September 1, 2010, 2:02 PM

Amazon expands in China

Amazon’s annual China sales could top $1 billion in 2011, says Goldman Sachs.

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The world’s biggest online retailer—Amazon.com Inc.—has big expansion plans in mind for China, now the globe’s second largest consumer economy, says one Wall Street stock analyst.

In a recent research brief, Goldman Sachs Group Inc. estimates that Amazon, No. 1 in the Internet Retailer Top 500 Guide, already generates $750 million in annual web sales in China, a figure that could increase 33.3% to $1 billion as soon as next year. Based on $1 billion in annual sales, Internet Retailer calculates that China would have accounted for 8.6% of Amazon’s total international sales of $11.68 billion in 2009.

“We estimate Amazon’s China business may add $1 billion to its revenue growth from 2011 and China may contribute about 10% of the global revenue by 2015,” says Goldman Sachs analyst James Mitchell, who covers Amazon. “Amazon is emerging as the only Internet retailer globally with a large market-leading business in each of the world’s top five economies.”

Amazon doesn’t talk much about its international expansion plans and doesn’t give out sales projections for individual countries, says an Amazon spokeswoman. But international sales for Amazon are growing:

In the second quarter ended June 30, Amazon reported international net sales totaled $2.97 billion, up 35% from $2.20 billion in Q2 2009.

For the first two quarters, international net sales totaled $6.32 billion, up 40.1% from $4.51 billion in January through June 2009.

A key indicator of Amazon’s emerging business model in China is the online retailer’s established base of customers—about 5 million—and its growing appetite for leasing more fulfillment space near some of the country’s largest cities: Beijing, Suzhou, Guangzhou and Chengdu. In China, Amazon already has 530,000 square feet of space, including a 180,000-square-foot distribution center in Beijing.

Amazon’s China strategy is straightforward, says Mitchell: Locate distribution centers and its supply chain near the major metropolitan areas and offer Chinese shoppers plenty of free or reduced rate shipping. “In its western China centers, Amazon can reduce shipping times to one day to three days,” says Mitchell. “Amazon can therefore study existing sales in a given city and forecast the step-up in sales that fast and free shipping might generate.”

China’s e-commerce market is growing. In 2010, e-commerce sales in China will reach an estimated $80 billion, an annual figure that could grow 275% over five years and reach an estimated $300 billion in 2015, says Goldman Sachs. Amazon, which began building a base in China in 2004 when it acquired electronic books retailer Joyo for $75 million, will have plenty of in-country competition. TaoBao.com, the Chinese equivalent of eBay, is an online marketplace that generates estimated annual sales of close to $60 billion—about 75% of all online retail sales in China, says Goldman Sachs.

But the conventional and online retail market in China, which combined generates annual sales of about $2.2 trillion, is also ramping up, says Goldman Sachs. Amazon, which since 2006 has been adding more lines of merchandise in China such as health and beauty products, can gain market share in the short term by concentrating on selling books and electronics, which Goldman Sachs estimates could generate annual sales of $300 million in 2010.

“The China market is particularly attractive for Amazon’s core categories,” says Mitchell.

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