Alibaba has been focusing on transformation throughout fiscal year 2024, and this theme is set to continue based on its latest financial results.

Alibaba's financial results for the first quarter of fiscal year 2025, announced on August 15, showed revenue of RMB 243.24 billion, up 4% year-on-year. Operating profit was RMB 35.989 billion, down 15% year-on-year. Adjusted EBITA was RMB 45.035 billion, down 1% year-on-year.

Net profit for the quarter was RMB 24.022 billion, down 27% year-on-year, which the company attributed to decreased operating profit and increased investment impairments.

Since last year, Alibaba has emphasized practicality across all business lines, focusing on cash conversion efficiency. This quarter, the cloud computing division maintained accelerated growth, while “N” series businesses such as local services and entertainment continued to reduce losses. However, Taobao Group's Q1 revenue was RMB 113.373 billion, down 1% year-on-year.

According to the National Bureau of Statistics, China's total retail sales of consumer goods reached RMB 3.7757 trillion in July, up 2.7% year-on-year, an acceleration of 0.7 percentage points from the previous month. From January to July, total retail sales of consumer goods amounted to RMB 27.3726 trillion, up 3.5% year-on-year.

Given the current consumption landscape, Taobao's growth in GMV and transaction frequency to some extent validates the strategic value of its recent adjustments. However, customer management revenue has yet to keep pace with this upward trend.

Essentially, Alibaba is still in the midst of a long-term rectification process aimed at getting back on track. Wu Yongming stated during a conference call that he expects Taobao's CMR growth rate to gradually match its GMV growth rate in the coming quarters, while most other businesses will achieve break-even within 1-2 years and gradually scale up profits. Alibaba's current priority is striking a dynamic balance between scale and efficiency, with Taobao being the most pressing concern.

01. E-commerce urgently needs to fill the GAP

This year's 618 shopping festival marked a significant change in Taobao's rules.

The festival period began on May 20, and the long-standing pre-sale mechanism was abolished. Consumers sought straightforward low prices, prompting the platform to simplify its promotional mechanics, aligning with its earlier slogan of “returning to users.”

Furthermore, Taobao's two main portals underwent a makeover in May. The mobile app became more streamlined, reducing its main channels from three to two (eliminating “Taobao Good Prices” and “Taobao Groceries”), and the web version also underwent significant interface and interaction improvements to enhance user experience.

These adjustments led to an increase in both the number of buyers and purchase frequency, reflected in Taobao's year-on-year high single-digit GMV growth and double-digit order growth. Additionally, 88VIP membership numbers grew by double digits, exceeding 42 million.

Despite these improvements, Taobao's China commercial retail business revenue still declined by 2% year-on-year in Q1. The company attributed this to a 9% decrease in direct sales revenue, but the more notable issue is that customer management revenue grew by only 1% year-on-year, with GMV growth offset by a decrease in monetization rate.

The decline in monetization rate is linked to recent model adjustments. Under the banner of “Returning to Taobao,” small and medium-sized merchants gained prominence, but their monetization rates are lower than those of Tmall, which primarily serves brand merchants and large enterprises. The new model, with Taobao taking the lead, generated a higher proportion of GMV, naturally lowering Taobao's overall monetization rate.

To bridge the GAP between GMV and CMR, Taobao announced several rule changes within months of the 618 festival's conclusion.

According to 36Kr, Taobao Group held a closed-door meeting with merchants after 618, outlining changes to be implemented in the second half of the year. The core message was a shift away from an absolute low-price strategy and a greater emphasis on allocating traffic based on GMV rather than “five-star price competitiveness.”

At the end of July, the “Experience Score” system, which had been tested for months, was launched. Previously, Taobao's seller service evaluation system (DSR) encompassed three dimensions: product description accuracy, seller service attitude, and logistics service quality. The new Experience Score reorganizes these into “Store Experience Score” and “Product Experience Score,” which will impact traffic allocation across various store operations scenarios.

Stores with high Experience Scores will gain more autonomy in after-sales scenarios, including the controversial “refund only” service. Merchants with a comprehensive store experience score of 4.8 or higher will not have the platform automatically intervene in “refund only” cases after delivery, encouraging merchants to negotiate with consumers first. Merchants with lower scores will still receive varying degrees of autonomy based on their Experience Score and industry nature.

(Source: Weibo @Fengzhongchanggong)

Weibo finance blogger @Fengzhongchanggong believes that eliminating low-price assessments presents an opportunity for high-quality merchants, but the platform's requirements for merchant service levels will be stricter than ever. While stepping back from the low-price competition, service quality remains a crucial metric.

