E-commerce Final Battle, Can Taobao Outperform Douyin?

Last Thursday, the Dolphin Analyst pointed out in the Pan-Retail Internet Summary "The Offensive and Defensive Situation has Reversed, "Alibaba, Ctrip, Didi" are Going on the Offensive" that the most resilient target in the e-commerce sector in the short to medium term was Alibaba, which was previously "disdained" by the market.

In the previous article, the Dolphin Analyst mainly started from the perspective of cross-industry advantages and market preferences: in the 2023 consumption recovery cycle, optional goods such as clothing and cosmetics dominated by Taobao-based e-commerce have greater elastic repairability, and Alibaba's performance is expected to show a marginal inflection point; in addition, the recent central government’s support for the reasonable development of the platform economy and the expansion of Ant's consumer finance company also indicate that the regulatory environment faced by Alibaba is continuously improving, which is conducive to valuation repair.

This article will judge the future growth prospects and reasonable valuation range of Alibaba's main business from a more detailed and fundamental perspective. The core conclusion of the Dolphin Analyst is:

1. According to the forecasts of authoritative institutions, after the relaxation of epidemic prevention, China's central GDP growth rate in the next few years will be restored to around 5% based on the historical correlation between domestic commodity retail and macroeconomic growth. The Dolphin Analyst estimates that the central growth rate of online commodity retail in China in the mid-term will be around 11%, which is significantly rebounded compared to the 6% growth rate in 2022, but it is also only an "L"-shaped recovery. Although the growth rate will stabilize, it will be difficult to recover to the "golden age" of more than 20% growth rate before 2019. The growth of various e-commerce platforms in the future will also revolve around this new center, launching a competition of "you push me in".

2. For traditional e-commerce platforms, the rising new force of live-streaming e-commerce is the biggest competitor and disrupter. Among them, Alibaba has the highest degree of overlap with live-streaming e-commerce in its advantage categories, and is the player with the most severe market share loss in recent years. Moreover, due to the stronger brand promotion effect of live-streaming e-commerce, merchants are more willing to advertise on live-streaming e-commerce platforms, which has caused a more severe impact on Alibaba's e-commerce revenue than its GMV. Therefore, live-streaming e-commerce, especially Douyin, is Alibaba's biggest rival. So where has the impact of live-streaming e-commerce on Alibaba reached?

Through benchmarking with users' penetration rate, shopping frequency, and per capita purchase amount, the Dolphin Analyst found that Douyin has reached a level similar to Alibaba's. And Douyin is essentially an entertainment platform, and its need to ensure user experience also limits the space for it to further promote e-commerce monetization aggressively. Therefore, the Dolphin Analyst believes that Douyin's live-streaming e-commerce model will no longer maintain a super high growth rate, and will fall back to the range of steady growth. Although it will still have a considerable erosion effect on Alibaba's e-commerce revenue in the next few quarters, the turning point of easing will soon come.

However, although the momentum of Douyin's live-streaming e-commerce model will slow down, the recently launched Douyin Mall (the traditional shelf e-commerce model) is an enemy that cannot be ignored. Although Douyin Mall is not mature at present, it is still unknown whether ByteDance has the ability to become a traditional shelf e-commerce platform. But this will be the final battle between Douyin and Alibaba. If Douyin Mall fails, the erosion of Alibaba will gradually end; but if Douyin Mall succeeds, it will be the "last days" for Alibaba. For friends who are interested in interpreting research reports on Chinese companies, welcome to add WeChat account "dolphinR123" to join our investment research group. You can get the Dolphin in-depth research report and chat with investment veterans about investment opportunities in real time.

