?One shareholder told us, ?We have nothing but money. You go ahead and kill them all,?? Liu Qiangdong, the CEO of e-commerce site 360buy, wrote on his Sina Weibo account in August.
The bombastic statement was just one of many that the chiefs of China?s top e-commerce companies exchanged during an industry-wide price war this summer. Liu triggered the media showdown with his outsized claim that 360buy, also known as Jingdong Mall, would make no gross profit on sales of large home appliances in the next three years. Retailer Suning fired back by vowing to beat 360buy?s prices, while competitor Gome guaranteed ?the cheapest prices in history? for home appliances. Alibaba, the leader in China?s e-commerce market, also jumped in, promising to subsidize online purchases.
By early September, regulators had confirmed that the price war was, at least in part, a farce (see box, pg 37). Sites had, in some instances, failed to stock the products or provide the discounts they advertised, or raised prices before cutting them. Even so, the price war had its intended effect: winning the attention of consumers and the media. White-collar workers chattered about the companies in Shanghai?s elevators and subways, and many Chinese made their first tentative clicks on the sites.?
The price war provided a window into an industry where the stakes are high and the competition is cutthroat. Boston Consulting Group (BCG) estimates that, each year until 2015, 30 million new Chinese consumers will shop online ? nearly the size of Canada?s total population. Yet winning a greater share of the market will be a long and painful process for companies and investors. E-commerce companies have seen profits slip and costs spiral as they slash prices and invest heavily in a bid to increase their market share. Meanwhile, China?s broader economic slowdown is also taking a toll on their business.
?It becomes a war of the balance sheet; ?I can afford to lose money for a longer period of time than you can,?? said Michael Clendenin, managing director of Shanghai-based consultancy RedTech Advisors. ?Ultimately, if you?re a consumer, it?s great. If you?re the investor, it?s not so great.?
Riding the wave
Even amid the often-awe-inspiring growth figures of many industries in China, e-commerce stands out as a remarkable opportunity. The market expanded 66% last year and is on track to grow 54% this year, according to estimates by Chinese consultancy iResearch. Some of the factors driving this growth are clear: Chinese incomes are rising, and broadband networks are expanding across the country.
Other trends unique to China make the e-commerce market an even more valuable prize. For one, e-commerce offers retailers the ability to reach locations they cannot through brick-and-mortar stores. In this massive and still-developing country, even China?s largest retailers have a limited reach. The top 20 brick-and-mortar retailers accounted for only 13% of total urban retail sales in 2010, according to BCG.
?It?s easy if you?re a big brand to make sure you have stores in the top 30, 40 cities, but frankly you need to be in 1,000 cities if you want to reach 80% of the middle class today,? said Jeff Walters, managing director at BCG.
Even in cities where big retailers like Wal-Mart are present, their reach may be limited, since Chinese consumers don?t typically travel far to go shopping, Walters said.
?It?s not the US where you hop in your car and you?re happy to drive 20 minutes to go to a big-box store. A lot of consumers are still coming in on a taxi or walking from their neighborhood, so there are a lot of parts of cities where they?re not really serving consumers.?
These consumers are already reaching out through e-commerce, with up to one quarter of e-commerce demand in China being for products that consumers cannot find in physical stores. Most e-commerce purchases are now concentrated in China?s larger cities, but analysts expect that trend to change as consumers in smaller cities and rural areas become more accustomed to online shopping.
For these reasons, winning the e-commerce race could prove much more crucial for big offline brands in China than it has in the US or other developed markets.
?Put simply, the US e-commerce market was formed after the retail market already matured,? said Jodie Ding, an analyst at iResearch. ?However, China?s e-commerce suppliers have taken the stage before the offline retail market fully developed, so the swift growth of e-commerce has had a much greater impact on the retail market.?
Open, sesame
China?s e-commerce market has long been dominated by Alibaba, one of China?s most innovative and successful companies. Alibaba has a handful of businesses, of which Taobao Marketplace is by far the largest. Like eBay, Taobao follows a ?C2C? or ?consumer-to-consumer? model, providing a platform for ordinary people and small businesses to sell items to each other.
Taobao?s reach is stunning. The site accounted for 79% of all e-commerce transaction value in 2010, as well as roughly two-thirds of the 16 million parcels delivered in China each day. It is by far China?s biggest retailer: More products were purchased on Taobao in 2010 than at China?s top-five brick-and-mortar retailers combined, according to BCG.
Taobao came to dominate the market by virtue of several strategic decisions. Unlike its rivals, it allowed sellers to use its platform for free, greatly boosting its number of users. It also developed a payment system to protect consumers against fake or poor-quality goods (an important advantage in a country where even eggs may be fake). Unlike traditional online payment providers, which transfer the funds before the seller ships the item, Alibaba?s Alipay holds the payment in escrow until after the consumer receives the product and can verify its quality.
