Chinese e-commerce sellers are struggling as sales growth slows, pricing pressure intensifies, and shopping platforms compete with more aggressive regulations to attract cost-conscious customers
The once-thriving e-commerce industry, characterized by shopping bonanzas featuring galas and celebrities, is experiencing the consequences of a sputtering economy, which has caused consumers to nearly weave knots in their purse strings.
Extreme discounting, influencer-led sales campaigns, and generous returns policies significantly enriched the sector. However, these same practices, which vendors are required to adhere to, are now causing harm to the very foundation of the industry.
Lu Zhenwang, an e-commerce operator based in Shanghai who specializes in the sale of everyday items to small vendors, declared that the period of prosperity for e-commerce has concluded. “This year, there is fierce competition, and I don’t think a lot of sellers will survive another three years.”
The profit margins of major platforms, including Alibaba and JD.com, as well as the thousands of small businesses participating in the e-commerce boom decade that commenced in 2013, are being compressed.
This expansion has resulted in e-commerce accounting for 27% of retail, with an annual sales volume of 12 trillion yuan ($1.65 trillion).
However, Euromonitor’s data indicates that e-commerce is expected to experience a decline as the economy slows, with the double-digit growth of recent years being supplanted by single-digit growth.
According to Lu, one consequence is that the enthusiasm for participating in sales festivals is significantly decreasing, with the most significant event, Singles Day, scheduled for November 11, being a “risky” proposition.
“You have no idea how many products you will be able to sell, but you have to build stock for it,” he said. “It’s almost impossible to see explosive growth during a shopping event.”
PROTECTION OF THE BUYER
Vendors are increasingly vocalizing their opposition to the adverse consequences of sales tactics as the effects of the recession become apparent.
During the “618” online purchasing event, which JD.com initiated on June 18, the proprietor of the womenswear brand Inman urged authorities to regulate the “purchase return protection” policies of platforms, which compel sellers to cover the cost of returns.
Vendors informed Reuters that PDD (PDD.O), a low-price platform that opened a new tab in 2021, initiated such policies. The platform was so successful that other platforms followed suit, albeit at a significant cost to sellers.
“The return rate on e-commerce platforms is 60%,” Inman founder Fang Jianhua stated on social media. He noted that the percentage was approximately 30% before implementing these policies.
Fang stated that significant platforms on which vendors depend should refrain from implementing “consumer first” policies that exacerbate the burden on businesses. In the face of numerous discount events, many companies are compelled to sell below cost to maintain high search rankings.
An e-commerce operator, Lu, stated that the return rates in categories such as apparel had increased significantly due to return protection policies.
Even though apparel return rates have consistently been relatively high, they have increased significantly since the requirement for buyers to pay for postage when returning products was eliminated, according to sellers.
“For every three pieces of clothes that you sell, at least two pieces will be returned, and you pay for the two-way courier cost,” according to Lu.
SELLING AT A LOSS
According to Davy Huang, the business development director at e-commerce consultancy Azoya, the rate at which consumers return impetuous purchases has increased, which has made it more difficult for small retailers to manage their expenses due to their insufficient cash flow.
“But I think return rates are just a fraction of the challenges these businesses are facing,” according to him. “They also face high traffic acquisition costs and high costs to collaborate with influencers and livestreamers.”
Retailers also feel the impact of factories selling directly to consumers at factory prices. He-Ling Shi, an economics professor at Monash University in Melbourne, stated that as a result, certain vendors on Pinduoduo have been operating at a loss for the past two years.
“They don’t have much hope that prices will eventually be enough to cover their costs, but they have to do it (keep selling via Pinduoduo); otherwise, they basically have to close their factories,” according to Shi.
Lu stated that the operating environment is unfavorable due to the “neijuan” effect, a term in Chinese that refers to the phenomenon of working harder for fewer rewards, resulting in the peaking of e-commerce.
“There is no growth in sales because there are no new customers, and the average income of people is not rising like ten years ago,” Lu pointed out. “There is only competition between sellers and platforms.” This is the new standard for the e-commerce sector in China.