E-commerce price wars escalate in China

With more and more brick-and-mortar home appliance retailers tapping the e-commerce market, the online price wars have been escalating more fiercely in the Chinese market.

Since the beginning of 2012, a life-or-death year for e-commerce, major Chinese online stores including Suning Appliance Co., Ltd and Jingdong Mall have been mired in comprehensive price wars.

PRICE WARS ESCALATE

Started by Suning in April, the first round of price wars involved major business-to-customer (B2C) retailers including Guomei, Dangdang, TMall, and Jingdong Mall. The second round of wars was waged by Jingdong Mall in June on its founding anniversary.

The third round of price wars is quick on the trigger after Suning announced recently to allocate one billion yuan RMB in August on the occasion of its third anniversary to further compete on price.

The average price cut will be around 30 percent during the sales promotion period, said Li Bin, executive vice-president of Suning.

An employee with Suning Branch in eastern China's Zhejiang Province said the discounts are so attractive that Suning's workers are awaiting to cash in on the opportunity.

Moreover, Suning has initiated its Beijing Strategy to unify the prices of its online and offline products, said Hou Enlong, executive vice president of North China. The tactic was seen by industry insiders as a targeted general offensive on its long-time rival Beijing-based Jingdong Mall.

The tactic will be later extended from Beijing to Shanghai, Guangzhou, Shenzhen, Chongqing and other major Chinese cities, according to Sun Weimin, vice president of Suning.

Lu Renbo, deputy director of the Market Economy Institute of State Council Development Research Center, said the main purpose of Suning to spend a pretty penny to wage a price war is to drive off some incompetent competitors so as to gain a larger market share in e-commerce.

However, Lu was not optimistic on Suning's move to unify its online and offline product prices, as he believed Suning's rivals like Jingdong Mall and TMall will offer even lower prices, resulting in losses in Suning's offline stores.

As for the reason for frequent price wars occurring this year, Lu explained that competition among e-commerce giants has been white-hot, but there is no instantly effective means for its materialization, thus making the price wars as a major method to vie for the market.

PROFIT MARGIN SQUEEZED

Statistics showed that major e-commerce companies spent as high as seven billion yuan RMB in May and June on price wars, said home appliance industry expert Liang Zhenpeng.

He predicted that the price wars will not stop until some online businesses are marginalized due to huge losses.

After rounds of head-to-head price battles among the online companies, some escaped narrowly from death while others went to the dogs.

Industry insiders said that although the promotions or tactics have raised sales volume, the price cuts squeezed the already limited profit margin, making many companies hogging the limelight at the expense of profits.

According to statistic data of iResearch, a leading online market research company, online transaction volume reached 773.56 billion yuan RMB in 2011, accounting for 4.3 percent of the nation's total retail sales volume and the online shoppers reached 187 million people.

The figures demonstrated that online shopping has become a major industrial driving force. Nevertheless, the chilly winter for e-commerce retailers is not over as major online stores face dual capital and market pressures while bearing the pain of extensive price cuts.

Statistics showed that Jingdong Mall's gross margin was only seven to eight percent annually, while U.S. online retailer Amazon's gross margin was above 20 percent. Price wars are thus believed to bring bigger losses to those more adventurous online companies.

Chinese netizens said for the time being price wars play an important role in the e-commerce market, but for the long run, service and reputation will be the major factors to win customers.