But despite these innovations, the market is gradually shifting away from Taobao. Taobao?s service has a loyal army of followers, but it also has several drawbacks. The complex platform is relatively difficult for beginners to master. It also has more problems with inferior products and delivery services than business-to-consumer (?B2C?) alternatives, at least in the mind of consumers. Sun Weimin, the vice president of rival Suning Appliance, describes it as ?an online farmer?s market,? with both genuine and fake products.
As Chinese consumers become more familiar with e-commerce, they increasingly want the reliability of B2C services, and an influx of venture capital has helped the B2C sector meet this demand. While Taobao is still growing rapidly in overall terms, the C2C service?s share of the e-commerce market is retreating, while the share of B2C retailers like 360buy, Amazon, Suning and Alibaba?s own B2C site Tmall is growing.
Given its loyal customers and focus on innovation, Taobao?s leading position seems unlikely to change anytime soon, though it is likely to continue slowly shedding market share to B2C rivals. For Taobao?s competitors, the price war is an effort to speed up this process.?
There will be blood
The closest competitor to Alibaba?s group of sites, Jingdong Mall?s 360buy.com, is one of the B2C companies that stands to gain most from this shift. Analysts say they are becoming the second priority when offline vendors choose their online sales channel. However, Jingdong Mall faces its own set of challenges, the first of which is building a comprehensive and reliable logistics service. The company announced in March 2011 that it would invest US$1.2 billion to improve its logistics and customer service over the next five years. Its long-term plan is to create independent businesses that can serve other companies, thereby generating more profit on their heavy investments.
However, financing the massive build-out will be a challenge. The company purportedly devoted about 70% of the capital from its first- and second-round investments to purchasing land and building logistics centers. While Jingdong?s cash position is unclear, since the company is private, some of the land plots it purchased are currently lying fallow, indicating it may be short of funds to develop them.
Jingdong announced in April 2011 that it had raised US$1.5 billion from investors including Russia?s Digital Sky Technologies, but it seems to have burned through much of this cash. Jingdong is now going through another funding round that is rumored to value it at a discount to its earlier investments. ?Their cash position is not dire, but certainly they recognize that they need more cash,? said Clendenin of RedTech Advisors.
The company plans to further bolster its cash reserves by going public in the US in early 2013. While the offering may be underpriced because of cool market sentiment towards Chinese companies, it would still give 360buy an influx of cash it could use to outpace its competition.
Before the IPO, Jingdong may cool its price cutting tactics as it tries to raise its gross margin (currently in the mid-single digits, according to a Hong Kong analyst meeting this spring) to better appeal to IPO investors, multiple analysts said. After its IPO, however, 360buy seems likely to double down on prices, making competition in the e-commerce market next summer even fiercer.
But despite CEO Liu Qiangdong?s bold rhetoric that he will receive funding no matter what, there is the risk that, at some point, 360buy?s investors will draw the line. ?Nobody is God; you can?t expect investors to follow you no matter what,? said Stephen Sher, chairman of online clothing retailer Moonbasa. ?Private equity has its own profit model.?
Brick and mortar
Meanwhile, the e-commerce businesses of traditional appliance retailer Suning (and, to a lesser extent, its rival Gome) seem to be gaining ground.
Times are tight for Suning as well: Its profits contracted 29.5% in the first half of the year, due largely to the slowing economy and especially the real estate market, which drags on purchases of appliances. But as a listed company, Suning is able to raise cash more easily. The company just completed a private offering of US$741.6 million in July and plans to raise up to US$1.26 billion through bond sales, after which it would have US$5.21 billion in cash, Suning Vice President Sun Weimin told China Economic Review.
Furthermore, Suning?s pre-existing network of 1,800 stores could be a big advantage to its online business, allowing it to provide faster delivery and better customer service, several retail analysts said. Having both online and offline stores allows companies to adopt a mixed strategy for promoting their products, for example, using physical stores to introduce new models but then directing consumers online to re-order old products. Chinese consumers appreciate this mixed model. According to a 2010 survey of more than 4,000 consumers by BCG, about half said they visit an offline store before making a purchase online.
But both Suning and Gome have much work to do in improving and integrating the electronic systems that govern inventory and other processes before they can make the most of this online-offline partnership. One of the reasons that Gome and Suning were able to expand so rapidly over the past decade was their heavy reliance on local suppliers and store managers, said Walters of BCG. ?These retailers don?t have a sophisticated inventory management system, so it?s not always easy for them to know what inventory is sitting in the store, [or] what [products] are on display.? To expand quickly offline, they will need to build up that underlying electronic infrastructure
With its cash reserves and extensive store network, Suning could pull ahead of 360buy.com in coming years, some analysts said. First, however, the company must integrate its offline and online services and drive traffic between them. ?The uncertainty is in the execution,? said Nina Yan, a consumer analyst at HSBC.
In the meantime, a handful of smaller players are nipping at Suning?s heels. Analysts say that Amazon China, while small, has carved out a strong position. Dangdang and Tencent are also holding on to significant shares of the market, as are a variety of specialty sites, such as grocery-provider Yihaodian, which sold a stake to Wal-Mart in August, and Vancl and Moonbasa in clothing.?
