As expected, but still surprising.

On August 15, Alibaba released its financial results for the first quarter of fiscal year 2025 ended June 30. During this quarter, the group's revenue reached 243.236 billion yuan, an increase of 4% year-on-year, slightly lower than market expectations; operating profit was 35.989 billion yuan, a decrease of 15% year-on-year; net profit was 24.022 billion yuan, a decrease of 27% year-on-year.

Although Alibaba remains one of China's largest and most profitable internet companies, its financial fundamentals continue to be under significant pressure. Moreover, a crack seems to be spreading from Alibaba's core Taobao and Tmall businesses.

Continued pressure on Taobao and Tmall

Taobao and Tmall, which account for the vast majority of Alibaba's revenue and profit, failed to achieve the expected absolute recovery in this quarter.

Compared to other Alibaba businesses, Taobao and Tmall Group's revenue in this quarter was 113.373 billion yuan, a 1% year-on-year decrease, which was a key factor in Alibaba's failure to achieve a more significant rebound in performance. Specifically, this performance period covered the "618" shopping festival, but Taobao and Tmall's retail commerce revenue in China still decreased by 2% year-on-year.

Among them, Taobao and Tmall's direct sales and other business revenue decreased by 9% from 30.167 billion yuan in the same period last year to 27.306 billion yuan, also dragging down the overall revenue performance of Taobao and Tmall. Alibaba explained that Taobao and Tmall had proactively chosen to reduce the scale of some consumer electronics and electrical appliances categories.

Before the release of the financial report, the market considered the weak macro social consumption, especially when the overall online retail sales of physical goods in society turned negative year-on-year in June, so the market showed a conservative and wait-and-see attitude towards the performance of Taobao and Tmall.

However, Taobao and Tmall's core cash flow business: customer management revenue (CMR), only increased slightly by 1% year-on-year, far below market expectations. Affected by this, the group's adjusted EBITA was 48.81 billion yuan, also a decrease of 1% year-on-year.

Taobao and Tmall's customer management revenue, which is the advertising and commission revenue from core e-commerce, is the core of Alibaba Group's revenue and profit, and the lifeblood of the company. From fiscal years 2021 to 2024, this revenue has generally contributed around 300 billion yuan in cash to Alibaba each year.

Even in fiscal year 2024, the EBITA profit generated by Taobao and Tmall's customer management revenue once accounted for 112% of the company's total profit. This also means that all other Alibaba businesses except core e-commerce generated negative profits of 12%.

In other words, the Taobao and Tmall business has long been the foundation of Alibaba's vast business empire. Once the foundation is weak and profitability is sluggish, problems will follow one after another.

Fortunately, in terms of expanding the pie and seeking incremental growth, Taobao and Tmall's GMV achieved a high single-digit year-on-year increase in the first quarter, with order volume increasing by double digits year-on-year, and its 88VIP membership increased from 35 million in the previous quarter to over 42 million.

However, the bad news is that the long-standing problems of Taobao and Tmall still exist: before Alibaba's radical reforms can fully unleash their potential, the gap between Taobao and Tmall's GMV and CMR (customer management revenue) has not narrowed but continued to widen during the current period of excessive adjustment, and its take rate has also substantially decreased.

Moreover, such weakness is becoming the norm for Taobao and Tmall. In the past two quarters, Taobao and Tmall's GMV growth rate has been faster than that of customer management revenue. In the previous quarter, when GMV returned to double-digit growth, Taobao and Tmall's CMR only increased by 5% year-on-year.

As a result, during the first-quarter earnings call, Alibaba's management explained the mismatch between GMV and CMR in this way: "After the market share has stabilized initially, starting from this quarter, we will accelerate measures to improve monetization and commercialization."

It is worth noting that the business with faster GMV growth on Taobao and Tmall is precisely the one with a relatively low commercialization rate. In addition, specific information about merchant growth, whether it is ACC (annual active buyers) or DAU (daily active users), was not disclosed in Alibaba's financial report this time.

