Alibaba’s singles day sets new record, but the real takeaway is getting overlooked

As easily predicted by all industry analysts, for the eighth year in a row, Alibaba has crushed its own record of Gross Merchandise Value (GMV) sold through its platforms during its “11.11 Singles Day”, the largest online shopping event in the Chinese market, and in the whole world.

The figures, as well as the trend of increasingly high records set at each yearly edition of the event, have been profusely reported on by the media already, but they are nonetheless worth a bit of a refresh here. In 2015, Alibaba closed the daily online shopping bonanza by totaling a GMV of 100 billion RMB, equal to 14.7 billion USD at the exchange rate at that time. On 11th November 2016, the tally reached 120 billion RMB, roughly 17.8 billion USD. Yesterday, for 11th November 2017, Alibaba announced a total GMV of 168 billion RMB, or 25.3 billion USD, surpassing expectations (the average analysts prediction was about 160 billion RMB, equivalent to 24 billion USD).

In order to have a better grasp of these jaw-dropping figures, let us draw a comparison with other similar events. In 2016, American consumers spent 12.8 billion USD, over five days, during the whole Thanksgiving shopping, which goes from the eponymous Thanksgiving Thursday till Cyber Monday, going through Black Friday. It is important to highlight how the American market figure comprises both online and offline sales: restricting the comparison to a single day and focusing only on online sales, the gap is even more appalling. During Black Friday 2016 and Cyber Monday 2016, total daily online sales were respectively 3.3 and 3.5 billion USD: these are figures that any recent edition of “11.11” has raked in the span of a few, frenzied shopping hours within the midnight opening buzzer.

As always in the presence of so much glitter, it is spontaneous to ask how much of that is truly gold. The ever growing total sales figures, and the way they are reported by media in China and all over the world, are probably distracting from some subtle nuances that are extremely relevant to objectively understand and assess the impact of Alibaba’s 11.11 in its entirety, from the market distortions that have been introduced and fueled by it, the sustainability of the system in its present form, the great stresses caused on the logistics network and last, the doubt that perhaps what originated as a clever and ultimately successful marketing ploy has long outlived its purpose, and it became a victim of its own success.

Before 2009, “Singles Day” was nothing more than an informal, mock celebration for college bachelors. 11/11 was chosen as date given the presence of several 1’s, synonymous with “loneliness” in Chinese culture and language. Jack Ma’s Alibaba appropriated the celebration of the “Singles Day” back in 2009, turning it into an online shopping festival with the objective of promoting its, back then nascent, B2C platform “Taobao Mall” (then renamed, and still known as, “Tmall” in order to separate it better, on an image level, from its other platform, Taobao). To draw a simplified parallel with Western markets, Taobao is somehow an equivalent of eBay, in that anybody can be a seller. Tmall is closer to Amazon Platform, in that Tmall determines who is allowed to be a seller, by posing very specific requirements. While the plan was clear for Jack Ma in 2009, only one critical piece of the puzzle was missing: he had to convince brands to move into Tmall by opening “flagship online shops” there, creating therefore sufficient critical mass to attract consumer traffic and ignite a virtuous circle of consumption. Alibaba needed to make some noise and this was the seed of the idea of an “online shopping festival day”, created out of thin air, even though somehow inspired by a preexisting, informal celebration among young Chinese.

This is precisely the reason why on 11th November 2009 Alibaba collaborated with 27 brands in order to have them offer discounts of up to 50%. The marketing ploy worked very well; on that day, Tmall was able to register a total GMV of 52 million RMB. As a comparison, the monthly sales of Lenovo’s official Taobao shop back then were around 3 million RMB. Just one year later, the GMV of 11th November 2010 skyrocketed to 936 million RMB. Besides the increase in sales, the 11.11 ploy was working especially well in achieving its original purpose, as these numbers were very successful in convincing existing brands to move shop from Taobao to Tmall, as well as new brands to sign in and jump on the Tmall bandwagon. In 2011, around 2.200 brands joined Tmall. In 2014, the number was 27.000. Today, Tmall has actually a much stricter “door policy” and getting past the velvet rope is becoming almost impossible. Brands are expected to be large enough so that they can afford to invest in Tmall’s hefty advertising services, as well as having physical stores since Alibaba is overtly declaring that their model is based on consumers seeing goods offline, and then buying them on Tmall for a better price. As a consequence of all of this, significantly fewer brands were approved to join Tmall in the past year than in the previous ones.

