Questions raised over stores' price war(2)

Promotion or ploy

So prices are slashed, at least according to advertisements. But data from etao.com, a website that tracks and compares prices of online products, depicted a different picture.

Among the 2,200 electronic appliance products for sale at Jingdong Mall, only 158 items, or 7.2 percent, had been reduced in price and about 30 percent of the supposedly lower-priced items were out of stock.

In general, the price cut is limited to 10 percent.

The sizzling fight may result in a win-win situation for merchants to push up sales in a concentrated period of time, said Analysys International researcher Chen Shousong, especially by luring new customers like Xu who is not "price-sensitive".

Traffic rocketed from the day the price campaign kicked off, according to data tracked by Analysys International. Jingdong attracted 1.8 percent of global traffic on Aug 15, compared with 0.75 percent two days earlier.

Suning and Gome rose to 0.8 percent and 0.2 percent from 0.15 percent and 0.03 percent.

Breaking down to items, Suning gives the most discounts on TV sets while Gome provides the best bargain prices for fridges. Jingdong Mall is more balanced among all appliances.

Wang Zikui, just married, is well positioned to watch the fray. As she looked to buy some home appliances online, she found only a small fraction of goods were on sale at bargain prices.

"In my case, only one Sony TV set was 500 yuan lower than shopping malls. A Panasonic fridge that I like was even 200 yuan more expensive online," said Wang, 28, who works with a publishing house in Shanghai.

"I have been checking prices almost nonstop for two months so that I can observe the fluctuations in prices. But the majority of shoppers won't be as familiar (with the prices). So I think what they are trying to do is to create a surge in shopping and drive up their sales," she said.

Perhaps that is what propelled more players to engage in the price war, including New York Stock Exchange-listed e-commerce China Dangdang Inc and Tencent Holdings Ltd's 51buy.com.

Price wars are generally a good thing for customers but an abuse of dominance by one or more parties or collusion regarding prices does not indicate healthy competition, according to Veronica Lockyer, a Shanghai-based counsel specializing in anti-trust cases at law firm Orrick, Herrington & Sutcliffe LLP.

"There have been many allegations that the companies involved in the price war first raised prices before lowering them or that they have not lowered prices or at least not to the extent they have claimed," she said.

Shoppers have also realized the ongoing price-cutting competition by the e-retailers is just another gambit in the battle for supremacy.

An unscientific poll on Sina Corp's popular micro blog service Weibo showed that nearly 4,000 respondents dismissed the price war as hype and only a little more than 400 responders believed the price fight was for real.

Some even questioned whether it's more of a show for investors.

Jingdong's strategy may have derived from its initial public offering attempt, which it delayed this year citing market turbulence.

Jingdong's Liu has emphasized the role of investors in a rather dramatic way.

"As I've said, no matter how much money we need, our investors will say 'yes'," Liu declared, dismissing rumors that the company is running out of working capital. He even boasted that Jingdong still has more than 8.7 billion yuan in cash.

Meanwhile, Suning recently announced it would issue as much as 8 billion yuan of corporate bonds to replenish its working capital and adjust its debt liabilities.

The money will be allocated to execute a 10-year development plan to open 2,000 outlets across China and significantly elevate online sales.

In general, to endure a three-year zero margin "is unlikely to be sustainable" in the long run, Lockyer said.

"However, online giants such as 360buy.com may be better able to withstand this price war than traditional bricks-and-mortar retailers who are more recent entrants to the online market."

But Qiu Lin, a researcher at Guosen Securities in Hong Kong, believes Suning has more firepower than Jingdong due to its fundraising capabilities and also because brick-and-mortar stores usually show a higher profit margin.

The gross profit margin of Suning's e-commerce website went down from 7 percent in the first quarter this year to 4 percent in the second quarter, while the company as a whole reported a profit margin of more than 10 percent.

As Suning achieved a 1.74 billion yuan net profit in the first half, a 4 percent gross margin is acceptable because it would lead to just less than a 1 billion yuan loss for the online business.

"But assuming that Jingdong achieves sales of 47 billion yuan in 2012, it still needs to maintain the gross profit at 4 percent to sustain its development," he forecast.

But the squeezed margin also leads to losses for investors in the long run, Qiu said.

"As merchants are subsidizing customers with money from shareholders and private equity funds, they will have to consider how long this can last."