E-commerce:A Young, Fast-Growing Industry in China

China’s e-commerce industry， though in its initial age， is expanding rapidly. By 2015， the e-commerce market is expected to be worth over RMB 2 trillion and possibly surpass the size of the U.S. market， fuelled by the exponential growth in its online shopping， according to a recent report by The Boston Consulting Group.

“The fast-growing e-commerce in China will lead to profound changes in consumption patterns and habits， and meanwhile bring golden opportunities for us，” Mr. Dixon Yuan， CEO of Yesmywine， a leading online retail platform for imported wine， told China’s Foreign Trade.

Nowadays， China， with the largest Internet population in the world， has 145 million online shoppers. That is the second largest in the world compared with 170 million in the United States. This is more than double the number in Japan and five times that of the United Kingdom.

During the Single’s Day， an unofficial Chinese festival， the e-commerce companies kicked off sales promotions to attract millions of people to go on a shopping spree. The day falls on November 11 as the date consists of four “ones，” a number that visualizes the Chinese word for bachelor — “bare stick.” (See more in the column Culture on P94)

Data shows that during the day， Taobao Mall (Tmall)， China’s largest B2C marketplace， secured orders worth 3.6 billion yuan (568 million U.S. dollars)， four time that of last year.

Chinese consumers， especially the burgeoning middle class， are making frequent use of on-line shopping， thus creating both opportunities and challenges for brand companies， retailers and e-commerce companies as well.

With the great opportunities in mind， more and more e-commerce players are marching into this industry. Organizations that have been quick to capture the attention of these consumers are already reaping significant benefits. However， there are still many companies which have been slow to respond， leaving significant growth opportunities on the table， according to the survey which based on more than 4，000 online shoppers across tier 1 through tier 5 cities.

The report indicates that companies wishing to benefit from the rise of online shopping in China need to understand the circumstances that make the e-commerce environment there unique， as well as the trends and consumer behaviors that will direct future progress. Companies longing to capture opportunities online need to customize their strategies to account for the unique behaviors， demands， and challenges of the online ecosystem in China.

“Any enterprise should be aware of the ever-changing e-commerce market， and adopt measures to seize the opportunities in accordance with the changes in the market and industry. Only in this way can they succeed，” said Dixon.

“Consumerism is already big in China where people simply love to shop. But China is unusual in that Internet access has far outpaced the reach of the top physical retailers， which means that e-commerce development probably will not mirror the pattern in other countries，” said Waldemar Jap， a Hong Kong-based partner at BCG and coauthor of the report.

“Companies that want to compete will not only have to understand how Taobao and others may already be shaping their online presence but they will also have to engage consumers via multiple online and offline channels，” he added.

The e-commerce market surges

In China， consumerism is on the rise. Moreover， the Internet is affordable and widely available， due to government efforts to modernize the country’s telecommunications infrastructure， said the report.

The years 2007 through 2010 saw a rapid growth in the number of consumers going online. In each year during the period， China gained between 73 million and 88 million new Internet users， a volume surpassing the population of France.

As new e-commerce offerings coincided with this growth， consumers become more and more familiar with online shopping. Besides， the ecommerce industry has benefited from China’s low cost of shipping.

The report estimated that all of the above characteristics will make the coming years， from 2011 to 2013， a period of rapid ecommerce penetration.

Online sales may account for 20 to 30 percent of nonretail sales growth in China through 2015， growing from a market size of RMB 476 billion in 2010 to more than RMB 2 trillion.

“However， we should not be too optimistic. China， though a leading market in terms of on-line shopping， is short in application of e-commerce in producer services including supply chain integration， which will play more important role in the future，”Xiao Feng， deputy general manager of Shenzhen OneTouch Enterprise Service Co. Ltd.， said in an interview with China’s Foreign Trade. His company is the first platform to provide import and export BPO(business process outsourcing) service for small and medium-sized enterprises and individuals.

“There are still other problems， such as the loss of basic social integrity and logistics system， the high cost and overexpansion of e-commerce，” Kelvein Cai， vice president of ShopEx， a leading supplier of ecommerce software based in Shanghai， told China’s Foreign Trade.

Just a few years ago， there were several barriers to e-commerce adoption in the industry. One of the barriers was the lack of a satisfactory method for payment， especially given that credit-card usage is not prevalent. The shopping portal Taobao has resolved this problem for most shoppers through its innovative Alipay escrow accounts， introduced in 2003. Today Alipay has become the most common payment method for e-commerce in China.

Business-to-consumer companies also offer the simplest solution， cash on delivery (COD)， which has been widely accepted by shoppers. Among the biggest of these websites， COD is rated the most frequently used payment method for nearly half of online shoppers.

The other obstacle was a low level of trust in a consumer population wary of fake or inferior goods. Taobao has effectively addressed this issue. The site features an extensive seller-rating system that enables potential shoppers to read up on the reliability of vendors and then make what they feel are dependable judgments about them.

New Internet users will certainly push e-commerce forward in the coming years， but so will the individual consumer’s level of familiarity with online shopping.

By 2015， the majority of today’s 145 million online shoppers will be “experienced，” and more consumers overall will have entered the ranks of the middle and affluent classes (MACs)， resulting in a sharp increase in the amount of money that each shopper spends online. Average annual online spending will have nearly doubled to RMB 6，220 per shopper， close to the $1，000 (RMB 6，500) average in the United States today.

“E-commerce in the future will see two main transformations: customers will be the driving force of the reform of business model and mobile telecommunications will change people’s life，” said Kelvein.