1. What is the central growth rate for online retail in the future?

As the e-commerce industry is essentially a retail business, and with the basic exhaustion of domestic internet dividends, it is difficult to achieve independent growth as a whole. As a result, predicting the future growth of Alibaba's core e-commerce sector requires first determining the central growth rate of the domestic macroeconomy and the online retail sector. Regarding the prediction framework, the Dolphin Analyst adopts a top-down forecasting approach, starting from GDP growth rate → retail market growth rate → online retail growth rate:

1. First, in step one, after the end of epidemic prevention and control in 2023, what level can the actual GDP (constant price) growth rate in China recover to? As macro research is not the Dolphin Analyst's specialty, we will provide a simple qualitative judgment. In comparison with the recovery year of 2021 after the epidemic, the two-year compound growth rate of GDP is 5.3%, with a high annual growth rate of 8.4% due to a low base in the previous year. However, since 2021, after experiencing a sharp contraction in the real estate industry and regulatory measures in multiple industries, the confidence and economic vitality of residents and enterprises have both suffered significantly, and the external environment this year has gradually moved from prosperity in 2021 to recession. Therefore, the rebound in GDP growth rate in 2023 is probably not as strong as that in 2021.

Quantitatively, with reference to the mainstream institutions' forecast for the range of China's actual GDP growth rate in 2023 being roughly around 5% to 5.5%. As for the rebound in 2023, the International Monetary Fund's prediction for the central growth rate of China's actual GDP in the medium term is about 4.6%.

However, the above GDP growth rate prediction is based on the assumption of unchanged prices, so the nominal GDP growth rate, which includes inflation, should be higher than the above prediction by about 1% to 3%.

1. In the second step, based on the previous GDP growth rate expectations, how much can domestic consumption and retail contribute to the growth rate? Looking at historical data, the growth rate of domestic commodity retailing has always been higher than the growth rate of nominal GDP in China between 2012 and 2016. However, the trend has reversed since then, and since 2017, domestic consumer spending has been slower than the overall growth of China's economy. There are many possible reasons for this trend reversal, and the Dolphin Analyst believes that the peak and decline of the birth rate of new births in China and the turning point of the ratio of domestic house prices to income, which may suppress other consumption, are the reasons for the continued weakness in commodity consumption growth and the macroeconomic growth rate since 2017.

Looking forward to 2023, focusing on the three major drivers of economic growth: consumption (including residents and the government), investment, and net exports. First, let's talk about net exports. From the data, the net export amount from January to November has dropped rapidly from the previous high double-digit growth rate to only about 7%, and it is likely that exports facing external demand will drag or make zero contribution to economic growth. Fixed asset investment mainly depends on the strength of next year's fiscal investment, the confidence of enterprises in restoring capex, and the situation of real estate investment repair. This issue is more complex and macro problems are not Dolphin Analyst's expertise, so we will not go into it here.

As for consumption, looking back in history, the 2021 when consumption rebounded was also the first time since 2016 that the retail sales growth rate was higher than the nominal GDP growth rate. Therefore, Dolphin believes that the retail sales growth rate in 2023 will be higher than the nominal GDP growth rate, and the leading margin is likely to be larger than that in 2021. However, in the medium to long-term trend, the deterioration of the domestic population structure and the problem of housing prices have not been resolved, so it is expected that after the recovery in 2023, the retail sales growth rate will gradually flatten with the macroeconomic trend. Overall, it is expected that the central point of retail sales growth rate from 2022 to 2026 will be between 7% and 8%.

The third step is based on the overall growth rate of retail sales to judge the central growth rate of online retail sales in the next few years, and the key is how much room there is for the already close-to-the-ceiling online penetration rate to increase. Looking at different categories, the online penetration rate of daily necessities, fresh food, and pharmaceuticals ranked from high to low in 2021 is 37%, 25%, and 15%, respectively, with considerable room for improvement. They also accounted for a total of 36% of the total retail sales. This is also the direction of the focus of investment by e-commerce platforms in recent years.

