Alibaba (Part 3): A Financial Overview of Alibaba Group

In Parts 1 and 2 of our Alibaba series, we introduced the history and key business segments that constitute the Alibaba Group ecosystem.

In Part 3 here, we provide a financial overview of the Group through a series of stylized facts and explanations.

In Part 4, we discuss the future of Alibaba Group.

Alibaba Series Roadmap

Note: Alibaba Group's fiscal year ends in March, so "fiscal year" in our Alibaba series refers to the year ended March 31st, while "1H2022" refers to the six months ended September 30th, 2021.

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Total Revenue, Operating Income, and Net Income

We start off with a series of stylized facts and explanations that capture Alibaba's key financial metrics.

#1: Alibaba's Total Revenue Has Been Growing at a CAGR of 31.4% During 2017-2021

Alibaba's total revenue has been steadily increasing year on year at a compound annual growth rate (CAGR) of 31.4% over the past five years.

#2: The Group's Operating Income Has a More Bumpy Trend with Occasional Drops Due to High Costs of Revenue

Alibaba's cost of revenue has increased from 38% to 59% of total revenue from 2017 to 2021, with a particularly significant jump going from 2018 to 2019. Management explains that the jump (and increase over the past five years as a whole) is primarily due to an increase in logistics costs related to the on-demand delivery service provided by Ele.me and fulfillment services provided by Cainiao Network, as well as higher inventory costs associated with Alibaba's new retail businesses.

#3: Alibaba Expects Increasing Costs of Revenue as the Group Continues to Expand its Scope of Business

Management reiterates each year that as the Group continues to invest further in "new retail, direct selling, globalization, local consumer services, user acquisition and engagement, and user experience and infrastructure", costs of revenue are expected to increase both in

absolute monetary terms and also potentially as a percentage of total revenue.

We recall that Alibaba's original business model is an online commerce platform that facilitates third-party selling by external merchants, a not so operationally heavy business to maintain and carry out. However, as the Chinese e-commerce market gradually matured and saturated, Alibaba expanded its scope based on a more operationally heavy new retail strategy that involves incorporating offline retail, direct (i.e. first-party) sales, and logistical services. Examples include the acquisition of offline retailer Sun Art, the establishment of (first-party selling) premium supermarket Hema, the launch of community buying program Taobao Grocery, as well as related logistics and delivery services that are part of Cainiao and Fengniao Networks.

In addition to the Group's new retail initiatives, Alibaba also cites additional costs related to its international expansion (e.g. inventory costs and costs in relation to fulfillment and delivery services) and expansion of its cloud computing segment (e.g. infrastructure investments involving higher bandwidth fees and colocation costs) as contributing factors to the increasing costs of revenue.

Note: colocation refers to a practice where companies can rent equipment, space, and bandwidth for computing services from an external data centre provider.

#4: Alibaba's Net Income Exceeded Operating Income in Recent Years Due to Proportionally High Interest and Investment Income

During the past three years since 2019, Alibaba's net income has been higher than its operating income. This is due to relatively high levels of interest and investment income during the period (RMB44.1 billion, RMB73 billion, and RMB72.8 billion in 2019, 2020, and 2021 respectively), which are added to income from operations to arrive at net income. A thorough examination shows that there are no consistent, systematic factors contributing to the proportionally high interest and investment income across the years.

Note: for reference, in 2019, Alibaba recognized interest and investment income from revaluation gains of previously held equity interest in Koubei and Alibaba Pictures, while in 2020, Alibaba recognized a one-time gain in relation to the receipt of equity interest in Ant Group and the joint venture contribution of its AliExpress Russia business. In fiscal 2021, Alibaba recognized a revaluation gain of the Group's previously held equity interest in Sun Art upon consolidation of the latter business.

Revenue Breakdown by Operating Segment

In this and the subsequent section, we examine Alibaba's revenue drivers in more detail.

As explained previously in Part 1 of the series, Alibaba has four main operating segments:

The specific monetization channels for each operating segment are summarized below.

(We recommend reading the summaries in conjunction with each segment's business description in Parts 1 and 2 for a more comprehensive picture).

Core Commerce

Revenue in the core commerce segment consists of revenue from direct selling, commissions, membership fees, as well as customer management services (i.e. performance-based advertising fees), depending on the specific marketplace. We break down the segment's revenue sources further in the following section.

Cloud Computing

Revenue is generated from enterprise customers based on the duration and usage of Alibaba Cloud's services.

Digital Media and Entertainment

Revenue comprises of membership subscription fees, self-developed online games revenue (mostly sales of in-game virtual items), and customer management revenue (i.e. performance-based advertising fees).

