China’s astonishing economic growth has coincided with the Internet revolution. The combination of these two major driving forces is about to transform the retail landscape, and as a result, it has opened the way to a surge of technological innovation and entrepreneurial activities. In a country that is currently experiencing unprecedented growth in various sectors, online retail stands out for its remarkable potential for further growth. With more than 1.3 billion people, China still tops the board with the world’s largest population and is currently the world’s largest e-commerce economy. By 2020, the Chinese e-commerce market will match the combined size of today’s American, British, Japanese, German, and French markets. Foreign entrepreneurs and Small and Medium-sized Enterprises (SMEs) seeking to seize the opportunity need to be fully prepared to catch up with the rapid rise of e-commerce in China. Chinese and foreign entrepreneurs are now being given the possibility to venture into this market with minimal start-up expenses and by gaining easy and low-cost access to a growing pool of potential customers. The growth of Chinese e-tail is already generating huge amounts of consumer surplus and has given Chinese shoppers living in remote areas of the country the possibility to access a much larger range of products than they could have imagined a few years ago.
Over the past decades, China has gained the reputation of being the world’s factory, focusing solely on manufacturing exports. This is about to change. The role of e-tail is tremendously important in the context of the Chinese government’s stated goal of relying less on exports to the recession-stricken West and focusing more on domestic consumption as a driver of further economic growth. This growth is largely underpinned by China’s huge cyberpopulation, which is the largest in the world. E-tail has offered multiple tangible market incentives to Asian and Western entrepreneurs and SMEs operating in China by giving them the possibility to sell directly in the online retail market where economies of scale are less important than in traditional retail. Chinese e-commerce is growing fast, and it is unleashing a remarkable transformation in consumption patterns, technological innovation, logistics infrastructure, and productivity. Since the economic reforms of the late 1970s, international brands have been trying to sell their products to Chinese consumers. Together with local brands, they offer a wide range of products for consumers to choose from. This wide selection of outstanding products has made Chinese consumers increasingly demanding. On top of this, the arrival of new brands has created a rather fragmented market, which, again has resulted in fierce competition between brands making it hard for newcomers. The good news is that shopping has become an essential part of the government’s national strategy for economic growth in China. Private consumption has grown at a rapid pace, and retail sales have grown at double-digit rates for years. Consumption is now the primary driver of the country’s economic growth. China used to rely heavily on exports and manufacturing, but with a growing internal economy, improved economic infrastructure, a slump in international market demand, appreciation of the Yuan, and increasing labor costs, the importance of exports has decreased in recent years. China’s transition to a more sustainable model is assisted by domestic consumption, technological innovation, and the service industry.
The term Chinese market is very general. In this book, it is used as shorthand for the sake of clarity and simplicity. The truth is that China is far from being one market. It is actually a group of 34 distinct markets, each corresponding to China’s administrative divisions. Think about it. You would never sell to a Swedish consumer the same way you would sell to a French consumer. You would never sell to someone in rural Texas the way you would sell to someone in New York. They are different. By the same token, you would not sell to someone in Beijing the same way you would sell to someone in a second- or third-tier city of China. In a few words, there is no one-size-fits-all solution when it comes to marketing and selling in China. As diverse China may seem, however, one must be aware of two major uniting forces, especially when it comes to e-commerce and marketing: Chinese Mandarin and the rise of social media. These two uniting forces make business in China much easier and are the basic tools all companies need to use if they want to do business, advertise, market, and sell their products in China.
Mandarin is the official language of China. It was adopted nationwide in 1932. Its pronunciation is based on the Beijing dialect and is written using simplified Chinese characters. Whether you are in Shanghai, Beijing, Qingdao, or Harbin, people speak Mandarin in addition to any local dialect. This makes things much easier when it comes to communication, marketing, advertising, and doing business.
