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this article is written based on public information and is for information exchange only and does not constitute any investment advice.

the 2024 interim report season has come to an end. the waves in the stagnant water still belong to the e-commerce sector: as a barometer of total social demand, competition and evolution never sleep.

as mentioned in our report "the fifth consumer age", in the period from 2018 to the present, the rise of pinduoduo and video e-commerce has led the main line of the e-commerce war: from questioning to imitating pinduoduo, the battle has continued to evolve.

to this day, through the clues that the e-commerce giants are on the alert, we can see that the latest battle is about to begin: this will be the fourth round of e-commerce battles in the past six years; in a sense, it will also be the fourth breakout battle that pinduoduo has to face.

the fun is about to begin. this time, it’s a battle for new quality supply.

01

"target" pinduoduo

as taleb said, "since cato the elder in ancient rome, people have been expressing their maturity by denouncing the "shallowness" of the next generation and praising the "values" of the previous generation." historically, the last person to enter the game in the old era will always be regarded as a public enemy.

this is not only pinduoduo's fate, but also a clue to tracking the e-commerce competition trends in the next period.

to understand the significance of this situation and the premise of understanding the evolution of trends, we need to review the several rounds of e-commerce battles since pinduoduo's rise:

first round: choose one of two

pinduoduo completed its ipo in 2018, which was the third anniversary of pinduoduo. at that time, brand merchants at pinduoduo's main venue were suddenly forced to "choose one of two options", resulting in a large number of pinduoduo brand merchants being forced to withdraw from the event, remove products from the shelves, and even request to close their flagship stores.

pinduoduo publicly denounced this "choose one of two" behavior and posted nine screenshots of conversations between merchants to prove it.

just one year ago, a similar war broke out between the two leading e-commerce companies. given pinduoduo's size and influence in the merchant camp at that time, it had almost no room to fight back in the face of the "choose one of two" situation.

fortunately, with the tightening of antitrust supervision, this round of war suspected of unfair competition finally came to an end.

second round: outside the fifth ring road

from 2019 to 2020, in the face of pinduoduo's offensive outside the fifth ring road, the two leading e-commerce companies successively launched highly targeted low-tier market strategies.

in 2019, jd.com took the lead in launching the "jingxi" brand, and upgraded it to an independent business group in 2020; in early 2020, alibaba launched the special price version of taobao - taote, and restarted juhuasuan.

contrary to expectations, neither taote nor jingxi has caused any substantial impact on pinduoduo so far.

game 3: close combat

the time node comes to the end of 2023. taobao and jd.com launched the "refund only" policy almost at the same time.

at the same time, jd.com began to vigorously promote user-side subsidies and increase the rights of plus users; taobao adjusted its organizational structure and launched a five-star price rating system, etc.

interestingly, during this process, the interface uis of the three companies were once indistinguishable from each other.

figure: ui of the 10 billion subsidy interface of three e-commerce companies (pinyin: zhongjing; taobao: right), source: screenshot of e-commerce platform app

however, due to the huge differences in resource endowments among the three e-commerce platforms, the capital market seems to be very wary of the ostentatious low-price strategy: calculated over a one-year period, alibaba's market value fell by 5.6% and jd.com's fell by 19.4%.

as jd.com and alibaba successively adjusted their refund-only policies, the third round of e-commerce battle ended in a whimper.

02

the fourth battle: supply side

the brief start of the “refund only” campaign is actually the beginning of a new round of campaigns.

as explained in our report "the fifth consumer age": after constant repetition and reflection, the leading e-commerce companies are currently returning to their own endowments and carrying out drastic reforms.

from following to returning, this time, a war around "new quality supply" is ready to start:

(1) at the strategic level, supply reform has become a consensus

let's take a look at the expected guidance from alibaba and jd.com at the earnings conference:

jd.com:ceo xu ran mainly discussed three aspects. the first was the interpretation of performance. the second was the reiteration of price competitiveness since the beginning of the year. in the second quarter, both 1p and 3p price competitiveness improved. the third point emphasized the results of platform ecosystem construction and indicated the work to be done in the future: to bring better returns on investment to merchants.

chief financial officer shan su also emphasized the supply-side construction: the impact of jd.com's support measures for merchants (including reducing commissions) has gradually faded over the past period of time, further optimizing the efficiency of traffic distribution. advertising revenue maintained healthy year-on-year growth this quarter, growing faster than gmv.

