A Cold Winter Ahead For China’s E-Commerce Industry Amid Overspending On Advertising

(iChinaStock News) Sina, one of the major news portal sites of China, recently conducted an interview with Mr. Qiangdong Liu, founder and CEO of Jindong Mall (360buy.com). Mr. Mr. Liu shared his concerns on the e-commerce industry of China since he believe the investment in adversiting had been overheating.

Following is the editted interview record.

Sina: We heard from you that there had already been bubbles in some sections of the internet industry China. You also predicted an upcoming harsh period for the industry in 2012. What do you think now?

Mr. Liu Qiangdong: It seems to me that the tough days are about to set in around later this year or early next year, nearly a year earlier than expected.

Sina : You mean we are expecting a winter for e-commerce?

Mr. Liu: Well, I believe the chill has been widely felt. It is far from freezing for the time being. Many enterprises will feel its fatal impact next year though.

Sina : What is your prediction based on? Why one year earlier?

Mr. Liu: I mainly derive my observation from the fact that many e-commerce companies are troubled by huge marketing costs which far exceed their revenues. To illustrate, one may puts 100 yuan in ads, only to make a 10 yuan –worth sale, which is plainly terrible.

Sina : This is what investment is thought to be about, isn’t it?

Mr. Liu:That has never been the practice of Jingdong Mall. Since our foundation in 2004, we haven’ spent a buck on advertising until 2007. It is only after the October of 2007, when we set up a marketing department, that we began to invest in advertising, with the budget amounting to but 8 or 1% of our sales.  It is indeed a small one by the industry standard. We prefer selling in this way to the costly marketing done by many of our rivals, which is never a sustainable way of doing business.

Sina :  Why do you think they have to do so then?

Mr. Liu: They fail to carry out a UE (user experience) program, without the support of which they can’t boost their sales but by frenetically throwing money into advertising. By contrast, we would always start with UE. Good wine needs no bush. Our users would introduce us to their friends if they are content with our service, thus bringing to us more customers. We regard our users as the best media, and we are able to keep our cost low with their help. As a result, Jingdong Mall can always offer affordable products.

Sina :Of course you can say that as Jingdong Mall is now a giant in the industry. Others may think you are not in the position to make comments because you have no idea how hard their situations are.

Mr. Liu: The fact is that we weren’t even advertising in their ways when we were still a dwarf in the industry. Joyo had already developed into a big business when Jingdong Mall just became an e-commerce company in 2004. Even at that time, we didn’t have any advertisement, much less investing that much in it.

Sina : Some might argue it would be tough for their survival without doing so. Do you think this is of a sound logic?

Mr. Liu: I don’t think so. It is entirely possible for a company to enhance user experience in the very first place. Slow as it is, the company will grow somehow. Some say that Jingdong Mall has been developing rapidly. That’s not true. We have now, after seven years of operation, only 20 or 30 billion yuan worth of sales, not so rapid indeed. One may think we are fast-growing simply because they had never heard of Jingdong Mall until recent years. Actually, we started e-commerce back in 2004 and spent the next four to five years optimising user experience, during which time we remained unknown. Emerging e-businesses these days, however, are trying to accomplish within one year what we achieved in the course of six years. For this, they have to be lavish with their input in advertising, which practice I fear a lot. It is also highly unsustainable from the global perspective.

Sina : So you think them too eager for instant success?

Mr. Liu: This is what they normally have to do when they’ve got so much money that they don’t know where to spend. Few are willing to invest in logistics as it takes years to expect the returns, 2 years in the case of Jingdong Mall. During this time, money is spent on buying lands, constructing warehouses, installing automatic conveyors and debugging equipments. That is, enormous costs and expenses are incurred without immediate effect. No one but Jingdong Mall dares to make such investment.

Sina :  When you said “have to”, do you mean that they are not necessarily willing to invest lavishly in advertising but they are just compelled by the capital to do so?

Mr. Liu: I’m not sure, but I insist that in the retail industry, a company must wait for years to prosper. Retail giants across the world, from Amazon and Wal-Mart to Gome and Suning, all struggled for a decade or two to finally establish their positions. I’ve never seen a case where only a few years will do. It took, for example, Dangdang (NYSE: DANG) 11 years to be listed. Jingdong Mall is only at its seventh years. That explains the fact we are not listed yet.

Sina : It’s not the time?

Mr. Liu: I insist that a decade is necessary for us to be in the interest of our investors and shareholders.

Sina : Then what do you suggest the other e-commerce businesses? Are they advised to start with user experience?

Mr. Liu: If I’ve got 100 yuan, I would rather put it in improving user experience than in advertising. Invest in better logistics and information system as well as research and development. If you can win favour with consumers with your supreme user experience, your business will somehow grow steadily when good words spread among consumers.

Sina : What will the winter you predict bring to the industry?

Mr. Liu: Something positive.

Sina :  Will it accelerate integrations within the industry?

Mr. Liu: In my opinion, the winter will prompt all relevant practitioners to draw their focus back onto the basics, which, in the case of retailing, are low cost and effective operation, instead of marketing and putting money into advertising in vain. We have never aimed at a 200 or 300% growth in sales. What we are doing day in and day out is all about improving user experience.

(Translated & Edited by iChinaStock.com)



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