E-Commerce Wars Hit Suning 苏宁沦为电商价格战的新俘虏
Electronics giant Suning (Shenzhen: 002024) has become the latest Internet player to fall victim to China’s bloody e-commerce price wars, issuing a profit warning as companies get set to report their second-quarter results. Suning’s warning shouldn’t really surprise anyone since these price wars have been going on for about a year now. So perhaps the 10 percent drop in Suning shares yesterday — the daily allowable maximum under China’s stock market rules — reflects investor realization of just how bad these price wars have become and fact that Suning will suffer some major profit erosion before the situation finally eases.
In a filing to the Shenzhen stock exchange, Suning estimated its profit in the first half of the year would fall 20-30 percent, as its business declined by 5-10 percent. (Chinese article) It blamed the sharp profit decline on a range of issues, including a weakening broader economy and adjustments as it closes some of its more poorly performing brick-and-mortar stores.
But the company also said that sales for its web site, suning.com, reached a disappointing 5.28 billion yuan in the first half of the year, a sizable 10 percent below its target of 5.9 billion in sales. The shortfall reflects not only weakening sales due to China’s slowing economy, but also the constant discounts that Suning and its rivals like Alibaba, Jingdong Mall and Dangdang (NYSE: DANG) are having to offer to attract customers in the cut-throat marketplace.
The heavy discounting has led most major players deeply into the red, with Dangdang reporting big losses in its last 2 quarterly reports. It has also hit Jingdong Mall, China’s second largest player also known as 360Buy, which is reportedly seeking more cash just a year after it raised around $1.5 billion in a record-breaking fund raising for a Chinese Internet company. (previous post) Even Alibaba, the industry leader and one of the few companies that is still profitable, is feeling the pressure, turning to various promotions to help merchants on its popular TMall platform to sell their wares. (previous post)
Industry watchers have remarked that the current state of overheated competition is unsustainable for too much longer, and that money-losing firms like Dangdang and Jingdong will find it increasingly difficult to get new funds to maintain their operations. Suning is in a relatively enviable position of being a profitable company, banking on its successful chain of real-world electronics stores to subsidize an e-commerce site that’s most likely losing big money.
We’ve already seen some early signs of potential consolidation, with Dangdang entering an alliance with electronics retailer and Suning rival Gome (HKEx: 493) earlier this year that I predicted could ultimately end in a full merger. Look for more ugly numbers to come out from the e-commerce sector in the next few months as the price wars to continue, with at least a couple of major closures or mergers likely by the end of the year as the much-needed consolidation finally picks up momentum.
Bottom line: Suning’s profit warning is the latest sign of cutthroat competition in the e-commerce space, with consolidation likely to gain momentum by year end with 1-2 major mergers or closures.
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