Innovation Initiatives and Others

Revenue is primarily generated from service fees paid by enterprise customers (e.g. software service fees for Amap) and product sales to consumers (e.g. T-Mall Genie speakers). Alibaba also mentions annual fees payable by affiliate Ant Group in relation to the micro-lending business (see here) transferred from Alibaba to Ant in 2015 as another source of revenue, although the annual fee arrangement has ended in 2021.

Next, we take a look at a couple of stylized facts and graphs capturing the evolution of each of Alibaba's key operating segments. The most notable finding is that while Alibaba's revenue has steadily grown over the past five years, a breakdown of total revenue by operating segment shows that this growth was not particularly dominated by one segment or another. Rather, each operating segment continued to maintain a steady proportional contribution to the Group's total revenue.

#1: Alibaba's Revenue Breakdown by Operating Segment Is Relatively Stable Over Time

#2: Core Commerce Comprises 86% of Alibaba's Total Revenue, Followed by Cloud Computing at 8%, Digital Media and Entertainment at 5%, and Innovation Initiatives at 1%

Breaking Down Core Commerce

In this section, we examine the revenue drivers behind Alibaba's core commerce segment in greater detail. Specifically, Alibaba breaks down the core commerce segment further into seven sub-segments:

A summary of the monetization channels for the individual sub-segments is provided below.

(We recommend reading the summaries in conjunction with each sub-segment's business description in Part 1 for a more comprehensive picture).

China Retail Commerce

Revenue generated by the China retail commerce sub-segment can be classified as either revenue from customer management services or from other China retail sources.

Customer management services refer to pay-for-performance (P4P) advertising services including keyword bidding (i.e. merchants bid for search result keywords that match product/service listings and pay on a cost-per-click basis), in-feed marketing services (i.e. merchants bid to market to groups of consumers with similar profiles that match product/service listings and pay on a cost-per-click basis), and display marketing services (i.e. merchants bid for display positions at fixed prices or based on a cost-per-thousand impression basis). Commission fees on transactions generated via T-Mall and certain other marketplaces are also included as part of revenue from customer management services, with fees calculated as a percentage of transaction value.

Revenue from other China retail sources are primarily generated from Alibaba's new retail and direct sales businesses, namely Freshippo, T-Mall Supermarket, Sun Art, direct import (presumably via Kaola Global), and Intime (Chinese: 银泰, a small regional department store chain acquired by Alibaba in 2017), and primarily consists of revenue from product sales, commissions on transactions, and software service fees.

Customer management services accounted for 83%, 74%, and 65% of China retail commerce revenue and 55%, 48%, and 43% of Alibaba's total revenue in 2019, 2020, and 2021 respectively.

China Wholesale Commerce

Revenue is generated primarily through membership fees, value-added services (e.g. premium data analytics and upgraded storefront management tools), and customer management services (mostly P4P marketing services).

International Retail Commerce

Revenue is generated through direct sales, commissions and customer management services by the AliExpress platform, as well as logistics services provided by Lazada.

International Wholesale Commerce

Revenue is generated primarily through membership fees, value-added services (e.g. customs clearance service fees) and customer management services (primarily P4P marketing services).

Cainiao Logistics Services

Revenue is generated as fees paid by merchants and third-party logistics service providers based on the number of contracted orders completed and other value-added services provided by Alibaba.

Local Consumer Services

Revenus is generated primarily through platform commissions and on-demand delivery service fees by Ele.me.

Other Core Commerce

Alibaba does not identify the sources of its other core commerce revenue .

Next, we turn to some stylized facts and graphs capturing the contribution of each sub-segment to total revenue over time. The most remarkable observation is that even after breaking down the core commerce segment into seven smaller sub-segments, each sub-segment's contribution to total revenue is relatively stable over time.

#1: Alibaba's Core Commerce Revenue Breakdown Is Relatively Stable Over Time

#2: China Retail Commerce Comprises 66% of Total Revenue, Followed By International Retail Commerce and Local Consumer Services (5% Each), Cainiao Logistics Services (4%), China Wholesale Commerce (3%), and International Wholesale Commerce and Other Core Commerce (2% each).

We also look at each sub-segment's contribution to the core commerce segment's revenue. Since the revenue contribution of each sub-segment is relatively constant from year to year, we choose the most recent 2021 data as a sample benchmark below.

#3: China Retail Commerce Accounts For 76% of Core Commerce Revenue, Followed By International Retail Commerce, Local Consumer Services, and Cainiao Logistics Services at 6% Each, and China Wholesale Commerce, International Wholesale Commerce, and Other Core Commerce at 2% Each

Annual Gross Merchandise Value (GMV)

Next, we examine the gross merchandise value (GMV) of goods transacted via Alibaba's many marketplaces and platforms. As Alibaba is a highly retail-driven company that relies heavily on the domestic Chinese market, the Group's GMV metrics are focused on capturing the China retail commerce sector. Up until 2020, Alibaba reported individual annual GMV metrics for its Taobao and T-Mall marketplaces, as well as an annual GMV metric for the Group's China retail marketplaces as a whole. We note that the China Retail Marketplaces GMV metric is exactly equal to the sum of the individual Taobao and T-Mall GMVs.

