Investors Herald reporter Peifeng Wu. The long-rumored alliance between Dangdang.com and Gome Online Mall has finally come to a conclusion.
On March 1st, in an email sent to our newspaper, Gome Online Mall stated that the alliance between Gome Online Mall and Dangdang.com has made substantial progress. This news has been confirmed by Han Depeng, CEO of Gome Online Mall, and Li Guoqing, President of Dangdang.com (Weibo). According to Grace Guo, Senior PR Director of Dangdang.com, who spoke to the Investors Herald reporter, the new Electrical City in cooperation with Gome "should go online in the first half of March."
In fact, this is only one of the major B2C platform cooperation projects Dangdang.com will undertake this year. It's understood that Dangdang.com will collaborate on a large scale with vertical B2C websites such as 3C, clothing, red wine, food, etc., to quickly enrich the product categories on Dangdang.com. The B2C website Letao, which specializes in shoe sales, will be moving into Dangdang this week. The confirmation of cooperation with Gome Online Mall marks the successful debut of Dangdang's Store Street model.
These actions indicate that Dangdang.com is accelerating its expansion towards a large comprehensive e-commerce platform. Multiple industry insiders interviewed by our newspaper expressed that now is the critical time for major e-commerce companies to seize the largest market share and boost sales. Dangdang's cooperation with vertical e-commerce will significantly enhance its sales figures. As its product categories become more diverse, competition between Dangdang, JD.com, and Tmall (Weibo) will intensify. However, it won't change the current e-commerce competitive landscape in the short term.
Severe losses lead to alliances with vertical e-commerce
"Dangdang Store Street or merchant activities are major initiatives driving development in 2012. We have added a large number of well-known companies such as Letao and Mobiash," Dangdang Chairman Yu Yu recently said during an earnings call.
"Previously, Dangdang also operated an open platform, but now we're expanding this platform further to quickly enrich the variety of products and give users more choices. This is a very significant move for us this year," Grace Guo, Senior PR Director of Dangdang, told our reporter.
According to Guo, Dangdang's open platform mainly consists of two types: one is branded stores like Lenovo, which has an official flagship store on Dangdang. The second type includes vertical category dealers, including e-commerce platforms specializing in shoes and bags, 3C, red wine, and clothing. What Dangdang refers to as the "Store Street Model" is collaboration with vertical e-commerce platforms, which will be widely expanded this year.
Previously, Yu Yu had stated, "We invite them to join Dangdang Store Street. We see some B2C companies and retailers who possess richer procurement knowledge than Dangdang, and they can supply products to customers. Therefore, whether it’s home appliances or red wine, as long as they are good B2C companies offering reasonable prices, Dangdang will invite them to join our Store Street."
According to Guo, Dangdang's cooperation with vertical e-commerce mainly involves sales sharing. Currently, Dangdang's partners are divided into those that stock inventory and those that don’t. Partners stocking inventory send their goods to Dangdang's warehouse center and use Dangdang's payment system and logistics services. Non-stocking partners, primarily vertical e-commerce platforms, do not use Dangdang's warehouses.
"Customers place orders on Dangdang, using Dangdang's payment system, after which the fees, minus the agreed-upon share, are returned to the merchants. Dangdang provides website backend access to its partners, who are responsible for shipping the goods. If necessary, Dangdang can also provide logistics services," Guo explained.
In September last year, Taobao Mall (now renamed Tmall) announced that 38 vertical B2C websites would be entering Tmall.com. Dangdang did not disclose specific revenue-sharing ratios, but Guo indicated, "Tmall has raised the entry threshold for merchants, while Dangdang offers the lowest in the industry." According to industry practice, different product categories may have different ratios. "Categories with higher gross margins will have higher revenue-sharing ratios, such as clothing. 3C products have lower gross margins but larger unit values, so the ratio will be lower," Guo revealed. 3C and clothing e-commerce platforms are the primary types Dangdang plans to develop partnerships with this year, along with others like red wine and food.
Renowned IT commentator Jinghua Jia believes that Dangdang's decision to expand this joint operation model stems from the bottleneck it faces currently. "Dangdang is an e-commerce platform primarily known for books, but now JD.com, Gome, and Suning have all entered the book market, increasing competition. Its advantages are being squeezed out."
"After going public, Dangdang remains in a loss-making state without improvement. Adopting a revenue-sharing cooperative model is mainly aimed at boosting performance and beautifying financial reports because the promotion of the Store Street model will bring about qualitative improvements in sales figures. This could also positively impact the stock price," the aforementioned analyst said.
