July 5, 2012, 10:28 AM

Chinese online retailers defer profits in pursuit of rapid growth

Online retail in China increased 53.7% last year, says the government.

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With 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 e-commerce market.

China’s Ministry of Commerce reported last month that business-to-consumer web sales in 2011 totaled 782.56 billion yuan ($124.22 billion), a 53.7% increase from the prior year, and that e-commerce accounted for 4.3% of total retail sales. By comparison, e-retail in the U.S. grew 16.1% in 2011 to $194.3 billion and accounted for 4.6% of all retail sales, according to the U.S. Department of Commerce.

Given the much faster growth in China, government officials there expect to overtake the U.S. soon as the world leader in web shopping. “In 2013, China is expected to surpass U.S. as the world largest online retail market.” Yaoping Jiang, vice minister of commerce, said in releasing the 2011 e-commerce figures.

The ministry reported that the strongest online growth last year came in sales of food, apparel and jewelry. As in the U.S., web sales in China are growing much faster than sales at physical store sales: China’s total retail sales grew in 2011 about 17.1% over the prior year to 18.12 trillion yuan ($2.88 trillion), the Ministry of Commerce reported. Total U.S. retail sales grew 7.9% in 2011 over 2010, the U.S. Commerce Department says.

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 iResearch, a market research firm that focuses on the Internet.

“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,” says Jingwen Ruan, chief operating officer of iResearch. “At this stage, they are caring more about sales volume rather than profits. In addition, online retailer 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 iResearch says, lost $170 million last year. While the report says No. 1 e-retailer Tmall turned a profit, it says No. 3 and 4, Amazon China and Suning, lost money. Amazon declined to comment.

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

Tmall, part of Alibaba Group, is an online marketplace that features products from 70,000 brands, half of which operate their own stores on the site. The company says it has 25 million registered users.

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-and-mortar 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 China-based e-commerce site, Amazon.com.cn, now provides more than 5 million SKUs in 28 categories, including apparel, computers and book. 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.com Inc. does not break down financial results by country.  But iResearch ranks it No. 3 in term of online sales in China, generating $465 million in web sales in 2010.

All those top e-retailers are wooing the growing number of online shoppers. The government says China has 513 million Internet users, of whom 194 million have purchased online. Boston Consulting Group, a U.S.-based consultancy, predicts there will be 700 million Internet users in China by 2015, of whom 47%, or 329 million, will be shopping online.

Chinese companies also are rapidly increasing their purchases online. Total e-commerce, including purchases by businesses, amounted to 5.88 trillion yuan ($933.33 billion) last year, a 29.2% increase from 2010 and accounted for 12.5% of China’s gross domestic product, according to the Ministry of Commerce. That means business-to-business e-commerce in China amounted to $809 billion in 2011, seven and a half times business-to-consumer web sales.

 

 

 

 

 

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