China’s relentless price war in e-commerce is making it difficult for retailers to make ends meet

By Sophie Yu and Casey Hall

BEIJING (Reuters) – Chinese e-commerce players are fighting for survival as sales growth slows, pricing pressure increases and shopping platforms use increasingly aggressive strategies to compete for the favor of increasingly price-conscious customers.

A once-thriving e-commerce industry marked by shopping sprees that included galas and celebrity events is now bearing the brunt of a sputtering economy that has left consumers in a veritable money-wasting scandal.

While extreme price discounts, influencer-led sales campaigns and generous return policies have done much to enrich the sector, the very practices that suppliers must adhere to are now harming those on which the sector is built.

“The good times for e-commerce are over,” said Shanghai-based e-commerce operator Lu Zhenwang, who sells everyday items for small merchants. “This year, competition is fierce and I don’t think many merchants will survive the next three years.”

The profit margins of large platforms such as Alibaba and JD.com are falling, but so are those of thousands of small businesses that have become indispensable since the e-commerce boom in 2013.

Thanks to this boom, e-commerce now accounts for 27 percent of retail sales, with 12 trillion yuan ($1.65 trillion) worth of goods sold each year.

But as the economy slows, e-commerce is also declining: the double-digit growth rates of recent years will soon be replaced by single-digit figures, according to data from Euromonitor.

One consequence of this is that enthusiasm for participating in sales festivals is cooling noticeably, said Lu. The biggest of these – Singles Day on November 11 – is a “risky” venture.

“You have no idea how much product you can sell, but you have to stock up on it,” he said. “It’s almost impossible to experience explosive growth during a shopping event.”

BUYER PROTECTION

As the effects of the economic slowdown begin to be felt, suppliers are raising their voices against the side effects of their sales gimmicks.

During the “618” online shopping event – which marked the launch of JD.com on June 18 – the owner of women’s fashion brand Inman called on authorities to restrict the platforms’ “return protection” policies, which force sellers to bear the cost of returns.

Such policies began on PDD’s low-price platform Pinduoduo in 2021 and proved so popular that others followed suit – at enormous cost to sellers, vendors told Reuters.

“The response rate on e-commerce platforms is 60 percent,” Inman founder Fang Jianhua wrote on social media. Before the introduction of these measures, it was around 30 percent, he said.

The story goes on

Fang said that large platforms that vendors rely on should not pursue a “consumer first” policy that places additional burdens on businesses, many of which must sell their products below cost to maintain their top positions in search results despite numerous discount campaigns.

According to e-commerce operator Lu, the return policies for clothing purchases have led to a sharp increase in return rates.

Although return rates for clothing have always been relatively high, they have skyrocketed since postage costs for returns were no longer covered, say sellers.

“For every three garments sold, at least two are returned and you pay the cost of shipping both ways,” Lu said.

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

SALE AT LOSS

Davy Huang, business development director at e-commerce consultancy Azoya, said the rate of consumers returning impulse purchases has increased, making life more difficult for small retailers whose cash flow is not enough to cover costs.

“But I think response rates are just a fraction of the challenges these companies face,” he said. “They also have to contend with high costs of traffic acquisition and high costs of working with influencers and livestreamers.”

Retailers are also feeling the impact of factories selling directly at factory prices. As a result, some retailers on Pinduoduo have been making losses for two years, says 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 their costs, but they have to do it (continue selling through Pinduoduo), otherwise they will basically have to close their factories,” Shi said.

Lu said the operating environment was poor because the peak of e-commerce had led to what is known in Chinese as the “neijuan” effect: working harder for lower returns.

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

(1 US dollar = 7.2709 Chinese renminbi yuan)

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