Starting in 2020, Alibaba ceased to report individual GMVs for Taobao and T-Mall, but rather kept only the China Retail Marketplaces GMV, along with the addition of a new, broader Alibaba Ecosystem GMV that takes into account other commerce segments (i.e international and wholesale), the Group's new retail and direct selling initiatives, as well as other components of the Alibaba ecosystem.

We now turn to some stylized facts and trends.

#1: Annual GMV for Alibaba's China Retail Marketplaces Doubled Over the Past 5 Years

The GMV for Alibaba's China retail marketplaces doubled from RMB3.77 trillion in 2017 to RMB7.5 trillion in 2021.

#2: Taobao's GMV Started Higher than T-Mall, Although There Is a Convergence in GMV Between the Two Marketplaces

In 2017, Taobao's GMV was 40% higher than T-Mall's GMV, with Taobao having an annual GMV of RMB2.2 trillion and T-Mall having an annual GMV of RMB1.57 trillion. However, as Taobao's GMV growth rate dropped significantly (from 22% in 2018 to 16% in 2019 and 9% in 2020), T-Mall's GMV eventually converged with Taobao's due to the former's faster growth rate (36% in 2018 and 23% in 2019 and 2020).

#3: The Alibaba Ecosystem is Still Heavily Dependent on China Retail Commerce

Out of the RMB7.05 trillion and RMB8.12 trillion annual GMV on the Alibaba ecosystem in 2020 and 2021, RMB6.6 trillion (approximately 93%) and RMB7.5 trillion (approximately 92%) are from the Group's China retail marketplaces respectively.

Annual Active Consumers

To supplement the GMV analysis, we also examine the growth in Alibaba's number of annual active consumers (AACs) over time. Alibaba reports multiple AAC metrics for the Group's different target markets, including the domestic China retail market, the Chinese market as a whole (which also includes new retail and non-commerce sectors such as digital media and entertainment), the international retail markets (which constitute of export-oriented cross-border platform AliExpress and international e-commerce platforms Lazada, Trendyol, and Daraz), as well as for Alibaba's entire ecosystem. We note that Alibaba defines its ecosystem AAC as the sum of AACs on all of its China marketplaces and global retail marketplaces.

The Group does not have an AAC metric for its domestic or international wholesale commerce businesses, but does mention the (negligible) number of paying members on its domestic 1688 and cross-border/global Alibaba.com platforms (i.e. 990,000 and 230,000 paying members in fiscal2021 respectively).

#1: The Alibaba Ecosystem Has 1.2 Billion AACs, Comprising of 953 Million China AACs and 285 Million AACs Abroad

#2: China Retail AACs Account For More Than 90% of AACs in All China Marketplaces and More Than 70% of the Ecosystem's Total AACs

*Alibaba did not report an AAC number for its China Retail Marketplaces in 1H2022

#3: 70% of Alibaba's New China Retail Users Come From Less Developed Areas

Since 2019, approximately 70% of Alibaba's new China retail AACs come from less-developed areas according to management reports. This reflects the high penetration rate of e-commerce in China's first and second tier cities, and also highlights the difficulties of further user acquisition in Alibaba's traditional target markets.

Average Consumer Spending

We calculate an average spending amount for each China retail consumer as the total GMV for China retail marketplaces divided by the total number of China retail AACs (plotted below). Over the past five years, the average annual GMV per China retail AAC only increased by 11.4% from an average of RMB8,297 per AAC in 2017 to RMB9,240 per AAC in 2021. This observation is rather surprising considering that the total annual GMV transacted on Alibaba's China retail marketplaces and the number of China retail AACs both steadily increased over the time period.

The stagnation in spending level perhaps suggests that a certain degree of saturation has been reached in terms of user spending potential in the China retail markets, meaning that Alibaba may have to rely on futher user acquisition to fuel GMV growth for this sector. However, given that Alibaba's new China retail consumers tend to be from the lower income classes, we think it will be very challenging for the Group to increase its average GMV per consumer in the long run. These concerns perhaps reflect Alibaba's heavy emphasis on diversification and finding new pillars of growth to plough ahead, the specifics of which we discuss in Part 4.

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Alibaba (Part 1): Introducing the Alibaba Ecosystem and Commerce Empire

Alibaba (Part 2): Alibaba Cloud, Digital Media, and Innovation Initiatives

Alibaba (Part 3): A Financial Overview of Alibaba Group

Alibaba (Part 4): The Future of Alibaba

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Pinduoduo (Part 4): Concluding Pinduoduo's Future

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