But the social network’s advertising revenue grew 18.4% during the quarter.
The world's fastest-growing e-commerce market represents a tantalizing opportunity for web merchants worldwide. But the East poses significant barriers to entry for Western retailers.
It took some persistent knocking and years of tough work before the door finally swung open, but Newegg Inc. now has the wherewithal to successfully sell online in China.
In 2001, Newegg, a U.S. personal computer and consumer electronics web-only merchant, began planning to sell online in China. At that time consumers were just starting to shop online. But since then e-commerce has rapidly accelerated. The China Ministry of Commerce estimates online sales totaled about $179.00 billion in 2012, up 40.7% from $127.20 billion in 2011.
But before Newegg could capitalize on that growth, it faced formidable barriers to entry. While Newegg's founders were from Taiwan and had long-standing personal and business relationships in China, it still took a year to secure a license from the central government in Beijing to become a certified web merchant. Newegg then invested $25 million to build a headquarters, open a series of regional fulfillment hubs and develop its own delivery network using local and regional carriers.
Newegg next had to file and win a series of lawsuits to secure the rights to the domain name it wanted—Newegg.com.cn—and begin the long process of inventing and reinventing an e-commerce strategy that would appeal to Chinese web shoppers. In the beginning Newegg's China annual sales were paltry—only $35 million in 2008. But last year Newegg, No. 28 in Internet Retailer's newly published 2013 Asia 500, posted Chinese web sales of about $400.0 million, up around 66% from $240.3 million in 2011. "Our business has been growing at more than 50% year over year," says Mike Chou, Newegg China president.
Newegg learned early on that it takes a significant financial investment and a commitment to tailoring marketing and product selection to China's consumers to succeed in that country. And other retailers are finding they need a similar strong commitment as they seek to penetrate markets in Asia and the Pacific Rim where e-commerce is growing rapidly.
Unlike the United States or the European Union, Asia-Pacific is a series of national markets. There is no common language, currency or commercial code. And there are well-established online retail competitors in each of the region's major countries. That means U.S. merchants must pick the markets they want to prioritize and learn those markets well.
To gain entry, such U.S. merchants as Wal-Mart Stores Inc. (No. 244), Macy's Inc. (No. 249) and Vistaprint NV (No. 142) are making acquisitions or forming joint ventures with Asia-Pacific companies with established e-commerce bases. Other U.S. merchants, such as Amazon.com Inc. (No. 4) and Zazzle Inc. (No. 301), are creating highly customized e-commerce sites that target shoppers in a particular country such as Japan based on lots of market due diligence and planning.
For U.S. retail chains such as Gap Inc. (No. 199), the path to a successful entry into Asia-Pacific e-commerce is to build upon their existing store bases and recognized brands.
Despite the obstacles, many Western brands and retailers are deciding that the opportunities for selling online in the Asia-Pacific region are too big to ignore. Collectively the nine biggest online retail markets in the region—Australia, China, India, Indonesia, Japan, New Zealand, South Korea, Taiwan and Vietnam—generated estimated 2012 web sales of about $377 billion, according to data published in the 2013 Asia 500. In comparison, U.S. e-commerce sales totaled $225.5 billion in 2012, based on U.S. Department of Commerce figures, while the Centre for Retail Research estimates European e-commerce sales reached $315.9 billion in 2012. In other words, Asia has already jumped ahead of what have been the world's two biggest regions for selling online.
India provides a good example of the opportunities and the barriers to entry for foreign retailers. While the country's economy ranks fourth in the world, e-commerce is just getting started—though it's projected to grow rapidly. E-commerce venture capital firm Matrix Partners India projects online retail sales will double in size to more than $3 billion within three years and reach $15 billion by 2017.
However, getting a share of that growing market won't be easy for non-Indian companies. India's government restricts e-commerce companies with backing from foreign investors from selling online directly to consumers. Instead, those merchants are only allowed to engage in business-to-business e-commerce.
Foreign retailers are lobbying the government to change its policy. But until it does, those rules effectively prevent big global web merchants such as Amazon from becoming significant players in India, says Zia Daniell Wigder, Forrester Research Inc. vice president and Asia e-commerce analyst. "Government regulations and compliance are a big part of what U.S. web merchants have to deal with if they want to do business in certain Asian countries," she says.
As a developing economy and early-stage e-commerce market, retailers aspiring to sell online in India face several other hurdles. Retailing in India is fragmented and dominated by tens of thousands of mostly small proprietors, and the country has a very low percentage of consumers with a credit or debit card compared with the United States and Europe.
Secure payment processing also remains a challenge as does order fulfillment and package delivery to the 60% of the Indian population that lives outside major cities such as Mumbai and New Delhi.
But even with significant barriers to entry, some U.S. web merchants such as Vistaprint aren't waiting to establish an e-commerce presence in India. Vistaprint wants in on the ground floor in India where Matrix Partners India projects the current online customer base of around 20 million shoppers could increase as much as 1400% and reach 300 million shoppers within 10 years. "There are infrastructure problems, but as the e-commerce market develops and matures, U.S. companies will begin to make serious investments," says Avnish Bajaj, Matrix Partners India co-founder and director.
Vistaprint, an online retailer of custom printing products, sees a prime opportunity to sell online to the country's more than 800,000 small businesses, and eventually to consumers, says Mark Inkster, senior vice president. Vistaprint spent a lot of time studying the market and looking over potential deals before making an acquisition, Inkster says.