Challenging task

Though opportunities are plentiful, the challenges are also formidable, experts say.

"Compared to multinational companies, local e-commerce companies enjoy more advantages," says Chen Shousong, a senior e-commerce analyst from Analysys International.

Chen says that multinational companies may not invest too much, until they are familiar with the market. On the other hand, local companies are more aggressive and enjoy considerable support from venture capital and private equity firms.

"Compared to traditional offline retailers, Internet companies are more fast-paced, have shorter product life cycles, and can be easily copied and replaced. It requires companies to develop products that cater to local demand quickly. Multinational companies cannot maintain this pace due to high communication costs and structure of operations," Chen says.

Unlike its ambitious parent, which operates in diversified segments including B2C, Kindle device sales and platform services, Amazon China's development has been mainly focused on the B2C field. However, even after nearly eight years of expansion and development, Amazon China still lags behind Tmall and Jingdong Mall in terms of market share.

Jap attributes this to the different philosophy of the US retailer.

"China is a large market. Starting a business in new cities does not mean adding new choices on your website. You need to be prepared in terms of services, supply chain and infrastructure," says Jap. "Some companies prefer to occupy the market even before they are ready, while some prefer to wait."

Lu Zhenwang, an independent e-commerce observer, says the ecosystem of the e-commerce industry in China is not that favorable for multinational companies given that most of their Chinese competitors are gaining market share by losing huge amounts of money every year.

"Take Jingdong Mall for example, if the turnover of Jingdong in 2011 was 30 billion yuan, and 2012 is 50 billion yuan, the total loss will be more than 4 billion yuan," Lu says. "From Amazon's perspective, it is hard to imagine how it is going to succeed.

"There has also been a change of strategy by Chinese retailers. Local companies like Dangdang and Vancl are now more concerned about making money than just adding numbers," Lu says. "This means competition has shifted to the fields that multinational retailers may be familiar with, such as the management of supply chain, product quality and customer service instead of just prices."

Left: Yu Gang, co-founder and chairman of Yihaodian. Right: Jonathan Seliger, president and CEO of Coach China. Photos Provided to China Daily

Shipping concerns

Another challenge for e-commerce is logistics management to ensure product quality and delivery efficiency.

According to BCG's report, the e-commerce industry in China has benefited from low shipping costs of just $1 on average to ship a 1-kg parcel, compared with $6 in the US. However, logistics has also become one of the biggest concerns for online retailers.

Due to the high cost of building their own delivery networks, many companies have outsourced these services to third-party logistics firms. But the negative feedback from many customers has prompted companies to set up their own delivery chains.

According to data provided by Jingdong Mall, complaints on third-party delivery services are as high as 12 times that of what is recorded on their own delivery chain.

Amazon China is the first company to explore the possibility of having its own logistics network. In February, Amazon China announced the launch of its 11th fulfillment center in Tianjin, taking the total floor area of Amazon's fulfillment facilities in China close to 500,000 sq m.

"The fulfillment network is especially important in China given its vast territory," says Wang Hanhua, president of Amazon China. "Amazon is the earliest among e-commerce companies to invest in this area in China, and is set to optimize its strategic layout in China on a long-term basis," he says.

However, distribution costs have increased by nearly 200 percent in the past five years. According to the China Federation of Logistics and Purchasing, logistics costs were the equivalent of 18 percent of GDP in 2011.

Warehousing costs are also increasing. The China Federation of Logistics and Purchasing stated that storage costs rose 22.6 percent year-on-year to 2.9 trillion yuan while management fees amounted to 1 trillion yuan, up 18.7 percent.

Another challenge, especially for offline retailers, lies in the integration of online and offline resources.

Chee Wee Gan, a principal in A.T. Kearney's Management Consulting practice in Shanghai, says that traditional retailers, such as Walmart, already have certain advantages: they are typically very strong in merchandising, category management, product assortment as well as strong retailing experience.

He says that returning goods and managing fulfillment is still a big challenge for online-offline synergy.

Mulligan feels that brands and traditional retailers should team up with large B2C companies, rather than trying to make it on their own.

"For big brands in China, which don't have their own online strategies at the moment, they can sell products from their own websites in partnership with companies like Yihaodian or Jingdong Mall, which will look after the deliveries and fulfillment for them.

"They can also partner with local large companies and sell products directly on these platforms. It is better for branded companies and traditional retailers to team up with the large local B2C websites as it will help take care of the distribution problems," Mulligan says.

Old is gold

Though many multinational companies have started making online moves, there are still some companies who feel that the offline stores are still the best bet for retail.

Many of these companies do not invest enough resources on e-commerce as they believe that the online business represents cheaper priced goods, something that may jeopardize their high-end image.

Companies like Marks & Spencer and Ikea have restricted their online presence to product exhibitions and do not sell any merchandise through the e-commerce platform.

Jap from BCG says that traditional retailers should strive to match the different aspirations of online consumers and provide different experiences, rather than just trim the prices.

"Some consumers are looking for cheaper prices online, while some others search for unique products or something that is sold only online or in overseas stores. There may also be some others who just enjoy the convenience of online shopping, without worrying too much about parking or crowds," says Jap.

Right choices

However, Gan at A.T. Kearney says that the multiple online channels act in diverse ways for retailers.

Most of the new online consumers tend to shop mostly on the Taobao platform, whereas customers who have been shoping online for more than a year use the same platform only 50 percent of the time. In contrast, the older/repeat customers spend only less than a third of their time on Taobao for shopping, Gan says.

"That means companies can use different channels to capture consumer trends. They can use Taobao to gain feedback from new consumers, and use more experienced consultancies to gauge consumer trends of older/experienced online shoppers."

Jap says that companies must speed up their movements in the online sector, as it not only generates more sales, but also influences customer behavior.

"It is fine for some companies to prioritize their offline channels. But they still need to understand how the Internet is affecting the decision-making process," he says.

"Consumers may purchase products offline, but their research and decision making process in the first-phase is greatly influenced by online information. This is especially so when buying items like large furniture. They will compare a lot of information before actually walking into an offline store."

Gan feels that while the future is indeed bright for e-commerce in China, there is going to be "more of a winner takes more type of situation", meaning that the leader will always get the bigger market share.

"There is a projection that by 2016, 16 percent of the retail trade in China will be conducted online, much higher than the US, where it is just 12 percent," he says.

But the physical retail landscape in China is nowhere as developed as those in the US or Japan. The Chinese online market is heavily fragmented, with consumers leapfrogging from various sites to grab the elusive bargains.

"The e-commerce battle will not be fought in the first-tier cities like Beijing, Shanghai or Guangzhou. The real battle will be in the second- and third-tier cities where new-middle class consumers are coming up. It is not going to be that easy for companies to expand their physical presence in these locations. Going online is the best way to ensure that they get more consumers and profits," Gan says.

Contact the writers at linjingcd@chinadaily.com.cn and suzhou@chinadaily.com.cn