Dangdang (NYSE:DANG), one of many Chinese e-tailers, has seen its shares fall by as much as 25% in the last few weeks. Although some of that is due to a general sell-off in small Chinese Internet companies, the fall also coincides with the company's warning that third-quarter revenue would come in lighter than expected.
Read below to find out what the warning means for investors and, at the end, get access to a special free report detailing how you can profit from China's growing economy.
Is it really that bad?
Heading into earnings season, Dangdang had forecast revenue to come in around $260 million. On Oct. 21, however, the company came out with preliminary results saying that revenue would be closer to $250 million --about a 4% haircut.
Although it's never fun to hear that your company's revenue will come in below expectations, if we zoom out, we see that the days of heady growth are still very much alive.
Though this year's growth of 21% is below the long-term average, it is still impressive.
Signs of a key shift
But it wasn't the announcement itself that caught my attention -- it was the reason given by management: "This change ... was primarily due to the Company's decision to reduce sales of certain lower margin products and focus more on bottom line performance."
For those who like to refer to Dangdang as the Amazon of China, this represents a serious difference in strategy. Amazon will sell just about anything online, and most of what it sells is fairly low-margin. Right now, it's all about growing sales and market share for Amazon.
As of now, the same cannot be said for Dangdang. The company stated it was "transform[ing] ... from an online bookstore into an integrated online shopping mall targeting mid- to high-end customers. [emphasis added]."
That's an interesting and important distinction. Unlike America, where Amazon is the runaway winner, the Chinese e-tailing scene is a hotly contested battle with several major players.
Alibaba's Taobao dominates the consumer-to-consumer market (think eBay), while Tmall -- another Alibaba subsidiary -- and 360buy.com's JingDong are the biggest players in the business-to-consumer market. Dangdang's market share is very low comparatively.
This isn't the first time the company has identified "mid- to high-end customers" as the target audience, but by discontinuing low-margin sales, it is certainly one of the most concrete steps the company has taken to show that it's serious.
It will be interesting to see how the company responds to analyst questions when earnings come out in November, and investors should continue to be cautious when investing in Dangdang. Remember, there are lots of much-bigger players in this space, and Dangdang has to succeed in winning over these high-end customers if it will ever come close to deserving the "Amazon of China" tag.
Editor's note: A previous version of this article stated that JingDong was owned by Qihoo 360 instead of 360buy.com. The Fool regrets the error.
Fool contributor Brian Stoffel owns shares of Amazon.com and E-Commerce China Dangdang. The Motley Fool recommends Amazon.com and eBay. The Motley Fool owns shares of Amazon.com and eBay. 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.