Retailer ePro's decision to go overseas may pay off amid price wars in China

A price war among domestic e-traders is squeezing profits to zero, but one retailer has found success further afield

PUBLISHED : Friday, 31 August, 2012, 12:00am
UPDATED : Friday, 31 August, 2012, 3:18am

While most retailers' eyes are fixed on the lure of the mainland's huge consumer market, electronic commerce trader ePRO is looking abroad - particularly to the emerging markets of Brazil and Russia.

"Beyond China there are another 5.5 billion people who can become our customers," said Candice Liu, business president of ePRO E-Commerce, a Hong Kong-listed firm that sells accessories for electronic products.

Amid a fierce price war among major domestic electronic commerce traders on the mainland over the past two weeks and news that big retailers were raising large sums to bolster their cash balances, Liu must feel vindicated by her decision.

Shenzhen-listed Suning Appliance, the largest consumer electronics retailer on the mainland, announced on August 15 it plans to issue up to 8 billion yuan (HK$9.79 billion) of corporate bonds to replenish the company's operating funds and adjust its debt structure.

The following day, Richard Liu Qiangdong, chief executive of Beijing Jingdong Century Trading, posted a microblog note announcing that Jingdong will operate at a zero per cent gross profit margin from large home appliance sales in the next three years.

"I assure you that the prices of large home appliances sold on Jingdong will be at least 10 per cent lower than those in the Gome and Suning stores," he wrote.

Jingdong runs online retail website the mainland's second largest business-to-consumer (B2C) website.

Rival retailers quickly fired back. Suning reacted by saying all its products will be cheaper than Jingdong's, while Gome announced its prices will all be 5 per cent lower than Jingdong's.

Candice Liu said B2C on the mainland, including Jingdong's business, was not making money for operators yet, despite the large number of goods sold online. Intense competition and price wars were the main reasons for the cut-price offers, she said.

Mo Daiqing, an analyst at Hangzhou-based China E-Commerce Research Centre, believed the purpose of the recent price wars was to gain market share at any cost.

"These home appliance retailers are selling the same products. Price is the only point that can attract consumers," she said.

Candice Liu said: "The atmosphere between e-traders on the mainland is like they all want to kill each other."

B2C was also a cash-burning business, she said, as traders dealt directly with consumers.

"B2C requires a lot to be spent on ads to attract consumers. Anyone who wants to do B2C needs to establish a high degree of brand awareness," she said.

Up to 90 per cent of ePRO's revenues come from its B2C website, with a net profit margin of 8 to 12 per cent that makes domestic traders green with envy.

"We sell products - all of which are sourced from the mainland - to foreign markets at nearly double our purchase prices," she said.

The business model was one that domestic players could only dream of, she said. "If we buy a product at 65 yuan, we will sell it online at about US$20 [126 yuan]. Domestic players may sell the same product at 95 yuan, which is already a good price for them. If they try to raise it to 100 yuan, a competitor may sell it at only 95, and even 90, within days."

The lack of spread between purchase and selling prices results in low gross profit margins for domestic retailers, and net profit margins "don't exist", Liu said.

So far, ePRO is doing well in Russia and Brazil as the competition is not as intense as in the United States or Europe, she said. There are plans to open branch offices in the two countries, though a final decision has not been made.

Brazil is the largest market for ePRO at present, accounting for 20 per cent of its revenue.

The company's best sellers are covers for the Apple iPhone and other accessories geared to the hot gadget. Smartphone accessories are high-profit products, Liu said.

"The profit an e-trader can make from selling an iPhone may be less than from selling a cover for that phone," she said.