Nearly everyone in China is not just on social media, but active on it. In the early days of social media, this trend was very appealing to people because social media was the only place one could connect with people from other parts of China and the world. Over time, social media became part of daily life. While in the West, everything happened gradually—when social media began to take hold, users could connect with friends and family using Facebook, search for information and the latest news using Google, and then login to Amazon to buy things in an affordable and fast way. In China, things happened differently. Several steps were skipped or shortened. Everything happened within a very short time. Platforms like QQ, WeChat, and Weibo started mushrooming and attracted huge numbers of users by making their services more efficient and expansive. Sites and applications included as many functions as possible and offered increasingly personalized features to keep users within their platform. For mobile users, features were designed to keep their phone memory and data usage at the lowest possible level. These social media platforms catered specifically to Chinese local customs. Features like red envelopes for Chinese New Year and quick gifts or payments to friends took off. Platforms are constantly testing new features that can improve the experience of Chinese users and increase conversion rates. The voice message feature is also widely used, so people can avoid spending time to type complicated Chinese characters.
The growth rate of e-tail in China has doubled every year since 2003. The increasing spending power of China’s growing consumer class is a major driving force. From 2015 to 2025, the lower middle class in China is expected to rise from 290 million to 525 million people. The country’s lower middle class is currently represented by households with an annual income of RMB 33,000 to RMB 50,000 (5,500 to 8,100 U.S. dollars). An average upper middle class household has an annual income of RMB 41,200 to RMB 120,000 (6,800 to 19,000 U.S. dollars). Although these figures might appear low, local price levels along with strict exchange rates must be taken into account. Hundreds of millions of Chinese people will experience a considerable increase in their disposable income in the coming 10 years. What is considered China’s poor urban population has decreased from 92 million in 2010 to 62 million people in 2018, while households classified as rich have increased from one to 13 million. Considering this, it is no surprise that a great number of international companies want to enter a market with such a massive potential.
Research in 266 Chinese cities revealed that the growth of online retail has resulted in an incremental increase in the country’s total consumption. Cities with higher online consumption rates are usually the ones with higher overall consumption. Another interesting fact is that consumption levels used to exhibit important variations across cities, but e-commerce is about to equalize these differences. Another interesting fact is that there is an expanding enthusiasm for online shopping among consumers coming from less-developed Chinese cities. Although the average revenue per person is much lower in these underdeveloped areas, the amounts spent online will soon become similar to those spent by shoppers from larger and more prosperous cities. This translates into a bigger wallet share for online purchases in developing cities, and the major reason for this is growing access to a wider variety of goods that cannot be found offline in third- and fourth-tier cities.
Apart from increasing overall consumption and driving economic growth, e-tail is about to shape the entire landscape of the Chinese economy in radical ways. For instance, competition has resulted in lower general retail prices. An additional advantage is that, by driving growth to other sectors, e-commerce has spurred the development of an RMB 84 billion (14 billion U.S. dollars) service provider industry, which e-sellers use to support their online trading activities. These services include payment systems, online marketing, advertising, logistics, warehousing, and IT services. Another positive outcome is that the success of e-tail has had an impact on the physical retail world. By offering a more effective retail service, the e-commerce industry is affecting a number of other sectors by urging traditional retailers to achieve a better coordination between supply and demand, which, again, is going to improve efficiency for the whole economy in the long run.
The Chinese E-Tail Ecosystem
In most developed countries, the retail industry has generally gone through distinct stages of gradual growth. Due to the fact that, in China, the retail market’s coming of age has coincided with the digital revolution, its development has followed different patterns compared to other countries. Generally, after starting with local or regional industry players, the field is eventually dominated by a few national leaders. In the case of China, clear national leaders are yet to emerge. The top five retailers have less than 20 percent market share. If the startling growth of Chinese e-tail continues, the country’s retail industry could skip the national stage and move directly from the local to the multichannel stage. Major online players have already emerged in the Chinese e-tail market. Alibaba and JD (Jing Dong) are among the top 10 Chinese e-tailers.
