China’s biggest internet platforms are embroiled in a costly fight to dominate the “instant retail” market, the rapidly expanding business of getting groceries, takeaways and daily essentials to doorsteps within an hour.
What started off as a scramble to widen customer choice has now turned into a battle of slashing profit margins and subsequently unsettling investors.
Tech giants such as Alibaba, JD.com and Meituan have now gone for months giving out discounts and various subsidies to shoppers as a way to buy loyalty from customers. Despite winning loyalty, profits have shrunk as billions of revenue have disappeared.
CEOs warn of ‘excessive’ rivalry among tech firms in China
Analysts have declared that such moves are now pushing companies into a situation where long-term growth will come at the expense of near-term stability.
CEOs have a warning as they foresee the rivalry spiraling. The warnings have grown louder with every quarterly update.
JD.com’s chief executive, Sandy Xu, told analysts that the sheer scale of rivalry was unsustainable. Meituan’s boss, Wang Xing, admitted the industry had entered a “new phase of competition” altogether, while Zhao Jiazhen of PDD Holdings conceded that conditions had only intensified as the summer wore on.
The skirmish began earlier this year when JD.com, threatened by Meituan’s decision to broaden its product base, launched a new app squarely targeting Meituan’s heartland in food delivery. Nomura sid that sector-wide cash burn topped $4 billion in the second quarter alone.
The implications for profitability are stark. S&P Global has warned that Alibaba, Meituan and JD.com will collectively commit more than 160 billion yuan, around $22 billion, into defending or expanding their positions in the next 12 to 18 months. Analysts predict “significant downward revisions” to earnings forecasts, with margins unlikely to recover until well into 2027.
Meituan is believed to be the most exposed as it relies on food delivery revenues. Alibaba, although less exposed, is facing the sector-wide effects of little near-term financial relief. JD.com saw its entire second-quarter profits offset by losses in its delivery department.
“We do not believe this quarter’s profit levels are sustainable for the company and expect fluctuations in profits in future quarters,” said PDD Holdings co-CEO Zhao at their recent results presentation.
Company chiefs remain upbeat
Despite the near-term damage, company chiefs remain convinced the investment will eventually pay off. Jiang Fan, who heads Alibaba’s core e-commerce arm, has predicted that instant retail could add as much as 1 trillion yuan in extra annual merchandise volume within three years.
Regulators have issued repeated cautions over “race to the bottom” tactics, urging firms not to destabilize the sector with unsustainable subsidies. In July, Meituan, JD.com and Alibaba all publicly pledged to support government measures aimed at curbing what Beijing calls “involution”, the cycle of relentless competition that drags everyone down.
What happens next hinges partly on the autumn shopping season. If November’s Singles’ Day event delivers the usual spike in spending, executives may claim vindication for their bruising strategy. Should consumer sentiment remain subdued, however, even China’s most deep-pocketed tech titans may be forced to rethink how long they can keep lighting money on fire in the name of market share.
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Source: https://www.cryptopolitan.com/china-sees-e-commerce-profits-shrink/