taotian:as alibaba's relatively "poor" business in the second quarter (big brother taotian performed below expectations compared to cainiao and alibaba cloud), taotian did not appear much in the conference call, and the focus was on the growth rate difference between taotian's cmr (customer management revenue) and gmv (cmr's growth rate was much lower than gmv).

ceo wu yongming and cfo xu zhiqiang both emphasized that with the growth of orders and gmv, the focus of the next stage of work will be to increase the monetization rate. the core of the analyst's question also revolved around gmv and cmr, and the 0.6% technical service fee was mentioned again.

jiang fan was rather tactful in answering the question, predicting that the technology service fee model would increase the acceptance rate of merchants. however, some media have estimated that the reform of the technology service fee will directly affect taobao's additional revenue of several billion to tens of billions.

at the same time, alibaba launched a new marketing tool, the full-site push, which is expected to gradually monetize the growth of gmv. therefore, although the current performance is not good, the phone will show a relatively optimistic trend for the future cmr growth rate.

combining the above guidance, financial report content and the latest measures of each company, in summary:

in terms of performance, the growth rate of jd.com and taobao's pure performance was lower than expected, but it achieved a decent growth rate. taking into account the revenue growth, the profit-oriented cost control effects of the three companies were good, and it seems to have become a consensus to make profits from the cost side.

in terms of expectations, judging from the conference call, jd.com and taobao are more optimistic about the growth rate in the second half of the year.

from a strategic perspective, both jd.com and taobao have spent a lot of time explaining that the focus in the second half of the year will be on the merchant side.

from the perspective of cost and market orientation, it is not difficult to understand why jd.com and alibaba both turn their attention to the supply side:

after the third round of battles, everyone has realized that the current "low-price" system formed by one-way subsidies using capital expenditures is unlikely to continue to work.

figure: sales expense rate trends of three e-commerce companies, source: choice financial client

in terms of the marketing rate trend, jd.com and alibaba have increased subsidies since last year to build a low-price system, which directly led to a 1pct and 2pct increase in marketing rates from the low point in the second quarter of this year. on the contrary, pinduoduo has maintained a relatively low cost control expenditure since last year (relative to revenue growth, and pinduoduo's more single business makes the absolute ratio higher).

before the first quarter, the revenue growth rate of jd.com and taobao was quite obvious. although the increase in cost expenditure failed to drive the rapid growth of actual profits, it was able to drive the positive correlation growth of business scale.

however, in the second quarter, the growth rates of both companies’ performance were basically the same as the same period last year, while marketing expenses reached a high point. this basic fact directly proves that growth driven by cost expenditure is limited and will not form a long-term stable incremental space.

during this process, e-commerce platforms gradually made new trade-offs and began to shift from low-price policies relying solely on subsidies on the demand side to supply-side reforms: on the one hand, the supply side, as the largest source of income for e-commerce platforms, directly determines the book performance of e-commerce platforms; on the other hand, the scale of the supply side also determines to a certain extent the price competitiveness of c-end products on the demand side.

this indicates that the main strategic line of the fourth battle of the three major e-commerce companies is:new quality supply。

(2) tactical level: strong subsidies and wide source of income

regarding the new quality supply narrative in the market, the current logic of leading e-commerce companies can be summarized in six words: strong subsidies and wide source of income.

first of all, in terms of supply thresholds, all companies have entered an era of strong subsidies.

the most typical action of taotian is that this round of technical service fees replaces annual fees, and collects points based on sales instead of a one-time fee. for merchants, this undoubtedly reduces the sunk cost in a perceptual sense.

currently, the changed tmall refund policy is aimed at merchants with an annual transaction amount of ≤120,000 (full refund); and from september 1 to december 31, 2024, for merchants with a transaction amount between 120,000 and 1 million, alimama coupons worth 50% of the basic service fee will be issued.

the increase and decrease are definitely beneficial to merchants with smaller annual turnover. taking the clothing category as an example, the software service fees borne by merchants with annual turnover of rmb 0-600,000 have all declined.

from another perspective, small and medium-sized businesses with annual sales of less than 600,000 are not the core contributors to revenue. direct tax reductions will not only increase the attractiveness of the taobao platform to small and medium-sized businesses and individual merchants, but will also increase the platform's own long-tail supply.

