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Consumer

Alibaba shows who's king with new growth in rural China

Vendors fear e-commerce giant will press them to ditch JD.com and Pinduoduo

NEW YORK/SHANGHAI -- Alibaba Group Holding blew past analysts' expectations for its April-June performance thanks to penetration into less-developed areas, showcasing the e-commerce behemoth's resilience in a challenging macro environment.

While the saturation of urban e-commerce markets has cast a shadow on the outlook for Alibaba's heretofore meteoric growth, the company has been steadily eating away at the market share of second-ranked JD.com and No. 3 player Pinduoduo. Alibaba's online retail operations, which generate nearly all its profits, reported 674 million annual active consumers on its China retail marketplaces as of June 30 -- up nearly 20% from a year earlier.

Alibaba's strong results came the day after fellow internet giant Tencent Holdings reported revenue that missed analysts' estimates and search provider Baidu lost its status as one of China's top five tech companies by market capitalization, symbolizing the shifting fates of China's original big tech trio, collectively known by the acronym "BAT."

On Thursday's earnings call, Alibaba CEO Daniel Zhang named "successful penetration into less-developed areas" as No. 1 among the group's achievements in the second quarter of 2019. Over 70% of the increase in Alibaba's annual active customers came from these regions, reflecting its initiatives to "touch a broader base of users," Zhang said.

The broadening of its customer base helped Alibaba overcome China's fading economic momentum and headwinds from trade tensions with Washington. Revenue grew 42% on the year to 114.92 billion yuan ($16.7 billion), topping the 111.73 billion yuan predicted by analysts. Non-GAAP diluted earnings per American depositary share came to 12.55 yuan, far above the expected 10.25 yuan. The New York-listed group's shares opened nearly 5% higher in the morning.

Alibaba's planned share sale in Hong Kong could be the biggest of the year, depending on the outcome of Saudi Aramco's IPO. (Photo by Yuki Kohara)

While cloud computing remains Alibaba's fastest-growing segment, with revenue up 66% on the year, the surge in overall revenue was driven by its core commerce business, which grew 44%. The segment, consisting of online marketplaces Taobao and Tmall, as well as such "new retail" operations as the Hema grocery chain, was buoyed by expansion in China's less-developed areas, a market long exploited by the Nasdaq-listed Pinduoduo.

Its 6.18 Mid-Year Shopping Festival, whose sales volume exceeded the company's projections, also had consumers in smaller cities and rural areas as its focus. The company's deep pockets enabled it to slash prices during the event without regard for profit, grabbing consumers' attention and forcing JD.com and Pinduoduo to follow suit.

Alibaba's focus on so-called lower-tier cities echoes that of JD.com, which spoke of a similar strategy in its Wednesday earnings call. Smaller rival Pinduoduo found its place on the saturated playing field as well by catering to the relatively untapped consumer base in less-developed regions.

Alibaba did not directly address an analyst's question on whether its target consumer in these areas overlaps with its peers. But it touted its broad product selection, access to manufacturers, and ecosystem of services, including payments, as key advantages that will help it stand out.

Alibaba's increasing dominance has vendors worried about a heavy-handed approach to client relations.

Typically, businesses that sell on Alibaba's Tmall platform take pains to build a positive relationship with the e-commerce titan. If they do not offer favorable terms on prices and promotions, "we get buried under countless products and can't catch users' attention," a source at a manufacturer said.

But in a rare show of open defiance, Guangdong Galanz Group, the world's largest microwave oven manufacturer, issued a statement in June expressing "strong dissatisfaction" with its treatment on Tmall.

Galanz claimed that Alibaba demanded that it remove products from Pinduoduo, backed by Alibaba rival Tencent. Galanz refused to choose between the two platforms, only to be shunned in Tmall's 6.18 sale -- second only to Singles Day in size -- the Guangdong-based appliance maker said.

JD.com CEO Richard Liu rides an electric tricycle as he leaves a delivery station to deliver goods for customers in Beijing. Both Alibaba and JD.com are eyeing growth in China's rural areas.   © Reuters

In 2015, Japan's Fast Retailing, operator of the Uniqlo casualwear chain, pulled products from JD.com after just three months on the site. Because Uniqlo also had a presence on Tmall, observers speculated that pressure from Alibaba might have been to blame.

A major maker of household goods had planned to set up shop on Pinduoduo in July but scrapped the idea in light of Galanz's complaint. "If Alibaba says, 'Sell for less here than anywhere else,' you can't refuse," a source at a Japanese food company admitted.

Meanwhile, Alibaba is focused on cultivating new areas of growth.

Operations including what it calls "new retail" recorded 134% growth. This model of combining online and offline shopping is exemplified by Hema, a grocery chain known for fast delivery of fresh produce as well as automated stores where customers make purchases through its app that in turn provides a wealth of data for Alibaba to improve supply chain management and the consumer experience.

"Chinese consumers have one overriding demand: 'Spoil me or else,'" said Michael Zakkour, vice president of Asia and digital strategy at consulting firm Tompkins International.

"New retail delivers consumer centricity, convenience, customization -- the ability for shoppers to contribute to their own experiences," Zakkour said. "That's how you spoil them -- allow them to decide where, when and how to shop."

Other areas of rapid growth for Alibaba include local consumer services such as on-demand delivery, which it offers through the Ele.me platform in competition with Meituan-Dianping. Revenue from the segment increased by 137% on the year.

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