Home » Business » Biz Commentary
More not merrier for online retailers
By Ding Yining |
May 29, 2012, Tuesday
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Print Edition
Print Edition
SUNING, China's largest appliance retailer, and its competitors are accelerating their expansion into the online sector as the country's Internet shopping market continues its rapid growth.
Online unit Suning Yigou launched a sales campaign last month, essentially earmarking up to 400 million yuan (US$63.5 million) in discounts for net shoppers. The price-cutting came as sales growth in Suning's bricks-and-mortar stores tailed off.
Suning Yigou predicted sales this year would soar to 30 billion yuan from 5.9 billion yuan in 2011. Yigou went into operation in 2009 but didn't report sales figures until last year.
About the same time as Suning, archrival Gome also launched its own online shopping site. This March, it teamed up with Dangdang, an independent shopping site listed in the US, to sell Gome's home appliances to buyers on Dangdang. Gome is hoping the move gives it a broader reach of consumers.
Even German-owned cash-and-carry supermarket wholesaler Metro began an online shopping site last month to serve customers in regions not yet covered by its street stores.
Irreversible trend
All these moves reflect an irreversible trend, according to Luo Qingqi, a veteran retail industry analyst and executive director of Paller Advisory. He said Suning at present has the advantage in delivering goods ordered online.
"Logistics systems require a large amount of capital and rather long process for investment return," he said. "From that perspective, established retailers like Suning and Gome have better logistics systems and deeper pockets than Taobao Mall and other shopping sites."
Suning is venturing into the online marketing territory dominated by Alibaba's Taobao Mall and 360Buy. Last quarter, Suning became the No.3 online retailer, behind Taobao Mall and 360Buy, though its market share was only 2.35 percent, compared with Taobao Mall's 37.38 percent, according to Analysys International. Gome had less than a 1 percent share.
"Our target is to become China's largest comprehensive online shopping mall," said Li Bin, executive vice president of Yigou.
The Suning online site currently is served by eight logistics centers covering 90 percent of domestic cities, and Suning Appliance's more than 1,600 stores nationwide are also pick-up points for customers placing orders online.
Li said there is still no specific plan for the website to make profit, but he said the company has hefty purchasing power and an efficient logistics system in place to give it an edge over rivals.
Gome's senior executives have been making similar comments recently and boasting about their logistics system.
"Suning does have strong management infrastructure and a solid logistics foundation, in addition to its relatively low sourcing costs from home appliance manufacturers," said Analysys International researcher Chen Shousong.
Investing in logistics
Gome's situation is similar to Suning's, while Taobao Mall and 360Buy are still in the process of investing in logistics. Their systems may not be up to the same par for another year or two.
Consumer discounts and manufacturer subsidies offered in this latest online price war can't last long, according to Luo.
"Consumers are very disloyal and can easily turn to other shopping sites for lower prices," said analyst Wang Zhouping with China e-Business Research Center. "There's no guarantee that a consumer will stick with only one retailer."
It's still too early to gauge whether Suning and other traditional retailers will be successful in their expansion into the virtual market.
Suning and Gome, as well as 360Buy, seem to think they can make headway by offering consumers bargain prices and eye-catching slogans.
But making a big splash in online shopping never comes easy.
"Suning and Gome are up against formidable competition, and the cost of their online campaigns could hurt profits at their off-line stores," said an investment director at Shengtai Investment Corp, who tracks Suning and other stocks in the retail sectors.
"Off-line stores and online vendors target different consumer groups, but obviously online shopping is growing at a much faster speed," he pointed out.
Computer-savvy
Online retail stores tend to target younger, more computer-savvy consumers, while traditional stores rely on older customers who like to see merchandise first-hand and may not know how to operate a computer.
In the first quarter, Suning's overall sales rose 10 percent from a year earlier to 22.6 billion yuan, but profit fell 15.3 percent to 951 million yuan. For China as a whole, the online retail market grew 53 percent last year to 782.6 billion yuan, accounting for 4.3 percent of retail sales. The Ministry of Commerce expects the online figure could rise to 3 trillion yuan by the end of 2015, compared with total retail sales of 32 trillion yuan.
Hong Kong-listed Gome has warned of lower income in the first three months, blaming a drop in sales and a net loss in its e-commerce business.
Consumer shopping sites like Dangdang and 360Buy.com are still suffering from operating losses due to heavy investment in logistics systems. Many of the sites, which are part of larger listed parents, don't make public specific figures on their performances.
The emergence of Suning and Gome in the online sector may eventually force smaller players out, and may cause venture capitalists to take a second look before investing in an arena rife with price wars.