Therefore, assuming that the online penetration rate of these three major categories can increase by about 8% to 9% (about 1.7% per year) in the 5 years from 2021 to 2026, the overall online penetration rate (excluding cars, oil, etc.) is expected to increase from 30% in 2022 to 35% in 2026, which is equivalent to an annual increase of 1.1%. Compared with the average annual increase of 2.3% in online penetration rate from 2019 to 2022 in the same four years, Dolphin believes that the above expectations are not too aggressive and are achievable goals. It is expected that the online penetration rate in 2023 will increase only slightly, as it is the first year of the release of the epidemic and consumption will return to offline channels.

Finally, Dolphin Analyst calculated that the central growth rate of online physical retail during the four years from 2023 to 2026 is 11.4%, among which the lowest growth rate is 11.3% in 2023 but still slightly higher than that in 2022. However, what surprised Dolphin Analyst is that even if we expect the online retail growth rate to stabilize after the epidemic, it will not accelerate again. Starting from 2024, the absolute growth of online retail sales will actually reach the highest value in history every year. It can be seen that there is still considerable incremental growth in the online retail market.

2. When will the impact of live streaming e-commerce on Alibaba stop?

According to the analysis above, we can see that the central growth rate of online retail can still be around 10% in the future, and except for 2023, when consumers return to offline, the annual increase in online retail sales will be about 1.6~1.7 trillion yuan in the following years. However, the emergence of the rising star live streaming e-commerce and Tencent Video Number, which is also starting to monetize e-commerce, are sharing this limited incremental growth in e-commerce. And this means that the market share of traditional e-commerce, especially the leader Alibaba, is being eroded.

1. Live streaming e-commerce grows, Alibaba suffers the most

Relying on its huge traffic advantage in user time, it quickly entered the e-commerce industry and rapidly expanded its scale with live streaming and short videos as the main business and shelf mall as the supplement. According to the rough GMV calculation (including unpaid or returned), the GMV of Douyin and Kuaishou has rapidly increased from about 200 billion yuan in 2019 to about 2.3 trillion yuan in 2022, a tenfold increase in three years. Among them, the scale of Douyin is larger, which is about 1.5 times that of Kuaishou. Such an astonishing growth rate and an already significant total volume will inevitably have a significant impact on the competition pattern of existing e-commerce platforms.

Meanwhile, the emergence of "new rich" live-streaming e-commerce has first and foremost affected the largest "old-school aristocrat" Alibaba e-commerce in the industry. According to Dolphin's incomplete statistics, from 2017 to 2022, the market share of the second-placed Jingdong in the industry has actually remained stable at around 20%, while Alibaba's market share has fallen from over 70% to less than 50%.

However, although Pinduoduo and live-streaming e-commerce are both competing for a considerable market share, their impact on Alibaba is not the same: 1) Pinduoduo's conquest of Alibaba is more about taking a foothold in the sinking market and fresh food, which may result in a loss of incremental space that Alibaba could have gained in these two sectors; 2) On the other hand, TikTok and Kuaishou are more about attacking and seizing the core advantages of Taobao's existing e-commerce business.

As can be seen from the graph below, among the three major traditional e-commerce platforms in China, Alibaba's e-commerce, as the industry leader, has the most balanced category coverage, but has an advantage in optional goods such as clothing and beauty; JD.com is dominated by 3C and home furnishings, while Pinduoduo is dominated by food and daily necessities. Clothing, beauty products, and jewelry account for about 60% of the GMV in live-streaming e-commerce, which is an absolute head. Therefore, in the process of rapid growth from zero to 23 trillion RMB, live-streaming e-commerce has surpassed Alibaba through innovative selling models. A considerable part of it directly comes from Alibaba. Among them, TikTok has a larger scale, higher positioning and a more obvious impact on Alibaba in the proportion of clothing and beauty.

Not only in terms of GMV, but live-streaming e-commerce has a greater impact on monetization.

