Where to go after Alibaba lost the first place on China retail market

Alibaba officially dropped out of the top place in China’s retail e-commerce market last year, On March 17th, Pinduoduo revealed its Full Fiscal Year 2020 results, announcing a 788 million annual active customers (AAC), surpassing Alibaba’s 779 million to become the new buzziest e-commerce marketplace in China.

What has Alibaba been doing for the past half year?

Alibaba released its financial results for the quarter ended June 30, 2021 on August 3. Total revenue was RMB 205,740 million (US$31,865 million), up 34% from the previous year. Core commerce, which includes China and International Retail Marketplaces, accounted for RMB 180,241 million in revenue, or 87% of total revenue.

An interesting fact of this report is that annual number of global active consumers under its ecosystem is highlighted instead of that of Chinese domestic market.

“For the June quarter, global annual active consumers across the Alibaba Ecosystem reached 1.18 billion, an increase of 45 million from the March quarter, which includes 912 million consumers in China.”——Alibaba’s Q2 2021 Results

According to previous reports, its AAC on China retail market is always a business highlight.

“Annual active consumers on our China retail marketplaces reached 779 million for the twelve months period ended December 31, 2020, an increase of 22 million from the twelve months period ended September 30, 2020. ”—— Alibaba’s Q4 2020 Results

It's widely assumed that this action demonstrates Alibaba's shifting focus on the overall growth of its ecosystem, an effort to close the growing gap between itself and Pinduoduo in the Chinese retail market.

How did Alibaba and Pinduoduo get this way?

The most significant distinction between Alibaba and Pinduoduo is that the latter focuses mostly on so-called “sinking markets”, a term associated with less savvy customers mainly from lower-tier cities or rural areas. Compared with their higher educated urban counterparts, these customers exhibit significant difference in preferences and behavior patterns.

Pinduoduo ascended to its current popularity initially by low prices, an outcome attained by removing middlemen in supply chain and focus on everyday consumer products. Pinduoduo uses a group buying function to quickly amass a great number of customers based off the high demand for these basic commodities. When a user chooses to buy an item as a member of a group, the price of the item drops as more individuals participate. This encourages consumers to share links to the items they're buying on social networks, particularly WeChat, with their friends and family. The fact that PDD can be accessible via WeChat, which has over a billion monthly users, has played a big role in its growth.

In 2018, Taobao had over 500 million users while WeChat had over 1 billion. Between the two numbers was a gigantic yet unexplored market, distributed in third- or lower-tier cities, a lot of them senior citizens.

This group has already been online and depends on the WeChat as their chief source of information. Therefore, WeChat naturally became an important channel for Pinduoduo to reach new users in the sinking market.

Colin Huang, Pinduoduo’s founder and previous CEO mentioned before that the early development of Pinduoduo can be attributed to the creation of a sharing scene on WeChat. “We didn't have data in the beginning, so we relied on individuals to figure out what your and your friends' traits were”, said Huang.

Pinduoduo has also attracted a huge number of consumers due to its constant promotions, such as a RMB 10 billion subsidy campaign. Nowadays, Pinduoduo has diversified its offerings to be all-encompassing, but it is still largely based on sinking market to provide customers with a "value for money" consumption experience.

Alibaba fought back with Taobao Deals, Alibaba's Value-for-Money e-commerce platform to provide consumers with more high quality, value-for-money products. It appeared to be on its way to gain a foothold in less-developed areas, as it’s mentioned in its recent report: “We continue to increase penetration rate in less-developed areas, reflecting our success in broadening product offerings to meet diverse consumer demand.”

Some future directions of Alibaba we may foresee

Alibaba announced on October 9th that Taobao Deals will debut a WeChat scan code payment function. Some users have started beta testing it now, and it will be fully accessible by the Double 11 shopping festival. In other words, shoppers can utilize WeChat to pay for purchases on Taobao Deals, breaking the long-standing barrier between the two internet powerhouses. According to the report, Taobao Deals is deepening its direct collaboration with original manufacturers to design, produce and distribute products that are innovative, cost-effective and quality assured. For the twelve months ended June 30, 2021, annual active consumers of Taobao Deals grew to over 190 million.

Daniel Zhang, Chairman and Chief Executive Officer of Alibaba Group, has also mentioned in earnings call last quarter that there will still be a huge population space in the sinking market in the future, and Taobao Deal is designed specifically for this segment of price-sensitive consumers, in which it will continue to invest in the future.