China’s relentless e-commerce price war leaves retailers struggling to make ends meet

Authors: Sophie Yu and Casey Hall

BEIJING (Reuters) – China’s online retailers are struggling to survive as sales fall, pricing pressure increases and online shopping platforms compete with each other with increasingly aggressive policies to attract increasingly cost-conscious customers.

The once-booming e-commerce industry, characterized by celebrity-studded shopping frenzies and galas, is now feeling the effects of a struggling economy that has left consumers nearly penniless.

While drastic price cuts, influencer-led sales campaigns and generous returns policies have done much to enrich the sector, the same practices that suppliers are forced to follow are now harming those on which the sector relies.

“The good old days of e-commerce are over,” said Lu Zhenwang, a Shanghai-based e-commerce operator who sells everyday items to small retailers. “Competition is fierce this year, and I don’t think many retailers will survive another three years.”

Profit margins are shrinking on large platforms like Alibaba and JD.com, but also among thousands of small businesses that joined the decade-long e-commerce boom that began around 2013.

This boom has seen e-commerce account for 27% of retail trade, with annual sales of goods reaching 12 trillion yuan ($1.65 trillion).

But as the economy slows, e-commerce is also slowing, with the double-digit growth of recent years set to be replaced by single-digit growth, according to Euromonitor.

One effect has been a noticeable decline in enthusiasm for attending retail festivals, Lu said, with the biggest of them – Singles Day on Nov. 11 – a “risky” proposition.

“You have no idea how much product you’re going to be able to sell, but you have to build inventory,” he said. “It’s almost impossible to see explosive growth during a shopping event.”

BUYER PROTECTION

As the effects of the economic slowdown become more and more felt, sellers are starting to speak out against the side effects of sales gimmicks.

At the online shopping event “618” – held after JD.com was founded on June 18 – the owner of women’s clothing brand Inman called on authorities to clamp down on platforms’ use of “return protection” policies, which force sellers to bear the cost of returns.

The policy was introduced on PDD platform Pinduoduo in 2021 and proved so popular that others followed suit — at huge costs to merchants, vendors told Reuters.

“The return rate on e-commerce platforms is 60%,” Inman founder Fang Jianhua wrote on social media. Before the policy, it was about 30%, he said.

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Fang said the big platforms that vendors rely on should not adopt a “consumer first” policy that increases the burden on companies, many of which have to sell below cost to maintain high search rankings despite numerous price cuts.

E-commerce operator Lu said its returns protection policy had caused a spike in returns in categories such as clothing.

Sellers say that while clothing returns rates have always been relatively high, they have increased since the removal of the requirement for buyers to pay for return shipping.

“For every three clothes you sell, at least two will be returned, and you will pay for the courier cost both ways,” Lu said.

Pinduoduo, JD.com and Alibaba’s Taobao and Tmall did not respond to requests for comment.

SELLING AT A LOSS

Davy Huang, business development director at e-commerce consultancy Azoya, said consumers are more likely to return impulse purchases, making life difficult for small retailers who don’t have enough cash flow to cover costs.

“But I think the return rates are just a fraction of the challenges these companies face,” he said. “They also face high traffic acquisition costs and high costs of working with influencers and live streamers.”

Retailers are also feeling the effects of factories selling directly to consumers at factory prices. As a result, some sellers on Pinduoduo have been making losses for two years, said He-Ling Shi, an economics professor at Monash University in Melbourne.

“They don’t have much hope that prices will eventually be enough to cover costs, but they have to do this (continue selling through Pinduoduo), otherwise they will have to close their factories,” Shi said.

Lu said the operating environment is weak because the rapid growth of e-commerce has triggered the so-called “Neijuan” effect in China — working harder for less profit.

“There is no sales growth because there are no new customers, and people’s average income is not growing like it was 10 years ago,” Lu said. “There is only competition between platforms, between sellers. This is the new normal for China’s e-commerce industry.”

(1 dollar = 7.2709 Chinese yuan)

(Reporting by Sophie Yu in Beijing and Casey Hall in Shanghai; Editing by Anne Marie Roantree and Christopher Cushing)