Although Dolphin has already foreseen in the annual outlook report that 2023 may not be a year of investment opportunity for pan-electronic business, the current situation may be worse than Dolphin's earlier expectations, specifically:

(1) The offline channel may have a more severe backlash on the online channel than expected. In January and February, the overall social retail sales growth rate quickly recovered to +3.5%, while the growth rate of physical online retail slowed down from 6.4% in the fourth quarter to 5.3%. Based on the current trend, the growth center and rebound strength in 2023 will still be restaurants & physical stores > offline physical ≈ online physical.

At the same time, although the overall recovery of optional consumer goods has arrived as scheduled, the growth rate of clothing, shoes, hats, and cosmetics quickly rebounded from December's -12%~-19% to +5.4% and +3.8% in January and February. However, on Taobao and other platforms, apparel and beauty products are still declining at a rate of 10%+. This also shows that the online channel may not have benefited from the optional recovery (or it may be due to Alibaba's own issues).

(2) In addition to the macro-level headwinds, the competition among e-commerce companies has deteriorated unexpectedly. The performance in the fourth quarter has already shown some signs. The overall year-on-year decline in marketing expenses for pan-electronic business companies shrank from -7% in the second and third quarters to -2%, indicating that e-commerce companies have begun to restart investment cycles, and the temporary lying down period has passed.

(3) Subsequently, JD.com launched the "Billion Yuan Subsidy," and Alibaba quickly followed up with measures such as "Five-Star Price Power" and "99 Special Sale Channel," completely focusing the e-commerce industry on the competition for the "cost-effective" positioning in users' minds. Dolphin believes that JD.com and Alibaba's measures mainly focus on two points:

The first is to change the promotion strategy from "big promotion" to "daily low price," reversing consumers' habit of "not shopping without a big promotion" and tending to frequently compare prices. This allows consumers to consume at any time without worrying about buying too expensive, thereby increasing consumption frequency and stickiness.

Second, in the traffic distribution strategy, it changes from high-profit and strong buying ability merchants occupying traffic advantages to low-priced merchants being able to obtain a certain degree of traffic tilt. Under this distribution strategy, merchants directly use the buying cost for price subsidies to attract users with low prices, thereby driving the user traffic and stickiness of the entire platform and following a logic similar to Walmart's low-profit and high-sales.

Therefore, JD.com and Alibaba's tilt towards "cost-effectiveness" aims to sacrifice a portion of their profit space and defend against user traffic through low prices rather than buying volume.

(4) However, to successfully make users believe in the platform's "cost-effective" positioning, in addition to maintaining low prices for goods in the long term, non-price factors such as the brand level, service quality, and decoration level of products across the entire platform also need to match the price positioning. And JD.com and Alibaba are unlikely to give up the tone and user base of their main websites. Therefore, this round of tilting towards "cost-effectiveness" is more about defensive counterattacks within the sector, using daily consumer goods consumption that is naturally suitable for the "everyday low price" strategy to temporarily delay or reverse the trend of user outflow. However, the effect of overflow to the main website to drive overall sales is relatively limited. However, the profit decline caused by subsidies is real.

(5) Referring to investment, due to the industry headwinds, revenue growth will not have many bright spots, and profit margins may deteriorate instead. In the short to medium term, e-commerce companies are not in a favorable cycle. Therefore, the basic investment strategy is to invest in oversold rebound only when the stock price is significantly lower than the valuation of core assets, and opportunities for trend-continuing upward movement are not easily available.

Starting from the second quarter of this year, revenue growth will enter a period of absolute low base, and the backlash of offline will gradually ease. At the same time, when e-commerce companies re-examine or adjust their competitive strategies after several quarters of internal competition, opportunities for the resonance rebound of fundamentals and stock prices may appear.

In terms of event-driven factors, the trend of asset spin-offs and listings in recent times may release hidden assets of the companies and create short-term investment opportunities. Dolphin Jun will analyze this separately in another article.

For the specific valuation adjustments of individual stocks, please stay tuned for the next article.

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I. Is the Spring of Consumption Coming?

1. The Double-edged Sword of Offline Recovery

As Dolphin predicted in the year-end outlook report, the lifting of control measures will certainly bring about a comprehensive recovery in consumption. But structurally, the recovery of offline consumer scenarios and traffic will also reduce the dividends of online consumption. The latest data from the National Bureau of Statistics on January and February retail sales have basically verified the above expectations. Specifically:

The growth rate of total retail sales has quickly recovered from -2.7% in 4Q22 to +3.5%. At the same time, the growth rate of physical goods retailing online has not only not increased, but has slightly slowed down from 6.4% in 4Q to 5.3%.

