Competitive Landscape Instigates Cash Depletion and Margin Erosion
Intense rivalry is engendering substantial financial losses and squeezing profit margins across various sectors.
Profit Forecasts in Jeopardy
Analysts anticipate a wave of profit warnings and downward adjustments for leading enterprises.
Regulatory Pressures Loom
Heightened regulatory scrutiny may temper aggressive pricing initiatives.
SHANGHAI, Sept 8
The fierce confrontation among China’s prominent online retailers in the quest for supremacy in the “instant retail” sector is likely to further undermine their profits in both the short and medium term. This struggle contributes to deflationary trends within the world’s second-largest economy.
Market Share Wars
Companies such as Alibaba, Meituan, and JD.com have inundated consumers with enticing discounts and promotional offers to capture a greater share of the rapidly expanding one-hour delivery market. This aggressive strategy is depleting their cash reserves and compressing profit margins, raising strategic concerns among investors.
Regulatory Oversight Intensifies
These companies now face increased regulatory examination, with officials expressing apprehension regarding a downward price spiral. In a climate marked by fragile property values and precarious job security, companies are compelled to adopt aggressive pricing and subsidy tactics to stimulate consumer spending.
Quarterly Earnings Under Scrutiny
Recent reports from e-commerce and food delivery firms revealing earnings for the quarter ending June 30 highlighted a prevailing theme of competitive pressure during analyst discussions and executive remarks.
Voices of Concern
At JD.com, CEO Sandy Xu cautioned against the perils of “excessive competition,” while Meituan’s CEO Wang Xing noted an emergence of a “new phase of competition.” Furthermore, Zhao Jiazhen, co-CEO of PDD Holdings, emphasized that competition within the industry has escalated throughout the quarter.
Strategic Maneuvering
The initial skirmishes erupted earlier this year when JD.com, concerned by Meituan’s strategy to diversify its product offerings, launched an app aimed at rivaling Meituan’s core food delivery service. Subsequently, Alibaba, which operates the Ele.me food delivery platform, boosted its investments in this domain.
Capital Investment in Competition
These three companies have allocated billions to secure market dominance. Analysts at Nomura have estimated that the collective cash burn within the industry reached over $4 billion in the second quarter alone.
High-Stakes Environment
“The landscape is increasingly treacherous, akin to a high-stakes ‘game of chicken,’ where the investments of the first player to yield may ultimately prove futile. We foresee this fierce competition persisting at least through the upcoming [Singles’ Day] shopping festival in November,” remarked Kenneth Fong, head of internet research at UBS Investment Bank in China.
Forecasting Future Investments
Analysts at S&P Global project that Meituan, JD.com, and Alibaba will need to invest at least 160 billion yuan over the next year to sustain or enhance their market presence in food delivery and instant retail. They have signaled impending “significant downward revisions” to profit forecasts, suggesting that margins are unlikely to rebound in the near term.
Challenges for Meituan and Others
Meituan is projected to bear the brunt of these developments, as food delivery constitutes a substantial portion of its revenue stream. JD.com’s losses in food delivery almost negated its profit for the second quarter, while Alibaba is somewhat insulated due to its smaller reliance on instant retail.
Pinduoduo’s Position
PDD Holdings’ domestic platform, Pinduoduo, has remained relatively distant from the instant retail skirmish; however, its cost advantage is diminishing as competitors engage in aggressive discounting.
Profit Sustainability in Question
“We doubt the sustainability of this quarter’s profit levels and expect fluctuations in earnings in subsequent quarters,” stated co-CEO Zhao.
Impact of E-Commerce Revenue Fluctuations
Contributing to the current quarter’s margin pressure will be challenges in maintaining e-commerce revenues following the recent mid-year 618 shopping festival.
Long-Term Strategic Investment
Despite the short-term losses, companies are optimistically banking on future gains. Jiang Fan, CEO of Alibaba’s e-commerce division, projected that the instant retail sector could generate an additional 1 trillion yuan in annual gross merchandise volume over the next three years.
Key Metrics for Future Observation
Critical indicators in the latter half of the year will include those reflecting the migration of instant retail users towards core e-commerce platforms. JD.com reported a more than 40% increase in quarterly active customers year-on-year for Q2, while Alibaba’s Taobao app recorded a 25% rise in monthly active users during the first three weeks of August, largely attributable to conversions from food delivery users.
Future of Price Wars
Although these companies seem poised for a lengthy contest, there remains the possibility that external interventions could curtail these price conflicts.
Regulatory Warnings Issued
Regulators have persistently cautioned platforms against engaging in a “race to the bottom” in pricing strategies. This has prompted Meituan, Alibaba, and JD.com to issue commitments in July aimed at mitigating price wars.
Expectations of Rationalized Competition
“We anticipate that the firms’ declarations regarding adherence to government anti-involution measures will gradually lead to a rationalization of competitive dynamics,” noted Ying Wang, senior analyst at Moody’s Ratings.
Source link: Livemint.com.
