Investors Herald reporter Peifeng Wu - The long-rumored alliance between Dangdang.com and Gome Online Mall has finally been settled.
On March 1, in an email sent to our newspaper, Gome Online Mall stated that the alliance with Dangdang.com had made substantial progress. Both Gome Online Mall's CEO Han Depeng and Dangdang.com President Guo He have confirmed this news. According to Dangdang.com Senior PR Director Guo He’s revelation to the Investors Herald reporter, the new electronics city in collaboration with Gome "should be online in the first half of March."
In fact, this is only one of Dangdang.com's major B2C platform cooperation projects this year. It is understood that Dangdang.com will collaborate on a large scale with 3C, clothing, red wine, food and other vertical B2C websites this year to quickly enrich Dangdang.com's product categories. The B2C website Letao, mainly characterized by shoe sales, will move into Dangdang this week. The finalization of the cooperation with Gome Online Mall marks the successful debut of Dangdang's store street model.
These actions indicate that Dangdang is accelerating its expansion towards a large comprehensive e-commerce platform. Several industry insiders interviewed by our newspaper expressed that now is the critical period for all major e-commerce companies to seize the largest market share and boost sales. Dangdang's cooperation with vertical e-commerce will significantly enhance Dangdang's sales revenue. With the enrichment of its product range, competition between Dangdang, JD.com, Tmall (Weibo), etc., will intensify, but it will not 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 events are significant measures to promote development in 2012. A large number of well-known companies such as Letao and Mobiasha have been added to enrich Dangdang's product line," Dangdang Chairman Yu Yu recently said during a financial report conference call.
"Previously, Dangdang also operated an open platform. Now, we are further expanding this platform to quickly enrich the variety of goods and give users more choices. This is a very big deal for us this year," Dangdang Senior PR Director Guo He introduced to our reporter.
According to Guo He, Dangdang's open platform mainly consists of two types: one is self-owned brands, such as Lenovo, which has an official flagship store on Dangdang. The second type is vertical distributors, including e-commerce platforms like shoes, bags, 3C, red wine, and clothing. What Dangdang refers to as the "store street model" is the cooperation with vertical e-commerce platforms, which will be extensively developed this year.
Yu Yu previously 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 appliances or red wine, as long as they are good B2C companies with reasonable prices, Dangdang will invite them to join our store street."
According to Guo He's introduction, the cooperation method between Dangdang and vertical e-commerce mainly involves sales commission sharing. Currently, Dangdang's partners are divided into warehouse-based and non-warehouse-based. Warehouse-based merchants store their goods at Dangdang's warehousing center and use Dangdang's payment system and logistics services. Non-warehouse-based merchants primarily refer to vertical e-commerce platforms, which do not use Dangdang's warehousing.
"Users place orders on Dangdang, using Dangdang's payment system. After deducting the commission, the remaining fees are returned to the merchants. Dangdang provides backend access to its partners, and the collaborating e-commerce platforms are responsible for shipping. If needed, Dangdang can also provide logistics services," Guo He explained.
In September last year, Taobao Mall (now renamed Tmall) also announced the entry of 38 vertical B2C websites into Tmall.com. Dangdang did not disclose the specific commission ratio but indicated that "Tmall has raised the threshold for merchant entry, while Dangdang offers the lowest in the industry." According to industry practices, different product categories may have different commissions. "Product categories with higher gross margins will have higher commission ratios, such as clothing. 3C products have lower gross margins but larger single-piece values, so the ratio will be lower," it was understood that 3C and clothing e-commerce platforms are the primary types Dangdang aims to develop collaborations with this year. Other categories such as red wine and food are also expanding.
Renowned IT commentator Jinghua Jia believes that Dangdang's expansion of this joint operation model is due to the bottleneck currently faced by Dangdang's performance, "Dangdang is an e-commerce company primarily known for books, but now JD.com, Gome, and Suning have all entered the book market, increasing competition. Dangdang's advantage is being squeezed out."
"Dangdang remains in a loss-making state after going public, without improvement. Adopting a commission-based cooperation model is mainly aimed at boosting performance and beautifying financial reports because the promotion of the store street model will significantly increase sales. This will positively impact stock prices," the aforementioned analyst said.