Suning shares this year have risen 5.5 percent on the Shanghai Stock Exchange. Gome, which has suffered from management problems, was down 27.2 percent in Hong Kong trading. Dangdang has risen 22.3 percent in New York this year.
Online unit Suning Yigou launched a sales campaign last month, essentially earmarking up to 400 million yuan (US$63.5 million) in discounts for net shoppers. The price-cutting came as sales growth in Suning's bricks-and-mortar stores tailed off.
Suning Yigou predicted sales this year would soar to 30 billion yuan from 5.9 billion yuan in 2011. Yigou went into operation in 2009 but didn't report sales figures until last year.
About the same time as Suning, archrival Gome also launched its own online shopping site. This March, it teamed up with Dangdang, an independent shopping site listed in the US, to sell Gome's home appliances to buyers on Dangdang. Gome is hoping the move gives it a broader reach of consumers.
Even German-owned cash-and-carry supermarket wholesaler Metro began an online shopping site last month to serve customers in regions not yet covered by its street stores.
Irreversible trend
All these moves reflect an irreversible trend, according to Luo Qingqi, a veteran retail industry analyst and executive director of Paller Advisory. He said Suning at present has the advantage in delivering goods ordered online.
"Logistics systems require a large amount of capital and rather long process for investment return," he said. "From that perspective, established retailers like Suning and Gome have better logistics systems and deeper pockets than Taobao Mall and other shopping sites."
Suning is venturing into the online marketing territory dominated by Alibaba's Taobao Mall and 360Buy. Last quarter, Suning became the No.3 online retailer, behind Taobao Mall and 360Buy, though its market share was only 2.35 percent, compared with Taobao Mall's 37.38 percent, according to Analysys International. Gome had less than a 1 percent share.
"Our target is to become China's largest comprehensive online shopping mall," said Li Bin, executive vice president of Yigou.
The Suning online site currently is served by eight logistics centers covering 90 percent of domestic cities, and Suning Appliance's more than 1,600 stores nationwide are also pick-up points for customers placing orders online.
Li said there is still no specific plan for the website to make profit, but he said the company has hefty purchasing power and an efficient logistics system in place to give it an edge over rivals.
Gome's senior executives have been making similar comments recently and boasting about their logistics system.
"Suning does have strong management infrastructure and a solid logistics foundation, in addition to its relatively low sourcing costs from home appliance manufacturers," said Analysys International researcher Chen Shousong.
Investing in logistics
Gome's situation is similar to Suning's, while Taobao Mall and 360Buy are still in the process of investing in logistics. Their systems may not be up to the same par for another year or two.
Consumer discounts and manufacturer subsidies offered in this latest online price war can't last long, according to Luo.
"Consumers are very disloyal and can easily turn to other shopping sites for lower prices," said analyst Wang Zhouping with China e-Business Research Center. "There's no guarantee that a consumer will stick with only one retailer."
It's still too early to gauge whether Suning and other traditional retailers will be successful in their expansion into the virtual market.
Suning and Gome, as well as 360Buy, seem to think they can make headway by offering consumers bargain prices and eye-catching slogans.
But making a big splash in online shopping never comes easy.
"Suning and Gome are up against formidable competition, and the cost of their online campaigns could hurt profits at their off-line stores," said an investment director at Shengtai Investment Corp, who tracks Suning and other stocks in the retail sectors.
"Off-line stores and online vendors target different consumer groups, but obviously online shopping is growing at a much faster speed," he pointed out.
Computer-savvy
Online retail stores tend to target younger, more computer-savvy consumers, while traditional stores rely on older customers who like to see merchandise first-hand and may not know how to operate a computer.
In the first quarter, Suning's overall sales rose 10 percent from a year earlier to 22.6 billion yuan, but profit fell 15.3 percent to 951 million yuan. For China as a whole, the online retail market grew 53 percent last year to 782.6 billion yuan, accounting for 4.3 percent of retail sales. The Ministry of Commerce expects the online figure could rise to 3 trillion yuan by the end of 2015, compared with total retail sales of 32 trillion yuan.
Hong Kong-listed Gome has warned of lower income in the first three months, blaming a drop in sales and a net loss in its e-commerce business.
Consumer shopping sites like Dangdang and 360Buy.com are still suffering from operating losses due to heavy investment in logistics systems. Many of the sites, which are part of larger listed parents, don't make public specific figures on their performances.
The emergence of Suning and Gome in the online sector may eventually force smaller players out, and may cause venture capitalists to take a second look before investing in an arena rife with price wars.
Suning shares this year have risen 5.5 percent on the Shanghai Stock Exchange. Gome, which has suffered from management problems, was down 27.2 percent in Hong Kong trading. Dangdang has risen 22.3 percent in New York this year.
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