From the perspective of online retail penetration rate (excluding automobile retailing), the penetration rate in January and February this year is 24.8%, with a year-on-year increase of only 0.2 percentage points. As can be seen from the following figure, this is the smallest increase in online penetration rate since the outbreak of COVID-19 (except for March 2021 when the penetration rate decreased year-on-year due to a high base).

3) On the other hand, the rebound in catering revenue, which reflects the level of offline consumption, is relatively strong. The catering retail growth rate in January and February soared from -14% in December last year to +9%. Even the offline commodity retail growth rate, which has been weak in performance, turned positive to 1.6% this time.

In conclusion, it is true that the recovery of offline consumption has indeed had a certain degree of erosion on online retailing, and service consumption, represented by eating, drinking, and leisure, is indeed the strongest in terms of recovery. From the current trend, it can be seen that the center of growth and rebound strength within 2023 will still be dining & in-store > offline physical objects ≈ online physical objects.

Is optional commodity consumption recovering?

Apart from the relative advantages and disadvantages of online/offline consumption reversing and services being stronger than goods, the second judgment of Dolphin Jun's outlook for 2023 is that in commodity consumption, optional goods will have a relatively strong recovery compared to necessary consumption. So, what is the actual situation? In general, there has indeed been considerable recovery in optional consumption, but online channels have not benefited from it.

According to the scale data of the above-standard social retail in January and February, the retail growth rates of typical optional consumption such as clothing, shoes, hats and cosmetics rebounded rapidly from a year-on-year contraction of -12%~-19% in December to +5.4% and +3.8%, respectively, which is significantly higher than the overall growth rate of 1.5%. Therefore, in January and February, the total consumption of optional goods did show a relatively strong recovery in all channels.

According to data from third-party institutions, sales of beauty and skincare and cosmetics on Taobao and Tmall platforms in January and February were still down 19% compared to the same period last year, which is worse than the -14.4% in 4Q22.

In terms of clothing sales, Taobao's platform also fell by 14% year-on-year in January and February this year, and there was no improvement compared to the same period last year.

Based on the situation that optional consumption has indeed recovered as a whole but online channels have performed poorly, Dolphin Jun believes that there are two inferences that can be made: ① The retaliation of offline consumption against online erosion is quite significant, especially for non-standard goods such as clothing; 2. The online sales data mentioned earlier only accounted for Taobao and Tmall platforms, and it is possible that other platforms (especially Douyin) have further occupied the market share of Taobao. Combining recent research, the GMV growth rate of Kuaishou in the first quarter was around 30%, and the poor performance of Taobao may be attributed to its loss of market share. The overall online situation of optional products may be better than that of Taobao.

In summary, although service and optional product consumption have shown signs of recovery as expected in 2023, the performance of major e-commerce platforms is still poor due to counterattacks from offline markets and internal competition among online platforms. This is also in line with the pessimistic guidance for the first quarter performance given by the management of Alibaba and JD.

Will the revival of in-store consumption be the main battlefield?

In addition, the significant increase in restaurant revenue growth from January to February, up to 9%, shows that the revival of in-store consumption is quite strong. At the same time, Meituan's guidance for the first quarter's in-store business GTV is also a year-on-year double-digit growth rate. Despite the impact of Douyin, Meituan's in-store business still enjoys substantial growth, indicating that the industry's positive outlook currently outweighs the negative impact of competition.

However, according to the management's communication, Meituan has decided to confront Douyin (or perhaps Kuaishou, which is also entering the local life sector) head-on. Meituan will increase the discount on group purchase coupons and provide some merchants with advertising fee discounts. At the same time, perhaps realizing that future competition will persist in the long term, Meituan has also lowered its long-term profit guidance for the in-store business.

Overall, the competition pattern of the in-store business may gradually deteriorate to an all-encompassing situation similar to that of the e-commerce industry. However, at the industry beta level, unlike the short-term headwinds and saturated online retail, the in-store business still has long-term potential for increasing penetration and scaling up the industry. Its prospects are still better than those of online retail.

How do e-commerce companies move forward after lying low?
Has the period of lying low passed?

Although the Dolphin had predicted in the industry summary last year that e-commerce companies' lying low for profit-making under adverse market conditions would not be a norm, the speed of actual transformation exceeded his expectations. In the fourth quarter, although the industry was still at the bottom of the cycle, the overall revenue growth rate of the pan-e-commerce companies was only 7%, which was similar to the situation in the second quarter and witnessed a double-dip in performance.

