Retailers Look to the Internet and the East

by Tony D'Altorio

Retailers Look to the Internet and the East

by Tony D'Altorio, Investment U Research

Tuesday, January 4, 2011

Remember the outrage and horror when Google left China last year?

At the time, I argued it had caused its own problems. There wasn't any reason for other corporations to worry, I said, and 2010 proved me right in the end.

Jeff Kim – VP of CDNetworks, which hosts e-commerce websites – saw firsthand how quickly things changed…

"Just nine months ago, many foreign companies felt that building a web presence in China was too difficult, given all the trouble Google had in China. [But now] people feel this market is just too huge to ignore."

Sharing his opinion, 30% of CDNetworks' new customers happen to be headed that way. It makes sense, considering China's still-rising market of 420 million internet users.

Chinese Online Shopping

China has taken to the internet with a practically gluttonous passion for online shopping.

Earlier this year, the number of internet users shopping online rose from 28% to over 33%… in just six month's time. And that's still less than half the global average.

Total 2010 online retail sales are forecast to double to $75 billion, about double the amount in 2009 and up from just $8.5 billion in 2007. Chinese shoppers seem to love ordering goods online cheaply and with the promise of speedy delivery.

Yet online purchases made up just 3.7% of China's total retail sales in the third quarter. So there is still vast room for it to grow.

Consulting firm McKinsey highlighted that potential recently. It noted, "About two-thirds of Chinese have been online for three years or less, and half for less than two – and in the past, it has taken about three years for an internet user to become an online shopper."

It went further too: "Assuming that this conversion continues, tens of millions of new [Chinese] e-commerce consumers could be just around the corner."

Retailers and consumers goods companies certainly agree. They're scrambling to launch online stores and invest in Chinese e-commerce companies.

Recently, Walmart (NYSE: WMT) and five other companies agreed to invest $500 million in, a fast-growing online retailer in China patterned a bit after (Nasdaq: AMZN). It went from selling only $200 million worth of goods in 2008 to an estimated $1.5 billion in 2010.

Walmart also plans a Chinese e-commerce site for its Sam's Club stores in 2011. Other stores have already beaten it to that punch, including The Gap (NYSE: GPS), which launched its own online store there just last month.

Chinese e-commerce

China itself hosts some extremely valuable internet companies. That includes Baidu ADR (Nasdaq: BIDU), Tencent ADR (PINK: TCEHY) and Alibaba (PINK: ALBCF).

Walmart's deal has also fed excitement about recent hot Chinese internet IPOs. Two such businesses are Dangdang ADR (NYSE: DANG), the country's leading online bookseller, and its largest online video company Youku ADR (NYSE: YOKU).

Currently,, a subsidiary of Alibaba, dominates China's online marketplace. Its Taobao Mall expects its 2010 transaction volume to quadruple from 2009.

Consumer-to-consumer transactions rank high on the Chinese preferred list so far. And once again, Taobao reigns supreme in this area.

According to Su Huiyan, an analyst at iResearch in Beijing, "Business-to-consumer transactions accounted for only 8.5% of total online retail sales last year. But that proportion will greatly increase over the coming five years."

That could spell trouble for Taobao, despite it leading the business-to-consumer market with a 33% share. Still, that's only half its overall e-commerce market share.

Taobao will face pressure from all sides: domestic competition, foreign competition and joint ventures between foreign and domestic companies. For one, many analysts believe an online mall started early in 2010 by Baidu and Japanese online retailer Rakuten (PINK: RKUNF) could become a serious challenger to Taobao Mall.

The company has also had to cope with an increasingly more demanding home base. It has moved its mall site to a separate domain to create a higher-end environment, while its parent Alibaba invests massively in a logistics network to clear up delivery bottlenecks.

As elsewhere, Chinese consumers have come to value product and service quality. So the country's e-commerce space is wide open with no clear winners yet.

It comes down to whether local companies can learn to deliver quality products quickly. Or if competition from Europe, Japan and the U.S. can gain entry and beat them to it.

Good investing,

Tony Daltorio

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