Article / 22 October 2014 at 4:53 GMT

Dangdang needs partners to book in better profits

China Watcher / Shanghai
China
  • As a specialist in books, Dangdang is facing tough competition from eBooks
  • Search engines don't show Dangdang’s flash sale site, due to a mix-up
  • Specialising in a shrinking market makes Dangdang’s outlook bleak

By Neil Flynn

One of my main research focuses is China’s ecommerce industry, which has been undergoing exponential growth for several years, and has recently enjoyed international exposure due to Alibaba’s record breaking IPO last month. But one firm that has always intrigued me is Dangdang, simply because for a firm with a billion dollar market cap, I don’t actually know anybody that uses it.
   
The best way to describe Dangdang is that it is what Amazon was 10 years ago. Amongst a variety of clothing and household appliances, Dangdang’s specialty is books. In previous articles and discussions, I have preached that for ecommerce firms to compete with Alibaba, they need to have a specialty. Jumei has cosmetics, VIPshop has the excitement of fashion flash sales, and even JD.com is known as the go-to place for electronic goods.

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 Dangdang is suffering in a market weighed towards ebooks. Photo: Thinkstock

The problem with specialising in books is that the market is facing strong competition from eBooks, and with smartphone manufacturers offering their own marketplaces to buy eBooks, Dangdang is feeling the pressure from both its ecommerce rivals and the likes of Apple.

China’s ecommerce industry has been enjoying strong year on year growth over the past two years, and Dangdang has seen similarly impressive revenue growth. Its problem is that it has been unable to generate a profit, and although the last three quarters have been profitable, the net margin is barely positive.
Dang's Revenue Growth & Net Margin Relative To Industry Growth






(Source: Dangdang Investor Relations and iResearchChina)

There was an increase in net margin growth from the third quarter of last year, which can be attributed to the launch of the firm’s flash sales operations. As ecommerce firms have expanded rapidly to meet growing demand, inventories have swelled.

But as these firms compete with each other across a wide range of different products, price competition leads to many firms having large inventories of old stock that they can’t sell. Therefore flash sales are a very effective at reducing this, because old stock can be sold cheaply. The leader in China’s flash sales market is VIPshop (唯品会) with a market share of 38.1%. Dangdang’s flash sales site is called 尾品汇, pronounced ‘wei pin hui’, and sounds exactly the same as VIPshop’s Mandarin name.

In fact, searching for Dangdang’s flash sales site in Mandarin will see the search engine show results for both firms, with VIPshop always listed first because it’s a bigger and more popular site. Yet, when users search for VIPshop in Mandarin, the search engine won’t show Dangdang’s flash sales site. This is an awful marketing strategy, as potential new customers are being directed to a larger rival, who sells many of the same fashionable goods as Dangdang.

A Baidu Search For Dangdang's Flash Sales Site Show VIP First
(A Search On Baidu For Dangdang's Flash Sales Site 尾品汇 Sees Rival VIPshop Listed First Because Their Mandarin Names Sound Exactly The Same. Source: Baidu)

Dangdang tends to be more expensive than its rivals for non-sale items. The cheapest firm is currently Suning, followed by the two behemoths Alibaba and JD.com. Yet the one advantage that Dangdang has over its rivals is that it often has good promotions and sales. This should see it benefit from big sales events, the biggest of all being the November 11 Single’s Day.

But in my view, a firm shouldn’t have to rely on promotions and flash sales in order to maintain an already low profit margin. Alibaba announced yesterday that it had partnered with smartphone manufacturer Meizu in order to develop its Android-rival mobile operating system. This will eventually see Meizu offering direct shopping links to Alibaba, and will help it to grow its eBook sales. This is the type of partnership that Dangdang should be aiming for, given that it is specialty is books. Partnership with a domestic smartphone manufacturer will create a direct link between smartphone users and Dangdang’s eBook store.

With a reputation for having cheap promotions, I expect Dangdang to perform well on Single’s Day, but in the long run, specialising in a shrinking market makes Dangdang’s outlook somewhat bleak.

-- Edited by Adam Courtenay

Neil Flynn is head equity analyst at Chinese Investors

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