Dangdang's 2011 annual report shows that Dangdang accounted for 1.6% of the B2C online retail market share in 2011, ranking fifth. However, Dangdang's success in books and general merchandise has not extended to the 3C category.
Dangdang's Q4 2011 financial report shows a net loss of RMB 1.3 billion in the fourth quarter. In terms of full-year results in 2011, Dangdang's total revenue was RMB 3.6 billion (approximately USD 575 million), up 59% year-on-year; net loss was RMB 2.29 billion (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 the total losses in 2011. Clearly, Q4 "severely dragged down" Dangdang's full-year performance. Dangdang CEO Guo He stated that the rapid growth of general merchandise in Q4 led to an overall increase in loss rates, which was the main reason for Dangdang's losses.
Traffic diversion could create opportunities for others
"Self-operated businesses are less scalable compared to open platforms, but the challenge of open platforms lies in coordinating multiple interests, system integration, and customer service assurance," commented Shousong Chen, an analyst at Analysys International when interviewed by the Investors Herald. Clearly, Dangdang has considered this category expansion as a lifeline to reverse losses.
However, Jinghua Jia believes that opening the platform is "a temporary fix, not a permanent solution," "it might generate traffic for others, making it a traffic-importing platform for others. There are certain risks involved."
Regarding this concern, Guo He told our reporter, "By bringing in vertical websites, will users be分流ed? Will users buy Letao's shoes once on Dangdang and then directly go to Letao's website next time? But we believe that comprehensive e-commerce has its own advantages compared to vertical ones, providing one-stop shopping and more choices for users. Of course, there will be some competition between each other, so we will strive to make the product categories complete in the vertical field."
Guo He believes that Dangdang's users are relatively high-income, highly educated, and high-spending groups, valuable to the industry. In terms of network operations, e-commerce conversion rates, Dangdang's conversion rate is relatively high. This is also an attraction for vertical e-commerce.
For adopting the platform model rather than self-operation, Guo He stated that cost-saving is not the main reason. "The cost advantage brought by the joint operation model is not the most concerning factor. Vertical e-commerce can be more professional in their fields. For example, we choose the platform model for clothing categories because clothing is a highly specialized industry. Moreover, our team lacks the experience and expertise of vertical websites, so we let the most professional people sell on Dangdang."
"Another consideration is the time cost. Compared to negotiating with each brand in every category individually, cooperating with vertical e-commerce can quickly increase the variety of products, saving time. At the same time, operational costs are lower. Without warehousing, no need to use Dangdang's storage and logistics, only providing the platform and backend, merchants upload product images themselves. Their images might feature models, be more aesthetic, and more fashionable," Guo He explained.
It is understood that Dangdang requires e-commerce platforms to ensure that their prices are "comprehensively the lowest." "We cannot require every product 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 the platform," Guo He said.
According to introductions, based on industry practices, merchants need to pay a deposit upon entry, which is used for consumer compensation. Dangdang will also provide comprehensive training to cooperative merchants, including Dangdang user habits, image selection, promotions, etc. The sole criterion for selecting cooperative e-commerce platforms is user experience.
Customers purchasing goods from cooperative e-commerce platforms on Dangdang can receive unified customer service from Dangdang. When encountering problems, Dangdang will uniformly solve them. For example, if a customer buys a product from Lenovo's official flagship store, the customer service might initially transfer the issue to Lenovo, but if Lenovo fails to satisfy the customer, Dangdang will take full responsibility.
And according to Dangdang's service standards, such as offering door-to-door fitting for clothing and unconditional returns. Dangdang was also the first to propose that customers can return goods with door-to-door pick-up and cash refund.
Dangdang stated that they have certain expectations for sales, but they cannot disclose them. Currently, they are not in a hurry to make money from this, "in the short term, we will not aim to make too much money from this. The main goal is to expand our product categories and enrich consumer choices."
It is understood that to improve service levels, mainly the speed of supply, Dangdang established parallel warehouses in South China and East China in February. Previously, Beijing had the most complete general merchandise offerings, but shipping outside of Beijing was slower. Now, the warehouses in East China and South China are basically equivalent to the Beijing warehouse. By April, there will be 10 such warehouses nationwide.