However, with the opening of policies during the fourth quarter and the certainty of consumer recovery, the marketing spending of e-commerce companies has shown signs of bottoming out and rebounding. The overall year-on-year decline in marketing costs of pan-e-commerce companies has narrowed from -7% in the second and third quarters to -2%.

From the perspective of accelerating marketing expenses, Pinduoduo and Vipshop, which were optimistic in the 3Q e-commerce summary last year, are also the fastest to turn around. Among them, Pinduoduo's marketing expenses in the fourth quarter have increased by 56%, and Vipshop has also rapidly narrowed from a year-on-year decline of 50%~60% in the first two quarters to -18%.

In contrast, the decline in expenses of Alibaba and Meituan is also narrowing, while only JD.com's marketing expenses are still widening. It can be seen that the pace of 4Q marketing expenses of e-commerce companies is basically one-to-one with the company's performance of the quarter. Once the company sees a trend of improvement in its own performance, it will increase investment again. The profit improvement brought by cost reduction and efficiency improvement and temporarily slowed competition in 2022 will not be sustainable.

2. Industry-wide competition for "cost-effectiveness"

Since 2023, JD.com has touted the high-profile launch of "100 billion subsidies" to once again focus on the positioning of cost-effectiveness and the battle for users' minds. Alibaba quickly followed suit, launching measures such as "Five-Star Price Force" (giving more traffic preference to low-price merchants) and "99 Special Sale Channel" (similar to the 9.9 free-shipping channel for daily consumption) in succession.

Since 2022, Pinduoduo, which focuses on cost-effectiveness, is undoubtedly the best-performing company in the industry, while JD.com and Alibaba are also aiming at cost-effectiveness. So, why does "cost-effectiveness" seem to have become the most reliable winning strategy, and what is the deep strategic consideration behind the company? Dolphin Jun believes that “The change from big promotions to everyday low prices in management and marketing strategies” pointed out by JD management in the performance conference is currently the biggest transformation that e-commerce companies are trying.

In fact, these two terms are not created by JD management, but are specialized terms in the field of marketing, namely:

(1) "Hi-Lo Pricing" is generally a marketing strategy adopted by high-quality merchants, which means that most of the goods are sold at standard prices, and a large discount is given to selected items for a short period of time to stimulate consumers' shopping impulses.

The characteristics of this strategy include: ① the discount time and goods are limited, and the merchant still maintains high profits for most of the time; ② the principle of promotion is that consumers think "they have taken a bargain," but they tend to consume only during the promotion period; ③ users attracted by promotion are mostly not highly loyal and tend to compare prices frequently to get the largest discount; ④ Promotion strategies are generally applicable to low-frequency optional consumption, and the cost of frequent comparison of discounts for daily consumption is too high; ⑤ Due to irregular promotions, merchants need to carry out a lot of marketing promotion during the promotion period to make users aware. (2) "Every Day Low Pricing": This is usually a marketing strategy adopted by discount stores or low-priced supermarkets. Its characteristics are: ① The vast majority of products provided by merchants are kept at relatively low prices for a long time, and prices are stable with few major price cuts; ② It is suitable for daily consumption, and users have higher loyalty. Because users already believe that the merchant has relatively low prices in most cases and will not compare prices frequently, nor are they worried about "price betrayals" caused by irregular large-scale promotions.

Obviously, Alibaba and JD.com previously adopted the "Big Promotion" strategy. The Double 11 and the 618 shopping festivals are the most important events for e-commerce platforms to attract traffic and boost sales performance within a year. However, e-commerce companies have gradually shifted from "Big Promotions" to forms of "daily sales" long ago. The frequency of promotions has increased, with promotions like the March 8th Women's Day, May 1st, Children's Day, September Back to School season and the Spring Festival New Year Shopping Festival, almost every month having promotions.

The time limit for promotions has also been extended, and the promotion period is generally around half a month now, smoothing out the peak of single-day sales promotions to a period of time. However, its essence still lies in the stimulation of consumption through discounts, and is more likely to lead to consumer habits of not consuming when there are no promotions.

But once users have formed this consumption habit, it means that the strategy of temporarily driving traffic with promotional discounts and making profits with regular prices is ineffective. Consumers only consume during the low-price promotion period, which is not conducive to the company's performance and profit. At the same time, when there is a platform that can provide "Every Day Low Prices" for almost all categories, consumers will naturally turn to the effortless and time-saving platform, resulting in the loss of traffic for the promotion platform.

