3/03/14

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.

By Frank Tong and Mark Brohan , Senior editor, China

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.

Gome Electrical Appliances Holding Ltd., the seventh-largest e-retailer in the China 500, is another China 500 merchant with big plans to grow its e-commerce base. The operator of 1,600 bricks-and-mortar stores in 400 cities, which specializes in consumer electronics and household appliances, is updating its e-commerce site with new features such as personalized product recommendations and aligning its stores more closely with its e-commerce operation.

And very much in the race is Amazon, the fourth-largest online merchant in the China 500, which originally entered China by way of its acquisition of bookseller Joyo.com in 2004. Amazon last June began selling Kindle e-readers and tablets in China and opened its first direct Amazon Web Services business in Beijing with local partners.

But if many of China's top e-retailers see going big as the path to success, some smaller China 500 merchants are concentrating on a single niche. One example is Guangzhou Huimei Fashion Co., No. 51 in the China 500. A Chinese clothing manufacturer that used to develop and sell products for export, Guangzhou Huimei now promotes its Inman brand of women's linen apparel via the Internet to fashion-conscious Chinese women.

By concentrating on a particular niche, Guangzhou Huimei's web sales increased to an Internet Retailer-estimated $185.1 million in 2013 and the company's e-commerce site now serves around 4 million shoppers, says founder and CEO Fang Jianhua. And Inman.com.cn plans to add accessories lines, such as shoes and bags. "Our product style is unique and made by natural fabrics," Fang says. "We are expanding from a sole brand to multiple brands."

However, for many China 500 merchants, such as JD.com and Gome, their e-commerce development efforts focus on getting bigger and more diverse. JD, which launched in 2004 as an online consumer electronics products retailer, claims that over 60 million consumers have registered with its site and that nearly 30,000 merchants now sell on JD in 12 product categories, including books, furniture, food and cosmetics. JD says it averages 500,000 orders and more than 100 million page views per day.

The company has been particularly aggressive building out its delivery infrastructure; it says it directly fulfills orders to consumers in 400 Chinese cities. As a result of that rapid expansion, JD grew its web sales 83% to $18.18 billion in 2013. JD also plans to keep growing its marketplace with new initiatives, such as a program that lends money to sellers, which Alibaba also does, and with pilot programs such as the one it launched in December with Beijing convenience store chains that take orders via JD.com and promise delivery within 10 minutes. "JD will have a three-digit growth rate in 2014," CEO Richard Lu told reporters at a company press conference.

At Gome, the chain retailer invested heavily in 2013 to tie together its online and offline stores and it is now seeing the effort pay off, says senior vice president Mu Guixian. In a January financial forecast with the Hong Kong Stock Exchange, Gome attributed its positive financial results last year in part to its work integrating its online platform into its bricks-and-mortar stores. Gome said in the filing it expected same-store sales to increase more than 12%. By contrast, larger rival Suning Appliance Co. Ltd., the No. 2 retailer in the China 500, reported comparable-store growth of 8.9% in 2013. With Internet Retailer-estimated web sales that increased 127% to $1.65 billion, "Gome's online business is running on a fast track," Mu says.

While Suning is still the bigger web merchant with e-commerce sales that grew 63.6% to $4.96 billion in 2013, Gome grew twice as fast as its main rival by focusing on improving its web shopping experience and increasing its online product inventory, Mu says. Monthly unique visitors to the retailer's e-commerce site, Gome.com.cn, more than doubled in 2013 to an average of 40.9 million from 17.5 million in 2012, according to web measurement firm comScore Inc. Mu also says the retailer has taken several steps to make sure its e-commerce site is an ally, not an enemy, of the company's more than 1,600 stores across China.

For example, inventory information is shared between the e-commerce site and stores so that consumers can order products online and pick them up in stores. Stores offer wireless Internet connections so that employees can place orders from online inventory when a shopper can't find what she wants in the store.

To make its web site appealing, Gome in 2013 began presenting personalized product recommendations and advertisements, Mu says. It also created a single shopping cart a shopper can use online to buy from Gome and the more than 10,000 outside merchants that sell on the retailer's marketplace. Those merchants account for about 20% of the value of goods sold on Gome.com.cn, Mu says.

While 80% of all Gome's web sales still come from consumer electronics, the retailer is expanding into new product categories online, including furniture and home improvement products. Gome last year added to its e-commerce site consumer packaged goods, such as toiletries or paper towels, which are typically low-cost items that consumers buy frequently. Mu says the hope is that those items will increase consumers' shopping frequency. This year the retailer plans to continue adding categories, such as jewelry and automobiles.

Gome encourages customers in its stores to compare prices with online competitors, because, Mu says, Gome's large volume allows it to negotiate favorable terms with its suppliers. For example, Gome recently announced a commitment to purchase at least $495 million worth of products in 2014 from Chinese manufacturer Haier Group in return for low prices on TVs, washing machines and air conditioners designed specifically for Gome.

Gome also plans to continue investing in mobile and social media initiatives, Mu says. Mobile devices accounted for 15%, or $247.9 million, of Gome's online sales last year, and Mu projects that will reach 50% by the end of this year.

To sell successfully online in China, web merchants need to commit to investing the time, money and resources into an e-commerce market that is years away from full maturity, say e-commerce and retailing analysts.

