Alibaba sales revamp expected to hit growth
Pricing war threatens to erode membership
A recent sales force reorganisation in response to competition is likely to hurt the growth prospects of mainland e-commerce company Alibaba.com at a time when international trade is declining, analysts say.
The Hangzhou-based business-to-business internet services provider made the move in response to a recent initiative by Nasdaq-listed rival Global Sources, which also provides online sourcing information and a transaction platform to bridge overseas buyers and mainland suppliers.
Global Sources, historically, has been a high-end player with annual membership fees of as high as US$80,000. Alibaba.com's premier 'Gold Supplier' membership costs 50,000 yuan (HK$55,700) per year.
Shortly after Alibaba.com's initial public offering in Hong Kong in December last year, Global Sources divided its pricing into six levels - including, for the first time, a 38,000-yuan-per-year entry-level membership fee.
'Our field checks suggest that Global Sources is enjoying good traction with its new pricing and that Alibaba.com is being forced to respond in ways it has not had to in the past, for example, discounting,' said Citigroup analyst Jason Brueschke.
This price war, which Alibaba chairman Jack Ma acknowledged in the recent results announcement, is threatening to erode the Gold Supplier programme that accounts for about 70 per cent of the company's annual revenue.
It further aggravates a trend in which about 30 per cent of Alibaba.com's Gold Suppliers opt not to renew their membership once it expires, according to another analyst.
Alibaba.com's reorganisation has divided its 2,000-person Gold Supplier sales team into two groups - one team focusing on new membership signings and the other attending to existing clients and account renewals.
The overhaul, which started in the first quarter and is expected to be completed this month, also changed the sales commission structure.
Although the strategy may help Alibaba.com manage sales staff in the long term, most analysts see teething problems.
'We expect the initial impact to be disruptive, as sales people spend more time in training rather than meeting clients,' Goldman Sachs analyst James Mitchell said in a research note.
Mr Mitchell cut estimates for new Gold Supplier clients in the first quarter to 1,100 from 2,600. Alibaba.com had 27,384 Gold Supplier customers at the end of last year.
'I know sales people. They don't like this kind of change,' said Mr Brueschke. He said the reorganisation would increase staff turnover and lower productivity.
Global Sources has bolstered its adjusted pricing strategy with plans to expand its mainland sales team by 1,000 employees this year.
'Starting in the second quarter, and likely accelerating into next year, we believe the disruption from the reorganisation puts [Alibaba.com's] growth rates at risk,' said Mr Brueschke. He downgraded Alibaba.com from 'hold' to 'sell', and lowered his target price to HK$10 from HK$17. The stock rose 5.78 per cent to HK$14.28 yesterday against a 0.59 per cent gain in the Hang Seng Index.
The deteriorating economic outlook in the United States and Europe has made prospects of online business-to-business trade uncertain.
'While we continue to see Alibaba.com's online B2B platform as a low-cost enabler of international trade, we believe the western buyer export markets and China's SME seller community - both constituencies that its website serves - are more vulnerable to the growing macro concerns than previously assumed,' said Deutsche Bank analyst Alan Hellawell.
China's export volume growth fell sharply from 24 per cent last year to 13 per cent in recent months.
Jun Ma, Deutsche Bank's chief economist for Greater China, said a faster than expected export deceleration was likely to cause growth in the number of the mainland's smaller businesses to slow more quickly than national GDP growth.
Mr Ma says failure rates may also increase, predicting that 10-20 per cent of exporters would go out of business this year.