International news analysis: China’s online retail race brings risk and opportunity

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There has been astonishing growth in the Chinese ecommerce sector over the past five years and it still has a promising future.

Taobao is the absolute leader in the Chinese ecommerce sector.

According to China’s Ministry of Commerce, about 200 million Chinese consumers made purchases in 2011, totalling Yn782.56bn ($124bn) in retail sales. They bought electronics, clothing, groceries, books and services as well as a significant amount of imported products. Yet online retail sales still account for less than 5% of total retail sales, leaving huge potential.

Taobao is the absolute leader in the Chinese ecommerce sector. The retailer operates a pure B2C and C2C online marketplace and has accumulated a great number of loyal customers. Taobao’s success lies in its low prices and wide range of products, especially those not commonly available through other channels.

In response to the increasing domination of Taobao, many of the leading retailers in the physical world are ramping up their investments in ecommerce and expanding their product range outside their core business.

Leading electronics retailers Gome and Suning have ventured into a raft of general merchandise categories, including through the acquisition of smaller operators. The investments are, however, a big gamble on whether the scale of ecommerce will ever become great enough to achieve profitability.

The race to add products from across all categories is causing retailers to lose differentiation. The crossover is also provoking price wars, with operators regularly offering the “lowest prices ever” as well as vouchers, free gifts and delivery, at the expense of both the retailers’ profit and those of suppliers.

As a result, most smaller players are just hanging on for dear life, and it is simply a matter of time before they shut down or are acquired by others. And many are betting on borrowing more money and the hope of the future – such as Suning issuing corporate bonds, 360buy (the second-placed player in terms of transaction value) finding new venture capitalists and Gome selling off assets.

Perhaps more etailers should stop pursuing growth and scale at all costs and focus instead on their competencies and the sustainability of the business. Amazon China is doing this by shoring up its customer service credentials and building its own distribution system with dedicated delivery teams in big cities.

For the time being, though, as the old Chinese proverb goes, everyone is “riding the tiger” – you can’t get off the ride, however dangerous it is.