Alibaba (BABA 1.44%) recently demoted its e-commerce chief Jiang Fan from a senior vice president to a vice president, took back his bonuses from last year, and removed him from a group of 38 "partners" who nominate the company's board members.

Jiang, who was once considered a potential successor to CEO Daniel Zhang, was reportedly disciplined for an alleged affair with social media influencer Zhang Dayi. Zhang is also the chief marketing officer of Ruhnn Holding (RUHN), an Alibaba-backed company that taps social influencers to sell products online.

Alibaba's campus in Hangzhou.

Image source: Alibaba.

The scandal started after Jiang's wife warned Zhang to stay away from her husband in a public post on Weibo. The accusation sparked rumors of inappropriate conduct, including claims that Zhang had influenced Alibaba to take a stake in Ruhnn in 2016, and merchants associated with Ruhnn had received preferential listings on Alibaba's marketplaces.

Alibaba subsequently issued an internal memo declaring its investment in Ruhnn had "nothing to do" with Jiang Fan, and that Ruhnn's Alibaba stores hadn't benefited from Jiang's influence. However, Alibaba also accused Jiang of "inappropriate" behavior and declared the crisis had tarnished Alibaba's reputation -- which could spell trouble for the company's core commerce business.

Another headwind for Alibaba's e-commerce business

Alibaba's core commerce revenue rose 38% annually last quarter and accounted for 88% of its top line. It's the company's only profitable business, and its profits subsidize the growth of its unprofitable cloud, digital media, and innovation initiatives units. Its Chinese retail marketplaces, including Taobao and Tmall, grew its annual active customers 3% year-over-year to 711 million, as its mobile monthly active users rose 5% to 824 million.

Parcels in a warehouse.

Image source: Getty Images.

However, Alibaba has also grown increasingly dependent on lower-margin businesses -- including its brick-and-mortar stores, cross-border and direct sales platforms, and its stake in the Cainiao logistics network -- to boost its commerce revenue. As a result, the segment's adjusted EBITA margin contracted annually from 45% to 41% last quarter.

The company also warned that its core commerce revenue would likely decline in the fourth quarter, which bore the full impact of the COVID-19 pandemic and lockdowns in China. That outlook was disappointing, since its rival (JD -1.68%) -- which takes on its own inventories and fulfills orders with its own logistics network -- expected its revenue to grow "at least 10%" in the comparable quarter.

Last April, Jiang set a goal of doubling Tmall's GMV (gross merchandise volume) within three years. That's a lofty target, since Tmall's GMV rose just 24% annually last quarter, and could decelerate as consumer spending softens with the broader economy.

Meanwhile, JD and Pinduoduo (PDD 2.28%) could still pull shoppers away from Taobao and Tmall. The growth of Pinduoduo, which appeals to lower-income shoppers with bulk purchases, notably forced Alibaba to penalize merchants who listed their goods on both platforms, but those draconian moves could spark antitrust probes.

In short, Alibaba remains the top dog in China's e-commerce market, but the headwinds are accelerating. Therefore, the last thing Alibaba's core commerce business needs is a personal scandal and rumors of shady business deals.

Alibaba's weathered scandals before

Jiang Fan will remain in charge of Alibaba's flagship Taobao and Tmall marketplaces, but his chances of eventually succeeding Zhang as CEO just got a lot slimmer. Yet Jiang's punishment was relatively light, and the actual scandal pales in comparison to Alibaba's other past mistakes.

Alibaba's biggest disaster was a fraud scandal in 2011, in which roughly 100 salespeople at its business-to-business marketplace knowingly allowed fraudulent sellers to set up online stores. That scandal resulted in the resignations of's CEO and COO.

Alibaba also agreed to pay a $250 million settlement for failing to disclose a meeting with Chinese regulators regarding counterfeit goods prior to its IPO in 2014. Moreover, Alibaba's Taobao was repeatedly listed (alongside Pinduoduo) as a "notorious" marketplace for counterfeit goods in the U.S. Trade Representative's annual trade blacklist. Alibaba weathered all those scandals, so it will likely survive Jiang Fan's demotion.

The key takeaways

Jiang Fan's demotion is a black eye for Alibaba's core commerce business, but it probably won't derail the core business unless damning evidence regarding inappropriate ties between Alibaba and Ruhnn emerges.

Alibaba also still clearly needs Jiang -- who joined Alibaba in 2013 and steered Alibaba's marketplaces away from desktop platforms to mobile devices -- to lead the charge against JD and Pinduoduo. But if the scandal deepens and forces Fan to resign, Alibaba could struggle to fill his shoes -- and that vacuum could cause serious long-term problems for the Chinese retail and tech giant.