Dangdang's 2011 annual report shows that it held a 1.6% share of the B2C online retail market in 2011, ranking fifth. However, Dangdang's success in books and general merchandise has not extended to the 3C category.
Its Q4 2011 financial report reveals that Dangdang's net loss reached RMB 130 million. In terms of full-year results, Dangdang's total revenue for 2011 was RMB 3.6 billion (approximately USD 575 million), up 59% year-on-year; its net loss was RMB 229 million (approximately USD 36.3 million), compared to a net profit of USD 30.8 million in the same period last year.
It can be seen that Dangdang's losses in Q4 2011 accounted for 56% of its total losses for 2011. Clearly, Q4 "seriously dragged down" Dangdang's annual performance. Dangdang CEO Li Guoqing stated that the rapid growth of general merchandise in Q4 led to an increase in overall loss rates, which was the main reason for Dangdang's losses.
Driving traffic might end up benefiting others
"Self-operation does not scale as well as an open platform, but the difficulty with an open platform lies in coordinating multiple interests, integrating systems, and ensuring customer service," said Shousong Chen, an analyst at Analysys International, in an interview with the Investors Herald. Clearly, Dangdang has already regarded this category expansion as a lifeline to turn losses into profits.
However, Jinghua Jia believes that opening up the platform is "a temporary solution rather than a permanent fix," "it might create traffic for others, turning Dangdang into a traffic导入platform for other businesses. There is a certain risk involved."
Regarding these concerns, Guo told our reporter, "Bringing in vertical websites might cause user diversion. Will users buy shoes from Letao on Dangdang once and then directly visit Letao's website next time? But we believe that comprehensive e-commerce platforms have their own advantages compared to vertical ones, providing one-stop shopping with more choices. Of course, there will be some competition between each other, so we aim to offer a full range of product categories in each vertical field."
Guo believes that Dangdang's users tend to be high-income, highly educated, and high-spending groups, making them a valuable audience for the industry. In terms of online operations, e-commerce conversion rates, Dangdang's conversion rate is relatively high. This is also one of the reasons attracting vertical e-commerce platforms.
For adopting a platform model instead of self-operation, Guo stated that saving costs is not the main reason. "The cost advantage brought by the joint operation model is not our main concern. Vertical e-commerce platforms can operate more professionally in their respective fields. For example, we chose to adopt a platform model in categories like clothing because the clothing industry requires expertise. Moreover, our team lacks the professional experience and depth found in vertical websites, so we let the most professional people sell goods on Dangdang."
"Another consideration is time cost. Compared to negotiating with each brand individually, cooperating with vertical e-commerce platforms can quickly add categories and save time. At the same time, operational costs are lower. Without warehousing, there is no need to use Dangdang's storage and logistics facilities, just providing a platform and backend access. Merchants upload product images themselves. Their images might feature models, look more aesthetic, and be more fashionable," Guo explained.
It's reported that Dangdang requires e-commerce platforms entering its platform to guarantee that their prices are "comprehensively the lowest." "We cannot require every item to be the lowest in the market, but based on sales volume, the overall evaluation should be the lowest. This is the minimum requirement for merchants entering our platform," Guo said.
Merchants entering the platform need to pay a deposit, which is used for consumer compensation. Dangdang will also provide comprehensive training for its partner merchants, including Dangdang user habits, image selection, promotions, etc. The sole criterion for choosing partner e-commerce platforms is user experience.
Customers purchasing items from partner e-commerce platforms on Dangdang can receive unified customer service from Dangdang. When issues arise, Dangdang will handle them uniformly. For instance, if a customer buys something from Lenovo's official flagship store, customer service might initially transfer the issue to Lenovo, but if Lenovo fails to resolve it satisfactorily, Dangdang will take full responsibility.
Dangdang will adhere to its service standards, such as providing door-to-door trial fittings for clothing and unconditional returns. They were the first to propose door-to-door pickup for returns and cash refunds.
Dangdang stated that they have certain expectations for sales, but they cannot disclose them yet. Currently, they are not in a hurry to make money from this. "In the short term, we won't aim to make too much money from this. The main goal is to expand our product categories and enrich consumer choices."
To improve service levels, especially delivery speed, Dangdang established parallel warehouses in South China and East China in February. Previously, Beijing had the most complete general merchandise inventory, but deliveries outside Beijing were slower. Now, the warehouses in East China and South China are almost equivalent to Beijing's warehouse. By April, there will be 10 such warehouses nationwide.
Short-term changes unlikely to alter e-commerce landscape
According to our understanding, apparel and 3C are the main categories for Dangdang's joint venture expansion. Finalizing cooperation with Gome Online Mall represents a crucial step in Dangdang's expansion plan.