Indeed Tmall is in a position of strength, as long as their numbers keep growing; and they are projected to be since the shopping fever is very contagious. According to a survey by China Tech Insights, more than 70% of respondents have planned to buy something on Tmall during this year Singles Day. Among them, 16.3% are users who never made a purchase during previous years’ festivals. Conversely, among those that purchased in the past, only 8.3% declared that they won’t take part in it this year, netting a total positive yearly growth of 8% in addressable consumers.

However, after so many record-breaking years, it looks like that the 11.11 system could be bursting at its seams, and while the creature might not be going to rear its ugly head and turn on its creators, it is reasonable to predict that Alibaba will be in for some careful taming in the future years. Even though Tmall has successfully set a “Singles Day” GMV record high every year, it looks like that these records no longer truly impress the general public, and the investors, as they became the norm. On the other hand, Alibaba keeps fanning on the flames by hosting boisterous, celeb-filled “GMV counting” galas, committing to and actually encouraging a game of raising stakes that will be difficult to let go in future, even though the 11.11’s original purpose, attracting big brands on Tmall, has already been met fully many years ago. Lastly, I cannot help but look with skepticism at that the obsessive importance given to the GMV metric, since the attention it gets could be grossly misplaced and misleading.

In order to understand what would appear to be irrational behavior on Alibaba’s side, it is important to understand that the strong expectations are, as in many cases in China, of political nature. China is undergoing a demographic shift that has a major impact on its economic growth model, shifting from a model based on production & export fueled by a migratory blue collar class, to a model based on internal consumption fueled by an urban middle class. Within this context, Alibaba and in particular its “Singles Day” represent the perfect standard bearer for the touted, and tangible, growth of Chinese consumption. It is not a secret that members of the Chinese Communist Party have met with Alibaba’s management to discuss the “Singles Day”. Alibaba has no choice but to ensure a steady growth on its “Singles Day” GMV figures, passing down the additional pressure on its partnering brands and merchants. A slowdown on the GMV metric would be perceived, correctly or not, as a sign of weakness of Chinese consumption levels, a message that the Chinese government surely does not want to be broadcasted live for the whole world to see.

On the other hand, global visibility is a double edge sword when it becomes a matter of transparency and lack of ambiguity of the results communicated to the financial markets: since May 2016, in New York, where Alibaba stock is listed, the SEC has been scrutinizing the way Alibaba reports its Singles Day figures, among other things, mainly for two distinct reasons.

First of all, “Gross Merchandise Value”, or GMV, is not a regulated or well-defined metric. For example, Alibaba’s GMV figures purposefully do not include returns, as in, merchandise bought by customers on Singles Day but returned, and thus refunded, later on for whatever reasons. Alibaba knows the precise figure but does not reveal it to the public, and simply states that is in the “single digit % of total GMV” ballpark. Other analysts disagree and estimate it to be as high as 30% of GMV. The truth probably lies in between these two extremes.

The second source of suspicion is that, regardless of the accurate GMV value totaled during 11.11, the use of such indicator (by the way the sole and only metric used to communicate the success of the event by Tmall), is probably misleading, since it does not represent an actual turnover by Tmall, and it is not even directly correlated to it. Specifically, Tmall is not a retailer (it does not buy and resell goods to a consumer by adding a markup) and does not even take a cut of the merchants’ revenues or earnings. Tmall’s revenues only come from selling advertising services to brands and merchants active on Tmall, as they all fight to gain more visibility on the platform itself. Precisely for this reason, some analysts, myself included, are baffled at Tmall’s cult-like obsession on GMV, since its usage is, at the very least, quite confusing. University of Pennsylvania management Professor Meyer’s rhetorical question perfectly applies to this case: “Have you ever heard of a shipping company that reports only the total value of the merchandise they ship around the world?”

