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  • Apr 20, 2014
  • Updated: 5:39am
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Mainland online market heads for more mergers

As competition gets hotter and investor interest wanes, analysts are expecting the e-commerce sector to enter a period of consolidation

PUBLISHED : Thursday, 04 October, 2012, 12:00am
UPDATED : Thursday, 04 October, 2012, 2:37am

A new round of mergers and acquisitions is looming in the mainland's e-commerce market after electrical appliance retailer Suning Appliance acquired online shop Redbaby last month, analysts say.

The US$66 million deal made headlines not only because it marks a major step in the country's largest home appliance seller's transformation into an all-round retailer, but also because it shows the capital market's enthusiasm for the e-commerce sector is waning and a period of consolidation is on the way.

"The e-commerce market in China has long been driven by venture capital," said Wang Ran, the chief executive of China eCapital, an investment bank.

Wang said it had been common for loss-making online shops to raise huge amounts of money again and again from various investors, who care more about how fast the companies can grow than whether they are able to make a profit.

"As the overseas capital market is turning weak, this situation will be hard to continue," he said. "I bet the peak season of mergers and acquisitions will come soon. And Suning's acquisition of Redbaby is just a beginning."

Founded in Beijing in 2004, Redbaby was originally a catalogue seller of baby milk powder and diapers.

In 2005 and 2006, it raised US$5.5 million from Beijing-based Northern Light Venture Capital and NEA in the United States before entering the e-commerce market.

The company quickly established a solid brand name on the internet and became the largest online retailer of baby-and-mum products in the country, with an annual sales growth of more than 30 per cent.

The initial success helped Redbaby raise more funds from the capital market. In 2007, it received US$25 million in investment from Kleiner Perkins Caulfield & Byers in the US.

At that time, the company decided to enter the luxury market and publish high-end society magazines to expand its customer base. However, the efforts failed, resulting in a loss of millions of yuan.

Three of the company's four founders resigned between 2007 and last year.

During that period, several major e-commerce players, such as 360buy.com which used to sell consumer electronics, and Dangdang.com previously an online book retailer, all said they would enter the market for baby-and-mum products.

Redbaby's market share started to shrink, and its sales revenue from such products was surpassed by 360buy and Dangdang in the middle of this year.

Early last year, Redbaby launched another website, binggou.com to sell cosmetics and skincare products.

The company originally planned to list last year but had to give up the plan because of the global economic turmoil. Its three major investors again injected as much as US$70 million to maintain the operations of the loss-making retailer. Finding a buyer was one of the few options left for Redbaby.

The mainland e-commerce market took off in the late 1990s, with the rise of start-ups such as Alibaba, Taobao and Dangdang. In the past five years, more traditional retailers entered the market in an effort to add revenue through online sales.

The competition online is getting hot, and raising funds from the capital market is getting more difficult given the weak economy. Several of Redbaby's rivals, including 360buy and casual fashion retailer Vancl, were reported to be facing financial difficulties early this year.

"The crazy market is getting back to normal," said Wang Guanxiong, an independent information-technology market analyst.

"There will certainly be more business-to-consumer retailers that find themselves unable to survive, and there will be more larger-scale mergers and acquisitions in the near future. After all, this is a normal option, other than an [initial pubic offering], for venture capitalists to exit from the companies they invested in."

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