A large selection of products is critical for companies to generate consumer pull. With the traditional offline retail industry still fragmented and rather underdeveloped, e-tail has become very profitable, especially because the small online merchants can take advantage of local gaps, inefficiencies, and niches of unmet consumer demands. The Chinese e-commerce market can be split into two main groups: marketplaces and independent sellers. Marketplaces are clearly dominant, and they account for about 90 percent of the e-tail market, according to the latest figures. Marketplaces are third-party platforms. They provide a website for a large number of merchants to list their products. These platforms offer existing traffic flows and the necessary tools for listing products and setting up individual online storefronts. They can also connect merchants with reliable service providers to assist them with all aspects of their e-commerce activities such as customer service, logistics, and warehousing solutions. Their main revenues come from charging transaction fees and from selling online marketing services to e-merchants. In China, the majority of e-sellers choose to work with third-party platforms as a way to avoid heavy up-front investment and to access effortlessly large numbers of interested customers.
The dominance of marketplaces can be striking to many of you, especially because, in most Western countries like the United States, marketplaces account for a small part of the market. Due to the ease of entry and the low start-up cost, however, Chinese third-party platforms are generally the fastest and most cost-effective way of entry. Marketplaces have provided a powerful launching basis for microbusinesses, entrepreneurs, and SMEs. Taobao and Tmall, the largest online marketplaces in China, have encouraged the creation and growth of many local e-tail brands, known as Tao brands. These brands have become incredibly popular, thanks to Taobao’s highly targeted online marketing campaigns and to merchants’ attractive offerings both in terms of quality and price.
On the other hand, independent merchants who choose to set up their own websites or independent e-shops might be free from having to pay transaction fees to a marketplace, but they still have to invest substantial amounts of money to set up their own platforms, customize them to meet local needs and tastes, and in addition to that, they will have to be in charge of all associated operations that are required to secure large traffic flows. Such expenditure can be very costly and incredibly time-consuming. It is justified only if merchants feel confident enough in their ability to drive consumer traffic to their sites. In later chapters, I discuss the pros and cons of a standalone website, especially for brand companies.
Although C2C (consumer-to-consumer) accounts for a very small share of global e-commerce in most Western countries, in China, the C2C market is as important as B2C (business-to-consumer), accounting for almost half of total e-commerce transactions. Microbusinesses and SMEs are the typical sellers in most C2C dealings in China. As a matter of fact, the Chinese e-commerce market is profitable, except for independent online merchants. China is the global leader by combined B2C and C2C e-commerce revenues, generating almost one-half of the global online sales of products and services in 2017. Due to ongoing strong growth, China is expected to add several more percentage points to its share by 2021.
A few key aspects and current facts of the Chinese online market include the following:
• About 90 percent of the e-commerce industry is marketplace-dominated. Large B2C websites are leaders in most Western countries, but this is far from being the case in China.
• About 50 percent of the online market is C2C. In other countries, C2C shares are in the single digits.
• Despite the fact that Chinese e-commerce is still in its early stages, high growth has been achieved with relatively low investment.
• Overall, the e-tail ecosystem is highly profitable and marketplace-based companies are by far the best-performing market segment.
Transaction value of B2C online retail market in China: 1st Quarter of 2015 to 1st Quarter of 2018.
Source: The date were calculated based on the financial results published by enterprises and interviews with experts and iResearch statistical model.
*GMV: gross merchandise volume
Source: iResearch Global Group, Fung Intelligence Center, company websites and interviews.
With the highest number of Internet users worldwide, which in 2018 reached 772 million, China has overtaken the United States as the largest online retail market. The Chinese e-commerce market has grown tremendously over the last 12 years, fuelled by the creation of third-party platforms like Taobao, Tmall.com, and Jing Dong (JD). On top of this, third-party payment systems, such as Alipay, have made Chinese consumers more confident with online shopping. A growing number of foreign SMEs who want to promote their products and services to a market with such a tremendous potential—while keeping their expenditure cost at the lowest possible level—regard the fast growth of e-commerce in China as an opportunity not to be missed. The most important factors influencing the growth of e-commerce across the country are broadband penetration, wide use of bank cards, and growing disposable per capita income. E-commerce, however, is far from being a mere substitute channel for purchases that would otherwise be made offline and should never be perceived as such. Its super-charged growth is the indicator of a radical transformation in consumer behavior; a transformation that is representative of the complex and dynamic economic landscape of the country in this beginning of the 21st century.
