When the top two Chinese home appliances retailers, Gome and Suning gained a third of the consumer market for the home appliance industry, they probably never considered the possibility of any potential threats from smaller appliance retailers with fewer resources. But over the past seven years, the domination of the appliance market by these two giants has been challenged.

One challenger is a start-up internet retail company called 360buy.com. Since its founding in 2004, 360buy has grown by over 200 percent in six consecutive years. In 2010, its sales reached RMB 10 billion and the total sales revenue for 2011 are expected to largely exceed the 2010 amount and reach roughly RMB 28 billion. It took appliance giant Gome 15 years to exceed sales of RMB 10 billion.

The numbers are promising but “It means very little if we only outsell our competitors by a few billion yuan,” said Liu Qiangdong, founder of 360buy. “We will consider ourselves safely ahead of our competitors if our total sales revenues reach at least RMB 50 billion.” He also announced his RMB 100 billion ambition to outperform Taobao, the largest online retailer in the Asia-Pacific region, within five years. So the question is: will 360buy be able to dethrone the reigning traditional retailers?

Offering competitively low prices is 360buy’s primary advantage, an advantage that did not come without challenges. Teng Bingsheng, a professor at Cheung Kong Graduate School of Business (CKGSB) analyzed the challenges 360buy faces. He points out one crucial weakness of the upstart is its uneasy relationship with its suppliers. “The suppliers acknowledge the potential of 360buy to compete successfully with both Gome and Suning,” says Teng, “Yet there is a fear that the existing distribution channels could be disrupted.”

Small brand names can still get decent sales revenues even if they only partner with 360buy. For big brand names, however, 360buy’s low-price tactics hurt their interests. In 2008, BenQ got tough with 360buy due to the low-priced MP512 Projector listing on 360buy.com.

BenQ stated publicly, “We cannot ensure the authenticity and originality of BenQ’s MP512 Projector; we cannot ensure that its core components are original production and we cannot ensure its quality or any after-sale service.” Meanwhile BenQ stopped supplying products to 360buy.

However, Liu Qiangdong insists that the continued ability to offer low prices for their products will be the key to his company’s success. “As long as 360buy exists, it must sustain its pricing strength and create value for our consumers,” Liu says. “This is a main reason consumers choose 360buy.”

To ensure the price advantage, 360buy also established rules for its product suppliers. Suppliers must guarantee that the prices of their products listed on 360buy are not higher than those sold on any other online or at any other offline shops. If between 20 percent and 50 percent of the products listed on the site are higher than any other selling channel, the supplier’s online shop on 360buy will be suspended for one month; if the percentage hits 50 percent or more, the supplier’s online shop and cooperation with 360buy will end.

According to Teng, 360buy will not be able to sustain long-term profits by being shortsighted and unable to see the big picture. With both Gome and Suning entering the online retail market, competition for 360buy has only intensified. In November of 2010, Gome announced that they were purchasing 80 percent of a company’s shares called Coo8, while Suning declared in January of 2011 that its B2C website was officially put into effect. Currently, Suning’s daily internet sales revenues have increased a hundred-fold, remarkably surpassing its offline sales revenues.

During its momentous growth, 360buy has had to face chronic challenges. Some of the obstacles include:

Logistics

Currently 360buy has six logistics centers, 12 subsidiary warehouses and 287 distribution stores. All of its logistical services cover 70 percent of the company’s total delivery capacity, but the company still struggles to keep up with the rapid increase of orders. The remaining 30 percent of delivery is given to third-party express couriers. During public holidays or heavy sales promotions, the express couriers cannot handle the amount of orders and often find it almost impossible to deliver products on time, which leads to dissatisfaction from the customers.

Customer Service

360buy has both online and offline customer service. Its online service used to enjoy a strong reputation. Customers would ask questions online and get timely answers. As 360buy’s sales increased exponentially and its products became more varied, however, its ‘online-service’ model could not satisfy the increase in customers’ needs. For its offline customer service quality, customers complain that getting responses from the customer hotline can take up to a half an hour.

Technology

When online orders skyrocket during peak discount campaigns, 360buy’s website, at times, cannot handle the spike and sometimes crashes. This instability adversely also affects its employees’ ability to work efficiently.

Teng commented that while these obstacles are not insurmountable, he pointed out that 360buy’s biggest problem at this stage is its inability to rival the size and core competence of its competitors. To engage in this uphill battle, 360buy will have to reform some of its business strategies in order to meet the challenges ahead. The company has made remarkable investments in its infrastructures including logistics. In 2011, 360buy acquired $1.2 million in capital inflows and plans to put all of this capital into logistical and technological advancements. It also plans to invest another RMB 5 billion to 6 billion into logistics construction. Logistical service centers will multiply allowing it to remain competitive. Regarding technical support, if new suppliers want to sell their products on 360buy, they will now be required to pay RMB 6,000 as a technical management fee.

“If the sales volume of a given product at 360buy reaches one-tenth of Gome’s volume for the same product, it will have reached a point where it can be considered a serious threat to the larger company,” predicts Teng. “At that point, manufacturers would be more likely to throw their support behind 360buy, and the company would have gained an important symbolic victory.”