At the same time, there are growing concerns both from brands and consumers. It is not a coincidence that Alibaba puts GMV and GMV only under the spotlight: discussing its total advertising revenue generated during 11.11, or even about the profitability of the 11.11 for the merchants, is basically taboo. For brands and merchants, large and small, the economic effort to gain visibility and traffic is a potential profit killer. There are no public figures, but precisely because of that it is reasonable to assume that the majority of the merchants operates 11.11 on a loss, or barely breaking even.

So, on one hand, we have brands and merchants chasing the dream of the “one billion consumer market”, bloodying themselves to conquer a slice of the pie, at rock-bottom profit margins. On the other hand, we have consumers that, aware of the price war generated by 11.11, change in a smart way their consumption behavior. It is now indeed ordinary for Chinese consumers to both delay big-ticket purchases (such as electronic gadgets or home appliances) waiting for Singles Day discounts, and purchase in advance, and in large quantities, non-perishable daily necessities such as personal care or home care products. It is kind of obvious to highlight how Alibaba’s Single Day has a disruptive effect on the inner workings of brands and producers, which are becoming more and more trapped into a scheme that on the one hand forces them to participate into, lest giving up consumer visibility, but on the other hand kills their margins and creates sales slumps in the months preceding and following Singles Day, especially in FMCG market segments that were not used to cope with seasonality cycles, or clearance sales due to perishing, obsolescence and end of seasons, such as a manufacturer of laundry detergents or toothpaste, and now have to suddenly to face such kind of market environment.

Inevitably some merchants even decided to take shortcuts and cheat the system in order to keep themselves in the Singles Day loop without committing financial suicide. According to a survey by China Tech Insights in November 2016, almost half of the interviewed that declared to be not interested in purchasing anything in Tmall’s Singles Day said that the main reason for their stance was that the discounts are, in some cases, not real at all. In other words, they are convinced that merchants are slowly and subtly increasing prices in the months leading to Singles Day, in order to appear to be offering a discount on 11.11. Or again, that the promised discounts are applicable on such limited item quantities, most often not disclosed, that it is impossible to successfully make a purchase, except for a few lucky shoppers, with very nimble fingers and fast internet connections. These kinds of situations do not escape from the scrutiny of some very alert Chinese consumers, who do not hesitate to out the dishonest merchants by posting proof on social media, hampering overall consumer confidence in the authenticity of the discounts as a whole. Tmall has been trying to crack down on dishonest pricing practice and introduced “pre-payment” purchase booking options in 2017. Nevertheless, leading to this year 11.11, a recurring joke on Weibo, China’s equivalent to Twitter, was that most of the promotions were so contrived and opaque that they required a Ph.D. in Mathematics to be fully understood by customers.

Besides the price and consumption distortions, there is another massive disruption generated by Singles Day: the pressure exerted on the logistics network. The sudden peak of shipping orders and parcels creates an immense stress on the infrastructure every year. Parcels that normally would take 1-2 days to be delivered can take up to 7 days because of 11.11, slowing down also packages that have nothing to do with the online shopping frenzy. In 2016, China Post State Bureau has estimated the record-breaking figure of 1 billion packages delivered for Singles Day, and in 2017 the challenge for the whole logistic industry will certainly be renewed, with an estimated 1.5 billion packages on the back of Singles Day 2017.

To summarize, I believe that while we read the amazing figures of 11.11.2017 it is really important to analyze rationally the fundamentals behind this phenomenon, and the clear conclusion is that the sustainability of the Chinese e-commerce ecosystem, still basically unregulated as it was in its infancy, inevitably will have to go through Alibaba’s ability to “self regulate” by thinking for the whole industry, including all the third parties at play, which are often limited by their physical natures, and to take into account how these parties are impacted by the initiatives promoted by Alibaba itself.