For VIP Holdings Ltd., a publicly traded online apparel retailer based in Guangzhou and the No. 8 e-retailer in the China 500, the key to long-term survival and eventual prosperity in Chinese e-commerce is offering consumers name-brand clothing, focusing on profitability and building a bigger e-commerce base, says chief financial officer Donghao Yang. "While maintaining and expanding profitability gradually over time, our top priority is to grow our market share in the discount retail market," he says. Although VIP has yet to break out its final 2013 numbers, the company reported its first-ever profits in 2013. For the third quarter ended Sept. 30, 2013, VIP reported net income of $12 million on revenue of $383.7 million compared with a net loss of $1.45 million on sales of $155.94 million a year earlier.

Over time, VIP says it achieved profitability through more tightly managing marketing costs by using social media more effectively and by negotiating better deals with suppliers. "We have increased our profitability," Donghao says. "We are better at controlling costs and achieving operating efficiency."

To both grow web sales and become profitable while selling discount apparel and accessories online means VIP cannot always be the lowest-cost seller. But it must have products fashion-conscious younger female web shoppers can't find anywhere else, particularly those living outside the so-called tier-one cities of China, such as Beijing, Shanghai and Guangzhou.

While other online retailers may concentrate on selling to web shoppers in big Chinese cities, 55% of VIP's core shoppers of women ages 20 to 40 live in less populous cities and rural China. To better reach that niche audience, VIP over the next three years is spending $200 million to double its number of distribution centers to four facilities to expedite shipping. VIP also is in the process of doubling the number of buyers it employs from 200 to 400 and increasing the number of apparel and accessories brands on VIP.com from 410 in 2010 to more than 3,000 in 2013.

VIP also continues to build its order volume, Donghao says. The company now ships about 11.7 million orders each quarter compared with 927,000 orders per quarter in 2010. "We are a mass market discount retailer," he says. "While we have sales events on designer brands, the majority of the brands that we are working with are mass market-oriented."

A unifying theme for many China 500 merchants is their determination to more effectively sell to consumers shopping on smartphones and other mobile devices. Chinese mobile commerce mushroomed by 101.3% to $15.7 billion in 2013 from $7.8 billion in 2012 and nearly 3900% from $400 million in 2010, iResearch says. As soon as 2015, iResearch predicts China's mobile commerce market could reach $41.40 billion. In comparison to China, U.S. m-commerce sales in 2013 grew about 64% to $34.2 billion from $20.9 billion in 2012, according to Internet Retailer's 2014 Mobile 500.

Chinese m-commerce is growing for several reasons and in the years ahead it may even be the way the majority of Chinese consumers shop online, says Kelland Willis, a Forrester Research Inc. e-commerce and China analyst. China has the world's largest mobile base with about 1.1 billion subscribers, according to Forrester Research. "The uptake of mobile commerce will push China's e-commerce market to new heights," she says.

Seeing that growth, many China 500 merchants are gearing up for a further uptick in mobile traffic and sales. At Dangdang.com, which began selling books online in 1999 and now sells a wide variety of merchandise, nearly 40% of site traffic comes from mobile devices and m-commerce accounted for about 10%, or $154 million, of its total e-commerce sales of $1.54 billion in 2103, the company says. Dangdang is the tenth-largest e-retailer in the China 500.

To accommodate mobile shoppers, Dangdang is updating its mobile site with new features such as faster search and updated login screens that enable registered users to quickly access personal information such as their shopping history.

Another China 500 merchant focused on m-commerce is Wuxi Maimaibao Information Technology Co. Ltd., which was founded in 2006. The retailer's primary target is customers in rural China and migrant workers in various cities. More than 200 million Chinese have moved from the countryside to cities in the last three decades, taking factory, construction and service jobs. They often don't have a computer, but most have at least rudimentary mobile phones. Maimaibao, No. 26 in the China 500, says its sales now average about $27.3 million per month and that its annual sales grew 100.6% to $327 million in 2013.

Maimaibao's site isn't designed for personal computers; instead it mainly sells products through its mobile site, MMB.cn. More than 40 million Chinese consumers have registered with the site and unique visitors exceed 8 million per day, the company says. The average ticket price ranges from $30 to $40, reflecting its typical shoppers' low incomes.

Products are priced to be affordable. For example, most T-shirts are priced at around $4.90. Maimaibao aims its service at the more than 230 million migrant workers in China's cities and the 350 million consumers in the countryside and small towns. "Before we launched our service, they didn't have choices," says founder and CEO Xiaowei Zhang. "Maimaibao is providing a fair shopping opportunity to people who really need them."

That's not a business model that's common in other parts of the world, but reflects China's uniqueness, as well as the need for e-retailers to adapt to a society undergoing profound change. China's e-commerce landscape is changing quickly and the web merchants that want to survive and prosper must be adept at building a recognizable brand that will keep shoppers coming back, says Willis.

"China marches to the beat of its own drum," she says. "Developments go fast, and consumer behaviors and attitudes change just as quickly. In such a fast-changing environment companies have to realize that their strategy will be always out of date."

frank@verticalwebmedia.com

mark@verticalwebmedia.com

 


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