Why Inflation is Good for Online Sales

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Why Inflation is Good for Online Sales



Credit Suisse analysts have found a reason to like China’s worryingly high inflation rate: it’s good for e-commerce.

In a mostly upbeat new report on the China’s online marketplaces, the brokerage house’s China Economics team expects the country’s inflation rate to increase from 3.2% in 2010 to 5.3% in 2011 and 4.6% in 2012, forcing traditional retailers to raise prices to offset rising raw materials, labor, rent and other costs. Online retailers will be under pressure, too, but because of their lower labor and rental expenses, price hikes will be lower, making online shopping more attractive to Chinese consumers and accelerating e-commerce growth. “E-commerce companies can stabilize margins through fast revenue growth and operating leverage,” analysts wrote. “As a result, we expect the e-commerce market will further cannibalize traditional retail business in 2011. This situation is already happening in the U.S. and Europe.”

China’se-commerce market grew 89% last year to $73.3 billion. Credit Suisse predicts total Gross Merchandise Value (GMV) will expand at a 40% average annual rate through 2015, due in part to ongoing growth in Chinese Internet users and further expansion in the types of goods and services that can be purchased on the Web. E-commerce is expected to account for 6.7% of China’s total retail sales by 2015, up from 3.2% in 2010.

The Credit Suisse report identified several other important trends affecting the market.

Traditional retailers are expected to increasingly invest in e-commerce (analysts specifically cited the recent investment by Gome, the country’s largest consumer electronics chain, in Coo8.com, a B2C electronics website), which would prove to be a “double-edged sword.” Heavy investment will mean higher losses and lower share prices—but failing to build an e-commerce presence means ceding market share to competitors. Taobao is the dominant e-commerce company in China and accounted for about 80% of the total China e-commerce market in 2008-10, according to the report.

Credit Suisse also predicted “explosive” growth in group shopping websites and increasing integration of e-commerce and social networks. Logistics—the physical delivery of all those packages to millions of consumers—will continue to be a drag on growth as China’s fragmented, regional delivery systems struggle to keep up with demand. “Without further improvements in the logistics system, e-commerce companies’ growth bottlenecks are expected to remain high,” analysts wrote.

Stock-market investors looking to get in on China’s e-commerce boom are likely to be disappointed this year, according to the report. After the successful 2010 IPOs of Chinese Internet companies including online bookseller Dangdang, Credit Suisse does not expect any major Chinese players to go public in 2011. Most have plenty of capital (or access to it) to fund expansion. In addition, leading e-commerce companies are undergoing key business development stages during which an IPO would be a distraction. “For instance, Taobao is promoting Taobao Mall (the company’s B2C platform for major brands) aggressively in 2011 and is still evolving its business models, e.g. logistics services,” analysts wrote. “Thus, from Taobao’s perspective, (a 2011 IPO) may not be the best timing.”

AlibabaE-CommerceGMVRetail

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