However, live-streaming e-commerce (especially TikTok) has a more significant impact on Alibaba's revenue. Although Alibaba's e-commerce has a relatively balanced proportion of GMV in all commodity categories, the profit margin of optional goods such as clothing and beauty is higher, and their products are non-standard, so merchants have more profit margins and willingness to pay commissions and advertising fees. Therefore, in fact, Alibaba's revenue from clothing and beauty products is higher, and the impact of live-streaming e-commerce on Alibaba's performance is actually more severe than the decline in market share.

Moreover, short video platforms themselves have higher media attributes and enormous traffic advantages. In addition to obtaining sales revenue through live streaming or short videos, merchants can also achieve better product promotion effects than on traditional e-commerce platforms. Therefore, merchants are more inclined to advertise on live-streaming e-commerce.

According to research statistics, the overall monetization rate (commission + advertising) charged by TikTok's live-streaming e-commerce is as high as 9% or more, far exceeding the overall monetization rate of 3% to 4% of traditional e-commerce platforms. Among them, the commission rate is only 1.5%, while the advertising monetization rate exceeds 7%, showing that merchants have a strong willingness to advertise on the TikTok platform.

Therefore, when merchants have a limited overall advertising budget and have to pay higher fees to advertise on live-streaming e-commerce platforms such as TikTok, it will undoubtedly result in a significant reduction in advertising budgets originally allocated to Alibaba's e-commerce. Dolphin Analyst believes that the continuous slower growth of Ali's e-commerce customer management revenue (CMR) since 2021 is one of the main reasons for the poor performance of Ali's e-commerce sector in the past, especially in the competition in clothing and beauty products on live streaming e-commerce, particularly Douyin (TikTok).

When will the impact of Douyin on Alibaba improve? After experiencing explosive growth tenfold in GMV over three years, can live streaming e-commerce, especially Douyin, maintain its growth far above the industry average, and when will its growth rate and turning point against traditional e-commerce such as Alibaba come? Specifically:

1. Has the GMV growth rate turning point in live streaming e-commerce arrived?

As official data is lacking, various third-party institutions' Douyin GMV data in the market is not unified, so we can only make directional judgments and should not scrutinize the data. According to Sandalwood data, Douyin GMV's YoY growth rate was still as high as 72% in 3Q22, but the growth rate has rapidly decreased to below 20%-30% since the fourth quarter, indicating that Douyin seems to be leaving the explosive growth stage.

However, if we refer to the e-commerce sales data of Double Eleven Shopping Festival 2022 released by Xingtou (Starlink) data, the growth rate of live streaming e-commerce still leads e-commerce, with GMV growth rate still as high as 146% during Double Eleven 2022 which is much higher than the industry average increase rate of 14% and the comprehensive e-commerce such as Alibaba and JD.com, which had growth rates of only 3% overall. And this shows that live streaming e-commerce seems to be still in the explosive growth phase and has not slowed down significantly, as shown in Sandalwood data. Dolphin Analyst believes that live streaming e-commerce began to hold shopping festivals with a low base volume, and the reason for the growth rate being much higher during the Double Eleven Shopping Festival in 2022 than non-festival periods. Nevertheless, this also indicates that live streaming e-commerce still has a lot of room for improvement and increase in volume.

So, aside from third-party data, what are the guidelines for Douyin and Kuaishou (Kwai) official's GMV growth rate for e-commerce in 2023? According to surveys, Douyin's 2022 GMV is between 14-15 trillion RMB, and the target for 2023 is to increase it by 500 billion RMB, reaching a total of approximately 2 trillion RMB, corresponding to a YoY growth rate of 35%-40%. While Kuaishou's GMV for this year is approximately 900 billion RMB, and the goal for next year is 1.3 trillion RMB, which is a YoY growth rate of 44%.