China’s Leading E-commerce Platforms: Taobao and Tmall
To capture a share of this market’s exponential growth, it is crucial to understand the factors that shape that growth. Alibaba’s Taobao is the leading e-commerce platform in China. It was launched in 2003, and it now counts more than seven million active merchants. The great majority of Taobao merchants are small businesses and individuals. They can create storefronts and product listings on the platform. Payment services are provided free of charge. Merchants need to hold a Chinese bank account and an Alipay account to qualify for registration. Most Taobao sellers are intermediaries, often representing factories or selling goods from wholesalers. On Taobao, customers can find anything they can imagine. You will find both genuine and counterfeit products. So, the platform is best for goods that are not susceptible to counterfeiting. While Taobao does not have the same brand requirements as Tmall, their rating system and customer feedback ensure that bad sellers do not survive long. In terms of pricing, Taobao is as cheap as it gets. As it has more sellers than any other e-commerce platform and because these sellers often compete to sell the exact same goods, prices are very competitive. You are unlikely to find prices, anywhere and for any product, lower than what you will find on Taobao.
Taobao revenues come mainly from display marketing services, offered to merchants so that they can drive traffic to their virtual storefronts. Revenues come also from third-party marketing affiliate fees to acquire additional traffic, as well as from selling advanced software to merchants that helps them manage, upgrade, and decorate their online storefronts. Alibaba aims to increase consumption through e-commerce among the 600 million people that reside in rural China through the Rural Taobao Program. The company has established service centers in villages where rural residents can buy and sell products with the help of service center operators. The program not only helps village residents to sell their products directly to urban consumers, but also extends the reach of brands and manufacturers to those remote populations.
Tmall is a Taobao offshoot. The launch of Tmall by Alibaba in 2009 was part of the company’s successful diversification efforts to expand from the Taobao fee-free, C2C model into the B2C market. Tmall is a platform where consumers can buy Chinese and international branded products. A large number of local and international brands and merchants operate their own stores on the Tmall platform. Alibaba revenues from Tmall come from annual upfront service fees, online marketing services sold to merchants, third-party marketing affiliates, storefront software, and commissions based on a pre-determined percentage of transaction value that varies by product category. Note that the right to sell on Tmall is reserved to companies that are legally registered in China and have a minimum of three-year market presence in Mainland China. Tmall currently dominates the Chinese B2C online market with a transaction value of more than 50 percent. The platform counts more than five million customers and over 70,000 brands. Tmall merchants are generally medium and large companies. The platform is used by more than 50 percent of online Chinese buyers. In terms of product quality and pricing, Tmall has much stricter requirements, and brands can only sell authentic and genuine branded products. All Tmall products are indicated with a Tmall seller badge that looks like this:
Following are the three main virtual store formats offered by Tmall:
• Flagship stores sell trademark products for which the merchant holds exclusive authorization.
• Specialty stores are used by merchants holding exclusive distribution rights to sell their products in China.
• Virtual stores offer merchants the possibility to reduce expenses and risk by testing the market before committing to a specialty or flagship store in China.
In spite of Alibaba’s dominance of the B2C market, other important companies have emerged. Jingdong and QQ Buy are the second and third largest B2C online retail platforms in China, respectively. Competition has become fierce between these leading platforms and is expected to drive further improvement and innovation in delivery, after-sales service, and online payment methods. For instance, some emerging companies try to win customers away from Taobao by providing faster delivery and a more professional after-sales service. To compete with Taobao’s customer service, many of these newly established companies have invested substantially in building their own logistics networks. For example, Jingdong has developed its own network of bike couriers and offer three-hour and same-day delivery in selected big cities in China.
Source: Deloitte China Insights 2017, EUSME 2016–2017.
Source: Deloitte China Insights 2017, EUSME 2016–2017.