Click to read the original article for details Source: Baobian (ID: baobiannews) Author: Li Xin This round of sell-offs in Chinese stocks may make many realize that high volatility is a permanent feature of financial markets, and there are no stocks that only rise without falling. The education sector needs no further explanation; it was once full of bull stocks, but this year it has plummeted due to multiple factors. However, many may not have noticed that the e-commerce giants, with their strong performance, have also seen significant declines in their stock prices, with an average decline close to a halving. Some netizens joked that during this year's 618 shopping festival, the biggest discounts might not be on the goods you buy online, but on the stock prices of e-commerce giants. If it were just antitrust, only Alibaba should have fallen in the e-commerce sector, but calculated from each company's peak, Alibaba and JD.com have both fallen over 40%, and Pinduoduo, whose stock price was once extremely resilient, has fallen nearly 60%, with its market value dropping to around $100 billion. In the past few years, e-commerce stocks have been important targets for global investment institutions, but now many institutions are reducing their holdings. What's wrong with e-commerce platforms? Is it a real decline due to industry problems, or is it irrational market volatility? Slowing Growth Becomes the "New Normal" "Growth is the solution to all problems," is a phrase often repeated by many economists. Only by achieving growth can we provide time and ideas for solving many future problems. Ralph Larsen, former CEO of Johnson & Johnson, also said: "Growth is like pure oxygen; it is the entry point to solving all enterprise problems." However, from operating data, although the gross merchandise volume (GMV) of the three major e-commerce platforms is still growing, the growth rate has slowed. The most typical is Pinduoduo, whose GMV growth rate has fallen from over 200% to 66%. Alibaba's GMV growth rate in 2020 was about 15%, just barely outpacing the market. According to data from the National Bureau of Statistics, in 2020, online retail sales of physical goods reached 9.76 trillion yuan, an increase of 14.8%. Why has GMV growth declined? The core comes from two key variables driving GMV changes: annual active buyers (AAC) and annual per capita spending (ARPU). Since 2018, the growth of annual active buyers for Alibaba and Pinduoduo has generally slowed. Due to its large base, Alibaba's AAC growth rate (%) fell to single digits in 2020, while Pinduoduo's AAC growth rate fell from over 70% to 31%. JD.com's overall growth rate has improved since 2018, but slowed slightly in the first quarter of this year. From the perspective of annual per capita spending, in the past three years, there has been almost no significant growth for the three platforms. JD.com's ARPU even declined slightly in 2020. Behind these phenomena is the near saturation of online shopping user growth. According to QuestMobile data, the scale of mobile internet users in China has shifted from linear growth to a stage of fluctuating growth, with growth almost peaking. In addition, by the end of 2020, the number of online shopping users in China had reached 782 million, accounting for 60% of the total population and 80% of netizens, with growth also facing a slowdown. However, the slowdown in GMV growth is not the end of the world. If the industry as a whole still has room for growth, medium-to-low speed growth is not unacceptable. The e-commerce industry is exactly facing this situation. According to data from the National Bureau of Statistics, as of May this year, the online penetration rate of physical goods in China was only 23.9%. Excluding categories such as petroleum, automobiles, and cigarettes, the actual online penetration rate in 2020 was only 30.7%. Penetration rate is a key indicator, which refers to the ratio of existing demand to potential demand for a product. A penetration rate of just over 20% often indicates that the industry still has development opportunities. There is a famous innovation diffusion theory in communication studies: any new thing, from being unknown to widely known, spreads at an uneven pace. At first, the spread of new things is relatively slow, but when the scale of people accepting it (i.e., penetration rate) reaches a critical point (generally 10%-25%), the speed of diffusion suddenly accelerates. The principle behind this comes from the herd effect. The first to try are a minority, but when more and more people try it and reach a certain scale, obvious following occurs. So from the overall industry perspective, e-commerce is still a promising track. However, the above is only an overall conclusion. From a specific industry perspective, an explosion still