THE Chinese mania for online shopping, especially among the younger generation, is driving an increasing number of traditional bricks-and-mortar retailers to take a more virtual view of their business futures.

Online retail sales last year totaled 500 billion yuan (US$77.4 billion), accounting for about 3 percent of retailing, according to the Ministry of Commerce. By 2015, e-commerce is expected to account for 5 percent of retail sales in China, Nie Linhai, a commerce ministry official, said in a conference in Shanghai last month.

The proportion may seem small, but the retail space is huge. In June, retail sales in China increased almost 18 percent from a year earlier to 1.45 trillion yuan. The Chinese Academy of Social Sciences predicted in a recent report that retail sales will double in the next four years.

As the world's biggest Internet market begins to transform the world's biggest consumer market, questions are being raised about how well the two realms can co-exist.

"Cinemas are still popular despite the growth of online movies and DVD players," said Gao Kun, an analyst with Dongxing. "There is room for both to operate. Once all the initial hype has dissipated, both traditional retailers and online stores will find their individual voices and their own target audiences."

The rush to renovate is on.

"Retailers are planning online businesses for the future," said Cui Hongbo, senior partner with United Wisdom Consulting Group. "It's not yet clear to what extent their investments in e-commerce will be profitable, but retailers surely don't want to be left behind as online business booms."

Expansion plan

Electrical appliance retailers, which raked in revenue of 1 trillion yuan in 2010, have been among the first to expand online.

Suning, China's largest electrical appliance retailer, said last month it plans to propel its online revenue to 300 billion yuan by 2020 from just 2 billion yuan last year. At that level, based on the company's forecasts, online sales will account for nearly half of revenue.

"We aim to build our online store as a leader in the electrical appliances market, expanding eventually to include books, consulting services and various kinds of daily goods," said Lin Guosheng, general manager of the e-commerce unit of Suning Appliances.

On June 16, Suning announced plans to sell 5.5 billion yuan of shares in a private placement to raise funds for projects that include upgrading information technology and improving its supply chain.

The company said it plans to amass an information technology team of 10,000 people and will spend billions creating the backup systems needed to support online sales.

Rival Gome is not about to be outdone in the virtual shopping world. In 2010, the company acquired Coo8.com, an online electrical appliance retailer, and in April Gome launched its own online store.

Under the company's strategy, Coo8 will share procurement with Gome but will remain an independent brand focused on sales of electrical appliances. Gome's online store will concentrate on offering a wider range of goods and entertainment merchandise.

"Coo8 and Gome's online store are like the left and right hand of Gome," said Wang Junzhou, president of the company. "They will both benefit from our extensive logistics system and large procurement volumes."

Gome said it expects Coo8's sales to hit 2 billion yuan in 2011 and the e-commerce unit of Gome to contribute 10 percent of revenue.

Low-cost myth

Even foreign brand retailers are getting into the act.

US-based Wal-mart bought a minority stake in Shanghai-based Yihaodian.com, an online supermarket, and announced it would establish Wal-mart China's e-commerce headquarters in Shanghai.

"We expect to offer consumers wider choices and provide more customized services," said Barry Friedman, vice president of Wal-Mart China.

UK-based Tesco said it began a trial project of offering home delivery of clothing and grocery purchases, taking a page from its experience in virtual shops in South Korea.

But is all the talk of making it big online realistic?

"Originally we thought the costs for online stores would be lower because they don't have to pay rent and other overhead costs, but as that business has grown larger, the low-cost myth is beginning to fade," said Cui Hongbo, a senior partner with United Wisdom.

"Their spending on advertisement, IT and logistics systems is eating into profit margins, which are already pretty narrow to ensure low prices," he said.

And then there's the myth of staffing numbers. 360buy.com, the largest online electrical appliances retailer with revenue of 10.2 billion yuan last year, said it needs a team of more than 10,000 people to support its logistics services. A similar bricks-and-mortar retailer earning 10 billion yuan a year may need only 2,000 or 3,000 people, Cui said.

Dongxing's Gao agreed that making a profit in the virtual realm isn't easy.

According to his research, pure online sellers such as 360buy.com, Joyo and Dangdang had about two-thirds of the market last year. 360buy and Joyo posted losses while Dandang eked out a slight profit.

"Gross profit margin for pure e-commerce firms is about 5 to 6 percent," Gao said. "It can be as high as 20 percent for traditional retailers."

Traditional retailers caught in the online selling frenzy face a number of hurdles.

"Their most obvious problem is the price gap," said Cui. "Suning has already received numerous complaints from customers who paid one price in a store, only to find the same product cheaper on the company's website. That can be harmful to a store's reputation."

He warned that retailers could end up creating "a war within a company," with online sales growth coming at the expense of in-store sales.

Traditional retailers also have to ensure the advantages of shopping in a store - friendly staff, speedy home delivery and quality of goods - is transferred online.

"This may be a disadvantage for traditional retailers, which are better at appealing to customers on an emotional basis," said Cui.