China 2018 Retail Industry Annual Review
The worst time is coming? “We still expect pressure on margins as the topline slows down, while we think cost measures will likely take time to yield.” said analyst Eddie Leung from BofA Merrill Lynch.
China's Gross Domestic Product slows to 6.5%(YoY) in the third quarter, marking China's weakest growth figure since the first quarter of 2009 during the global financial crisis. Weaker industrial output and trade tensions have started to weigh on China's retail market. Retail sales rose 8.1% in November, the data from the National Bureau of Statistics was below many analysts' expectations for a 8.8% rise. There were some signs and signals. Auto sales( in the seventh paragraph), as the first one to be hit by the fragile consumer sentiment, have been declining since May.
The worst time is coming? At least JD.com（京东） and Alibaba（阿里巴巴） has implied it in their fiscal reports.
To hold or to sell? JD.com & Alibaba
JD.com reported its net revenues of CNY 104.8 billion (USD 15.3 billion), growing 25.1% from the same period in 2017, but still missed analysts’ forecasts for CNY 106.09 billion. Even the company’s rival Alibaba posted stronger-than-expected second-quarter earnings in its latest fiscal report, cautioned that 2019 revenues would be weaker than what had been originally forecasted before, for "fluid macro-economic conditions." The two E-commerce giants in China are highly exposed to macroeconomics and geopolitical strife. And all numbers seem to echo the same fact, 2019 will not be any better than this year. But does it really true?
Let's take a look at what the opinions toward the two stocks from critic Wall Street analysts first. Bank of America Merrill Lynch maintained a Buy rating and USD 37 price target and UBS with a USD 28 target. JD.com is more than an E-commerce platform, which has businesses in logistics, warehouse, financing and investment, etc. As the improvement and mature of logistics, growing revenue from third-parties in 2019, commercial business will release more margins.
“We still expect pressure on margins as the topline slows down, while we think cost measures will likely take time to yield.” said analyst Eddie Leung from BofA Merrill Lynch commenting JD.com.
Alibaba's numbers were very much alike. The company has been endured a fall in profit of more than 30% the fourth quarter of 2018 fiscal year mainly because a heavy spending on Alibaba's businesses outside of e-commerce, including cloud computing and brick-and-mortar retail, the company call it as “new retail”.
Online or brick-and-mortar? JD.com & Alibaba
Hema Xiansheng（盒马鲜生）, Alibaba's lavish, high tech supermarkets selling fresh food, has seen rapid growth in the number of shops from 13 to 65 in July 2017 and August 2018, respectively.
Alibaba has a logistics arm called Cainiao（菜鸟） which is deploying 700 robots to build the largest smart robotic smart warehouse in China.
The two divisions costing huge investment aside, Alibaba's cloud-computing divisions, the market leader Aliyun in China, has seen the sales soared 90.5% in the latest quarter.
The two companies have been leading digital trend in China’s retail market, also the ones to usher in the New Retail era, or what JD called it as Retail as a Service.
China's offline retail market is worth around USD 4.5 trillion. To build, to buy or partner are common ways to pursue the offline chance, however, core competitive will always lie on how to solve big problems and removing inefficiencies, according to a report from consulting firm PwC.
An alternative for Starbucks? Luckin & Starbucks
Luckin（瑞幸） grew from nobody to a company valued at USD 2.2 billion after its latest funding round of USD 200 million in one year. The company wins customers by offering a relatively low price compared to that of Starbucks, which approximately is 20% below, encouraging users to invite friends to order via social networks and get discounts and promising to deliver products in 30 minutes.
Starbucks has sensed threatens, even the company is estimated to have a 70% of the market and planned to nearly double the 3,400 stores in 2020. Starbucks worked with Alibaba subsidiary Ele.me to pilot delivery services.
Burning cash strategy cannot make sure living long and prosperous for a company. DiDi did win the battle against Uber China, but we must notice where it stand, an existing car-hailing market and a bunch of customers who highly require the needs, what DiDi does just change the form and optimize users values. It is not the same way where Luckin going, which lures people who are reluctant to buy coffee before to buy their coffee, one day, the real triumph will come if they could lure a whopping number of customers from Starbucks someday, but not yet, with its loss of CNY 857 million in the first nine months 2018. Subsidy policy will eventually phase out, after all, as what already happened in China's NEV market.
Copy or not? Naixue's Tea & Heytea
Luckin is creating its customers, Naixue's Tea（奈雪的茶） and Heytea（喜茶） creating a new tea beverage market in China. The two companies help to shape the market phase and had some fights meanwhile. PENG Xin（彭心）, the founder of Naixue's Tea, accused Heytea is copying her original product in Oct. Heytea also gave out aggressive feedback implying the company will not produce replications. Starbucks is less emphasized on the core of the disputes, whose enterprise is built upon a lifestyle for a specific group of people but not the hype innovation.