needs time. The reason for saying this is that categories that are easy to "go online," such as home appliances, electronic products, and clothing, shoes, and bags, already have high online penetration rates, with some close to 40%. This is a key reason for the short-term decline in GMV growth. Future industry growth will require the penetration rate of new categories such as beauty, healthcare, fresh food, food and beverages, and daily necessities to rise. This also explains why giants are betting on fresh food e-commerce and community group buying. The essential reason is that this business model makes it possible for high-frequency, low-unit-price, and perishable goods like fresh food to "go online." Taking community group buying as an example, the core logic of this model is "online pre-sale, purchase based on sales, centralized distribution, and self-pickup at stores." "Online pre-sale, purchase based on sales" can reduce the loss cost during fresh food storage; "centralized distribution, self-pickup at stores" means that after the central warehouse receives the goods, it sends them to various pickup points, where consumers pick them up themselves, or the group leader is responsible for the "last mile" delivery, thereby significantly reducing logistics and fulfillment costs. In fact, for e-commerce giants, the real problem at present is the fierce competition from within and outside the industry. Internal Competition: Downward and Upward Expansion The current e-commerce landscape temporarily presents an "asymmetric" tripartite division. Data from the National Bureau of Statistics shows that in 2020, total online retail sales nationwide were 11.76 trillion yuan, while the transaction volume of Alibaba, JD.com, and Pinduoduo reached 1,138.16 billion yuan, accounting for 97%. However, the share distribution is uneven: Alibaba 61%, JD.com 22%, and Pinduoduo 14%. The tripartite structure is not natural; it has evolved gradually. It should be noted that in 2015, Alibaba was dominant, with a share close to 80%. The reason JD.com and Pinduoduo were able to tear open two gaps in e-commerce competition lies in their unique business propositions. Since 2007, JD.com has continuously built its own logistics, optimized user experience, and implanted the keywords "genuine products" and "fast delivery" in users' minds. Pinduoduo, on the other hand, completed the reconstruction of the upstream and downstream value network by integrating original Taobao low-end merchants, coupled with the demographic dividend of internet users in third- to sixth-tier cities and the support of WeChat social fission, achieving a breakthrough. From the breakthroughs of JD.com and Pinduoduo, we can see that if the industry pie is still growing, even if the leader has a leading market share, there are still opportunities. Because the new pie released each year is large, the leader may still be overtaken or have its share taken by peers. Currently, the competition among the three major e-commerce platforms mainly revolves around Alibaba and JD.com's "downward expansion" and Pinduoduo's "upward expansion." The lower-tier market is a piece of soil to be cultivated. In the first quarter of this year, total online retail sales nationwide reached 2.81 trillion yuan, a year-on-year increase of 29.9%. However, rural online retail sales reached 439.79 billion yuan, a year-on-year increase of 35.3%, far higher than the national total. For downward expansion, Alibaba's strategy is to focus on community group buying and Taote (formerly Taobao Special Edition). According to a report by LatePost, in March this year, Alibaba established the MMC Business Group, focusing on community group buying. The business group integrated the community group buying business of Retail Link and Hema Market, led by Alibaba partner and President of the B2B Business Group, Dai Shan. In July, the Hema Business Group also established a new NB (Neighbor Business) division, which also provides "order today, pick up tomorrow" services. Another move by Alibaba was investing in Shihuituan. Taking Alibaba's important chess piece, Hema Market, as an example, it is a life service platform that directly goes down to communities. Hema Market's approach attempts to integrate 6 million small shops in China and Alibaba's supply chain capabilities, provide digital services to small shops, and at the same time, based on community needs, prepare dishes and daily necessities in advance, reducing consumer purchase costs and improving product quality. Taote is seen by the outside world as Alibaba's business to benchmark against Pinduoduo. In the 2021 fiscal year report, Alibaba mentioned that Taote's annual active users exceeded 150 million, contributing about 70% of Alibaba's new annual active buyers (AAC). Wang Hai, Alibaba's vice president