Wednesday, Aug 23, 2017, 6:42 AM CST – China

Special Report

E-commerce Activism

From Stall to Mall

Taobao’s shift towards a business-to-consumer model has come at a cost to small-scale sellers, who are learning some harsh lessons about the cutthroat world of business

Ouyang Qingqing, a 20-year-old sophomore from Zhejiang Province, displays her Taobao store‘s bestselling item, an eye-bag corrector PHOTO BY LIU JUN / LENS

A warehouse sometimes doubles as a bedroom for a Taobao merchant PHOTO BY LIU JUN / LENS

Taobao’s shift towards a business-to-consumer model has come at a cost to small-scale sellers, who are learning some harsh lessons about the cutthroat world of business

Over the past decade, domestic online marketplace Taobao has risen to eclipse online giants such as eBay to become China’s leading online retail platform. It has enjoyed particular popularity with small-scale sellers; everyone in modern China seems to have a Taobao store, with merchants ranging from college students to farmers to wholesalers who find themselves with a little surplus stock.

But such diversity in China’s online merchant class may soon be a thing of the past. Having previously focused on customer-to-customer (C2C) retail with its highly accessible Marketplace platform, in 2008 Taobao began its foray into the business-to-customer (B2C) market with the establishment of its highly regulated premium portal, Tmall. With many C2C customers now struggling to survive, Taobao’s change of face has left many dispirited.

Indeed, due to the bias of Taobao’s internal search engine, the website’s C2C sellers now find it difficult even to display their wares; in every product search, Tmall stores occupy the top three results. Previously decided by the time companies list a product, meaning every store had an equal chance of coming out on top, search result rankings are now decided by various parameters including previous sales volume of the product, the seller’s credit rating, and the number of times the store has been visited and bookmarked.

Additionally, the sales volume reading of a Tmall store is able to accumulate over time, while that of a C2C store is reset to zero at the end of every month, making it even more difficult for small sellers to attract attention.

Even for sellers who had established solid roots on Taobao Marketplace, business has been hard to sustain. Wang Weiyang, a 29-year-old woman from east China’s Jiangsu Province, started her Taobao operation in 2005 upon leaving university, when she found herself faced with a lack of prospects in an overpopulated job market.

By that time, Taobao had begun to take the upper hand over eBay in the battle for the China market. With free registration, commission-free transactions and a free third-party payment platform, the homegrown hero soon amassed millions of registered users. By 2006, Taobao had overcome the previously dominant eBay, which charges commission, eventually edging it out of the market entirely.

“For start-ups, Taobao looked like heaven,” said Wang. This was an image that Taobao was keen to reinforce; the company’s slogan at the time was “Small is beautiful.”

Wang’s business of spectacle frames started slowly but soon picked up. After three years, her store had recorded more than 5,000 transactions, and she found herself better off than most of her white-collar former classmates. But Wang’s luck changed when Tmall was launched in 2008. Since then, customer traffic to her store has dropped by more than half.

Struggling to Profit

Kick-started by customer traffic redirected from Taobao Marketplace, Tmall soon overtook major rivals Dangdang and 360buy to become the country’s largest B2C portal. Aside from higher profit margins than Taobao Marketplace, which generates revenue mostly from advertising, quality control was another reason for the shift toward Tmall. Populated by companies rather than individuals, the B2C platform is much easier to regulate, said Chen Shousong, an e-commerce researcher with Beijing-based IT consultancy Analysys International.

Due to its sheer size and low barriers to entry, Taobao Marketplace became awash with counterfeit goods and unscrupulous sellers. The launch of Tmall created an outlet through which Taobao could compete with 360buy and other rivals with quality goods and services.

“B2C portals will be a major part of future e-commerce, as they provide more security and ensure higher quality,” said Chen.

While China’s C2C market grew by roughly 70 percent in 2010, B2C sales almost doubled during the same period, according to iResearch, a Beijing-based IT consultancy. Sales on Chinese B2C websites are expected to more than triple to 650 billion yuan (US$102bn) in 2013 from around 198 billion yuan (US$31bn) in 2011, and by that time, B2C sales will account for 47 percent of total online sales in China, up from 25 percent in 2011, according to estimates from Analysys International.

So far, Tmall has amassed more than 50,000 companies selling more than 70,000 brands. In 2011 alone, the number of Tmall stores grew more than 40 percent. Tmall occupied 35.5 percent of the B2C market in the third quarter of 2011, compared with 13.3 percent for runner-up 360buy, according to Analysys International.

In response to the protest against Tmall’s recent annual fee hikes, Jack Ma said in a recent post on Sina Weibo, China’s Twitter equivalent: “If it is normal for a company to want to make profit and abnormal for it not to, Taobao has been abnormal since it was founded nine years ago.”

The commission-free policy since 2003 had enabled it to beat eBay, and in the following three years when fellow Chinese web giants Baidu and Tencent launched their respective C2C portals, it was forced to carry on with its commission-free policy for fear that it would lose its market share to rivals. There is no doubt that the policy was one of the main reasons behind Taobao’s immense sustained growth to its current size of over 8 million stores.

However, while transactions on Taobao have always been commission-free, in a real sense, Taobao has never been truly free of charge, as store owners have always had to pay to use tools and services such as customer traffic data and store decoration. After it achieved market dominance, Taobao began working out a wide range of premium value-added services to turn its market share into profit, a venture which proved challenging.

Broken Dreamers

In June 2006, Taobao infamously tried to launch a bidding system for search result rankings similar to that of Baidu, but was later forced to give up when shopkeepers threatened to stop using the website to sell goods. As a compromise, the advertising tool Taobao Express was put into operation in 2007.

In 2009, advertising made up 85 percent of the company’s total revenue, allowing it to break even. Taobao’s 2010 profit was estimated to be 1.5 billion yuan (US$235.7m), only about 0.4 percent of Taobao’s total sales figure of 400 billion yuan (US$62.9bn) that year, way below the industry average of 2 percent, according to iResearch estimates.

Taobao’s profits are bound to soar with the rise of Tmall, as the economically robust Tmall sellers are more willing to spend money on advertising. The other side of the coin is that preferential treatment of these large-scale sellers and their impressive advertising budgets may mean that the days when anyone could make their fortune on Taobao are over.

For many Taobao sellers, the friendly-faced website was a symbol of the commercial possibilities of China’s economic liberalization; no matter who you were, wealth was only a few clicks away. But with a legal responsibility to maximize profits, the giant marketplace has been forced to teach its smaller tenants some harsh lesson about the world of business. While its defense is consumer protection, Taobao’s despondent amateur merchants might well ponder that maximizing profit has been the goal from the very beginning.

Tags: e-commerce, Taobao

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