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On August 15, Alibaba (9988.HK) released its quarterly results for the period ended June 30, 2024. Alibaba's revenue reached RMB 243.236 billion, a year-on-year increase of 4%; adjusted EBITA decreased by 1% year-on-year to RMB 45.035 billion; net profit attributable to ordinary shareholders was RMB 24.269 billion.

Among the six major business groups, Taobao and Tmall generated RMB 113.373 billion in revenue, a year-on-year decrease of 1%; Cloud Intelligence Group's revenue was RMB 26.549 billion, up 6% year-on-year; Alibaba International Digital Commerce Group's revenue was RMB 29.293 billion, up 32% year-on-year; Cainiao Network's revenue was RMB 26.811 billion, up 16% year-on-year; Local Services Group's revenue was RMB 16.229 billion, up 12% year-on-year; and Digital Media and Entertainment Group's revenue was RMB 5.581 billion, up 4% year-on-year.

Notably, Alibaba International Digital Commerce Group recorded an adjusted EBITA loss of RMB 3.706 billion for the quarter, a year-on-year expansion of 782%. The significant loss in adjusted EBITA was attributed to increased investments in cross-border businesses such as AliExpress and Trendyol, partially offset by a substantial reduction in operating losses due to improved monetization rates and operational efficiency at Lazada.

In the previous quarter, Alibaba International Digital Commerce Group's adjusted EBITA loss was RMB 4.085 billion, an 88% year-on-year expansion. At that time, Alibaba stated in its financial report that Lazada continued to focus on improving operational efficiency.

Clearly, Alibaba is intensifying its investments in the Alibaba International Digital Commerce Group.

During the earnings call, Jiang Fan, CEO of Alibaba International Digital Commerce Group, mentioned that Lazada achieved its first monthly EBITDA profit in July. "This milestone reinforces our confidence in effectively investing in the Southeast Asian market and consolidating our market share. In summary, our strategic focus is twofold: improving operational efficiency across all business units while actively investing in key markets to drive high-quality growth and scale, with the goal of achieving larger-scale profitability in the future."

It is evident that Lazada has entered a stage of refined operation in Southeast Asia, but the e-commerce competition in the region is fiercely competitive. Can Lazada sustain its profitability?

01

Deep Localization

Data shows that since Alibaba acquired Lazada, personnel have been transferred from various business units such as Taobao, Tmall, business platforms, search, and supply chain, involving collaboration across dozens of technical business units, technology selection, system setup, and development. An independent team was formed to optimize and transform Lazada.

In June 2022, Dong Zheng took over as CEO of Lazada. He is one of the longest-serving executives at Lazada and has deep roots in the Southeast Asian market. According to media reports, Jiang Fan subsequently replaced the CEOs of the six Southeast Asian countries primarily covered by Lazada with executives with extensive local experience.

In an interview with a media outlet, Dong Zheng stated that Lazada insists on being a fully localized company in Southeast Asia. The team, infrastructure, and business layout are based on an effective localization strategy to meet the personalized needs of Southeast Asian consumers.

Data indicates that Lazada focused on building its logistics network from its inception. Leveraging its local logistics experience and Cainiao's system, Lazada and Cainiao launched a cross-border express delivery service in Southeast Asia in June 2021, which accelerated logistics by nearly 50%, essentially achieving "72-hour delivery" services in countries like Singapore, Thailand, the Philippines, and Malaysia. In terms of warehousing, Lazada has established a three-dimensional cross-border logistics network, offering various shipping options such as consolidated direct mail, overseas warehousing, and domestic central warehousing, and actively building overseas warehouses in Southeast Asia.

In April 2023, Lazada became the first e-commerce platform in Southeast Asia to offer a fully managed service. Lazada also integrated platform resources to establish a dedicated shopping channel, Choice, for its fully managed service, providing merchants with more exposure opportunities. A few months later, Lazada opened up its Malaysian, Thai, Vietnamese, and Philippine sites to allow holders of Chinese passports to directly register local stores.

In Southeast Asian countries, Lazada's operations are more focused. According to media reports, Lazada has focused on attracting brand merchants and enhancing user experience in Malaysia, with LazMall's sales of key brands achieving double-digit year-on-year growth, and the "gold coin deduction" interactive gameplay being extended to other markets. In the Philippines, Lazada is more inclined to introduce interactive gameplays to increase user engagement.