It's reported that negotiations between Dangdang and Gome Online Mall lasted for half a year. Zhang Bing, the director of procurement and sales at Gome Online Mall, who was responsible for the specific negotiations, stated that the entire negotiation process was conducted under extremely confidential circumstances. Currently, all related process systems for business, finance, technology, etc., have been fully completed.
Jinghua Jia believes that the reason why previous negotiations took a long time might be due to Gome's concerns. "Gome urgently needs to expand its online share, but Gome already has Gome Online Mall and Kuba, which operate independently. If it enters Dangdang again, there will be some conflicts, and it will be difficult to balance among them. Internal contradictions haven't been resolved yet, adding new troubles."
Shousong Chen also believes that conflicts between Gome's electronic businesses are inevitable, "but they won't become major problems."
Neither Gome nor Dangdang disclosed specific details of this cooperation. Analysts believe that their cooperation is not as simple as opening a store. Dangdang will entirely construct its new electrical city through Gome Online Mall.
Although Guo did not reveal more details, she stated that the cooperation model with Gome Online Mall is the same as with other vertical e-commerce partners.
Based on this estimation, Gome Mall will be responsible for warehousing, logistics, and other aspects of Dangdang's new electrical city, while Dangdang will participate in sales revenue sharing. "Cooperation with Gome Online Mall should go online in the first half of March," Guo revealed.
IT industry analyst Ronghai Li stated that now is the key period for major e-commerce platforms to capture the largest market share and boost sales. The strategic intentions of Gome Online Mall and Dangdang are quite clear. Gome Online Mall hopes to quickly become the largest online home appliance retailer, while Dangdang aims to achieve the largest scale in overall sales.
Analyst Shousong Chen believes that this cooperation benefits both parties. Gome's e-commerce strategy is to realize the value of its supply chain through platform integration with Dangdang. For Dangdang, "directly utilizing Gome's supply chain advantage saves five years of effort."
After Dangdang's Store Street plan expands, its product categories increasingly overlap with Tmall and JD.com. Competition between them is bound to intensify. "Dangdang currently won't affect JD and Taobao. It won't change the current competitive landscape," Chen told our reporter.
Data from iResearch shows that in the B2C sector, Tmall holds a market share of 53.3%, JD.com holds 17.2%, third-ranked Suning Easy Purchase (Weibo) holds only 3.3%, and Dangdang holds 1.6%, ranking fifth. There is still a significant gap compared to the top two.
Whether cooperation can continue is the key
Dangdang's PR Director Grace Guo told our reporter that cooperation with vertical e-commerce is not a short-term strategy. "Mutual benefit, helping vertical e-commerce grow stronger, simultaneously brings greater sales and profits to Dangdang."
Guo stated that collaborating with Dangdang allows vertical e-commerce to save on marketing expenses and operational costs, and can drive traffic to their own websites. Dangdang's traffic will be diverted to cooperative e-commerce platforms. Advertising expenses will also decrease. "Roughly calculated, profits are no less than selling on their own platforms."
Clothing e-commerce platform Letao, which mainly sells shoes, will also be moving into Dangdang this week. Letao CEO Bisheng Pi told the Investors Herald reporter that he is willing to continue long-term cooperation with Dangdang, which is beneficial for both sides. It's understood that Letao has already entered Tmall in the form of opening a store.
Guo stated that Dangdang might choose multiple vertical e-commerce platforms in the same category for cooperation. "Our criteria are to provide consumers with more and better choices (in terms of variety and quantity), lower prices, and of course, the service quality of the resident merchants is also a key factor. So if one merchant can meet all requirements, it might be exclusive. Otherwise, complementary arrangements are needed."
Jinghua Jia pointed out that this might cause conflicts among e-commerce platforms cooperating with Dangdang. "For example, if Vancl shirts are sold, and other clothing e-commerce platforms also sell them, different clothing e-commerce platforms entering the Store Street will face competition regarding how Dangdang allocates advertising and booth positions."
"Meanwhile, there will be trouble with price wars. With similar product categories, Dangdang will require partners to participate in promotional activities, which might not be good for the original website users. Vertical e-commerce platforms might enter, but it doesn't mean this model can last. Whether they can cooperate long-term is the key," Jia analyzed. Share to: >； Related Reports: Dangdang and Gome become the first domestic e-commerce strategic alliance: JD.com faces a strong rival. Dangdang and Gome join forces to explore the 3C market with annual sales of no less than 3 billion yuan. Dangdang's Li Guoqing publicly mocks JD.com's Liu Qiangdong: Why hire Gome? Weibo recommendation | Sina Technology Official Weibo >> More