Short-term difficulty in changing the e-commerce landscape
According to our understanding, apparel and 3C are the main categories for Dangdang's joint operation expansion, and the finalization of cooperation with Gome Online Mall marks an important step in Dangdang's expansion plan.
It is reported that negotiations between Dangdang and Gome Online Mall lasted for half a year. Zhang Bing, 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, and currently, all business, finance, technology-related process systems between both parties have been fully completed.
Jinghua Jia believed that the previous long duration of negotiations 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 Gome were to enter Dangdang, there would be some conflicts, making it difficult to balance. Unresolved internal contradictions add new troubles."
Shousong Chen also believed that conflicts among Gome's electronic businesses are inevitable, "but it won't become a major problem."
Neither Gome nor Dangdang disclosed specific details of this cooperation. However, analysts believe that this cooperation is not as simple as opening a store. Dangdang's newly created Electrical City will be entirely established by Gome Online Mall.
Although Guo He did not reveal more details, he stated that the cooperation model with Gome Online Mall is the same as with other vertical e-commerce partners.
Based on this estimation, the new Electrical City on Dangdang will be responsible for warehousing, logistics, and other aspects by Gome Mall, with Dangdang participating in sales commission sharing. "Cooperation with Gome Online Mall should be online in the first half of March," Guo He revealed.
IT industry analyst Ronghai Li stated that now is the key period for various e-commerce companies to seize the largest market share and boost sales. The strategic intentions of Gome Online Mall and Dangdang are evident. 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 from Analysys International believed that this cooperation benefits both parties. Gome's e-commerce strategy is to realize the value of its supply chain through platform对接with Dangdang. For Dangdang, "directly utilizing Gome's supply chain advantage saves five years of effort."
After Dangdang's store street plan expands, the overlap in product categories with Tmall and JD.com increases. Competition between the two will inevitably intensify. "Currently, Dangdang will not affect JD.com and Taobao. It will not change the current competitive landscape," Shousong Chen told our reporter.
iResearch Consulting Group data shows that in the B2C sector, Tmall holds a market share of 53.3%, JD.com holds 17.2%, the third-ranked Suning Easy Purchase (Weibo) accounts for only 3.3%, and Dangdang holds 1.6%, ranking fifth. There is still a significant gap compared to the top two.
Whether the cooperation can continue is crucial
Dangdang PR Director Guo He told our reporter that cooperation with vertical e-commerce is not a short-term strategy. "Mutual benefit, helping vertical e-commerce grow stronger, will simultaneously bring greater sales and profits to Dangdang."
Guo He stated that cooperation with Dangdang allows vertical e-commerce to save on market expenses and operational costs, and can attract traffic to their own websites. Dangdang's traffic will be diverted to the cooperating e-commerce platforms. Advertising expenses will also decrease. "Rough calculations show that profits are no less than selling on their own platforms."
Clothing e-commerce Letao, mainly focused on shoe sales, will also move into Dangdang this week. Letao CEO Sheng Bi told the Investors Herald reporter that they are willing to maintain long-term cooperation with Dangdang, which benefits both parties. It is understood that Letao has already entered Tmall in the form of opening a store.
Guo He stated that Dangdang might choose multiple vertical e-commerce partners in the same category, "Our selection criteria are to offer consumers more and better choices (variety quantity), lower prices, and the service quality of the merchants is also a key factor. So if one merchant can meet these requirements, it might be exclusive; otherwise, complementarity is needed."
Jinghua Jia pointed out that this could cause conflicts between e-commerce companies cooperating with Dangdang, "For example, if Vancl shirts are sold, and other clothing e-commerce companies also sell shirts, different clothing e-commerce companies entering the store street will face competition over ad placements and booth allocations."
"There will also be trouble with price wars. Similar product categories mean Dangdang will require partners to participate in promotional activities, which might not be beneficial for the original website users. Vertical e-commerce companies coming in does not guarantee that this model will last long. Whether they can cooperate in the long term is the key," Jinghua Jia analyzed.