If both companies can achieve their goals this year, then the overall GMV growth rate of Douyin and Kuaishou's e-commerce in 2023 will drop slightly from last year's approximately 56% to 41%, but the absolute GMV increment will increase from 830 billion RMB last year to 940 billion RMB, that is, the growth momentum of live streaming e-commerce will not slow down significantly. However, the above guidelines refer only to Douyin and Kuaishou. Two companies' "expectations", whether they can be realized next year remains to be seen.

1. Where is the growth momentum and ceiling of live streaming e-commerce?

The Dolphin Analyst believes that the early growth momentum of live streaming e-commerce mainly lies in the improvement of user penetration rate, while in the medium and long term, it lies in the improvement of user shopping frequency and customer unit price. So where are the above three driving factors currently at?

First of all, from the perspective of user penetration rate, according to the survey, the penetration rate of Kuaishou e-commerce users under annual active users in 2022 is 30%, while the overall user penetration rate of Douyin e-commerce in daily active users has exceeded 50%. The penetration rate of the Douyin Mall of the shelf-based e-commerce model has also exceeded 20%. It can be seen that the current user penetration rate of Douyin e-commerce is quite high, significantly ahead of Kuaishou (which should also be the main reason why the total GMV of Douyin far exceeds that of Kuaishou). Therefore, the Dolphin Analyst believes that Douyin's phase of rapidly increasing GMV scale by increasing the volume of e-commerce users has basically passed, while Kuaishou still has a lot of room for improvement.

As we all know, the strong traffic advantages of short videos and live streaming are the foundation for Douyin and Kuaishou to carry out a series of commercial monetization activities such as e-commerce, local life, and recruitment. But water can carry a boat, but it can also capsize it. The entertainment attributes at the core of Douyin and Kuaishou also limit their commercialization ceiling. Douyin and Kuaishou must limit the proportion of commercial advertisements, otherwise, once they harm users' entertainment experience and cause users and traffic to leave, it will be forsaking the core for the peripherals. Although the user penetration rate of Douyin e-commerce will continue to increase, and even to 70-80%, it is not impossible, but the current penetration rate has passed the halfway point, and Douyin is also difficult to significantly increase the proportion of e-commerce-related videos. The pace of future penetration rate improvement is likely to slow down.

From the perspective of customer unit price, it was found through the survey that in 2022, the customer unit price of Douyin e-commerce ranged between RMB 60-80 yuan, with the customer unit price of the search and mall channels higher than that of the live streaming and short video channels. Kuaishou's customer unit price has also reached the level of RMB 80 yuan. In comparison, the customer unit price of the Taobao e-commerce platform is only about RMB 100 yuan, and that of Pinduoduo is only about RMB 40 yuan. Therefore, the gap in customer unit price between live streaming e-commerce and traditional e-commerce is not large, with only 20%-30% room for improvement compared to Alibaba.

As for the frequency of orders per capita, Kuaishou's order frequency per year in 2022 has approached 50 (the Dolphin Analyst has not seen relevant data from Douyin), while the order frequency per year of Pinduoduo users is 77 times, and that of Taobao e-commerce should be more than 90 times. Therefore, there is still room for improvement in the frequency of orders per capita in live streaming e-commerce. However, from another perspective, the sales model of promoting products by anchors or video recommendations can adapt to fewer shopping scenarios than shelf-based e-commerce, so the upper limit of the order frequency of live streaming e-commerce seems reasonable and logical considering it is slightly lower.

Overall, in terms of buyer volume, order frequency and average order value, although Douyin still has room for improvement compared to Alibaba, there is no longer a qualitative gap between them. Among them, although the buyer penetration rate and user order frequency still have large room for improvement, the business model of live e-commerce actually restricts the ceiling of the above two points. As for the average order value, the difference between live e-commerce and traditional e-commerce is even smaller, and mainly due to the low proportion of high-priced products such as 3C and appliances on live e-commerce platforms.

Therefore, based on the current position of the above three indicators, although live e-commerce still has growth advantages, it has basically passed the explosive growth stage and is difficult to maintain high double-digit growth. Although it will continue to seize traditional e-commerce market share in the next few years, the impact will be significantly reduced.

