'Value war', not 'price war' needed

China's online retailing giants like 360buy, Suning and Gome on Wednesday pledged to outdo one another on pricing, with each company claiming to sell its products at lower prices than its competitors.

Beijing Jingdong, which owns the retail site 360buy.com, China's second-largest online retailer by sales, sparked the latest round of the war.

Liu Qiangdong, chairman and founder of 360buy.com, said on his micro blog that Jingdong Mall will always price its online products 10 percent lower than the same products sold in the online shops of Suning and Gome, and the company would dispatch 5,000 agents to check prices at rival outlets.

Suning and Gome immediately responded by announcing that the prices of their online products will always be lower than those of Jingdong.

The cut-throat online price war to many is a mere sham in the battle for larger market share rather than genuine offers of discounts.

It seems unlikely that consumers are going to benefit much from the current war, rather, once the ongoing price war escalates into a vicious competition, those emerge strongest will monopolize the market, thus disrupting market order and jeopardizing the interests of suppliers and consumers in the end.

Marketing stunt

Consumers complain that the ongoing price war is merely a tacit marketing conspiracy.

When bargain-conscious consumers rushed online to buy these low-priced products, they found that it was not so easy to grab the promised bargains, as quite a few of the so-called close-price items were either out of stock or not really on sale at a low price. Some found that the so-called "price cuts" came after significant price hikes a day before.

"Most of the products' prices on Jingdong were increased before they brought them down. Although some of the prices were lower than when the war started, the price cuts were definitely not as dramatic as the retailers claimed," said Yan Chengyue, a Jingdong customer from Xiamen, Fujian province.

According to etao.com, a website that compares the prices of online products, by noon on Wednesday, among the 2,200 electronic appliance products for sale at 360buy Jingdong Mall, only 78 items, or 1.6 percent, had been reduced in price and about 30 percent of the supposedly lower-priced items were out of stock.

Jingdong even raised the prices of about 50 items by up to 100 percent, according to etao.com.

Also, in a survey conducted on Sina Weibo, the country's most popular microblogging site, 90.7 percent of 42,003 respondents said the price war is simply a promotional stunt.

"There could be price wars launched here and there. If you look at price comparison, in reality, I think the price actually didn't drop as much as it's advertised in the media," said Martin Lau, president of online games and social-networking company Tencent Holdings Ltd. "More of the companies are trying to promote their companies, rather than really lowering price."

Market disruptions

The ongoing price war has triggered concerns for potential market disruptions.

Observers worry that excessively low prices may dampen the enthusiasm of suppliers and create problems in securing sufficient stocks, which may lead to a delay in giving the customers their discounted goods.

Chunlan, a major air conditioner manufacturer, said the price war may affect upstream suppliers and create disorder in the home appliance market, adding that consumers will ultimately suffer.

The online battle has also wounded appliance manufacturers like Changhong and Hisense which declared that the "price war" can not surpass the agreement signed between manufacturers and sellers.

Liu Junhai, vice president of the China Consumers Association, said the companies engaging in the price war are not making an effort to offer diverse products and better services.

"If the winner ends up monopolizing the online retail market, shoppers will be deprived of the benefits of benign competition," he warned.

The Ministry of Commerce on Thursday also expressed concern over the battle by reiterating that all marketing strategies must comply with laws and market rules. Chinese law forbids companies from selling at prices lower than cost in order to squeeze out competitors.

The Ministry said it would introduce more specifications to better guide the development of the nation's e-commerce market.

Zhao Ping, an official from the Ministry of Commerce, said the cut-throat price race, as a common way of grabbing market share, is beneficial to customers in the short term, but in the long run, when one side "dies out" in the competition, the other side will hold a dominant position to set prices that is detrimental to consumers.

"Therefore, it is necessary that related authorities should maintain market order, and meanwhile enterprises also need to regulate their own behaviors and search for new profit model," Zhao stressed.

Gloomy market conditions

It's hard to say how long the price-cutting war will last as not only the online but also the offline retailers are aiming to get a lion share of the cake under pressure from sluggish sales in gloomy market.

Long Yongxiong, consumption and transportation industry joint leader Deloitte China, said the current price battle is just one chapter in an unfolding story, as B2C retailers hope to firstly eliminate opponents and then consider raising profit margin.

China's appliance retailers are already under pressure as a slow housing market has triggered a slowdown in sales of refrigerators, air conditioners and the like.

"If people are holding off buying a home, that could affect sales in certain sectors -- home appliances, home decoration to some extent, furniture," said Ben Cavender, a consumer goods analyst at China Market Research Group in Shanghai.

On the other side of the coin, due to investment in e-commerce, Suning's net profits dropped nearly 30 percent in the first half of the year. Jingdong suffered a loss of 1.3 billion yuan in 2011 with its gross profit margin as low as 5.5 percent and was forced to put off its IPO this year due to unfavorable market conditions.

Improving competitiveness

Large discounts are one of the few methods online retailers have at their disposal to attract consumers, however, analysts warned that there are huge hidden dangers lying in the "price war" because it only focused on the short-term effect and immediate interests.

The battle will not only make severe impact on development of online retailers, but also pose dual threat to the trust and credibility of the benign development of e-commerce industry.

"Enterprises should reflect on the development model and take a long-term view on scientific development so as to foster a time-honored brand," said Mo Daiqing, from China e-business Research Center.

Retail and e-commerce companies in a number of countries have shifted from "price war" to "value war" and "service war."

Amazon, for example, is not in favor of burning money in the "price war." Amazon China CEO Wang Hanhua held that what matters most to Amazon is to upgrade user experience so that customers will speak for you. "Only by sticking to core competitiveness, can online companies definitely earn its share of cake," Wang added.

According to a report from China e-Business Research Center, lack of innovation has mired Chinese online retailers in repeated cost-driven price wars.

"The price war will serve as a trump card in the initial stage of expansion, but the model of sacrificing reasonable profits in the long run is not a sustainable model," warned Shi An, founder of Gootime Technology, a service provider in the IT industry.

He said e-commerce companies should aim to strengthen their offering by improving the user experience on their website as well as their services.