jd.com recently announced a new round of upgrades to its "spring dawn plan", which will use policies such as traffic support, ai efficiency improvement, and light asset operations to increase the platform's attractiveness to new merchants.

secondly, taobao and jd.com are also correcting their mistakes in a timely manner. although they have lowered the supply threshold, they have also begun to actively open up sources of revenue on the high-frequency supply side to ensure the stability of their performance.

jd.com started to expand its supply last year. under ideal circumstances, it would have achieved scale by making concessions (reducing commissions for 3p merchants and canceling platform usage fees) (the number of third-party merchants increased by 46% month-on-month) and, in the face of intensified competition, would have made up for the commission difference through advertising and traffic distribution, thus forming a positive cycle.

judging from the results, jd.com has achieved results that exceed expectations: in the second quarter of 2024, the growth rate of advertising is higher than the growth rate of gmv, which is an obvious correction of the take rate. the market also relatively recognizes jd.com's timely change of direction. even if the self-operated income is zero growth, the market value remains stable.

the rule changes of taotian are more obvious: although the entry threshold for small and medium-sized merchants has been lowered, the 0.6% commission, according to calculations by third-party research institutions, means nearly 10 billion yuan in commission for mid-sized and large merchants. in addition, the introduction of new promotion tools can also gradually offset the capital expenditure lost in the pursuit of order expansion in the future.

of course, in order to safeguard the interests of the core merchants on the platform, taotian has made considerable concessions on the operational side, and loosening the refund-only policy is one of the manifestations of this.

alibaba's conference call also vaguely revealed that the cmr growth rate will continue to improve in the future. while lowering the entry threshold, a high growth rate in customer management in the third quarter is almost certain. since the adjustment policy was announced one month ago, the stock price has risen by more than 10%, which has been significantly recognized by investors.

figure: alibaba’s market value performance in a single month after the policy adjustment, and jd.com’s market value performance after the conference call, source: choice financial client

this series of measures all mean that jd.com and alibaba’s goal is to seek more performance certainty while expanding supply.

in summary, whether it is alibaba or jd.com, in this round of strategic tactics centered around supply, both companies have chosen to ensure business stability while hoping to shake up the market structure and expand supply share through more complex calculations and business models.

after experiencing a cycle of growth and decline, there is no doubt that the growth pressure is now on pinduoduo's side.

03

how will pinduoduo respond?

faced with the new battle on the supply side, this time, pinduoduo chose to abandon short-term profits and use the most direct means of subsidies to expand the supply pool and face the new battle head-on.

at pinduoduo's second quarter earnings conference, ceo chen lei stated that profit-related data would begin to decline from q3, and that more investment would be made on the supply side to reduce fees for merchants who support innovation and continuously improve quality. this initiative would invest 10 billion in the first year (similar to a merchant version of a 10 billion subsidy).

chen lei also said: pinduoduo is ready to sacrifice short-term profits in the future, and the management has reached a consensus on this and will not repurchase or distribute dividends in the next few years.

there are very few companies that are in a period of continuous doubling growth that would use words like "profit decline is inevitable, sacrifice of short-term profits, and fierce competition" to describe themselves in a conference call. the main purpose of lowering external expectations is to concentrate their efforts and focus on the next stage of strategy.

therefore, we can see that pinduoduo's subsidies for the supply side are quickly implemented:

on august 13, pinduoduo launched a refundable benefit for technical service fees to merchants who signed up to participate in the on-site resource activities. for all product orders generated by on-site activities such as 10 billion subsidies, flash sales, platform promotions, 9.9 special sales, trendy prices, and multi-person groups, after the user initiates a refund, the platform will proportionally refund 1% of the basic technical service fee for pay-later orders and 0.6% of the basic technical service fee for other orders.

subsequently, pinduoduo upgraded its "technical service fee refund benefit". in addition to enjoying the service fee refund benefit, the rate of pay-later technical service fees for orders generated by merchants participating in resource activities was reduced from 1% to 0.6%.

at the end of august, the "promotion service fee refund benefit" launched by pinduoduo to merchants has officially come into effect. for orders where consumers make a full refund before shipment, the platform will automatically return a promotion red envelope corresponding to the merchant's promotion software service fee, without the need for merchants to file a complaint.

on september 5, pinduoduo’s latest merchant notification showed that the basic deposit for merchant stores was reduced from 1,000 yuan to 500 yuan, and the deposit for new stores was also reduced to 500 yuan, covering 70 categories. this directly affected millions of merchants and further broadened the supply radius.

