On Nov. 11, 2019, Chinese people collectively bought more goods online than the population of any country on any other day since the invention of the internet—or of commerce, for that matter.
Known as Singles Day, the promotion is China’s biggest annual online shopping festival, and eclipses the sales of the US’s Black Friday and Cyber Monday combined. In 2020, merchants on online platforms including Alibaba’s Tmall and Taobao, JD.com, and Pinduoduo, sold more than RMB 330 billion (around $51.3 billion) worth of goods in 24 hours, significantly lower than in 2019, according to data from China-based data services company Syntun.
That figure, known as gross merchandise volume (GMV), is equivalent to the price of more than 900,000 China-made Teslas or 6,600 of China’s homegrown passenger jets.
GMV is the total value of goods sold through a particular marketplace over a certain period of time. The money isn’t the e-commerce platform’s revenue—it’s a measure of how much money is going to the merchants that list their products on the platforms. Investors track it closely to get a sense of an e-commerce platform’s scale.
Platforms that report GMV make a big deal out of it. E-commerce companies plaster live totals on massive screens at media events and push these figures to investors as beacons of growth. But longer-term numbers are usually released only annually.
Yet, the concept is sneakily deceptive. There is no standard definition for GMV—platforms measure their own sales figures in different ways, essentially creating their own definitions.
Returns and cancelations
Every penny a customer commits to pay on a platform is counted as part of GMV—whether or not they pay, or later get the money refunded.
Imagine this scenario, a popular one among internet users in China. It’s 11:59 p.m. on Nov. 10. You have one minute to go until Singles Day promotions begin. Your shopping cart is full, stocked with items whose prices will fall as soon as the clock strikes 12. But, in the back of your mind, you wonder if you should be buying RMB 5,000 worth of goods.
The moment comes. You quickly tap the pay button before your precious goods sell out. It’s done—your bank balance falls by RMB 5,000, while Alibaba books another RMB 5,000 in GMV.
But in the morning, you wake up feeling guilty. Slowly, you realize that you probably don’t need another winter coat, so you cancel the order.
Down in Yiwu, the merchant doesn’t mind too much—in fact, it helps them climb in search results. They’re busy buying and canceling thousands of orders for the same coat from dummy accounts, boosting their rank.
Meanwhile, in Hangzhou, Alibaba’s GMV ticker keeps rising, undeterred by thousands of similar cancellations that may be processed every minute. In fact, that ticker will never fall, because GMV totals include all transactions on a platform, even when those goods are cancelled or returned.
According to Alibaba’s 2019 annual report, the company GMV figures include all orders for products and services on its platform regardless of whether items are actually sold, delivered, or returned. Rival e-commerce platforms JD.com and Pinduoduo also include unfulfilled orders in their GMV totals.
“Like other measures of economic scale, such as GDP, GMV is imperfect. Depending on the company definition, it can include unpaid orders, orders that have been added to cart but ultimately not purchased, cancelled orders, or returned orders,” Michael Norris, research and strategy lead at AgencyChina, told TechNode.
Aside from including cancelled or returned orders, Alibaba, JD.com, and Pinduoduo all include shipping costs in their GMV calculations, further inflating sales volume.
The metric may be flawed, but it’s the only game in town when it comes to shopping festivals.
GMV calculations have even led to spats between rival e-commerce platforms. In 2017, Alibaba’s public relations head mocked JD.com for releasing an extended 11-day sales figure, as it always does. JD.com racked up RMB 127 billion in GMV between Nov. 1 and Nov. 11 while Alibaba’s figure reached RMB 164 billion in 24 hours.
JD Retail’s then chief marketing officer and now CEO, Xu Lei, hit back at the e-commerce giant, saying that Alibaba’s 24-hour GMV figures were driven by pent-up consumption from users all looking for a discount on one day of sales. Alibaba has now extended its Singles Day promotions to 11 days.
Beyond all of the generous inclusions in GMV, there is something more insidious that boosts sales metrics: brushed orders. Here, stores on e-commerce platforms pay people to order items that are very cheap or are cancelled later. A store’s motivation can be higher seller ratings or increased visibility of their products in search results.
China’s government is attempting to root out brushed orders. In June, Beijing tax authorities sent out alerts to a group of nearly 2,000 merchants who were required to make supplementary tax payments based on inflated numbers that resulted from brushed orders. The government has also proposed a law that would make merchants liable to pay tax on falsified sales.
“Brand retailers nowadays don’t do much of that anymore, but small mom-and-pop merchants use brushing as a service to market their products during [shopping] festivals, ” said Li Junheng, founder of JL Warren Capital, a China-focused equity research firm.
Investors are aware of the pitfalls of the GMV figures e-commerce platforms report and attempt to adjust for brushed and unfulfilled orders to get a better sense of what a company’s “real” GMV may be.
“I typically apply a discount rate of between 20% and 40%, depending on the platform,” said AgencyChina’s Norris.
Investors also get around misleading numbers by comparing figures year on year, as opposed to using the absolute values.
Keeping up with the times
With the pandemic, livestreaming sales hit the big time, and it’s only expected to become more popular. The explosion in popularity could create even more problems for people trying to separate the signal from the noise in GMV figures.
The problem? Livestream purchases have extremely high return rates, more so than any other type of purchase.
“A general rule of thumb is that the GMV sold during livestreaming sessions have the highest return rates, as they target compulsive shoppers,” said Li. Depending on the category, up to 50% of all purchases are returned. The effects can be at their worst when livestreams are hosted by online influencers, who have an incentive to book as many orders as possible to boost their value as advertisers.
According to Alibaba, more than 30 livestreaming channels on its platforms generated in excess of RMB 100 million in sales each during last year’s 11-day Singles Day shopping festival. Over 500 channels generated RMB 10 million each during the same period.
The figures will only increase. KPMG expected livestreaming e-commerce in China to reach more than RMB 1 trillion in 2020, up from RMB 430 billion in 2019. With half of all goods being returned, reported GMV metrics could become far less useful to gauge a platform’s scale.
“Over time, as livestream e-commerce becomes a bigger chunk of the overall e-commerce pie, analysts will need to adjust the discount rate they apply to platform GMV,” said Norris.