Retailers in China are racing to expand in an e-commerce sector that is growing faster than anywhere else in the world, including the United States.
What’s driving this speedy development? In the late 1980s, China began its transition to a market economy, giving its state-run retailers little time to acquire marketing skills before the Internet began to dominate consumer consciousness a decade later.
“In the U.S., where retailing has long been an established industry for more than 100 years, e-commerce is the icing on the cake. But in China, where retailing as a market is still relatively new, online retailing is the cake,” Export Now CEO Frank Lavin explained in an interview with Internet Retailer. Lavin’s company assists foreign companies in selling their products online in China.
Various analysts have described the competition in the now booming market as “ferociously competitive,” “cutthroat,” and “a street fight,” as e-retailers increasingly resort to price cuts to nab sales, even at the cost of losing profits. And according to Teresa Lam, an e-commerce analyst and vice president at Fung Business Intelligence Centre, it is only expected to intensify.
“Most Chinese online retailers seek to grasp market share by adopting a low-price strategy despite low or even negative profit margins, and this has led to unhealthy market competition,” Lam said. “We expect price wars to continue to break out and amplify in 2014.”
To keep up with the race, companies are making fast delivery a priority, building fulfillment centers so that shoppers can acquire their purchases sooner. They are also offering a wider selection of products, with many “inviting other merchants to sell on their sites so that they can better compete with the giant Taobao and Tmall marketplaces.” Businesses are also rethinking web design, adding attractive new features to their websites and finding new ways to grab consumer attention. A focused marketing plan has also proven profitable for companies like VIP Holdings Ltd., the No. 8 e-retailer on Internet Retailer’s China 500 list.
The Guangzhou-based VIP is a publicly traded online apparel retailer whose success rests on “offering consumers name-brand clothing, focusing on profitability and building a bigger e-commerce base,” according to Donghao Yang, the company’s chief financial officer. VIP has managed its marketing costs more efficiently by using social media to attract new consumers, and has also focused on negotiating more reasonable deals with suppliers.
Although expansion is important, a large part of the company’s success can be attributed to catering to a niche market. Fifty-five percent of VIP’s core demographic — women aged 20 to 40 — live outside of tier-one cities like Beijing, Guangzhou, and Shanghai, in areas where access to the latest fashions is often limited. While other online retailers target urbanites, VIP has made a considerable profit in offering exclusive items to shoppers in smaller cities and rural areas, increasing its brand offerings from 410 in 2010 to over 3,000 in 2013. To increase shipping speed and efficiency for its customers, VIP also plans to spend $200 million over the next three years to build new distribution centers. The company’s order volume continues to grow, having increased by over 10 million orders shipped per quarter since 2010.
All of these measures have proven more than successful for VIP, which reported its first-ever profits last year. The company reported a net income of $12 million on revenue of $383.7 million for the third quarter ended September 30, 2013, compared with a $1.45 million net loss on sales of $155.94 million a year earlier.
“We have increased our profitability,” Donghao says. “We are better at controlling costs and achieving operating efficiency.”