Chinese Online Retailers Struggling to Be Profitable

W ith online retail sales exploding in China， many Chinese e-retailers are investing heavily， in some cases accepting losses now in hopes of gaining a larger share of what could soon be the world’s largest ecommerce market. And the escalating price wars this year have further eaten into their profits， if there is any.

Therefore， most of the major ecommerce players are still struggling to become sustainably profitable. “For every dollar they earn， they spend four，” Li Guoqing， DangDang’s CEO， commented on 360Buys’s business model.

Struggle to make ends meet

Many of China’s online retailers are investing heavily in distribution centers and other infrastructure projects， and as a result many are only marginally profitable or losing money， according to an Internet Retailer report.

“The profit of almost every e-retailer was very low because they are investing lots of money into infrastructure and hoping to grab more market share，” said Jingwen Ruan， chief operating officer of iResearch. “At this stage， they are caring more about sales volume rather than profits. In addition， online retailers need to improve a lot in the management capability， such as supply management and channel management， and need many experienced online shopping professionals as well. All need lots of investments to support their further development.”

Among the major investments Chinese web retailers reported last year were Tencent Group， which is moving to catch up with earlier e-commerce players， spending $1 billion on a new e-commerce platform， distributions centers and delivery services. Suning also said it invested$1 billion in its e-commerce operations. Slow delivery during peak holiday periods has plagued Chinese e-retailers， and many are investing in improved shipping services.

In a recent report， iResearch estimated that 360Buy， China’s No. 2 web retailer lost $170 million last year. While the report said No. 1 e-retailer Tmall turned a profit， it said No. 3 and 4， Amazon China and Suning， lost money.

According to iResearch， Tmall’s sales totaled $16 billion in 2011， 360Buy$4.9 billion， Amazon China $952 million and Suning $936 million.

360Buy initially sold electronics online， but later diversified into a wide range of other consumer goods. The company says its web sales last year more than tripled from $1.62 billion in 2010. Suning is better known as a brick-andmortar electronics retailer that has aggressively expanded into e-commerce in the last 2 years.

Amazon started its Chinese business by buying domestic Joyo.com for$75 million in 2004 and named it “Joyo Amazon.” Last year， the name changed to Amazon China. Amazon’s Chinabased e-commerce site， Z.cn， now provides more than 5 million SKUs in 28 categories， including apparel， computers and books. Amazon China operates 11 fulfillment centers and offers same-day delivery in 17 cities; in another 53 cities， the retailer promises next-day delivery.

Amazon does not break down financial results by country. But iResearch ranks it No. 3 in terms of online sales in China， generating $465 million in web sales in 2010.

Escalating price wars

With more and more brick-andmortar home appliance retailers tapping the e-commerce market， the online price wars have been escalating more fiercely in the Chinese market.

Since the beginning of 2012， a lifeor-death year for e-commerce， major Chinese online stores including Suning(or 360Buy) Appliance Co.， Ltd and Jingdong Mall have been mired in comprehensive price wars.

Started by Suning in April， the first round of price wars involved major business-to-customer (B2C) retailers including Guomei， Dangdang， Tmall， and 360Buy. The second round of wars was waged by 360Buy in June on its founding anniversary.

The third round of price wars is quick on the trigger after Suning announced to allocate one billion yuan in August on the occasion of its third anniversary to further compete on price.

Statistics showed that major e-commerce companies spent as high as seven billion yuan in May and June on price wars， said home appliance industry expert Liang Zhenpeng.

He predicted that the price wars will not stop until some online businesses are marginalized due to huge losses.

After rounds of head-to-head price battles among the online companies， some escaped narrowly from death while others went to the dogs.

Industry insiders said that although the promotions or tactics have raised sales volume， the price cuts squeezed the already limited profit margin， making many companies hogging the limelight at the expense of profits.

Statistics showed that 360Buy’s gross margin was only seven to eight percent annually， while U.S. online retailer Amazon’s gross margin was above 20 percent. Price wars are thus believed to bring bigger losses to those more adventurous online companies.

Chinese netizens said for the time being price wars play an important role in the e-commerce market， but for the long run， service and reputation will be the major factors to win customers.

Subject to government investigation

China’s e-commerce industry descended into full-scale war in August: Suning， Gome， and 360Buy vowed to undercut each other on electronics and appliance sales， with several other sites taking sides， mostly against 360Buy. The price war was supposed to benefit consumers， but turned out to be a promotional stunt. A government investigation finds many of the original promotions were a sham.

Jack Ma， founder of Alibaba was conspicuously absent from the microblogging ping pong between China’s ecommerce executives. Ma said the latest so-called price war is bad for consumers. He added that sellers should be grateful to their partners and customers， and recognize the latter are savvy enough to know a good deal when they see one， according to a Buy Buy China report.

Concurrently， China’s National Development and Reform Commission is investigating irregularities in “wartime” pricing and distribution. So far， the NDRC has found that some of the competitors raised their prices before announcing price cuts; goods were listed as out of stock despite being available; and products sold “at cost” were sold at a premium.

The NDRC is yet to publish a final verdict， but it is likely to impose fines on some or all of the parties involved. Regardless of who gets punished， China’s ecommerce industry is now one step closer to consolidation. Sometimes， even a fake war breeds real casualties.