Will the Real Chinese Amazon Please Stand Up?

If you're bullish on Amazon.com (Nasdaq: AMZN) and China, chances are you've heard of Dangdang (NYSE: DANG  ) . Dubbed the "Chinese Amazon" by mainstream media looking for an alliterative Asian ally, Dangdang's been hyped up as the second chance for investors who missed out on Amazon's ridiculous stock growth. However, a deeper look at China's online marketplace reveals a couple of competitors ready to snag Dangdang's rising sales.

Dangdang, a short history
Arguably the biggest mom and pop shop in history, Dangdang was founded in 2000 by couple Peggy Yu Yu and Guoqing Li. Through a variety of subsequent acquisitions and business developments, Dangdang quickly rose to fame as the premier Chinese online bookstore. From 2009 to 2011, unique visitors more than doubled from 910,000 to 1.9 million. Dangdang currently operates 19 logistics centers across China, totaling 340,000 square meters of warehouse space.

Despite its growth, Dangdang's market history reveals a compelling story for the bears out there. In 2010, the company had an IPO at $16, a price that Li felt was grossly undervalued. In a not-so-subtle Internet post to underwriter Morgan Stanley, Li wrote: "My CFO was in panic mode, I held back a breath and silently cursed you [expletive deleted]." I can't help but wonder what he thinks of Dangdang's current price under $5.50.

An Asian Amazon?
Elephant in the room: If you're looking for the obvious reason why Dangdang might not be the "Chinese Amazon" that has bulls foaming at the mouth, look no further than, well, Amazon.com.

Amazon first knocked on China's door in 2004, when it acquired joyo.com for $75 million. With five years of experience and invaluable cultural wherewithal, joyo.com was the perfect stepping stone for this online giant.

Amazon has since expanded its Chinese warehouses from 14,000 square meters to 400,000. Its name has also changed, first to "Joyo Amazon" in 2007 and then "Amazon China" last year. With less than a decade on the ground, Amazon China currently accounts for 2.3% of all retail sales in China.

Who will work the network?
Amazon's brand and distribution channels are powerful worldwide, but another reason it's trounced competition in the states is its incredible network effect. Buyers head to Amazon.com because that's where sellers are, and vice versa.

The all-powerful network effect has both helped and hindered online auction site eBay (Nasdaq: EBAY  ) . In the U.S., the word "eBay" is interchangeable with "e-auction." However, eBay's 2001 entry into Japan didn't work out so well because of Yahoo!'s (Nasdaq: YHOO  ) 95% market dominance. eBay eventually pulled out entirely in 2002, only to slink back five years later with a (undoubtedly Yahoo!-centric) joint partnership agreement in hand.

Since the network effect is really just a fancy way of saying "all the buyers and sellers come here to do business," let's examine some hard numbers to see who's ahead. An Analysis International sales report provides direct insight into which companies currently dominate the online Chinese marketplace.

Source: Author, data from Analysys International.

As you can see, the success story of Dangdang suffers another blow. Not only does Amazon China enjoy 50% more sales than Dangdang, but online giants Tmall and 360buy collectively dominate over half the entire market.

Just as Dangdang is erroneously considered China's Amazon, Tmall (plus its other half, Taobao.com) is often wrongly compared to eBay. In truth, the distinction between online auction sites and online retail sites is quickly blurring. Features like eBay's "buy it now" price show that consumers don't really care how they buy something. Discount matchmaker priceline.com's (Nasdaq: PCLN  ) historic success proves that customers don't even really care who they buy something from, as long as they get the best price with reliable service.

Tmall is just as much Dangdang's competitor as Amazon China is, and Tmall is nearly 25 times as large. Alibaba Group Holdings, of which Tmall is a subsidiary, has plans for an IPO already in the works.

My bets are placed
Tmall seems to be the obvious victor for Chinese online retail, but I'd also give Amazon its due based on its larger global network effect. No matter what, my money isn't going anywhere near Dangdang. It's got a relatively tiny network effect, no scale advantages, net negative income for the past four quarters, and declining sales last quarter. Bottom line: I'm making an "underperform" call on my Motley Fool CAPS page.

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Fool contributor Justin Loiseau has no material interest in any companies mentioned in this article, but he did buy a bicycle pump on Amazon.com last week. You can follow him on Twitter, @TMFJLo, and on Motley Fool CAPS, @TMFJLo.

The Motley Fool owns shares of Amazon.com and Priceline.com. Motley Fool newsletter services have recommended buying shares of Amazon.com, Priceline.com, and eBay. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (7) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 14, 2012, at 10:49 AM, jhlblais wrote:

    THIS WAS A BADLY WRITTEN AND HORRIBLE ARTICLE BY A STUPID....STUPID WRITER.

