This article originally ran on Financial Times on March 20, 2022.
Chinese ecommerce group’s Taobao Deals app is aimed at the estimated 930mn consumers in smaller and less affluent cities.
In the northern industrial town of Baoding, toilet paper rolls off Jinye’s industrial machinery, ready to be sent direct from the factory floor to bathrooms across China.
Sales of Jinye’s absorbent tissues have exploded since it became one of the first companies to open a store on Alibaba’s Taobao Deals, a platform launched by the ecommerce group in 2020 to target the fast-growing market of bargain-hunting shoppers in smaller and less affluent cities.
For years, Alibaba has focused on shoppers in wealthy first and second-tier cities such as Shanghai and Beijing through its flagship Taobao and upmarket Tianmao platforms, becoming the go-to online emporium for consumer goods in China.
But as growth on these two platforms has slowed from rising competition and regulatory pressures, the Chinese ecommerce group has turned to the estimated 930mn consumers in third and fourth-tier cities to boost its slowing sales growth.
“Alibaba moved late to capture shoppers in lower-tier cities, but their rearguard action has been very effective,” said Michael Norris, senior research analyst at Shanghai-based consultancy AgencyChina.
“In two years, Taobao Deals has managed to mop up consumers that Taobao and Tianmao didn’t reach.”
Alibaba launched the Taobao Deals app in March 2020, targeting lower-tier shoppers who are more dependent on online shopping channels than peers in larger cities. Morgan Stanley estimates that consumption in China’s lower-tier cities will surge from $2.3tn in 2017 to $6.9tn in 2030.
In February Daniel Zhang, Alibaba’s chief executive, said that after investing “heavily” in Taobao Deals, it had turned into a “powerhouse in new user acquisition for China commerce”. Taobao Deals’ monthly active user base swelled to 150mn by November 2021, a 75 per cent increase from the previous year, according to Beijing-based analytics firm QuestMobile.
The move put it in direct competition with price-competitive Pinduoduo, which sells products directly from factories or farms to consumers.
“We’re learning from Pinduoduo, but we’re building Taobao Deals with Alibaba’s logistics network, branding and user base. It isn’t an isolated business but a part of Alibaba,” said one Taobao Deals manager in the central city of Chengdu.
This shift in focus comes during a difficult period for Alibaba. The company founded by Jack Ma has lost about 60 per cent of its value since Chinese authorities cancelled the initial public offering of its fintech arm Ant Group in November 2020. Subsequent anti-monopoly probes and fears of Chinese equities being delisted from US exchanges have weighed on the company’s outlook.
Beijing’s move to enforce anti-monopoly regulations last year meant Alibaba was forced to end practices such as signing exclusive deals with merchants to sell on Tianmao and Taobao, which helped preserve their dominant position.
Retailers can now choose to sell their wares on Alibaba’s online emporiums and hawk their goods on fast-growing rivals, including ByteDance’s Livestream shopping platform on the popular short video sharing app Douyin.
Analysts warn that the recent coronavirus outbreak in China could be hitting Alibaba harder than its competitors given many of its main logistics centres are in Zhejiang province, situated next to Shanghai and where the company has a disproportionately large presence.
According to estimates by research firm eMarketer, Alibaba’s share of total ecommerce sales fell to below 50 per cent in 2021, a decline of 30 percentage points since 2015. In February, Alibaba reported its slowest quarterly sales growth since its 2014 public listing.
But analysts note that Taobao Deals’ explosive growth underscores the enduring strength of Alibaba’s ecommerce business. The group has been able to harness its strong network of relations with manufacturers and efficient logistics and delivery systems to disrupt new markets in just two years.
“When Alibaba decided to focus on what Pinduoduo was doing, it was always going to be tough for them [Pinduoduo] to compete,” said Jacob Cooke, chief executive of Beijing-based ecommerce solutions company WPIC. “They’ve put massive resources into it and have managed to gain hundreds of millions of users in a short time period.”
Alibaba does not disclose a breakdown of revenue for the Taobao Deals platform but Roger Yang, Jinye’s operations director, said his sales had “blossomed” across China since opening the Taobao Deals store two years ago. His workforce has grown from 60 to 300 employees with strong demand from “price-sensitive” shoppers.
Taobao Deals advised Jinye to shift from manufacturing paper towels to tissues after analysing data about consumer demand on its platform. Jinye now sells tissue paper tailored for all preferences: thick, soft or tough tissues, which are stored in Taobao Deals’ warehouses close to the factory in the northern province of Hebei, before being sent to customers across the country through Alibaba’s delivery networks.
After spearheading the rise of online shopping in China two decades ago, Alibaba has been forced to respond to fast-footed competitors threatening to knock it from its top spot. When JD.com built an efficient delivery system to complement its ecommerce platform, Alibaba responded by launching Cainiao, the logistics company that manages Jinye’s toilet paper delivery.
In Alibaba’s “tussle for lower-tier cities”, AgencyChina’s Norris said competitive pricing was the most important determinant of success.
Taobao Deals uses several tactics to gain an edge on pricing. Retailers sell end of season products or create a separate label to sell the same goods cheaply but without denting sales of the mainstream brand.
The app also gives out coupons to shoppers, subsidising knockdown prices for companies that want to access shoppers in lower-tier cities without lowering prices.
“Big brands want to access . . . consumers in lower-tier markets, but they don’t want to lower their prices. Taobao Deals intervenes with coupons so customers can purchase branded goods at a lower price, while the brands don’t need to sacrifice profits,” said the Taobao Deals manager.
While Alibaba’s fight to penetrate the lower-tier markets by splashing the cash to keep shoppers and merchants happy has eaten into its profits, Alibaba may be calculating this largesse is worth it to capture a fast-growing market.
But in the ecommerce battle for China’s lower-tier cities, nothing is preordained. “There isn’t a lot of platform loyalty in China. When it comes down to it, whoever has the better deal will win,” said Cooke.