Just a few days into 2024, Alibaba has taken a significant step with its International Digital Commerce (AIDC) arm, aligning with one of the themes outlined in our recent 2024 e-commerce trend report. Startling developments unfolded as Lazada, Alibaba’s main e-commerce platform in Southeast Asia, initiated a sudden layoff of over 100 employees, with predictions suggesting a potential reduction of up to 30% of the total workforce across Southeast Asia.

Before delving into recent events, let’s review Lazada’s performance in recent years

From 2020 and well into 2021, Lazada consistently achieved impressive quarterly order growth , and even saw growth of more than 100% in some quarters. However, the phase-out of the COVID-19 e-commerce boom and intensifying competition from Shopee’s aggressive pursuit of growth led to a gradual decline, culminating briefly in negative order growth in Q3 2022. 

In 2023, Shopee shifted focus towards profitability by trimming sales and marketing expenses, providing Lazada with an opportunity for a temporary recovery to growth. Shopee has since pivoted back to top line focus, and TikTok Shop – a relatively new entrant in the market – has further contributed to a more intense competitive landscape. Lazada now has a choice to make about what to do next.

Our take: Lazada is aiming to transform its workforce to better position itself for profitability and coming fundraising

Over the past year, we have observed significant developments from Alibaba as the company strives to compete with uprising rivals in China and internationally, such as PDD Holdings (with Pinduoduo in China and Temu overseas) and Bytedance (with Douyin in China and TikTok Shop elsewhere).

In May 2023, Alibaba announced its intent to restructure its operations into six distinct entities, introducing AIDC as its international e-commerce arm. Initially, plans were announced to spin off various businesses, including its Cloud business, grocery unit Freshippo, and Logistics arm Cainiao. However, the spin-off plans for the Cloud business and Freshippo were later scrapped, highlighting the fluidity of their current plans and the potential for change.

More recently, in September, Alibaba underwent significant leadership changes as its former group CEO and Chairman, Daniel Zhang, abruptly stepped down. Alibaba Group’s co-founders, Eddie Wu and Joseph Thai, took on the roles of CEO and Chairman, respectively, leading to notable management shifts and retrenchments within the same year. 

These strategic developments at Alibaba seem to now be making their way to Lazada in Southeast Asia. Just last week, Lazada has amped up its restructuring efforts, carrying out substantial retrenchments across the region. While specific details remain undisclosed, reports indicate that even senior leaders in countries like Singapore and Malaysia have been let go in the past week.

Why is Lazada cutting its workforce now?

The pivotal question is “Why now?” Like other e-commerce platforms in the region, Lazada has been facing a tough strategy dilemma for a while – what to choose between driving top line growth or prioritizing profitability. Lazada appears to have chosen the latter option and focus on profitability. There are several reasons why this makes sense:

1. Competitive market dynamics

With Shopee’s intense push for growth and the entrance of TikTok Shop, competitive intensity has picked up, making growth more expensive for Lazada.

2. Competitors’ moves towards profitability

Particularly Shopee’s recent achievement of profitable quarters (3 to be exact) puts Lazada’s core competitor further ahead, which means Lazada needs to restructure its business to become more profit-capable. Tokopedia in Indonesia is close to being EBITDA profitable, and even TikTok is making moves towards profitability.

3. Self-funding

In order to reach its ultimate goal of spinning off, profitability becomes more crucial in the business, as public markets increasingly reward profitability. This was evidenced by the news of Spotify’s shares jumping 7.5% after its layoffs last month. A spin-off also means that Lazada won’t have unencumbered access to Alibaba ‘mothership’ funds anymore, forcing the company to become more self-reliant. 

What are the implications for consumer brands in Southeast Asia?

Given Lazada’s shift towards profitability over growth, we anticipate a reduction in the company’s spending, specifically on activities like discounts, vouchers, and shipping fees. 

Price sensitive consumers may increasingly shift to channels such as platforms Shopee and TikTok Shop, as long as those platforms continue to prioritize top line growth and provide more attractive shopping incentives. If Lazada makes these moves too suddenly, it could even become a more expensive platform for brands to engage with, and one where brand receive less platform support

To mitigate these risks, brands should ensure that their e-commerce growth strategy in 2024 continues to rely on multiple platforms. We also recommend brands that currently sell on Lazada to pressure test the viability of their platform P&L by modeling scenarios where support from Lazada is diminished.

E-commerce in Southeast Asia continues to be a multi-horse race. Don’t place all your bets on one just yet.