Market Shift: Seller's Market Returns

As we analyze the financial report for the second quarter of 2024, which corresponds to the first quarter of the fiscal year 2025 for Alibaba, several significant observations and conclusions can be drawnThe retail landscape is witnessing a pivotal shift, moving away from a “price-driven” model towards a “profit-driven” approachThis transition is catalyzing a profound change in how merchants select platforms, which is something that Alibaba’s Taobao is preparing for by implementing various “anti-involution” measures, including but not limited to loosening the strictures around refund policies and utilizing advanced algorithms to intercept fraudulent activities.

In response to new merchant requirements, Taobao has also begun to enhance its operational toolkitA prime example of this evolution is the introduction of the “Full Site Promotion” featureIt aims to break the long-standing “bidding” barrier that has posed a significant challenge for smaller retailers, allowing businesses of all sizes to access marketing tools on an equal footingThis has not only enhanced the overall Gross Merchandise Value (GMV) but has also spurred an increase in customer management revenue, exhibiting Taobao's efforts to modernize and adapt to the changing market dynamics.

Observing the ripple effects of these strategic moves, it is anticipated that the impact of these changes will become significantly apparent by the fourth quarter of 2024. This particular quarter is crucial, as it is often under considerable scrutiny from market analysts, and will reveal the true effectiveness of these initiatives.

Interestingly, during the time when the industry was engrossed in a narrative heavily focused on low pricing, the prevailing sentiment seemed to suggest that price control among platforms was the defining competitive strategyMany believed that whichever platform could offer lower prices would inevitably attract more users and thus gain a competitive edge

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In hindsight, initial skepticism directed toward my forecasts reflected this prevailing mindset, but the release of the fourth-quarter financial report for 2024 offers a moment of reflection.

As per Alibaba’s most recent financial disclosures, Taobao Group’s customer management income has experienced a year-on-year growth of 9%, totaling approximately 100.79 billion RMB (or 13.81 billion USD). This surge is primarily driven by an increase in online GMV, coupled with enhancements in the take rateIt stands as one of the most impressive performances recorded in recent quartersNonetheless, skepticism persists among some observers, arguing that despite these numbers, the domestic demand remains lackluster and that the “low-price narrative” continues to dictate the overall market toneCritics believe that Taobao should remain focused on price comparison and sustaining low prices, suggesting that the ambitious reform measures may pose undue risks.

In response to such debates, it is essential to reassess the macroeconomic landscape and industry conditions, leading us to the following core assertions:

• The macroeconomic environment is showing signs of gradual recovery following the painful “de-stocking” periodThis is steering the industry towards a more proactive restocking phase, with various indicators rebounding from their troughs.
• Industry sentiment is improving, with upward movements in price levels indicating a shift towards a “seller’s market.” In this context, the ability of platforms to attract and retain merchants is becoming a key determinant of their core competitive advantage.
• Taobao appears well-positioned to lead the industry by focusing on re-establishing stable relationships within the merchant ecosystem, which is fundamentally driving the positive trends in its fourth-quarter financial performance.
• Furthermore, Taobao is still sitting on various untapped policy incentives to foster growth.

The ongoing debate among peers revolves around whether the current retail environment operates more as a “buyer’s market” or a “seller’s market.” The former emphasizes low prices, placing consumer interests at the forefront, while the latter prioritizes merchant profitability and enhances the relevance of sellers within the marketplace.

The fluctuations in industrial product inventory levels serve as crucial indicators of macroeconomic trends and are closely correlated with the Producer Price Index (PPI). The fundamental logic here suggests that during periods of economic vibrancy, businesses increase their inventories due to high demand, leading to upward pressure on prices

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Conversely, a downturn prompts companies to offload excess inventory to maintain liquidity, resulting in lower consumer prices.

From 2021 to 2023, China encountered a challenging de-stocking period influenced by numerous factors, during which companies focused primarily on cash flowIn a bid to survive, aggressive price slashes were extended to consumers.

Simultaneously, live-streaming e-commerce emerged as a significant channel, catering to the needs of merchants seeking to clear their inventories, which is why many live-streaming sessions prominently proclaim “lowest prices online,” showcasing a classic “buyer’s market” dynamic.

However, as the dust settles post-de-stocking, signs of recovery began to manifest in 2024, with industrial product inventories showing year-on-year increasesThis signals that merchants are beginning to adopt a more optimistic perspective regarding market recovery and are actively restocking in anticipation of future demand.