and general manager of the C2M Business Division, once said that in the future, Taote will build a full-category source direct supply system, while focusing on industrial consumer goods and agricultural products. It is worth noting that the agricultural products that Alibaba is getting involved in have always been Pinduoduo's competitive advantage. Ping An Securities mentioned in a report that agricultural products account for about five times more of Pinduoduo's total GMV than peers, and in the first quarter of 2021, agriculture-related orders increased by more than 300% year-on-year. JD.com, on the other hand, restructured its Jingxi Business Group targeting the lower-tier market last year, including the discount shopping platform Jingxi, the community shopping platform Jingxi Pinpin, and Jingxi Tong, which serves small and medium convenience stores. In addition, Liu Qiangdong also personally went to the front line to supervise the community group buying business. According to JD.com's financial reports, as of the first quarter of this year, the Jingxi Business Group contributed about 80% of JD.com's new annual active buyers (AAC). Facing the pincer attack of the two giants, Pinduoduo, on the one hand, is making efforts to consolidate the lower-tier market with "Duoduo Maicai," and on the other hand, is continuously increasing average order value and marketing revenue, such as attracting more brand merchants to settle in. Previously, Pinduoduo management stated that since the beginning of the year, brands such as Johnson & Johnson, Unilever, and Midea have reached in-depth strategic cooperation with Pinduoduo. In addition, the first-quarter financial report of Pinduoduo also pointed out that since March, Pinduoduo has officially charged a 1-3% commission on products in the "Billion Subsidy" program, while expanding the product categories in the program to include agricultural products and fast-moving consumer goods, thereby further increasing the commission rate. Although each company is making a lot of moves, from the financial report data, under competition, the gross margins of the three major platforms have collectively declined. Gross margin is a key indicator of a company's profitability, indicating how much money can be used to cover various operating expenses and generate profit for every 1 yuan of revenue after deducting the cost of sales. A decline in gross margin can have two possibilities: either it means the company is actively sacrificing profits to grab market share, or it lacks competitiveness and has to sacrifice profits. But in any case, the change in this data is a trace left by enterprises in fierce competition. External Competition: Opponents Are Never Just Peers While the three giants are locked in fierce battle, perhaps no one expected that a more ferocious opponent might come from the short video platforms next door. In the past two years, the rise of short video platforms such as Douyin and Kuaishou has not only changed the distribution of user traffic time but also evolved their own live-streaming e-commerce businesses. According to Kuaishou's financial report, in the first quarter, Kuaishou's live-streaming e-commerce GMV was 118.559 billion yuan, nearly 300% of the same period in 2020, making it Kuaishou's fastest-growing business segment. Douyin E-commerce previously disclosed that from January to December 2020, its overall GMV grew 11.3 times. However, in 2019 and 2020, the two platforms were quite low-key. For example, during the 618 period in 2020, Kuaishou, whose annual GMV had reached 350 billion yuan, chose to cooperate with JD.com, while Douyin, with the idea of "building good relationships," used mini-programs to connect with third-party platforms such as JD.com and Suning for 618. However, as the antitrust curtain opened and "choosing one of two" became history, the new "e-commerce waves" like Douyin and Kuaishou in 2021 have been particularly active. Kuaishou changed its previous supporting role and personally hosted the first live-streaming e-commerce gala with Jiangsu Satellite TV and Zhejiang Satellite TV - "Kuaishou 616 Sincere Night." Douyin, as early as April 22, held an online Douyin 618 merchant recruitment conference, preparing for 618 in advance, and also proposed the concept of "interest e-commerce." In fact, live-streaming e-commerce is a highly promising sub-track of e-commerce. According to iResearch forecasts, by 2025, the scale of live-streaming e-commerce is expected to reach 6.4 trillion yuan, with a penetration rate of 23.9%. Why can live-streaming e-commerce become popular? Overall, in addition to the longer time people spent at home due to the pandemic and the platform's traffic allocation dividends, more importantly, live-streaming e-commerce mobilizes more senses of users, with information