This time, when discussing the results, Alibaba CEO Daniel Zhang believed that the quarterly results demonstrated the effectiveness of the strategy, focusing on enhancing user experience through good products, prices, and services, driving Taobao and Tmall Group to stabilize its market share and return to a growth trajectory.

However, as Taobao and Tmall refocus their strategy on GMV, they face multiple challenges such as retaining users, improving profit margins, and effectively converting increased traffic into revenue, giving investors a satisfactory explanation. Alibaba is still struggling to find answers.

Alibaba still needs to increase revenue

The key to the answer may lie in striking a balance: finding the optimal solution between fairness and efficiency. This is an incredibly difficult challenge that continuously tests the wisdom of Alibaba's management.

In fact, to narrow the gap between Taobao and Tmall's GMV and CMR means not only expanding the pie but also dividing it more equitably. Only in this way can Alibaba sustainably monetize its core e-commerce business.

At the end of last year, after a series of intense personnel changes, Dai Shan, who had served as CEO of Taobao and Tmall Group for only half a year, announced her resignation. After Daniel Zhang took over, the core management team of Taobao and Tmall Group was almost entirely restructured. Accompanied by personnel changes, the strategic focus of Taobao and Tmall Group's business underwent a 180-degree turn.

Over the past year, Alibaba's internal reforms have escalated again, cutting out various flashy projects and focusing on its main business, continuously exploring the monetization capabilities of its e-commerce business. However, the actual effects of these radical reforms have been mixed.

On the one hand, after the smoke of Pinduoduo's relentless low-price war dissipated temporarily, Taobao and Tmall once again shifted their focus back to GMV as their business development orientation. After the adjustment, the controversial "refund only" mode, which had been criticized and angered merchants, was relaxed.

For example, in July this year, Taobao and Tmall lowered the priority of price competitiveness in its e-commerce business segment. In the new algorithm logic of Taobao and Tmall, GMV will replace price competitiveness as the new core metric, and the core of traffic allocation will become "experience points" including logistics, positive feedback rate, refund rate, and other indicators. The "refund only" policy for merchants will also be relaxed, aiming to regain merchants' favor.

However, on the other hand, in the profit distribution aspect that is most likely to trigger emotional fluctuations among merchants, Taobao and Tmall's hand in dividing the pie once again veered inward.

At the end of July this year, Alibaba initiated a drastic monetization adjustment: the company, which once adhered to the value of "customer first," announced that starting on August 9, Taobao e-commerce would begin charging a 0.6% platform technology service fee. In addition, several business lines, including Idle Fish, AliCloud, and Amap, have adjusted their fee rules for platform merchants, marking Alibaba's full entry into the era of charging fees.

It is worth noting that Taobao was previously the only e-commerce platform in China that was free to use for sellers.

After this fee rate adjustment, Taobao will eliminate the annual fees of 30,000 and 60,000 yuan previously charged only to Tmall merchants, and the annual fees already paid for 2024 will be refunded. For Taobao sellers with annual sales exceeding 120,000 yuan but not exceeding 1 million yuan, Taobao will issue Alimama coupons to sellers, with a face value equal to 50% of the basic software service fees already paid to Taobao in 2024.

However, the problem is that under Taobao and Tmall's new distribution system, it may objectively increase the cost burden on merchants. For example, previously, Tmall merchants only needed to pay an annual fee of 30,000 to 60,000 yuan, and most merchants could enjoy a full refund of the annual fee once they completed sales exceeding 10 to 20 times the annual fee threshold, with a half refund for half the threshold.

Under the current new rules, however, merchants must pay a service fee of 0.6% per order. This means that the more orders a merchant completes, the more service fees they will incur, with no upper limit. According to estimates, if converted using 2020 GMV figures, the new service fee rules for Taobao and Tmall will generate an additional 24.8 billion yuan in revenue, and more merchants will be subject to fees.

