based on various financial metrics.
JD's revenue is by far the highest, due to the nature of the company's 1P-dominant business model where (more or less) a product's entire price is recorded as revenue as opposed to only the marketing fees and/or commissions earned from operating an online platform. For this reason, we do not think that revenue is a very meaningful metric to compare the three companies, although Alibaba and Pinduoduo can be evaluated against one another in this regard. Turning to the two 3P-dominant companies, we see that Alibaba's total revenue significantly exceeds Pinduoduo's, with revenue from Alibaba's core commerce segment being 7.3 times Pinduoduo's total revenue in 2020.
Turning to what we view as a fairer benchmark of company performance, operating income trends differ drastically across the three competitors. Alibaba is the only company among the three to have significant and positive operating income over the past four years, while JD's operating income has been gradually increasing and turned positive in 2019. In contrast, Pinduoduo has been operating at a loss since its founding, and there are no indications yet as to when the company will finally turn a profit.
Note: operating income for Alibaba's core commerce segment is higher than for the Group as a whole because Alibaba's non-commerce businesses are loss-making (see Alibaba (Part 3))
Gross Profit Margin
The gross profit margin metric is highly correlated with the extent to which a company is engaged in direct selling, as 1P selling is associated with significantly higher cost of goods sold (COGS). For this reason, JD has the lowest (but most constant) gross profit margin at only 15%, a value similar to that of Suning, a primarily offline but also online retailer that predominantly sells 3C goods. Alibaba's gross profit margin is moderate but declining due to the implementation of the Group's operationally and capitally intensive new retail strategy and international expansion, which involves offline selling, a greater reliance on local, national and international logistics, as well as significant infrastructure development (see Alibaba (Part 4)). In contrast, Pinduoduo has the highest gross profit margin as the company is focused almost entirely on third-party selling, although Pinduoduo's gross profit margin dropped in 2020 as it brought back its 1P initiative (see here).
Operating Profit Margin
Alibaba is the only company with a significant positive operating profit margin during the four year period from 2017 to 2020, although this margin has been decreasing as a result of the high COGS and reduced gross profit from the Group's new retail initiatives and international expansion. JD's operating profit margin is improving but still close to nonexistent, in part because of the company's already low gross profit margin and also because of high fulfillment expenses (approximately 50% of gross profit) as JD delivers most of the orders transacted on its platform using the company's own delivery arm. Lastly, Pinduoduo's large, negative operating margins are due to the company's hefty marketing expenses that comprise of advertising fees and cash concessions (explained here).
Conclusion, Future, and Challenges
As discussed in our introductory article (here), we expect Alibaba, JD, and Pinduoduo to gradually converge in business model as China's e-commerce landscape matures. In this conclusion section, we summarize each company's current position and highlight some of the challenges facing each company going forward.
Alibaba - The Quest For Diversification