Big fish gets bigger
The battle for market share is important because, in the internet business, just being the largest player can bring big benefits. The largest internet companies are able to adopt a marketplace model, where they basically sell their traffic to the third-party companies they host on their platform. Amazon is one example: Small retailers are willing to give Amazon a cut of their business because they receive more customers just by being on its platform.??
This is an ideal way for internet companies to make money, said Clendenin of RedTech Advisors, because it entails few costs. ?There?s no sales pressure, there?s no principle, there?s no inventory risk. The money you make, you know 90% gross margins, all of that just drops straight to the bottom line,? he said. ?That is what is going to make these platforms bigger than they are.?
Alibaba is clearly the best positioned as an online marketplace. Because Taobao blocks searches via Baidu, China?s largest search engine, many Chinese consumers now go directly to Taobao when they want to buy something. ?Taobao is becoming almost like a search engine or starting point for online shopping in China. That in itself is incredibly valuable, because ? the most valuable online advertising is advertising to consumers who are about to buy something,? said Walters of BCG. ?There are many ways to potentially monetize that and capitalize on that going forward, and I think that?s probably what Alibaba is thinking about.?
Smaller players could theoretically close this gap with Alibaba if they merge and absorb the traffic of their rivals. Consolidation would offer small companies other benefits, for example instantly expanding their logistics networks.
China?s e-commerce market is very geographically fragmented, said Marie Jiang, a retail analyst at Shanghai-based research firm Pacific Epoch. For example, Alibaba dominates in eastern China, near its Zhejiang-province headquarters, whereas 360buy is much more concentrated in northern China. Based on some studies, the consumer overlap? of these two sites is only 0.1%, she said. ?I would say it?s a win-win strategy if one company acquires another,? Jiang said.
But the factors that have thus far kept this market so geographically fragmented may continue to limit consolidation. One is local protectionism, said Charlie Chen, an analyst at BNP Paribas. Expanding from a regional to a national player is much more complicated than in the US because in China each province operates ?like an individual kingdom,? with its own set of companies, regulations and taxes, Chen said.
Insufficient infrastructure is also a challenge, he said. While shipping costs are low in China, so is the quality of service. E-commerce sites are typically forced to rely on an assortment of tiny courier companies to make their deliveries, resulting in bad service that can dissuade customers and lead to inventory build-up. E-commerce companies are making massive investments in distribution centers and systems in an effort to improve service and lower costs, but the process is expensive and well-located plots are getting harder to secure.
CEO and investor personalities could also act as a barrier to consolidation. Potential acquirers have approached Dangdang, for example, but the company has ?an interesting view of what they?re worth,? Clendenin said.
Bottom line
E-commerce companies are likely to continue building their scale, investing in technology and finding incremental ways to boost efficiency in order to increase profits. But without much consolidation in the market, margins are likely to remain thin for companies and investors. Investors will see tactical buying opportunities in the sector when stocks get oversold, but stock prices are unlikely to surge in the next few years, as the stocks of Baidu or Tencent did, said Clendenin.
?If I were an investor, I would be very cautious to participate in this kind of price war because it?s basically a cash-burning game,? said Charlie Chen of BNP Paribas. ?I would basically hold my money and see who will be the survivor.?
In the longer-term, Alibaba, 360buy, Suning and Amazon China all seem set to continue as strong contenders, with Alibaba?s Tmall likely to retain the number one spot in the B2C market for the next three to five years, analysts said. ?The question is, who is number two? Is it Suning or 360?? asked Clendenin. ?The deciding factor is can Suning build up enough traffic over the next couple years to be number two? It?s a little early to determine that, but my guess would be that they can.? The market probably has room for a few successful niche players as well, especially those that develop a unique retail experience and strong marketing, like clothing retailer Vancl.?
But weaker contenders, such as Dangdang, may have a hard road ahead. There are clearly e-commerce companies receiving funding now that will not exist in five years, said Walters of BCG. ?So if I think of the risk of any individual e-commerce company, it?s pretty high, because it just unclear exactly how it?s going to play out, who is going to emerge as the winner in different categories.?
But while the performance of any one player may not be so promising, the e-commerce market as a whole is. In the five years to 2015, the sector is likely to quadruple, potentially even surpassing the size of the US market, and the percentage of Chinese who shop online will grow from 23% to 44%. ?We are, in many ways, just getting started with e-commerce in China,? Walters said.
Source: http://www.chinaeconomicreview.com/race-bottom
greenhill nj plane crash plane crash new jersey beef o bradys bowl the hobbit the hobbit an unexpected journey latkes
What do you want to be when you grow up? That?s the question Michelle Ward, the When I Grow Up Coach, helps her clients answer. Ward is certified by the International Coach Federation. She?s spent over 750 hours coaching hundreds of creative people to devise the career they think they can?t have ? or discover it in the first place.
Margarita Tartakovsky, M.S. is an Associate Editor at Psych Central and blogs regularly about eating and self-image issues on her own blog, Weightless.
In June, Mozilla and the National Science Foundation (NSF)