    Motley Fool has dropped very badly in providing accurate investment advice to investors. Its now just a on-line fish wrap, that is PAID money by certain SHORT HEDGE FUNDS to WRONGLY bash companies that these hedge funds have shorted.

    And furthermore the writer in this article got his fact COMPLETELY wrong when he mistated this.... " declining sales last quarter " .

    Sales didnt decline last quarter you.. I D I O T !!!

    They rose year over year by appx 50% !!!!!!

    Is there a senior editior at this HORRIBLE outfit that reads the CRAP that these writer's put out BEFORE it hits the Investment world ???!!!!!!

    What a worthless fish wrap Motely Fool has become......all for the idea of taking Hedge Fund money to write erroneous articles about companies that these Hedge funds have shorted.

    PATHETHIC !!!!!!!

  • Report this Comment On August 14, 2012, at 11:35 AM, TMFJLo wrote:

    @jhlbais

    Dangdang's sales dropped from 1.2 CNY to 1.06 CNY between December 31, 2011 and March 31, 2012:

    http://www.google.com/finance?q=NYSE:DANG&fstype=ii

  • Report this Comment On August 14, 2012, at 12:29 PM, jhlblais wrote:

    Your S T U P I D ....calulations ignores the SEASONALITY in the retailing business where EVERYBODY in the world knows that the 4th Q or the CHRISTMAS SELLING SEASON IS USUALLY THE HIGHEST QUARTER FOR ALL RETAILERS.

    A MORE ACCURATE ACCESSMENT IS TO EXAMINE THE YEAR OVER YEAR NUMBERS !!!!!

    How stupid are you ????

    How stupid of you to compare a RETAILER's 4th Quarter to its 1st Quarter ???!!!!

    Because of the seasonality to retailing you CANT do that !!!!

    CHRISTMAS and Q4 is the strongest Q for EVERY RETAILER with a expected drop in sales in the following Q1 for A L L R E T A I L E R S ....yes, even NIKE, NORDSTROM, and GAP have sales drops from their Q4 to the next Q1 .

    Thats just investing 101 when your looking at a retailer !!!!!!!

    How S T U P I D of you to ignore the seasonality in RETAILING !!!!!!!!!!!!

    Thats what I mean when I say the Motley FOOL has become a FISH WRAP for allowing stupid writers to say the company is doing badly cause Q1 sales werent as good as Q4 sales.......

    A MUCH MORE ACCURATE MEASURE IS TO MEASURE YEAR OVER YEAR SALES GROWTH AND ........ Year over Year sales were up 58 % FOR Q 1 !!!!!!!!!!!!

    From your OWN worthless Motley fool web site......sales INCREASED YEAR OVER YEAR..............

    http://www.fool.com/investing/general/2012/05/21/e-commerce-...

    Here is your own link from another writer who is paid to write worthless articles paid by short hedge funds......because your company cant earn enough income from subscriptions YOU RESORT TO writing ARTICLES THAT ARE filled with errors and WORTHLESS TO SMART INVESTORS.

  • Report this Comment On August 14, 2012, at 12:53 PM, jhlblais wrote:

    Where is your answer that this Justin ???

    In looking at a retailer did you decide to just factor out the BIGGEST EVENT OF THE YEAR......which is Christmas ?

    Seriously dude, how stupid of you to compare a Q1 with lower sales, to a Q4 which has Christmas sales .......and say ....sales are dropping cause Q1 sales were lower than Q4 ??!!!

    Did you ever study Investments in college at all......or did you write this article for $100 for a short hedge fund.......because thats exactly what it looks like now ????? !!!!!!!!!!!!!!!!!!!

  • Report this Comment On August 14, 2012, at 1:18 PM, TMFJLo wrote:

    @jhlblais

    In investing, no metric is perfect and each of us has to choose which to rely on to come to our own conclusions.

    I chose to use absolute numbers rather than seasonally adjusted numbers because Dangdang is a growth company; Comparing year over year sales for a growth company is unfortunately a lot like comparing apples to oranges.

    Dangdang exists in an increasingly competitive market and any sales drop is cause for concern at such an early stage in its development.

  • Report this Comment On August 14, 2012, at 1:19 PM, Xavicat14 wrote:

    The margins of 360 buy are at an awfull and unsustainable 5,4%, Amazon China not a lot higer.

    DangDang.com has a far better healthy growth than these two.

    You don't have clue about the chinese B2C market and how it works.

  • Report this Comment On August 19, 2012, at 12:02 PM, redwooddancer wrote:

    To jhlblais:

    I don't know if your accusations have any basis in fact, but calling names, using capitalized words and many exclamation points just makes you look like a troll. Nobody takes trolls seriously.

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