March 3, 2014, 11:26 AM

E-retail leaders in China bet big

With national e-commerce sales that grew 42% in 2013, China's 500 largest web merchants hunt for more market share.

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Most online retailers would be clicking their heels over 70% annual growth. But it's not fast enough for Yu Gang, president of Yihaodian, one of China's biggest online retailers with web sales that increased 69.7% to $1.91 billion in 2013. "We need to accelerate business development if we want to be a truly dominant Chinese e-commerce brand," he says. "We want to double in size."

Yu figures he's got three years to make Yihaodian big enough to survive against China's fast-growing e-commerce giants. "We have this one-time window to build China's one-stop Internet destination for shopping and services that could potentially reach tens of millions of Chinese consumers," he says.

Why the urgency? It's because Yihaodian's competitors are rapidly attracting capital to foster their rapid growth. JD.com, the top-ranked Chinese e-retailer in terms of online sales in Internet Retailer's newly published 2014 China 500, filed documents in January to raise $1.5 billion in an initial public offering of stock. Alibaba Group Holdings Ltd., the dominant e-commerce company in China whose two big web shopping portals—Taobao and Tmall—account for as much as 80% of online retail purchases in the country, is also planning an IPO that analysts say could value the company in the range of $100 billion to $150 billion, not far off Amazon.com Inc.'s $160 billion market value.

Plus, Amazon is already a top 10 e-retailer in China. And Wal-Mart Stores Inc., the world's leading retailer by sales, has staked its claim by acquiring a 51% stake in Yihaodian. In all, seven of China's top 10 online retailers as ranked by the China 500 are either public companies, owned by public companies or have plans to go public.

Investors are willing to pour money into Chinese online retailers because of the explosive growth of Chinese e-commerce. The number of Chinese online shoppers has grown by 125% from 108 million consumers who made at least one online purchase in 2011 to 242 million in 2012, says the China Internet Network Information Center, a government-sanctioned research organization. That helped fuel 42% growth in China's e-retail sales in 2013 to $305.74 billion, from $215.31 billion in the prior year, Beijing-based Internet research firm iResearch Consulting Group estimates.

Chinese online retail sales are growing much faster than the country's total retail sales, which increased 13.1% in 2013. That's because China's transition to a market economy, which began in the late 1980s, did not give the country's state-run retailers much time to gain marketing skills before the Internet became a mass phenomenon a decade later.

That's one reason online retailing in China is growing quicker than it is in the United States, says Frank Lavin, a former U.S. Commerce Department undersecretary for international trade and now CEO of Export Now, which helps foreign companies sell online in China. "In the U.S., where retailing has long been an established industry for more than 100 years, e-commerce is the icing on the cake," Lavin says. "But in China, where retailing as a market is still relatively new, online retailing is the cake."

The time to grow and gain market share is now, say Yu and other Chinese e-retailers. And that's producing online competition that retail analysts describe as "cutthroat," a "street fight" and "ferociously competitive," in which e-retailers routinely cut prices to capture sales, even if it means sacrificing profits.

"Most Chinese online retailers seek to grasp market share by adopting a low-price strategy despite low or even negative profit margins, and this has led to unhealthy market competition," says Teresa Lam, a vice president and e-commerce analyst with Fung Business Intelligence Centre, a Shanghai-based business research and investment banking firm. "We expect price wars to continue to break out and amplify in 2014."

So how are Chinese e-retailers— and the 90 non-Chinese retailers in the China 500—working to gain e-commerce market share? They're expanding selection, in many cases by inviting other merchants to sell on their sites so that they can better compete with the giant Taobao and Tmall marketplaces. They're building fulfillment centers so they can offer fast delivery, a big challenge in a country with no national delivery services like UPS Inc. or FedEx. They're adding customer-pleasing features to their web sites and finding new ways to compete for the attention of the growing millions of Chinese consumers shopping on smartphones and tablet computers.

Yihaodian is a prime example. The retailer last year doubled the number of SKUs it carries online to 3.4 million and it expects to have as many as 8 million SKUs available for purchase by the end of this year, Yu says. Yihaodian in the past year also increased the number of registered users that shop on Yhd.com—the retailer switched from the URL Yihaodian.com last year—by 97% to 57 million from 29 million. And its mobile commerce sales now account for 30%—$572 million—of all web sales compared to 6%—$33 million—just three years ago. "Now is the time to go big," Yu says. "We're seizing the opportunity to build substantial market share."

Yihaodian, the sixth-largest e-retailer by sales in China, has ambitions to build an even larger Chinese online retailing and Internet services company that includes a bigger marketplace for other merchants to sell on Yhd.com. It plans to offer those sellers e-commerce technology and related services in the same way Amazon offers services via its Amazon Web Services and Fulfillment by Amazon business units.

Yihaodian is leveraging its partnership with Wal-Mart to open and operate a network of about 20 fulfillment centers around China and offer more same-day shipping outside of big cities such as Shanghai and Beijing. But competitors keep raising the bar. JD.com, formerly Jingdong Mall, recently invested $590 million in logistics to provide same-day delivery in dozens of large Chinese cities and three-hour delivery in six of them.

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