3. Platform positioning and underlying mechanism reconstruction?

From the current measures, is this transformation still procedural or needs to change fundamentally? Why do JD.com and Alibaba tilt the platform's positioning towards "Cost Performance"? Can this change be successful, and can it regain market share from Pinduoduo? Let's take a closer look at these questions:

(1) JD.com and Alibaba's attempts: As mentioned above, JD.com and Alibaba's measures can be divided into two types: one is price subsidy-based "100 billion subsidy" and "9.9 special offer", and the other is distribution mechanism-based, like "5-star pricing power" giving traffic to low-priced merchants.

So how about the intensity of promotion? According to a survey by Ranshu, JD.com's "100 billion subsidy" has increased in strength and coverage compared to when it first launched.

As of March 26th, the GMV of goods participating in JD.com's 100 billion subsidy accounted for 9% of the platform's total, an increase of 6 percentage points from the day it was launched. Among them, JD's self-operated channels contributed 83% of GMV with less than half of the total number of SKUs. The number of SKUs covered by the 100 billion subsidy was more than 3,000 on the day it was launched, and by March 26th, it had exceeded 7,500. Moreover, these products are offered with significant discounts compared to historical lows. On the category side, the SKUs of the four categories of household appliances, mobile phones, computer office, and digital products account for nearly half of the total, contributing more than 75% of the GMV. However, the category is expanding, and the proportion of food, drink, and alcohol is increasing.

However, according to the investigation, in terms of the category with the highest proportion, household appliances and mobile phones, the proportion of GMV of subsidized goods participating in the billion subsidies is increasing, but the growth rate of GMV in these two categories has not improved significantly; only stock demand has been transferred from conventional channels to the "billion subsidies" channel, without bringing incremental demand.

It can be seen that JD is indeed expanding "Billion Subsidies" from a small-scale trial to a general norm. However, the effect of subsidizing GMV so far seems to be not good.

(2) Changes in traffic distribution mechanisms: In addition to the initiatives of "Billion Subsidy" and "9.9 Special Sale" which respectively change the user's mindset through subsidies for large single products and daily consumer goods, Alibaba and Jingdong are also trying to optimize their core traffic distribution mechanisms.

Although the traffic distribution algorithm of e-commerce platforms is like a black box to us, various factors such as store level, traffic, conversion rate, and paid promotion have an impact. Under the logic of traffic monetization, Dolphin believes that the circulation logic of traffic is: high-price and high-volume of merchant goods (can generate higher transaction volume) -> high profit margin (strong ability to pay for promotion) -> pay for purchase volume, and skewed traffic (further promote merchant transaction volume).

Under this distribution logic, in short, the merchants who make the most money and are most willing to spend money on buying traffic will always occupy the traffic high ground, contribute the most revenue to the platform, and are the real objects that the platform truly serves.

Recently, Taobao and Jingdong have proposed "One-click Comparison Price" and "Five-star Price Force" and other low-price priority traffic distribution strategies, which are: the merchant's product price is the lowest -> the platform gives free traffic skew-> the merchant has thin profits but sells more goods -> low prices bring more natural user traffic. That is, merchants directly use the cost of buying traffic for price subsidies to attract natural user traffic at low prices, and both merchants and platforms follow the logic of volume rather than price.

Dolphin believes that the difference between these traffic distribution strategies is one of the most essential differences between Pinduoduo and Alibaba and Jingdong, in addition to brand/price tonality. Therefore, Jingdong and Alibaba's tilt towards "cost-effectiveness" this time is to sacrifice a part of their profit margin, and defend/counterattack user traffic through low prices rather than buying traffic. This time, e-commerce platforms no longer focus on their own income or profits, but on how to retain users and hopefully attract new natural traffic.

This is also why JD changed the assessment indicators from income to GMV, and why Pinduoduo believes that it should not rely mainly on top merchants for monetization, but on monetizing the entire platform's traffic.

(3) Can transformation succeed: Combining academic research in related fields, Dolphin found that the shopping mall (also applicable to online platforms) originally positioned as "quality/high-end", if it wants to transform to a lower price positioning, it needs to meet: ①long-term and stable relative low price,②daily consumer goods need a wide range of guaranteed low prices, and optional consumption can only guarantee low prices for a few highly influential individual products,③The non-price factors such as the brand level, service level, and decoration level of all products on the platform should also match the price positioning. (Possible explanation of why Pinduoduo still maintains a relatively rough app page)

As we can see, JD.com and Alibaba's measures are all correct and reasonable operations in the above business logic and academic research . We also believe that "Hundred billion subsidies" and "9.9 special sale" can compete with Pinduoduo in their respective sectors.