figure: pinduoduo’s announcement on reducing merchant deposits, source: 36kr

a series of policies have proven to the market that pinduoduo is determined to reform its supply side, ensuring that pinduoduo is attractive enough to merchants. from the perspective of merchant operating costs, we roughly disassembled the corresponding data of the three platforms and found that:

first of all, it should be noted that jd.com's advantage comes from the economies of scale of its own categories, and the entry threshold for merchants is relatively high. the core reason is that its business model is quite different from that of the other two companies. therefore, the following data is for reference only.

check-in threshold:

tmall: the deposit for a store holding a trademark registration acceptance notice is rmb 100,000, the deposit for a store holding a registered trademark is rmb 50,000, and the deposit for a flagship store type is rmb 150,000.

taobao: both individuals and enterprises can join, but they need to pay a consumer security deposit of 1,000 yuan.

jd.com: taking pop merchants as an example, according to the data from shunqi.com, the deposit for r trademark and tm trademark in the beauty and skin care category is 50,000 and 100,000 respectively; for medical beauty, it is 20,000 in first-tier cities and 10,000 in other cities; for alcohol and 3c, the deposit is 200,000, and for other categories it is around 10,000-100,000.

pinduoduo: the latest store deposit has been reduced to 500 yuan. there is a price difference between personal stores and corporate stores, but the overall gap is not large.

transaction costs:

the basic comprehensive service fee consisting of taobao commission, credit card, and tmall points accounts for approximately 6% of total revenue, and the technical service fee is 0.6% (currently there is a refund policy for some small and medium-sized merchants).

jd pop merchants: transaction commission is around 5%.

pinduoduo charges a commission of 1-3% on its 10 billion yuan in subsidies, and a commission of 1-5% on special categories such as prescription drugs and jewelry, and has canceled the technical service fee.

operating costs:

taotian: the categories are relatively complete, so merchants need to rely on traffic promotion to expand their revenue. taotian has many traffic tools, and the overall marketing investment is between 10% and 30%.

jd pop merchants: marketing expenses are around 10%, and the comprehensive cost including third-party fulfillment logistics is around 25%.

pinduoduo: no payment is required for natural traffic (price, keywords), and the live broadcast technical service fee is 0.4%-3.4%.

in summary, pinduoduo has a lower entry threshold, more natural traffic on the operating side, and its overall comprehensive cost is still lower than other platforms.

whether it is the commission or the lowering of the entry threshold, it will inevitably affect pinduoduo's monetization rate and bring fluctuations in market value (it fell by nearly 30% after the performance was released). but the signal pinduoduo sent to the outside world at the same time is: don't compete with me in supply scale, i can reduce the cost of the links to drive supply and even sacrifice short-term profits, so as to rely on the supply scale to form price competitiveness.

it is highly likely that in the third quarter, we will see a significant impact from the poor decision-making of the top e-commerce companies:

jd.com will most likely achieve impressive performance growth; taobao can almost be sure that cmr will usher in exaggerated growth (new revenue brought by technical service fees); and pinduoduo will most likely have cmr revenue lower than the overall performance growth, which will lead to a slowdown or even a decline in profit growth.

but in the long run, pinduoduo will most likely achieve large-scale growth of supply-side merchants, thereby establishing supply-side advantages, and is expected to resolve the attacks from within and outside the industry.

04

conclusion

in summary, facing the new supply, the major e-commerce companies made different initial choices based on their own endowments and current circumstances: the old platforms chose to "defend" the supply-side profit algorithm logic and seek a balance point for maximizing profits based on the existing scale; while the up-and-coming ones chose to sacrifice short- and medium-term profits and "attack" the absolute supply scale.

all choices made in a specific era always have reasons that coincide with the times and their own characteristics. we cannot simply "predict" the rationality of major corporate decisions from a single dimension.

however, if we look at it from a higher perspective, the most suitable industrial competition model for long-term development must be the one that can keep pace with the progress of society. we cannot arbitrarily discuss the superficial characteristics of the economic cycle, but the social contradictions buried under the manifestations will not change easily, namely:

resolving the contradiction between people’s growing needs for a better life and unbalanced and inadequate development will continue to be the common historical mission of all e-commerce platforms in the future.

in this regard, we might as well wait and see what choices the market and consumers will make in the new war.