Who needs profits?

Retail giants promise pricing plunge; shoppers wait for action

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24 Aug 2012
Week in China

We could become profitable tomorrow, but there is no value in that itself. We have to invest now." Such was the verdict of Liu Qiangdong, founder and chief executive of 360buy in an interview with the Financial Times earlier this year.

Now Liu – who runs China's second-largest online retailer by transaction value – wants to take it up a notch by shouting his no-profit strategy from the rooftops. Two weeks ago Liu launched a price war against his brick-and-mortar rivals Suning and Gome, announcing that his e-commerce site will implement a zero gross profit margin policy for its consumer electronics and home appliances business over the next three years. Additionally, 360buy will guarantee appliance prices at least 10% below either competitor.

Under the new policy, 360Buy has recruited 5,000 undercover shoppers to gather pricing information from Gome and Suning stores around the country. Shoppers who visit Gome or Suning and find prices that are not at least 10% above 360buy can also file a report. And once an undercover shopper confirms it, 360Buy will lower its price and issue coupons to the reporting consumer to meet its discount guarantee.

For Suning and Gome, the timing couldn't be worse. The two are already under pressure from a property sales slowdown that has hit sales of refrigerators, air conditioners and the like. Nonetheless, both retailers are bristling for the battle ahead, advertising that they'll offer even lower prices than 360buy.

What has prompted this latest bout of kamikaze commerce?

360buy and its brick-and-mortar rivals are fundamentally different companies. 360buy is a relative schooner to Suning's ocean liner, with Rmb30 billion in transaction volume last year. Suning, with Rmb94 billion in sales over the same period, dominates China's retail scene with about 2,000 retail outlets.



If you look at price comparison, in reality, I think the prices didn't drop as much as advertised in the media


But from Suning's standpoint, 360buy has been expanding its own slice of the retail pie at an alarming rate. Last year it saw sales rise 200% from 2010. Worried about the challenge, Suning and Gome have both moved aggressively online too. Suning in particular has been beefing up its internet presence by launching its own e-commerce platform (see WiC130). Gome recently announced a tie-up with online retailer Dangdang.

Competition is intensifying. Earlier this year e-commerce leader Alibaba, which owns the country's largest consumer site Taobao and TMall, also announced its own initiative to boost its consumer electronics business.

News of the price war has sparked a wave of interest among shoppers. In the first three days of the campaign 360buy saw its traffic increase almost 13-fold to 1.4 million visitors while visitors to Suning's website soared from 420,000 visitors to 2.1 million. Gome also reported that traffic jumped from around 30,000 hits to 370,000, according to search engine Baidu.

But the spike in traffic hasn't translated into higher sales as consumers soon learned that the price war was fairly limited in its early scope. As it turns out, 360buy had only slashed prices on 6% of its major home appliances while Gome offered price cuts on 16.6% of goods.

Only 4.2% of large home appliances available on the internet were offered at lower prices, according to Etao, a web portal for online retailers.

A case of all talk and no action by the retail giants? A poll on Sina Weibo showed that nearly 4,000 respondents dismissed the price war as hype, with only 10% believing the price fight was real.

"There could be price wars launched here and there. If you look at price comparison, in reality, I think the prices didn't drop as much as advertised in the media," says Martin Lau, president of online games and social-networking company Tencent.

"The companies [are] trying to promote themselves, rather than really lowering prices."

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