Once the most valuable company in China, Alibaba has struggled since Beijing launched a sweeping crackdown on China's private sector more than a year ago. 

Alibaba Group Holding Ltd. will focus on retaining users rather than pursuing the aggressive market-share grab of years past, re-calibrating its strategy after more than a year of relentless curbs on every facet of China’s internet sector.

CEO Daniel Zhang sketched out on Thursday how China’s ecommerce leader will now prioritize user retention over acquisition—a significant shift for a company that achieved massive scale by vanquishing rivals like eBay Inc. and fought rivals in arenas from media to the cloud and commerce. On Thursday, it reported the slowest revenue growth since it went public, underscoring how Beijing’s crackdown on its technology sector is taking a financial toll.

The about-face underscores a growing realization of the speed with which up-and-coming competitors from ByteDance Ltd. to Pinduoduo Inc. are drawing users from traditional leaders Alibaba and JD.com Inc., even as the Chinese economy struggles to recover during punishing Covid-Zero lockdowns. Alibaba’s shares fell more than 6% in pre-market trading in New York.

“We have substantively captured all consumers with purchasing power in China,” Zhang told analysts on a conference call. “Our focus will shift from new user acquisition to user retention” and growth revenue per user.

Alibaba struggles under private-sector crackdown

Once the most valuable company in China, Alibaba has struggled since Beijing launched a sweeping crackdown on the private sector more than a year ago.

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The Chinese government forced Alibaba’s finance affiliate, Ant Group Co., to call off what would have been the world’s largest initial public offering in 2020, and then instituted a series of reforms that have undercut Alibaba’s business model.

Beijing’s crackdown isn’t over. Bloomberg News reported this week that Chinese authorities are asking the nation’s biggest state-owned firms and banks to start a fresh round of checks on their financial exposure and other links to Ant Group, according to people familiar with the matter. In response, the company has turned increasingly outward—Lazada, Alibaba’s Southeast Asian arm, Trendyol in Turkey and Daraz around South Asia have evolved into important units of the company. Alibaba outlined a long-term goal of quintupling Lazada’s gross merchandise value, the sum of transactions across its platforms, to $100 billion.

But market volatility has eclipsed those efforts. The company recently called off a fund-raising plan for Lazada after failing to secure an envisioned valuation. Asked about the prospects of raising funds and perhaps spin off the Lazada business in the future, Zhang said he’s open to such moves for multiple businesses.

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Tough competition from rivals

Alibaba last year pledged to re-invest all profit toward growth initiatives, hoping to sustain the double-digit sales increases it’s managed for almost a decade. But its competitors continue to make inroads, particularly with newer models for online commerce including community buying, a hyper-local format that delivers goods to local neighborhoods, and online deals.

Alibaba’s answer—Taobao Deals and Taocaicai—are loss-making for now but will eventually yield profits as they develop, executives said.

“Alibaba is reaping good returns from the investment in Taobao Deals with most of its new customers coming from the initiative. The success of Taobao Deals is also important as a defensive moat to fend off competition,” said Vey-Sern Ling, senior equity advisor with Union Bancaire Privée.

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Sales rose 9.7% for the three months ended December, far below the 40%-plus growth that was common before the government scrutiny began. Net income tumbled 74% to 20.4 billion yuan ($3.2 billion), after the company took a big hit from losses in its global investment portfolio. Annual active consumers rose 43 million to a better-than-expected 1.28 billion while cloud revenue jumped a slower-than-anticipated 20%.

Alibaba warned in November that revenue growth for the fiscal 2022 year would be 20% to 23%, compared with the 27% analysts had been projecting. Its valuation has dropped from a high of about $860 billion to $291 billion. In a sign of the times, liquor maker Kweichow Moutai Co. is now worth more than Alibaba.

“We remain focused on building long-term capabilities centered around customer value creation despite the resurgence of Covid, China’s macroeconomy slowdown and increasing competition,” Zhang said.

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