1. What is the future direction of live e-commerce?

Based on the analysis above, Dolphin Analyst believes that the business model of selling goods through live streaming on Douyin and Kuaishou will enter a steady growth stage that is stronger than the industry in the future, and the scale limit has also appeared. So in addition to continuing to grow in the mode of live e-commerce, is there still room and ways to further increase the GMV of Douyin and Kuaishou's e-commerce? Combining logic and expert research, Dolphin Analyst believes that developing into comprehensive shelves e-commerce and full-category e-commerce are two relatively clear directions.

First of all, logically speaking, since entertainment attributes and commercial realization are relatively mutually exclusive, constructing a pure e-commerce platform that is independent of the Douyin main platform is a method that can allow users who want to watch short videos and shop without affecting each other. According to research by securities firms, by the fourth quarter of 2022, the GMV of search channels in Douyin's total GMV has clearly exceeded 10%, and the GMV growth rate of mall channels in the recent period is in triple digits. And according to expert research, Douyin also has a target to increase the proportion of GMV from search+mall channels to around 40%.

In addition, although clothing, beauty, food and other products are still the main and superior categories of live e-commerce, Douyin and Kuaishou have the motivation to increase the proportion of non-superior categories such as electronics and home furnishings from the perspective of expanding product category coverage or improving the average order value. According to research institution data, the categories with the fastest annual growth rate in the first half of 2022 on Douyin are also household goods and books, audio and video products. And if Douyin, Kuaishou, and other platforms gradually increase the proportion of GMV from search and mall channels, they can better adapt to the shopping scenes of standard products such as electronics and home furnishings.

Summary: It can be seen from the above that the impact of live-streaming e-commerce on Alibaba is likely to start marginally improving, but whether Douyin can rebuild an independent and complete full-category e-commerce platform from live-streaming is the biggest unknown for Alibaba. However, at present, Douyin Mall does not yet have the elements of success.

This article mainly focuses on the analysis of the prospects of Alibaba's core e-commerce sector. In the next article, we will study Alibaba's other two core assets, finance/payment (Ant Group) and cloud services, and give a comprehensive judgment on Alibaba's reasonable valuation.

Previous research by Dolphin Analyst:

[Industry]

January 5, 2023, "The tide is turning, "Alibaba, Ctrip, and Didi" are counterattacking"

September 30, 2022, "Pinduoduo vs. Vipshop: Your "poor days" are their "good days"?"

September 22, 2022, "Alibaba, Meituan, JD.com, Pinduoduo: All resigned to their fate? Still have to fight for the "big luck""

April 27, 2022, "Alibaba vs. Pinduoduo: After the bloody battle, only coexistence remains?"

April 22, 2022, "Why are Meituan and JD.com doing better in the stock fightdown"

April 13, 2022, "As the cycle "degenerates", how much value do Alibaba and Tencent have left?"

[Company]

November 18, 2022, conference call, "Alibaba: "Actively preparing for the end of the epidemic situation" (summary of conference call)"

November 18, 2022, financial report review, "Alibaba: Bursting Losses are just Paper Tigers, "Competition Deadlock" is the Fatal Blow"

August 4, 2022, conference call, "Alibaba without user growth: Focusing on wallet share, Seeking Quality and Efficiency (Summary of conference call)"

August 4, 2022, financial report review, "Cutting down and slimming down, Alibaba is "throwing itself into the money-making journey"" On May 26, 2022, the telephone conference call on "Sustainable Management and User Expectations for Recovery (Alibaba Telephone Conference Summary)" was held.

On May 26, 2022, the financial report review on "After a 70% Plunge, Alibaba Finally Sees the Dawn of a Turning Point?" was conducted.

Risk disclosure and statement: Dolphin Research Institute Disclaimer and General Disclosure.