August 19, 2015    3 minute read

Alibaba’s Shift in Strategy

   August 19, 2015    3 minute read

Alibaba’s Shift in Strategy

2015 hasn’t been an easy year for Alibaba, China’s biggest online retail giant. Its share price has dropped by 24% since it launched its IPO in September last year. Its revenue was $3.2bn, a growth of 28% lower than the expectation of $3.39bn. It has also reported the slowest quarterly growth in the past three years. This dramatic fall in its short-term profitability has worried investors.

(Source: FT)

So what is Alibaba?

Alibaba allows a business in the UK to find a manufacturer in China and have a range of goods produced and shipped. It’s not just businesses that use Alibaba’s websites. It also owns taobao.com, China’s largest shopping website, and tmall.com, which offers a wide selection of branded goods to China’s emerging middle class. Alibaba’s reach does not end there, it also runs the online payment system alipay.com, which operates in a similar manner to Paypal. It also has a large stake in Sina Weibo, China’s version of Twitter, and the online video provider, Youku Tudou, which operates in a similar way to YouTube. The company also offers online marketing, cloud computing and a logistics operation. Alibaba claimed the title for the largest global IPO in stock exchange history in September last year when demand for its share was way over expectation.

The Strategy Shift

In future quarters, a weaker renminbi will be a drag on dollar-dominated results. The company’s growth was mainly crimped by Chinese authorities suspending online lotteries and the transfer of its lending business to a sister company. Alibaba’s operating margin fell to 52%. The company says it reflects its investment in digital payments and cloud computing.

Alibaba has been successfully transformed itself at the time when many consumers are moving to mobile internet. Alibaba has used the rapidly increasing online market to pioneer smartphone technology in the country, and now controls over 75% of all mobile retail in China. Results have shown that over half of the group’s revenue is generated by its mobile site.

Recently, Alibaba has announced that it will invest $4.6bn in a 19.99% stack in China’s largest physical electronics retailer, Suning. Suning will also invest $2.25bn in Alibaba in return for a 1.1% stack of the company. This strategy shift has concerned investors, given the company’s performance has been way under expectation since the launch of its IPO and the magnitude of the size of investment made by Alibaba in its core business and other areas. On the other side of the coin, this creates a link between the company’s online services and traditional retailers and businesses: a trend known as ‘’Online-to-Offline’’- that Alibaba is hoping to tap into. Suning, which has about 1,600 shops in China, said customers would be able to browse electronics in its stores before purchasing the item on Alibaba’s site. It also said its network of physical stores would join forces with Alibaba’s distribution operations to cut the delivery time of goods to customers – to as little as two hours.

Although some investors think they could benefit from this shift in strategy, this doesn’t affect the others’ disappointment from its poor performance in the last two quarters. Billionaire George Soros’s family office sold almost its entire stake in Alibaba Group Holding Ltd.

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