A halting economic recovery in China coupled with a persistently weak property market and high job insecurity levels have sapped consumer confidence and spending power in the world's No. 2 economy, hitting global firms across the board.
Alibaba is also grappling with stiff competition from rivals including JD.com (9618.HK) and discount-focused retail platforms such as PDD Holdings' (PDD.O) Pinduoduo and ByteDance-owned Douyin.
Alibaba reported revenue of 243.24 billion yuan ($33.98 billion) for the quarter ended June 30, compared with analysts' average estimate of 249.05 billion yuan, according to LSEG data.
Revenue at the firm's domestic e-commerce arm fell 1% even as the number of purchasers and their purchase frequency increased order growth by double digits.
Chinese e-commerce giants have had to resort to heavy discounting and promotions to attract shoppers, pressuring margins across the retail sector.
"The spending slump in China is real. Consumers are spending less, downgrading purchases and becoming more rational," said M Science analyst Vinci Zhang. "So going into the second half of the year, Alibaba and JD.com will likely continue to face challenges."
Sales at China's blowout mid-year e-commerce sales festival in June fell for the first time ever according to third party estimates, despite major platforms' efforts to dole out offers for an extended period.
U.S.-listed shares of Alibaba, which topped market estimates for quarterly profit, reversed earlier losses to rise about 2% in early trade on Thursday.
Alibaba executives have maintained that increased purchasing and the introduction of new tools for merchants will increase advertising and customer management revenue to the platform in the future.
On a call with analysts, executives on Thursday reiterated their expectations for new monetisation tools to increase revenue growth in the second half of this fiscal year.
Alibaba Group chief executive Eddie Wu said the priority for the domestic e-commerce arm Taobao and Tmall Group has been enhancing the user experience to boost gross merchandise value (GMV), a measure of sales.
"As market share stabilises, we can turn our focus to monetisation," he said.
Alibaba announced the biggest shake-up in the company's history in March 2023, splitting into six units and sharpening its focus on its core businesses, including domestic e-commerce.
Helped by investments to expand its global presence and growing demand around the world for lower-priced goods from China, revenue at Alibaba's international e-commerce unit rose 32% to 29.3 billion yuan.
For Alibaba's cloud segment, revenue grew 6% to 26.55 billion yuan, accelerating from the 3% growth seen in the prior quarter, thanks to an uptick in public cloud adoption and strong demand for AI-related products.
The company has moved to reduce low-margin project-based contracts and has said a scale-up in its cloud infrastructure has helped it cut prices across its cloud products.
Net income attributable to ordinary shareholders in the quarter was 24.27 billion yuan, compared with 34.33 billion yuan a year earlier.
($1 = 7.1584 Chinese yuan renminbi)
