March 28, 2013, 3:45 PM

GROWING PAINS

(Page 2 of 3)

Analysts typically put Taobao's sales into the category of consumer-to-consumer, or c2c e-commerce, even though most of its sellers are entrepreneurs who buy goods from Chinese manufacturers or wholesalers to sell on Taobao. They characterize as business-to-consumer, or b2c, the sales that take place on more regulated marketplaces like Tmall and through the e-commerce sites of major retailers. And that portion of e-commerce is now taking off. While Macquarie estimates that c2c sales this year will be more than double b2c sales, it projects 55% growth in b2c through 2015, versus 35% in all of e-commerce.

Taobao's early dominance of e-commerce has trained Chinese consumers to turn first to online marketplaces for a vast array of merchandise and low prices. To compete, major competitors have created their own web shopping malls in hopes of offering comparable selection. These include companies that have raised large sums from venture capitalists and public share offerings, such as 360buy.com, No. 2 among Chinese e-commerce companies, which has raised more than $2.2 billion, and No. 10 Dangdang, which pocketed $272 million in its 2010 IPO. (Jingdong announced in March 2013 it was changing its e-commerce domain name to JD.com from 360buy.com, and introducing a new mascot, a dog named Joy.)

For a company like Le Saunda, a Chinese manufacturer of high-end shoes that's been selling online for two years, the prospect of trying to draw enough online shoppers to its own e-commerce site is still too daunting. To promote "self-built web site sales, you need a lot of promotion in order to have enough customers," says Ken Yang, e-commerce director. Instead of building its own site, Le Saunda operates storefronts on marketplaces like Tmall, 360buy, Amazon.com.cn (No. 8 among Chinese e-commerce sites), Yintai.com (No. 28) and Dangdang.

These marketplace operators compete fiercely for the loyalties of Chinese consumers, and of the retailers that sell on their sites. Last summer, for example, 360buy launched a round of well-publicized price cuts that were quickly matched by competitors Suning and Gome. The prices were so low the government warned retailers not to violate laws against selling goods below cost.

To woo sellers, such major players as Alibaba, 360buy and Suning offer loans to online retailers. That's important because small companies have trouble getting loans from China's banks that prefer to lend to the country's giant state-owned companies, says Julia Q. Zhu, who previously worked at Alibaba and recently founded consulting firm Observer Solutions in Washington, D.C. Alibaba's AliFinance arm has made more than 200,000 loans since starting its program in 2010, handing out $2.2 billion in the first half of 2012. The average loan is $10,200, Alibaba says, and is often used to buy merchandise.

Big marketplace operators are also competing in fulfillment, building extensive delivery networks in a country without a national delivery service like UPS or FedEx. 360buy announced in November it would let other retailers use its service that provides same-day delivery in 23 cities and next-day delivery in more than 150 cities. The 360buy service includes collecting cash on delivery, a payment method used in as many as 80% of Chinese e-commerce transactions, Macquarie says, in a country where credit cards are not commonplace. Alibaba announced in January it would work with major financial institutions, logistics companies and retailers on a $16 billion project to create a nationwide delivery network.

These investments and price wars take their toll on profits. While Alibaba is profitable—the privately held company reported to part-owner Yahoo Inc. net income of $782 million on $2.9 billion in revenue for the nine months ended June 30, 2012—many of its competitors are not.

VIPShop, No. 13, proudly reported a $6.3 million profit in the fourth quarter of 2012 and a full-year loss of only $9.5 million compared with a $156.5 million loss in 2011; Dangdang increased revenue 44% in 2012 but its operating loss increased 94% to $71.2 million. Jingdong Mall, operator of 360buy.com, projects finally becoming profitable in the fourth quarter of 2013.

The losses may be cooling investor excitement. One indication: Chinese group-buying site Lashou, which raised $155 million in three investment rounds, put off an IPO planned for 2012.

In the face of this tough competition, Western retailers have had mixed results selling online in China. Amazon, the dominant e-retailer in North America and Europe and No. 8 in China, acquired Chinese online bookseller Joyo in 2004, rebranded it Amazon.com.cn and expanded into general merchandise and as a platform for other sellers. Amazon executives emphasized in January plans to step up investment in China, where it operates 13 distribution centers, according to MWPVL International Inc., a logistics consulting firm. Wal-Mart, which does not operate its own e-commerce site in China, last year raised its stake in Shanghai-based Yihaodian, No. 24, to 51%.

However, U.S. home improvement retailer Home Depot Inc. closed its seven bricks-and-mortar stores in China last year, and Metro Markt, the consumer electronics retailer subsidiary of Metro AG of Germany, announced in January it was closing its stores and e-commerce site. Meanwhile, U.S.-based Toys 'R' Us and luxury goods retailer Neiman Marcus announced plans late in 2012 to begin selling online in China.

Another U.S. brand that launched its own e-commerce site last year is handbag manufacturer Coach Inc., which went live in November at Coach.com.cn. Coach, which operates 70 stores in China, projects selling $300 million there this year, but did not break out an online projection.

Most Coach stores are in China's largest cities, and the new e-commerce site is attracting new customers—it has shipped to customers in more than 110 cities, many where there are no Coach stores, says David Duplantis, executive vice president of global digital media and customer engagement. At least 40% of purchases on Coach.com.cn are by new customers.

There are challenges, including the many unauthorized web sellers of Coach products in China. The Coach site emphasizes that it is the only authorized online seller of Coach goods in China. "China is the only market where we have to do that," Duplantis says.

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