China’s online shoppers are waking up to find their country’s leading online shops caught in one of the fiercest price wars in China’s consumer history. The lighting of the fuse was two micro blog messages sent by Liu Qiangdong, CEO of 360buy Jingdong Mall, on August 14. Other competitors have joined the battleground with a variety of price-cutting strategies. On September 1, Suning, and Gome’s Coo8 initiated a new episode of this show: the 3C price war.
Nearly one month later, the exchange now seems less like a price war and more like a stage, where all the actors are striving to be the protagonist of the show via utilization of the public media. The main goal of the online commerce players is to increase their websites’ visit volume and defeat their competitors by any means necessary. Government entities, such as the NDRC, which has now become heavily involved in the price war, have characterized it as fraudulent to the consumers. The evidence of NDRC’s investigation strongly supports this conclusion, For example, the evidence shows that the promotional prices had previously been pushed up higher than the actual original price, goods not being displayed online while there were inventories offline, etc. 360buy has now made a statement of apology to the consumers, and Suning has admitted it made mistakes during the price war at a press conference for the launch of its new brand products. There has been great media coverage and hot discussions about the price war following the intervention of the government entities. Some say apologies are far from resolving the fundamentally improper competition problem. How to ensure a rational price war with reasonable competition is a problem that remains to be solved.
China’s current economic slowdown seems to be the main reason for triggering the price war this time. China’s Retail Price Index (RPI) fell 0.3 percent from the previous month and hit a new all-time low in July according to the National Bureau of Statistics (NBS). The slowdown of the domestic economy, especially the recession of the real estate market, has caused the demand for home appliances to shrink; too many stores, logistics, and distribution networks have been built in anticipation of a demand which has not materialized as strongly as was anticipated, and now a huge price war with online competition and falling prices and margins has ensued.
The spokesman of the Ministry of Commerce (MOC) recently said that the MOC was communicating with related departments and discussing measures to boost domestic consumption growth. New policies to promote consumption will very likely be rolled out within the year. Some of the detailed measures are expected to include continuing preferential policies to encourage home electrical appliance sales in rural areas. The question is, will such policies help the economy in the long run? As far as the home appliance industry in concerned, it has already reached a condition of perfect competition after many years of development, having established brands occupying considerable amount of share in each segment market. The stimulation polices adopted in the past few years has actually overdrawn the market needs, which distorts the laws of the market economy. When faced with China’s economic slowdown this year, it has become even worse.
From the economic perspective, the price war is also inevitable; it is a war between the emerging online distributors and the traditional retailers. Online commerce has grown as fast as can be imagined. How has this happened? First of all, a consumer base that is mainly made up of young people who are used to a fast and convenient life style and prefer shopping at home or in the office (there is a word for boys and girls of this group, “Zhainan” and “Zhainv” respectively). Secondly, every single section of the supply chain has been well penetrated with abundant investments and has become more and more specialized. Last but not least, price is still the most important factor considered by the common consumers in China, and online commerce usually offers lower price than offline retail. The intense war from the beginning indicates that the traditional retailers are paying attention to the new online market. Some argue that traditional retailers with both online and offline stores are in a more advantageous position than pure e-commerce distributors, but the dilemma always exists for these players: inability to attract online consumers if the web price is not low enough, but if the online price is too low it will damage their offline sales.
On the other side, is price the only way to attract consumers? Industry insiders have said that although the promotions and tactics have raised sales volume, the price cuts, if real, are squeezing already limited profit margins, causing many companies to hog the limelight at the expense of profits. Statistics showed that Jingdong’s gross margin is only 7-8 percent annually, while U.S. online retailer Amazon’s gross margin is above 20 percent. Price wars are thus believed to bring bigger losses to more adventurous online distribution companies. All rational consumers understand that in the long run, service and reputation will be the major factors in winning customers.
The current price war is also a war at the edge of product homogeneity and at the transition point of a new business model. Both traditional retailers and online distributors are facing problems of product homogeneity, and are in the process of seeking updated business modes to achieve continuous growth. It is foreseen that differentiated customization will be a trend for these players.
Although it is widely thought that price wars will continue to be a strategy of Chinese e-commerce players for a certain period of time (if no force majeure), it is recommended that investors focus on companies that non-financial shareholders are investing in, and companies that own commercial property (as increasing rents will boost earnings). Occasionally the goal set by financial investors has two-fold impacts on the invested companies, especially under the extreme circumstances. Usually it can incentivize the investees to realize their dream sooner, while on the other hand it may bring too much pressure on them, causing them to risk taking radical measures to fulfill the goal set. Who knows? We shall wait and see.
