Third-party stores, alliances vital for foreign firms to make inroads in online retail market

In late February, US retail giant Walmart said it would increase its investment in Yihaodian, a fast-growing online retailer from China, and boost its stake from 20 percent to about 51 percent.

The announcement has caused "a ripple effect" in China's highly competitive e-commerce market and also sparked debate as to whether it would help the US retailer grab the top slot in China's B2C market.

Online retail transactions in China have seen annual growth of more than 100 percent from 2006 to 2010, compared with the 18.1 percent growth in total retail sales, according to the 12th Five-Year Plan (2011-15) for e-commerce, released by the Ministry of Industry and Information Technology.

In 2010, the number of online shoppers in China totaled 161 million, with a transaction volume of 513.1 billion yuan ($84 billion, 64 billion euros), accounting for 3.3 percent of the total retail sales.

Compared with the entire retailing industry, online retailing in China is still "a small fish in the big pond". But its strong growth has attracted a lot of traditional retailers including several foreign players.

German retailer Metro has sowed more than one seed in China's e-commerce sector - its official online store that was launched on March 1, its flagship store at Tmall, the B2C arm of Alibaba, and the online store for imported foods co-launched with sssclub.cn.

Most of the other foreign retailers including Tesco, Auchan, Ito-Yokado and Carrefour have also established online stores, either through direct investment or through third-party e-commerce platforms.

However, the offline and online businesses are totally different when it comes to operation mode. So it is not easy for traditional retailers to "stretch their muscle" to online sales.

Walmart had made detours in the US. In 1996, when the company launched its online store in the US, David Glass, the then president and CEO of Walmart, had said that the company would try to make the online store a success within two years. Unfortunately that did not work out as planned.

The retailer had to adjust its online business strategy. Its subsidiary Walmart.com was established in January 2000 and adopted a relatively independent operation mode. In 2010, Walmart established a new unit Global.com and an associated department @WalmartLabs for online shopping technology development, mobile services and other related stuff.

The online journey of foreign retailers in China is not that smooth too. Bertelsmann Book Club abruptly closed, and GaoPeng.com powered by Groupon had to resort to huge layoffs. All these illustrate the Chinese retail market is extremely complex. It is difficult to succeed by simply copying the operation mode in foreign markets.

For foreign companies, there are two key issues to be cleared out in order to be successful in China's online market.

First, what is the strategic positioning of your online sales? "A main and an auxiliary"? - Online Shopping Mall being the complement of the entity store, or "walking on two legs"? - Both independent and at the same time complementary so as to reduce the disparity of sales prices and sales channels between online and offline.

Second, what is the difference between online sales and entity stores in terms of organizational capacity? Online sales are quite different from entity store sales in services, logistics, marketing tools, talent requirement, personnel evaluation system and profit cycle. It is also important to understand whether a company has the ability and willingness to invest and learn from such differences.

For those foreign retailers who lack talent and logistics network in China and who do not understand the Chinese market, it might be a wise choice to invest or buy shares of existing online stores or co-start a shop via third parties. Such moves will help them accumulate experiences and prepare better for further integration.

Shen Lei is a researcher at the China Europe International Business School (CEIBS). Hu Weiyi is the general manager of PICC Asset Management Co.