Charging sellers for basic software services is just one of the measures that Taobao and Tmall are taking to increase their revenue. In April this year, Alimama also launched a new advertising product, "Whole Site Promotion," which aims to mobilize the entire Alibaba ecosystem's traffic, including search, homepage, and in-app information streams, to drive a comprehensive increase in sellers' GMV in a more intelligent manner.

From Taobao and Tmall's perspective, the goal of Whole Site Promotion is to help merchants achieve better ROI (return on investment, calculated as realized GMV divided by advertising spend). However, from another perspective, Whole Site Promotion will also generate more revenue for Taobao and Tmall.

As a horizontal comparison, after Pinduoduo launched a similar advertising model in 2021, its advertising revenue rebounded from the bottom: in fiscal year 2021, Pinduoduo's advertising revenue was 72.56 billion yuan, and in fiscal year 2023, it surged to 153.54 billion yuan.

Although Daniel Zhang previously stated that among most e-commerce platforms, Taobao currently offers the highest ROI for sellers' advertising investments.

However, it will still take some time before Taobao and Tmall fully roll out the Whole Site Promotion model, and more observation is needed to see if this model will impose additional cost burdens on platform merchants. Earlier, it was reported that some merchants who initially tested Whole Site Promotion found that they needed to set their advertising budget at around 1.5 times their historical total advertising budget for the product to ensure stable ROI realization.

As such, from the low-price model to the "refund only" policy, to the current increase in fees and Whole Site Promotion, it is evident that Taobao and Tmall Group intends to activate GMV, drive the return of merchant budgets and operational focus, and ultimately achieve greater commercial monetization.

However, in this game of growth versus profitability, Alibaba, under immense pressure, seems to be struggling to maintain a balance between benefiting customers and pleasing users at this stage. More than a year after Jack Ma proposed "returning to Taobao, returning to users, and returning to the internet," it is often the merchants who bear the "cost" rather than the platform itself.

Correcting excesses must go beyond the necessary extent, and time is needed to see results

In April this year, when asked about Alibaba's toughest competition, Joseph Tsai sincerely remarked:

'When we examine our internal situation and reflect on the past few years, we realize that we have fallen behind because we forgot who our true customers are. Our customers are the users who shop on our apps, and we haven't given them the best experience.'

From being a leader in the e-commerce industry to strategically following Pinduoduo, from seeing a decline in GMV to urgently seeking new growth points, from the launch of Taobao Lite and community group-buying business Taocaicai to subsequent in-depth adjustments in organizational structure and management, Alibaba has not been able to complete a truly profound adjustment in its Taobao and Tmall business in recent years.

On the one hand, Alibaba neglected user experience, resulting in missed significant opportunities in the sinking market after 2020. On the other hand, the company's decreased focus on small and medium-sized merchants at that time also led to merchant outflows, which were originally the foundation of Alibaba's business.

Currently, Alibaba's in-depth adjustments are once again undergoing a comprehensive turn. After Daniel Zhang took over as CEO of Alibaba Group, Alibaba unleashed its full potential, focusing all resources on Taobao and Tmall, and trying to find a balance between revenue and profit in sales and fairness through various measures.

Generally speaking, it is easy to win a game from start to finish when all factors are fluid at the beginning, and adjustments can be made quickly, without regard to cost, and with immediate results. However, the difficulty lies in making even minor adjustments when the game enters its later stages and things begin to solidify, requiring even more effort and attention.

Of course, it is an objective fact that it is difficult to change course for a large ship, so correcting excesses must go beyond the necessary extent, and this is a necessary approach.

At present, one can see that Alibaba is becoming increasingly urgent under heavy pressure, whether it is adjusting fee rates or introducing new traffic promotion advertising methods. However, when many frustrations, pressures, and challenges are piled up on this company, merchants who have consistently contributed around 300 billion yuan in management fees to the Alibaba ecosystem each year over the past few years seem to have become the pawn in this dramatic upheaval, subject to repeated manipulation and contention.