E-commerce growth in China is explosive, but profits are woeful.
Call it the China paradox: E-retail growth is so explosive there that investors are pouring money into Chinese e-commerce, fueling profit-killing price competition and expensive expansion efforts.
Take the experiences of the big marketplace operators, which are competing to offer delivery services to their sellers, using the extensive delivery networks they’ve developed 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, as credit cards are still not commonplace, according to Macquarie Equities Research, part of Australia-based global financial services firm Macquarie Group. Alibaba Group Holdings Ltd.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.
Such investments and price wars can take their toll on profits. While Alibaba, No. 1 in the newly released Internet Retailer Top 500 Asia guide, 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 in the Top 500 Asia 500, reported a 197% increase in revenue in the third quarter of 2012. But the company also reported an operating loss of $3.3 million. Jingdong Mall, operator of 360buy.com, projects finally becoming profitable in the fourth quarter of 2013. Newegg.com.cn (No. 17), the Chinese e-commerce operation of U.S.-based e-retailer Newegg Inc., “is expected to be profitable in the next few years,” the company says.
The losses may be cooling investor excitement in China’s e-commerce arena. One sign of that was the decision by Chinese group-buying site Lashou, which raised $155 million in three investment rounds, to put off an IPO planned for 2012. The rise and fall of Chinese imitators of U.S. social buying service Groupon Inc. illustrates the investor-driven froth of e-commerce in China: within 18 months of the first Groupon wannabe launching in China in January 2010 there were 5,200 group-buying sites—a number that fell below 3,000 by late 2011, Macquarie says.
Many Chinese web merchants, backed by venture capital, are willing to trade profits for business-to-consumer e-commerce market share, the executive chairwoman of Chinese e-retailer Dangdang, which went public in December 2010, told analysts last fall.
“Before and after Dangdang’s IPO there was a huge inflow of billions of U.S. dollars into the b2c segment in China,” Peggy Yu Yu said. “Selling at or below cost became an easy way for some companies to pump up sales.” Dangdang is No. 10 among Chinese online retailers in the Internet Retailer Top 500 Asia guide.
That ferocious price competition hasn’t stopped global brands and retailers from joining China’s e-commerce fray since China’s entry into the World Trade Organization opened the country to foreign retailers in 2004. Tmall, a major online marketplace operated by Chinese e-commerce behemoth Alibaba Group (No. 1 among all e-retailers in the Top 500 Asia), now offers products from 2,000 non-Chinese brands, up from just one—Japan’s Uniqlo—in 2009. And such major companies as Toys ‘R’ Us Inc., The Estee Lauder Cos. Inc. and Coach Inc. have launched their own e-commerce sites to sell directly to Chinese consumers.
There are big opportunities to sell online in China, says Andrew Stockwell, vice president of Asia/Pacific for research and consulting firm Forrester Research Inc. But global brands need to take into account the challenges in making delivery and accepting payment, the huge scale of e-commerce and, especially, how fast online retailing is changing in China. “The strategy you develop for the next six months can’t be your strategy for the next 18 months,” he says.
China’s e-retail sales will reach $258 billion in 2013, predict analysts at Macquarie Equities Research. They project 35% annual growth in e-commerce in China from 2011 to 2015, down from the 94% annual growth rate of 2007 to 2011. If U.S. online retail sales, which grew 15.8% to $225.5 billion in 2012, grows at and the same rate in 2013 it would total $261 billion this year, or slightly more than Macquarie’s estimate for China. But, given China’s much faster growth rate, it seems certain to overtake the U.S. in online retail sales by 2014.
For much more about Chinese e-commerce growth, opportunities and challenges, read the April issue of Internet Retailer magazine.