Price war produces more boasts than savings

By Zhao Qian Source:Global Times Published: 2012-8-19 19:35:03

Liu Qiangdong, CEO of popular online computer and consumer electronics site 360buy.com, waged a fierce price war last week with his major competitors Suning and Gome. But the event has turned out to be more cold war than total war, despite promises on all sides to slash prices to new lows.

Consumers have been disappointed and industry insiders relieved to find that the conflict has not resulted in significant price cuts, despite both online and off-line stores receiving a dramatic jump in both visits and sales. Some are talking darkly of a joint conspiracy to draw in customers and win media attention.

But the war is still going on. And if no bottom line is established for price cuts, smaller firms risk being eliminated altogether, while the giants may find that the conflict has only ended up costing them. China's home appliance e-commerce sector is still an immature market, and the conflict may set it back by years.

Opening shots

Liu started the war by claiming on his verified Weibo account Tuesday that the prices of home appliances on 360buy.com would be at least 10 percent lower than those at other online retail sites of Suning and Gome, his firm's main competitors. 360buy.com has a longer online presence than the other two firms, and is determined to fend off their attempts to intrude into its business.

After his initial salvo, Liu aggressively published around 40 posts within three days, including a claim that "if Suning cuts its products to one yuan per set, I will sell them for free."

Senior executives of Suning and Gome, which have both online and traditional off-line appliance retail businesses, all accepted the challenges via their own Weibo accounts. Suning promised that all its products will be lower than 360buy.com, while Gome boldly pledged its prices would be 5 percent lower than those of 360buy.com.

But as of Sunday, executives' grand promises hadn't resulted in plunging prices.

Yet there's still no sign of a clear end to the price war, and all the players have pledged on Weibo that they have no intention of making peace.

Suning and Gome declared Friday that, save for computer and telecom products, all their products in brick-and-mortar stores will sell at prices lower than 360buy.com. Normally, the products in physical stores are slightly higher than online products due to higher operation costs.

360buy.com, which began its e-commence business at least five years earlier than Gome and Suning, has established a firm consumer base. It has already set up strong and close relationship with distributors of 3C products, namely computers, communication and consumer electronics, giving it a solid foundation to exploit.

While Suning, with 1,900 off-line entity stores and 4,000 after-sales offices nationwide, has a comprehensive storage and distribution system which has been operating for over 20 years that could offer huge support for its online sales.

But Suning copied 360buy.com's e-commence model after it started its online sales in 2009, without adding any innovations of its own, and the two websites even have a suspiciously similar look.

Dangerous game

A price war normally requires deep pockets to fund the conflict and drive out competitors. But none of the sides involved are making the kinds of profits usually needed to compete. 360buy.com hasn't made a profit since being launched in 2007, when it gained its first investment of $10 million from venture capital (VC) firm Capital Today. Since then, 360buy.com has obtained investment of around $1.5 billion from VCs and private equity (PEs).

Liu stated on his Weibo Sunday that 360buy.com "will not make a profit via appliance sales within three years and just focus on market share expansion," and that "part of our investors supported me to fight the price war." The eventual goal of the firm appears to be to win a substantial market share through the price war, then go public to bring in a huge influx of cash for investors.

Liu also declared that if the price war doesn't end within three months, 360buy.com's initial public offering will be delayed for a year.

As listed companies, Suning and Gome have already got into market trouble because of the price war.

Shares of Gome fell 1.45 percent, closing at HK$0.68 per share Friday. And Suning's shares closed at 6.15 yuan per share Friday, with a drop of 0.49 percent compared with the previous day.

In July, Suning issued 387 million shares via private placements, raising 4.7 billion yuan ($739 million) to boost its capital, but later its share prices halved because of its poorer-than-expected mid-year business performance.

The total profits of Suning in the first half of this year declined by 34.7 percent year-on-year, according to the company's report in late July, which may have been the inspiration for Liu to launch his attack.

On August 13, a day before the price war started, Suning announced it would issue a corporate bond of up to 8 billion yuan, "which brought a great opportunity" for 360buy.com to target Suning's share prices through launching the price war, Liu was quoted by Caixin magazine as saying Thursday.

Every side wants to triumph in the price war. But as things stand, the situation is looking like a stalemate.

Price war not the only option

Liu Buchen, a home appliance expert at Zhengzhou-based Jiachunqiu Media, was quoted by the Beijing News Friday as saying that Suning and Gome who started their business in off-line stores may have more difficulty because of the high operating costs of their stores.

 "Once Suning and Gome make up their mind to expand their online business, unify their online and offline product prices and integrate their business effectively, they will seriously threaten 360buy.com and win the protracted war," an independent Internet expert named Panshizhixin wrote in a commentary for National Business Daily Friday.

According to some other industry experts, each of the retailers have their own advantages, and upgrading their existing business models to save operation costs and improving service quality would be a better choice than a price war.

The price war has already attracted government attention. The Ministry of Commerce said Friday it would release more rules to guide the sales and marketing of the e-commerce sector, without disclosing further details.

 In the end, all three sides may find that efficiency and quality are more effective than promises of slashed prices in winning buyers.

 



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