Monday 10 November 2014

Alibaba Buffs a Key Business Metric

Chinese E-Commerce Urges Discounts to Drive Sales on ‘Singles’ Day’

Updated Nov. 9, 2014 6:01 p.m. ET
Chinese e-commerce companies hand out discounts to increase transactions on Nov. 11. The WSJ's Kathy Chu tells Deborah Kan why this is even bigger than Black Friday in the U.S. 

In preparation for this Tuesday, which is China’s biggest day of the year for online sales, e-commerce company Alibaba Group Holding Ltd. BABA +2.68% for weeks has been offering rock-bottom prices on everything from coats to couches on its websites.
To get those discounts, shoppers make a small down payment as many as four weeks in advance, and then pay the balance on Nov. 11, a day that generates more online sales in China than the U.S.’s Black Friday and Cyber Monday combined.
The presales not only help to drum up attention for Nov. 11, known in English as Singles’ Day, but they shift many transactions to that specific—and closely watched—date. Tempting shoppers to opt for that date boosts the value on that day of one of Alibaba’s most important performance metrics: gross merchandise volume, or GMV, the amount of business transacted on its shopping sites.
Alibaba’s most impressive GMV is generated on Singles’ Day, a sales event the company started in 2009. (The date 11/11 is a loosely defined holiday celebrated by young single Chinese for its four “1’s,” the number representing their single status.) On last year’s Singles’ Day, Alibaba erected a screen at its Hangzhou headquarters that displayed in real time the GMV its sites were racking up.
The promotion highlights how important scale and growth are to Alibaba—particularly now, two months after it launched a record $25 billion initial public offering of stock. Investors world-wide were attracted by Alibaba’s huge and fast-growing population of online shoppers; now they are watching closely to see how well the company can keep its numbers up.

“Alibaba is facing unparalleled pressure this year, and they need to push [transaction volume] as high as possible,” said Ronald Wan, who is the chief China adviser at Asian Capital Holdings.
U.S. e-commerce pioneer eBay Inc. EBAY +0.48% says it coined the term GMV during the mid-1990s to provide a more accurate reflection of its strength online than revenue alone. EBay, like Alibaba, only hosts shops on its site, so it doesn’t book as revenue the sales that occur on its marketplace.
Investors and analysts watch GMV because it is a measure of how fast an Internet commerce company is growing relative to competitors.
In the e-commerce world, GMV is “the most important measure, more important than revenue, because it’s really the indicator of market position,” said Henry Guo, managing director at JG Capital, a Greenwich, Conn., investment adviser.
Alibaba’s GMV, the total volume of merchandise handled by its Tmall and Taobao shopping sites, was 1.68 trillion yuan ($274.3 billion) in the year through March, making it the world’s largest e-commerce platform—bigger than Amazon.com Inc. AMZN +1.09% and eBay combined.
There isn’t a standard definition of GMV, however.
Alibaba, like most e-commerce companies, counts the value of goods bought on its shopping sites, as well as services such as travel bookings and movie tickets.
Alibaba, as well as Chinese rival JD.com Inc. JD +0.86% and eBay, also tally transactions regardless of whether they have been paid for. That means they could include the value of goods later canceled or returned—though they sometimes impose a threshold for how expensive those goods can be. Alibaba’s ceiling is 100,000 yuan, or about $16,000.
JD.com excludes from GMV goods that aren’t sold or delivered if they cost more than 2,000 yuan.
Both Alibaba and JD.com throw in the value of shipping charges.
A spokesman for Alibaba said that returns for Singles’ Day are in the single digits as a percentage of the total. Alibaba doesn’t disclose what percentage of orders aren’t paid for or returned on an annual basis.
Ella Ji, a China Internet and consumer analyst for investment-advisory firm Oppenheimer & Co., estimates that industrywide, returns for online sales can range from a single-digit percentage of total sales for electronics and appliances to nearly 20% for apparel.
EBay defines GMV as transactions on its marketplaces regardless of whether they are paid for and completed. A spokesman for eBay said the “overwhelming majority of transactions on eBay are completed trouble-free.”
JD.com said the company used to disclose merchandise volume net of returns and cancellations, but stopped before going public because there was confusion about the term.
A spokesman for Alibaba said the company is “completely transparent and consistent” in disclosing its online and mobile GMV: “We’re not eBay, Amazon or JD.com. We are not a retailer. We are an ecosystem that brings buyers and sellers together, so the way we calculate GMV is different.”
Referring to Alibaba’s inclusion of goods under 100,000 yuan in GMV, he said the company’s marketplaces sell a wide range of products and services that have a high value, unlike most of its competitors.
Last year, Alibaba reported Singles’ Day GMV of roughly 36 billion yuan—more than 2% of its annual total and 90% more than a year earlier.
Some market watchers are wary of the stellar figures.
“I’m really skeptical that e-commerce shows such dramatic growth,” said Anne Stevenson-Yang, co-founder of investment-advisory firm J Capital Research. “You see a lot of pushing of numbers to make them appear bigger than they are.”
“I would be disappointed as an investor to learn that [Aliababa’s] goods that are not actually paid for,” said Mr. Wan, of Asian Capital Holdings. “If the ratio is too high, then some sort of explanation or elaboration needs to be made.”
This year, Alibaba says 27,000 merchants on Tmall and an undisclosed number on Taobao and AliExpress will be participating in the event.
Singles’ Day participants, whose products are included on Tmall’s official sales page, must offer at least a 50% discount on all products sold on Nov. 11, said Atsushi Watanabe, a consultant at Shanghai-based T.U. Business Consulting Co., which helps Japanese companies use Chinese e-commerce sites.
Big sellers can apply to join the presales promotion, which began on Oct. 15; an enticement is that the discount on presold goods can be lower.
A spokesman for Alibaba said its presales promotion aims to help vendors make sales, not boost numbers, on Nov. 11. The early deals give customers more time to make buying decisions, while allowing merchants to gauge demand and prepare for prompt delivery, he said.
Wei Li, a spokesman for Chinese retailer Hstyle, which is offering a plaid wool coat at half price for 299 yuan, said the presales lessen the stress on computer systems on Nov. 11. “Otherwise, many customers cannot get what they want and it will put too much pressure on the servers,” he said.
Other Chinese e-commerce sites are also diverting sales to the high-profile shopping period, analysts say. JD.com has a 12-day sales event, also dubbed Singles’ Day.
A spokesman for JD.com said spreading the sale over 12 days lets the company’s logistics network “stay on track and our customers get their products when they expect them.”
“Everybody tries to squeeze sales to [Singles’ Day] to make their numbers look brilliant,” said JG Capital’s Mr. Guo. “It’s OK…as long as it’s not fake.”
—Juro Osawa, Lilian Lin and Wei Gu contributed to this article.
Write to Kathy Chu at kathy.chu@wsj.com

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