and impact far exceeding text and images. Specifically, the live-streaming e-commerce logic of the three core platforms, Taobao, Douyin, and Kuaishou, is different. Taobao Live uses "search" as the main consumption path, i.e., the "people find goods" model. Douyin Live follows the "content path" of interest e-commerce. Through algorithms, it selects high-quality content and accurately recommends and distributes products to users. This model, which uses "interest tags" as a medium to precisely match product content with potential users, forms a "browse and buy" discovery-style consumption, essentially "goods find people." Kuaishou Live, on the other hand, takes another path, emphasizing the deep trust between anchors and fans. According to Kuaishou's financial report, the average repurchase rate of its e-commerce users increased from 45% in 2019 to 65% in 2020. By comparison, we can see that although live-streaming e-commerce presents a tripartite situation, each player uses a "differentiated competition" approach. Differentiated competition is a good offensive strategy, especially for startups. Li Shanyou, founder of Chaos University, once stated a startup principle: "Better to be different than to be better." This means that to survive in fierce competition, enterprises should try not to compete head-on with powerful giants, but use differentiation to win. Clayton Christensen once gave a set of numbers in the famous book "The Innovator's Dilemma": if a startup directly competes head-on with existing giants, the success rate is only 6%, but if it avoids the giants and jumps to a new value network, the success rate increases to 37%. Corresponding to the cases of giants that have risen in China in recent years: Pinduoduo focused on the lower-tier market outside the Fifth Ring Road in its early days, forming a differentiation with Tmall and JD.com, and then rose rapidly; Meituan's rise is largely due to its focus on life service e-commerce such as food delivery, forming a differentiation with Alibaba's physical goods e-commerce. It can be seen that due to different strategies, the future market competition will be extremely fierce. If we expand our perspective, live-streaming e-commerce as a new business form itself, in a sense, also forms differentiated competition with traditional text-and-image and offline supermarkets. And with its low penetration rate, live-streaming e-commerce will inevitably impact other e-commerce models in the future. At this level, existing e-commerce giants and potential e-commerce giants will inevitably have a battle in the future. Overall, due to the rapid increase in penetration of new categories, the e-commerce industry can still maintain a certain growth rate in the coming years. But as Liu Cixin wrote in "The Three-Body Problem," "To destroy you is none of your business." The emergence of new models may lead to a restructuring of the competitive landscape of the entire industry in the future, which makes the fundamentals of current players uncertain. From the perspective of stock prices, financial markets price stocks based on expectations. Continuously exceeding expectations in fundamentals is the fundamental driving force for stock price increases. So for enterprises, how to maintain competitive advantage? How to stabilize and reverse market expectations? These are key issues that need to be considered at present. -END- PS: The 2021 (4th) China FMCG Conference, hosted by "New Distribution," is about to open in Shanghai. Focusing on industry trends + practical cases + connecting growth as the core, 3,000 FMCG practitioners will gather for the event. 10 themed forums covering new retail O2O, community group buying, short video live-streaming e-commerce, distributor transformation, new consumer brand rise, new alcoholic beverage interpretation, distribution B2B supply chain, omni-channel marketing, B2B2C new technology applications, etc., with operators in each sub-field bringing the latest case interpretations. Some of the confirmed heavyweight guests so far include: 1. Tao Shiquan, founder of Jiangxiaobai; 2. Yao Xuhong, general manager of Meiyijia Holdings Co., Ltd.; 3. Lu Xiuqiong, global expert partner at Bain & Company and former vice president of marketing for Coca-Cola China; 4. Chen Xiaodong, senior vice president of Nestlé Greater China; 5. Zhang Fujun, president of Lee Kum Kee Sauce Group China; 6. Bi Chaojiao, general manager of China Resources Snow Breweries (China) Marketing Center; 7. Yang Hongbin, vice president of Junlebao Dairy Group; 8. Yang Shun, COO of Lipton Greater China; 9. Zhang Yipeng, general manager of Kuaishou E-commerce SKA Brand Operations Center; 10. Li De, e-commerce general manager of Gold Hong Ye Paper Group... A grand event for FMCG people, you must be there! Are you "watching" me?