Bottom line: A blossoming price war between Alibaba and JD.com in the online grocery space could stretch out for the next year, costing each hundreds of millions of dollars on promotions as they battle for market share.
Just days after e-commerce partners JD.com (Nasdaq: JD) and Walmart (NYSE: WMT) revealed a major promotion for their online grocery business, sector leader Alibaba (NYSE: BABA) is firing back that it will outspend its smaller rivals in the hotly contested space. This sudden price war in online groceries space looks remarkably similar to another battle that broke out nearly a year ago, when Alibaba launched another major promotion against online grocer Yihaodian, Walmart’s main China e-commerce site at the time. Walmart appeared to later concede defeat in that battle just two months ago when it sold Yihaodian in exchange for shares in JD.com, Alibaba’s chief rival.
This particular story nicely summarizes the fierce rivalry between Alibaba and JD.com, China’s top 2 e-commerce sites, as well as the predicament foreign companies like Walmart face when they try to enter the fiercely competitive market. Alibaba is the only major player making profits in e-commerce, thanks largely to its early start.
It has used that advantage to quash both domestic rivals and foreign ones like Walmart, which surprised everyone with the announcement of its sale of Yihaodian in June. JD.com is also losing big money, but its deeper cash resources and aggressive posture have helped it to survive Alibaba’s frequent onslaughts, and even gain a significant share of the market.
Last week JD detailed its road map for Yihaodian for the first time since the Walmart tie-up, including plans to spend 1 billion yuan ($150 million) to promote the site over the next 3 months. (previous post) Just a day later, Alibaba responded by saying it will spend “multi-times that number”, simply because it has so much cash it can afford that kind of expense. (English article)
Alibaba CFO Maggie Wu disclosed the plan during a conference call at the end of last week to discuss the company’s latest quarterly results, which included its fastest revenue growth since its record $25 billion IPO nearly 2 years ago. A big contributor to the latest growth spurt was online groceries, as Alibaba’s Tmall Supermarket saw sales triple from a year earlier.
The whole grocery war story seemed strangely familiar to me, so I went and searched my archives and discovered that a nearly identical tale played out around this time last year. That story saw Walmart buy out its joint venture partner in Yihaodian last July, in a clear signal it intended to focus on the kinds of groceries and household items that were the site’s specialty.
But just a couple of weeks later, Alibaba fired back with its announcement of a 1 billion yuan campaign to promote its own Tmall online grocery store. (previous post) In hindsight, it certainly looks like Walmart was blindsided by Alibaba’s aggressive ways and decided it might be better off taking a back seat and letting JD.com wage the online grocery wars on its behalf.
Such a strategy looks smart, since most western companies like Walmart are reluctant to spend huge sums on such price wars without any clear road map to profitability. By comparison, Chinese companies are far more willing to incur huge losses, often lasting years, without any real idea if or when they might ever become profitable. Instead, those entrepreneurial firms simply spend until they have no money left, and then either close, get acquired or find investors to give them more money to continue their battle.
All that brings us back to the present and this latest price war between Alibaba and Yihaodian, which is just a proxy for the JD-Walmart alliance. Alibaba can easily carry through on its promise to heavily outspend Yihaodian, and is likely to do just that to try and grab as much share as possible of the blossoming online grocery market. But JD.com and Walmart could be quite a potent rival, and we’re likely to see some very bloody price wars over the next year as the pair of arch rivals vie for market share.
- INTERNET: Alibaba Answers Walmart Challenge With Grocery Blitz
- E-COMMERCE: Walmart Quits China E-Commerce, Amazon Next?
- INTERNET: Fortune 500 Misses China Web Giants, Captures JD Minnow
- Today’s top stories