However, the stratification of user groups is one of the key factors in distinguishing platforms. This is also why JD.com and Alibaba previously targeted the sinking market through independent "Tao Te" and "Jing Xi" apps, thereby distinguishing themselves from main apps and protecting the experience of main app users. Therefore, the Dolphin Jun does not believe that JD.com and Alibaba will turn the overall tone of the main app to "cost-effective".

Therefore, the overflow effect of the main app driven by "billion subsidies" and "9.9 special sale" may be relatively limited, and it is more of a defensive behavior.

(4) What is the cost of tilting towards "cost-effectiveness"? First of all, for Alibaba and JD.com, subsidizing prices or giving low-priced merchants some free traffic will inevitably lead to an increase in their marketing subsidy costs. And the current subsidy results are mostly just shifting transactions from regular channels to subsidy channels with limited additional increments.

Therefore, the revenue scale of JD.com and Alibaba will also be adversely affected. Combined, the profits of JD.com and Alibaba are bound to have a marginal deterioration trend.

For Pinduoduo, although the Dolphin Jun believes that Pinduoduo's cost-effective positioning in the hearts of users will not be overturned, competition intensification is also inevitable. At the same time, after the consumption recovery (although weak), the logic of daily necessities dominance, consumer "downgrading", and destocking by merchants, although continuing, will weaken marginally.

Overall, when the industry's head players such as Alibaba, JD.com, and Pinduoduo all adopt the same subsidy strategy, the result is likely to be a zero-sum game. No one can truly gain incremental traffic, but the profits of the three companies will be negatively affected.

4. Where are the opportunities for pan-e-commerce in 2023?

Looking ahead to 2023 from the current point, the Dolphin Jun believes that the key points that need to be focused on when investing in pan-e-commerce companies are as follows:

(1) The weak recovery in commodity consumption before the year and the backlash of online dividends belong to the expected headwinds. Therefore, at the beta level of the industry, online retailing will not take the lead in the medium and short term, and revenue growth will be difficult to improve.

(2) Although the restart of competition did not surprise the Dolphin Jun, the speed of the restart and the competition method of using subsidies to carry out similar price wars still exceeded the expectations of Dolphin Jun. It is basically doomed that if no differentiation path is taken, but choosing the same strategy to enclose, the profit margin levels of the three companies, Alibaba, JD.com, and Pinduoduo, are very likely to fall from the high point of last year's 3/4Q before anyone yields.

(3) Combined with the above two points, there is no bright spot in revenue growth, and the profit space may deteriorate instead. In the medium and short term, e-commerce companies are not in a favorable period. Therefore, the investment strategy is basically only to invest in oversold rebounds when the stock price is significantly lower than the valuation bottom of core assets, and opportunities for sustained upward trends are difficult to appear. But other than that, do the generalized e-commerce companies have no chance? The Dolphin believes that this is not necessarily the case.

(4) Firstly, although there is not much upward trend in the short to medium term performance, the wave of asset spin-offs and listings launched by Alibaba and JD.com releases the valuation potential for many Internet companies with numerous invisible assets.

(5) Lastly, starting from Q3, e-commerce companies' revenue will enter an extremely low base period; the impact of offline channels cannibalizing online channels may also begin to fade; after experiencing two quarters of highly probable inter-competition, e-commerce companies may re-evaluate their competition and investment strategies. At that time, e-commerce companies may welcome a wave of performance and stock price repairs from a fundamental perspective.

Please look forward to the next article for the specific valuation adjustments of individual stocks.

Dolphin Longbridge Investment Research's related research in the past:

E-commerce industry

January 5, 2023 " Offensive and Defensive Situation Greatly Reversed: "Alibaba, Ctrip, and Didi" Will Fight Back"

September 30, 2022 " Pinduoduo vs. Vipshop: Your "Hard Days" Are Their "Good Days"?"

September 22, 2022 " Alibaba, Meituan, JD.com, Pinduoduo: Have They All Given Up? They Still Have to Struggle for the "Great Fortune""

April 27, 2022 " Alibaba vs. Pinduoduo: After Bloody Battles, Only Coexistence is Left?"

April 22, 2022 " Meituan, JD.com, What Makes Them Perform Better in Stock Battle?"

April 13, 2022 " As the Cycle "Decays", How Much Value Do Alibaba, Tencent, and Others Have Left?"

Risk disclosure and statement in this article: Dolphin Investment Research Disclaimer and General Disclosure