Will China Eat Online Retailers?

1 Flares Twitter 0 Facebook 0 LinkedIn 0 Google+ 1 1 Flares ×

For many years now, it has been pretty good business to setup an online store, source a few products from China and sell them in the US. But are those businesses about to get killed? I saw something this evening that took me a little bit by surprise and could spell trouble for the small online merchant.

My in-laws recently came to visit and they brought with them a pretty cool baby walker they found in China. I thought its pretty novel and would go over well here, so I looked into sourcing it and sure enough I found it available on Alibaba for a really cheap price – $2 per unit. After shipping it would still be under $6. It looks like something I could sell for around $19.95 USD, so Great! Next step, I looked on eBay to see if anyone is selling it and for what prices. To my shock, it was not only already on eBay, it was all over eBay! And not only that, the price was already less than I could even source if for.

But how could that be?!?!?! It is popular in China but hasn’t even hit the US market yet. As I looked closer, the competing sellers were all from China and Hong Kong. Interesting.

It made me wonder if we are finally at that point where the ‘tiger eats its own tail’ so to speak? Or put another way – it was the Americans that pushed into the cheap labor markets of China to maximize profit margins. A lot of businesses jumped in and thrived because of their ability to arbitrage the products and sell them in the US. But now the Chinese have learned what products America consumes and how to produce them, and so why wouldn’t they want to compete directly if they can?

You have to admit there is a pretty poignant irony here – as retailers take advantage of the low-cost sourcing opportunities, perhaps they were sewing the seeds of of their own demise, by enabling competitors with an inherent ability to compete at much lower prices; competitors that likely otherwise would not have entered the market.

The online retail sector is already pretty air tight, as competition has pushed PPC rates to the limit of what the average e-retailer can afford for any standard commodity product. Organic search results meanwhile are becoming more and more biased toward larger brands. The large retailers thus are already starting to eat alive of smaller players in this way, since the only way to make a profit at this stage is to source at lower costs but driving higher volume. But even massive retailers such as Amazon are reportedly only generating 5% profit margins. And so what does that mean for the mid-size retailer who has just been arbitraging the China trade all these years, not re-investing into their value chain, or otherwise creating brand equity?

The last 5 years have been an amazing ride for retailers. The next 5 years should be a lot more challenging albeit interesting to observe. A few smart retailers will find their way with unique and original products. The large brands like Amazon and Walmart have significant brand equity and will be just fine. But I’d predict that a lot of small and medium sized online retailers are probably going to be squeezed out before the market finds its final equilibrium. Who knows though, perhaps we’ll see a rebirth of “Made in America” nationalism at some point or government regulation that will limit this trend. It will be interesting to watch.