Furthermore, Lazada offers subsidies such as daily cashback and discounts, collaborating with merchants to launch limited-time promotions, brand discounts, etc., attracting users through pricing and service. In July this year, Lazada Malaysia introduced an automatic return function, further optimizing the purchasing experience.

According to Momentum Works data, in Thailand, Singapore, Malaysia, and the Philippines, Lazada ranked second in market share after Shopee in 2023. In Indonesia, Lazada ranked fifth in market share.

Clearly, Lazada has established a certain market advantage in Southeast Asia.

02

Transition from "Burning Money" to Profitability

The e-commerce market in Southeast Asia still has significant potential, which also means that competition among platforms is inevitable.

At the end of 2023, Lazada underwent another organizational adjustment. Prioritizing the headquarters, Lazada centralized user product and merchant strategy teams to the headquarters. Previously redundant user product, brand, and SME merchant operation teams were downsized. The middle and back-office departments in local offices were also streamlined, including risk control, platform governance, legal affairs, etc., which were primarily relocated to the headquarters, allowing local offices to focus more on refined operations for local merchants, localized consumer engagement, and enhancing logistics experiences.

During this adjustment, Lazada's and AliExpress's commercial departments were integrated, resulting in some layoffs at Lazada. In January this year, Lazada conducted its first round of layoffs since being acquired by Alibaba in 2016. Media reports stated that the layoffs involved all departments, including commercial, retail, and marketing, aiming to "streamline decision-making and improve organizational and operational efficiency."

Meanwhile, Alibaba's investments in Lazada have not decreased.

At the end of May this year, Alibaba injected another US$230 million into Lazada, marking Alibaba's 10th round of investment in Lazada. According to statistics, Alibaba's total investment in Lazada is approximately US$7.7 billion.

Media reports stated that on August 13, Lazada held an all-hands meeting where CEO Dong Zheng revealed that the company achieved positive EBITDA in July 2024. He stated, "This profitability demonstrates the effectiveness of Lazada's business strategy, and Lazada will continue to actively invest in the Southeast Asian market under a sustainable operation model."

However, other platforms are also making the shift. Due to losses, Shopee's parent company, Sea Group, began centralized layoffs in mid-2022, with an overall layoff ratio of approximately 10%. The e-commerce business in the Southeast Asian market ceased offering any subsidies, and all business goals shifted from "growth" to "profitability."

According to Sea Group's Q2 2024 financial report, Sea Group's total operating revenue reached US$3.8 billion, a year-on-year increase of 23%, with Shopee's e-commerce revenue accounting for 73.6% or US$2.8 billion.

Sea Chairman and CEO Forrest Li stated, "Based on our strong first-half performance and outlook for the remainder of the year, we expect Shopee's adjusted EBITDA to turn positive starting in Q3. We are also raising our full-year 2024 GMV growth guidance for Shopee to the mid-20% range."

In addition to Shopee, Lazada also needs to contend with TikTok Shop. According to Momentum Works data, the total gross merchandise value (GMV) of e-commerce platforms in Southeast Asia reached US$114.6 billion in 2023. Shopee led with a 48% market share, followed by Lazada at 16.4%. TikTok Shop and Tokopedia each accounted for 14.2%, ranking third. Due to the merger of TikTok Shop Indonesia and Tokopedia, their combined market share will reach 28.4%, surpassing Lazada to become the second-largest e-commerce player in Southeast Asia.

As TikTok Shop expands in Southeast Asia, it will erode Lazada's market share. Meanwhile, Temu, which has been cautious about Southeast Asia, has ventured into the Thai market after a year, and whether it will expand its investments remains uncertain.

Another challenge for Lazada stems from policy changes. Since the beginning of 2024, Southeast Asian countries have gradually tightened regulations on cross-border e-commerce and increased taxes on cross-border transactions. Although Lazada is deeply localized, it still has many cross-border sellers who are inevitably affected.

Having achieved its first monthly EBITDA profit, Lazada must now consider how to maintain its competitive advantage while sustaining profitability.

Source: WhaleDimension (ID: WhaleDimension)

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