Rise Of The Online Titans

China’s titans of online retailing have unsheathed their marketing swords for a war in cyberspace that industry watchers say will decide the future of everyday shopping habits for nearly a billion consumers.

Dozens of retail companies have staked out online niches since bargain-hunting, Internet-savvy Chinese consumers started migrating to e-commerce websites from traditional storefronts for certain purchases about a decade ago.

The shift began as a trickle but has since become a raging torrent. Online retailing last year was an 800 billion yuan industry in China, rising 56 percent from the previous year, according to China e-Business Research Center. About 4 percent of all basic consumer purchases in China are now made on the Internet.

Smack in the center of this vast and widening merchandise landscape is a nucleus of major retail companies that analysts say have amassed huge arsenals in the areas of financing, logistics, and advertising capacity. These companies have strengthened their positions and won investor confidence to a point where they may be able to dominate the business for years to come.

Key industry leaders include Suning Appliance Co.’s newly launched online platform Suning.com, 360buy Jingdong Mall’s site 360buy.com, the Taobao network operated by Alibaba Group, Tencent Holdings Ltd.’s 51buy, and Yihaodian, which in August got a Chinese government green light to cooperate with Wal-Mart Stores.

The investment community hasn’t entirely lost interest in the smaller warriors of cyber retailing such as clothing merchant Vancl and bookseller Dangdang. But in the eyes of many, the biggest and most fearsome of the bunch have already set a development pace and business standards that the rest, it seems, will have to follow to succeed in China.

At the same time, the market leaders are ready to compete head-on with one another and push individual business models—each with unique characteristics and challenges—to the limit over the next year. None of these titans appears satisfied to share the lead. Each seems determined to rise above the rest.

“The (business) models for online retailers have diverged,” said a private equity investor in e-commerce industry. “We’re looking for which model will pass the test.”

Strategic Maneuvers

Emerging at this stage of the fight for China’s e-commerce crown is a common retail tactic that’s been attracting shoppers since long before the invention of the Internet: price-cutting.

Suning, 360buy, and home appliance supplier Gome Electrical Appliances Holdings, which like Suning has expanded into cyberspace from a traditional chain-store base, have separately promised to sell products at cost to online customers at least through late 2012.

A company shareholder of Suning said in July the company would launch in the following month a nationwide “a zero gross profit” sales promotion. The campaign was slated to cover storefronts and the company’s online mall.

The promotion’s chief aim was to lure online consumers away from rival 360Buy, the Suning source said.

But 360Buy got a jump on Suning during the first half of the year, when it overwhelmed competitors during what a private equity source called a “fierce” price war for products such as TVs and computers. Despite cutting prices, the source said, “360Buy.com was still able to grow faster than other online retailers” during that battle for shoppers.

A microblog posting in mid-August by Liu Qiangdong, CEO of 360buy’s parent company, pledged another round of price-cutting this fall as part of a bid to beat back Suning and Gome, which has similarly promised to slash prices to the bone.

Online retailers have also written fund-raising and large-scale capital spending into their tactical plans.

To prove his company’s willingness to take financial risks, for example, Suning Chairman Zhang Jindong used his company equity as mortgage to support Suning’s largest fundraising—4.7 billion yuan to finance its strategy to fully transit into an e-commerce company. The company reported 94 billion yuan in revenues last year, including store and online sales.

Shenzhen-listed Suning has a market capitalization of 46 billion yuan in mid-August. 360Buy is believed to be exploring options for an initial public offering despite executives saying the company will not go public no earlier than 2013. Alibaba, on the other hand, has privatized its Hong Kong listed business-to-business subsidiary and is expected to launch a listing of the group.

Suning’s latest financing push underscores the efforts of online retailers to scale up their physical operations in ways that offer shoppers more choices and convenient deliveries.

Ji Weidong, executive director of Morgan Stanley Asia, said the next year or two will determine whether these financial bets will pay off. He calls the coming months “the most critical time” for online retailing in China.

Some companies have spent hundreds of millions of yuan to hire workers, build logistics centers, and open warehouses around the country to streamline customer orders.

360Buy.com is counting on benefiting from logistics and distribution services that it has been building since 2007. The network includes a nationwide delivery system and nearly 20,000 logistics staff. The company plans to invest 10 billion yuan between 2012 and 2014 in warehouses and distribution networks.

Suning appears to have an advantage in its established logistics and warehousing network, which was originally built to feed its chain of 1,724 stores nationwide. Since going online in 2010, the company has expanded the network to accommodate e-commerce customers.

Alibaba’s Taobao, in business since 2003, is the most experienced e-commerce company among the industry titans. It’s also lapping up far more revenues than any other player.

Market research firm Analysys International said Taobao deals accounted for 76 percent of the nearly 279 billion yuan in transactions posted by all online retailers in China during the second quarter.

Alibaba, which originally started as a business-to-business platform, has been a pioneer in China’s business-to-consumer market and credited with cultivating online shopping habits among Chinese consumers.

But Alibaba’s model has basically been fixed, and its efforts to seek new breakthroughs, such as connecting its shopping platform with social network services, have had little effect.

For China’s e-commerce titans, the War of 2012 is expected to be “a battle for survival,” said Ji Weidong. “Unless white-hot fighting strategies are employed, there will be no room for survival” in online retail.

Wang Shanshan and Yu Ning are Caixin staff reporters.


E-Commerce, Retail Sales