According to predictions from Wind Information, the PPI is projected to rebound significantly by 2025, marking an end to the negative growth phase — a clear reflection of the transition to a strategic seller’s market.

Despite ongoing apprehensions regarding the macroeconomic climate, relevant metrics indicate that a discernible “turning point” is on the horizonConsequently, merchants’ bargaining power will strengthen, which will in turn pivot competitive differentiation from price-related factors to the ability of platforms to cultivate merchant loyalty.

Post-2024, Taobao is at the forefront of initiating reforms conducive to enhancing the business environmentThe platform has rolled out an all-encompassing promotion scheme aimed at boosting merchants' customer acquisition efficiency, alongside several policy interventions targeting nefarious practices that exploit price discrepanciesThe integration of WeChat Pay is a notable decision that alleviates operational anxieties for merchants, prompting a gradual increase in specific product categories returning to Taobao.

In recent announcements, Taobao aims to assist brands, particularly small to medium-sized enterprises, in their expansion efforts across various online platforms by adopting a comprehensive approach consisting of six major initiatives: new product incentives, external traffic amplification, private member domains, commission incentives, support for new merchants, and the optimization of the business environment

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The scale and ambition of these initiatives far exceed traditional industry support measures.

One significant action that has garnered frequent mentions from merchants is the commission incentive strategy, which effectively entails a performance-based rebate where Taobao returns cash to merchants upon achieving specific targets, akin to boosting the financial profit margins for businesses on the platform.

Currently, incentives have been launched in the fashion, beauty, and outdoor sports sectors.

In the competitive landscape of skincare products, the Tmall channel has witnessed a stable increase in year-on-year sales growth in skincare and makeup categories in 2024. In the period from October to November, year-on-year growth rates for skincare and makeup on Tmall were recorded at +9.6% and +7.1%, respectivelyThis represents a marked improvement compared to the figures from January 2024, which showed growth of +6.6% and +6.4%. This resurgence during the Double Eleven shopping festival further underscores Taobao’s capability to achieve favorable sales results in beauty categoriesIn contrast, Douyin’s adherence to the “low-price narrative” has led to a notable downturn in the same product categoriesIt is vital to emphasize that the turning point for this shift has begun in mid-2024, coinciding with the strategic pivot towards a “seller’s market,” reinforcing the methodical transformation taking place.

As the new retail market dynamics evolve, platforms like Taobao must redefine their relationships with merchants, while merchants should reassess the platforms’ role and their anticipated investments (in areas such as new product launches or marketing budgets). Merchant backing will directly influence platforms’ standing in consumer perspectives, thereby initiating a positive feedback loop for the upcoming cycle.

This raises pertinent questions: how substantial will Taobao’s growth potential be moving into the new year, and can it maintain its core competitive edges in a highly competitive environment?

By focusing on the Full Site Promotion initiative, we can discern its significance as a recent innovation worthy of market analysts' attention

However, there are divergent viewpoints regarding its aims; some interpret it as a tactic aimed at increasing monetization rates, equating it to a “tax” levied on merchantsIs this the reality?

For an extended period, Alibaba’s traffic distribution and marketing systems revolved primarily around Tmall vendorsThe “Taobao Direct Connect” feature, for instance, stems from a bidding-based placement method initiated in the PC era, where those who pay higher for search terms gain greater visibility.

Despite numerous adjustments made over the years, bidding remains a fundamental operational principleWith the extensive growth of Tmall to this point, the Direct Connect traffic tends to be monopolized by wealthier top-tier merchantsMeanwhile, smaller retailers, particularly those focusing on product innovation and poised for rapid growth, have found it increasingly challenging to thrive.

Taobao’s goal to “encourage the development of quality brands” necessitates stimulating the growth of small-sized brandsThis ambition goes beyond merely driving up Taobao’s GMV; it requires an overhaul of underlying operational frameworks to ensure sustainable business models, which directly influences financial performance and, consequently, the platform’s sustainability.

For Taobao to accomplish this objective and allow more quality-focused but smaller merchants the chance to flourish, it is crucial to provide tailored marketing tools that revive activity within the e-commerce ecosystemThis not only addresses the immediate needs of merchants but also looks to unearth new profit avenues, ultimately enhancing the platform's overall monetization.

Today, the Full Site Promotion tool serves a pivotal role beyond simply being an extension of Direct ConnectIt empowers sellers (available for both Taobao and Tmall merchants) to customize their Return on Investment (ROI) settings in the backend, allowing for smart advertising placements

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