Another change that will directly impact e-commerce monetization is Taobao's announcement that, starting September 1, all merchants, including those on Taobao and Tmall, will be charged a 0.6% “basic software service fee” on order transaction values. Additionally, the advertising product “Full-Site Promotion,” launched in April, is expected to contribute to commercial acceleration within 6-12 months after optimization of advertising algorithms and user data.

In conclusion, validating the effectiveness of this new round of adjustments may take longer than previous ones.

02. Cloud computing advances steadily, AIDC surges ahead

Cloud computing, another core business, generated quarterly revenue of RMB 26.5 billion, up 6% year-on-year, marking the fastest growth rate in nearly two years. The company attributed this to double-digit growth in public cloud services and increased adoption of AI-related products. Adjusted EBITA profit increased by 155% year-on-year, reaching RMB 2.337 billion for the quarter.

Demand for cloud computing is stable. According to the “Cloud Computing White Paper (2024)” released by the China Academy of Information and Communications Technology last month, China's cloud computing market reached RMB 616.5 billion in 2023, up 35.5% year-on-year, maintaining high vitality. Stimulated by AI-native cloud technology innovations and corporate strategic adjustments, the market is projected to exceed RMB 2.1 trillion by 2027.

Based on information disclosed during the post-earnings call, Alibaba Cloud's existing customers have significantly increased their AI-related budgets compared to last year. “AI Efficiency Enhancement” has become a must-have for most enterprises, particularly those heavily reliant on digitalization, which will only increase their investments in cloud and AI. Despite launching a full-scale price war domestically and internationally since March to compete for market share, Alibaba Cloud still achieved significant profit growth, demonstrating the stability of its cloud business.

Alibaba Cloud was prominently featured during the recent Olympics, with two-thirds of national broadcasters using its real-time global transmission services, and its AI technology deployed in 14 Olympic venues. Management is optimistic about the continued growth of AI-driven cloud resource utilization, and the company plans to maintain its current investment pace in AI projects, aligning with surging market demand.

Compared to domestic retail and cloud computing, cross-border operations are still in an aggressive investment phase.

This quarter, AIDC revenue grew by 32% year-on-year to RMB 29.293 billion, with growth slowing compared to previous quarters. Adjusted EBITA for AIDC was a loss of RMB 3.706 billion, eight times the RMB 420 million loss in the same period last year, but the loss narrowed sequentially due to increased investments in Global SpeedSell and Trendyol, partially offset by improved monetization and operational efficiency at Lazada.

Cross-border e-commerce is widely regarded as a future growth area requiring sustained investment. The financial report acknowledges that Alibaba's cross-border operations still need time to optimize efficiency and explore profit models.

During the post-earnings call, management mentioned that Alibaba's overseas business comprises multiple segments, differing from single-segment models of other companies. The company aims to integrate its supply chain, particularly from China, as soon as possible.

As analyzed in previous articles by Xinlichang, 1688 Cross-Border has launched services such as “Global Selection,” “Cargo Connects the World,” and “Cross-Border Select,” aiming to upgrade supply chain capabilities and gain upstream dominance in the overseas market. As overall revenue growth slows, we should expect to see more efforts towards business transformation.

03. Final Thoughts

Alibaba's key businesses are currently navigating a delicate balance between scale and efficiency, each progressing at different rates and requiring more time to observe the impact of adjustment variables over longer periods. As the battle lines lengthen, adaptability becomes increasingly crucial.

For instance, before the second half of this year, domestic e-commerce players engaged in intense low-price competition. However, post-618, Taobao de-emphasized absolute low prices and reverted to GMV-based traffic allocation, while Douyin concluded that live streaming e-commerce could not sustain extreme low prices and prioritized GMV again. According to LatePost, Pinduoduo also shifted its focus in Q2 from commercialization and profit enhancement to restoring GMV as its top priority.

Meanwhile, the State Administration for Market Regulation's “Provisional Regulations on Countering Unfair Competition in Networks” will take effect on September 1, prohibiting platform operators from using service agreements or transaction rules to unreasonably restrict or impose conditions on transactions, prices, or dealings with other operators within the platform.

This implies potential adjustments to controversial consumer-biased platform policies, including “refund only.”

Given this context, Taobao's strategic pullback from low-price competition and adjustments to platform policies mentioned earlier are timely and necessary. In the long game, clarity of direction and attention to detail are both essential. Alibaba must make the right choices at every turn as market dynamics shift.

*Images in the title and article are sourced from the internet.