Please ensure Javascript is enabled for purposes of website accessibility

This Company Will Win the Chinese E-commerce Market

By Adrian Campos - Sep 26, 2013 at 10:00PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Despite increasing competition from Amazon China, Alibaba's Taobao and Vipshop, Dangdang is expanding its revenue quickly. What competitive advantages protect Dangdang from fierce competition?

One of the best-performing Chinese IT stocks so far this year is E-Commerce China Dangdang (DANG), better known as Dangdang, up an amazing 90% since last September. Just like Amazon (AMZN -1.24%) in its early days, Dangdang was conceived as an online bookstore. However, the company now offers cosmetics, home appliances, and apparel, among other products. Despite increasing competition from, Alibaba's Taobao, and online discount retailer Vipshop (VIPS 1.32%), Dangdang keeps expanding its revenue. What competitive advantages protect Dangdang from fierce competition?

DANG Chart

Source: Ycharts

The biggest bookstore in China
Compared with Alibaba's T-mall, Dangdang is quite small. According to iResearch, in the first quarter of 2013, Dangdang had only a 2.6% share of the online consumer shopping market. Although this number is above Amazon China's share by 0.7 percentage points, it represents a small proportion of T-mall's huge share.

Source: China InternetWatch

Despite its small market share, Dangdang has become the largest bookstore in terms of selection and revenue. As of June, the company offered more than 900,000 books. Consequently, most Chinese would visit Dangdang (rather than Taobao) if they want to find and buy a book. 

Strong brand
In 15 years, the company has been able to build a strong reputation for quality service, fast delivery, and wide selection of books. It has one of the lowest complaint rates among the top 10 B2C Chinese websites. Its 6.73% rate is well below Taobao (17.31%), which faced the most product quality customer complaints in the first quarter of 2013. 

The next challenge for Dangdang is to capitalize on its strong brand to successfully go beyond books. The company already has more than 900,000 stock-keeping units of general merchandise, and, like Taobao, a platform for third-party merchants. Moreover, it took on Amazon by releasing its own e-book platform on 2011, where you can download some digital books for as little as 2.99 RMB (U.S. $0.50). To further strengthen its brand, the company is investing heavily in TV advertising, in an effort to promote its new apparel and fashion business. Its investments in mobile technology are already paying off. During the second quarter of 2013, mobile traffic accounted for almost 40% of overall traffic. These are the right steps to keep a company competitive. 

The war for the Chinese online retail space
Dangdang's competitive advantages have allowed the company to grow its revenue by seven times between 2008 and 2012. Still, this growth rate has not been enough to reach profitability. That being said, at the current pace, it won't be long before we see Dangdang breaking even. The latest earnings call came in with a 22% increase in revenue. Net losses came in at $10.46 million, representing only 5% of total revenues. 

Weak profitability was probably caused by fierce competition and price wars, which according to Dangdang's CEO, are set to destroy most e-commerce competitors and cause an industry reshuffle.

Even the world's largest online retailer, Amazon, is vulnerable to such conditions. Holding less than a 1% share of China's e-commerce market, the company needs to redesign its marketing strategy in the second-largest world economy, where online shopping volume is set to double by 2015.In order to take market share away from well-established competitors like Dangdang and Taobao, Amazon will have to use more aggressive marketing campaigns. For example, by increasing its discount on Kindle devices, it could put more Kindles in the hands of Chinese consumers, and secure a strong position in the emerging Chinese e-book market. 

Companies can also choose to develop a unique business model in order to survive. Vipshop is one of the largest flash-sale e-commerce websites in China, with more than 3.5 million active customers and double-digit revenue growth expected ahead. Unlike Dangdang, which is still struggling to break even, Vipshop is very profitable, despite its focus on leftover products. Its gross profit figure increased by almost 180% in the latest quarter, to $82.6 million, suggesting strong competitive advantages. First, due to the nature of its business model, the company holds no inventory. It targets the fast-growing Chinese middle class. And considering it already offers more than 6,000 brands, Vipshop's current scale of operations is large enough to generate bargaining power against merchandisers.

Final foolish thoughts
The war for the Chinese online retail space has just started. Even Amazon China is struggling to capture market share. Only companies with strong competitive advantages and branding, like Dangdang and Vipshop, are set to survive.

Adrian Campos has no position in any stocks mentioned. The Motley Fool recommends The Motley Fool owns shares of Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned, Inc. Stock Quote, Inc.
$140.80 (-1.24%) $-1.77
Vipshop Holdings Limited Stock Quote
Vipshop Holdings Limited
$9.94 (1.32%) $0.13
E-Commerce China Dangdang Inc. Stock Quote
E-Commerce China Dangdang Inc.

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/08/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.