E-commerce: an attractive option

There are a number of conditions particular to China’s consumer market that make e-commerce an attractive option for companies and that will help drive the coming years of growth， according to the research.

First is the limited reach of brick and mortar. China’s massive geography hampers the effectiveness of physical retailing. The country’s coveted MACs are quickly expanding beyond the biggest cities， meaning that firms must constantly broaden their reach. Today even the largest retailers in China， GOME and Suning， have stores in only about 260 cities. And well-known multinational retailers cover even less ground. This limited reach results in the fragmentation of retailers. The country’s top 20 retailers account for only 13 percent of total urban retail sales.

Second is the high cost of brick and mortar. Physical retailing is pricey for companies. Skyrocketing real-estate prices eat up a much larger proportion of operating costs for modern physical retailers in China than in more developed markets.

Moreover， China’s distribution structure is still inefficient and often involves multiple layers of middlemen and wholesalers， resulting in a loss of profit margins. Selling directly to consumers on the Internet circumvents both of these costly outlays.

In addition， a number of factors make e-commerce attractive on the consumer side. E-commerce offers a better selection， better bargains and greater consumer trust. Thus， it is becoming more and more popular among Chinese consumers.

E-commerce sites enable easier access to a wider range of goods. Since Chinese consumers are price sensitive， online channels are able to offer them the best deals. E-commerce sites also offer a number of features that help increase the trust of consumers.

China: a unique market different from elsewhere

China’s e-commerce environment is unique compared with other markets. The unique circumstances of the country’s economic explosion have led to an equally unique ecommerce ecosystem. The report has explored the following four factors which are important for companies to understand when creating online strategies.

First is the dominance of Taobao. It has accounted for an enormous 79 percent of transaction value in 2010. The company has virtually defined the e-commerce landscape in China. By contrast， most other markets are far more fragmented. In Japan， a leading company， Rakuten， has just a 30 percent share， while in the United States， Amazon takes a share of merely 14 percent.

It is crucial for companies， even those that are solely engaged in physical retailing， to understand the degree to which Taobao may be shaping their online presence. Many are unaware of the extent to which their products are already being sold by other merchants on Taobao. Companies without an explicit online strategy are allowing a fast-growth channel to develop without their control or influence.

Second is the delivery and logistics challenge. Until now， e-commerce has benefited from low shipping costs but has been impeded by an inadequate delivery infrastructure.

Given the immaturity of the infrastructure， the consumers have concerns over package delivery， not limiting to the risk of damage during delivery. Companies such as Taobao and 360buy.com， the vendor of computer， communications， and consumer electronics， are responding to these concerns in a number of ways， including making massive investments in distribution centers across the country.

Third is the distinctive online behavior. The types of websites consumers choose for both their online and offline shopping (the latter for researching products or seeking out reviews) are quite different from those in other countries. Only 19 percent of consumers in China go to official brand or manufacturer websites， versus 41 to 60 percent in Japan， the United States， and the European Union.

The Chinese websites of foreign brands are often direct translations of their home-country websites， with little customization or localization for the China market. In particular， they rarely create any sort of platform to engender a sense of community， which would attract consumers to visit frequently.

Chinese consumers are quite possibly the most social in the world during the shopping process. Certainly， they are the most prolific reviewers and readers of online reviews.

The last is the unique online-shopping ecosystem. The relationship between search and online retail sites is different in China. In most markets elsewhere around the world， searches begin with Google. In China， Chinese shoppers are developing the habit of not relying on search engines to find products online. They usually start their search from within the top e-tailer Taobao as it blocks the Baidu spider. Baidu is the top search engine in China.

Social networks offer another way to engage with consumers online， but they also play out differently in China. Most challenging is their fragmentation; there is no single top contender akin to Facebook in the United States， but rather multiple social networks that attract different demographics， said the report.

Implications for different companies

The survey points out that while many Chinese companies use or are planning to use the Internet as a selling tool， some multinational companies have been slow to take advantage of this fast-growing channel. “Those that do recognize the opportunity should understand that e-commerce in China will require a specific， customized strategy. Different types of companies face distinct challenges and choices，” said the report.

Chinese consumers， especially those who are urban and middle class， have shown that they prefer to be multichannel shoppers. In a few years， multichannel shoppers will make up nearly half of urban China’s consumers (accounting for around 80 percent of GDP). It is therefore not enough for companies to focus exclusively on consumers’ online or offline shopping habits.

Moreover， consumer needs vary. Heavy spenders have different concerns from their lower-spending counterparts， and consumers across city tiers and in urban versus rural areas are looking for different products. Companies have to be clear about who their target customers are， where they live， and what their specific needs are.

Finally， because e-commerce growth rates and penetration are higher in some product categories than in others， the online opportunity and the potential role of the online channel will vary across categories.

The research， with an in-depth look of the Chinese unique market， offers several solutions for different companies.

As for brand companies， especially those in the fastestgrowing online categories like travel， consumer electronics， casual wear， and skin care， must first decide what sort of online presence they want to have in China， and what role e-commerce should play in their strategy. To determine this， they must understand their target customers.

They should focus on engaging consumers purely on the basis of the brand. target customers not yet served by the brand’s typical retail channels， complement the current reach of retail and supplement the offline presence， which requires tight integration of the company’s online and offline channels.

Brand companies must also choose among many options in crafting their online presence. After deciding on format， brand companies need to consider their go-to-market setup， from the types of products to sell online to the logistics of accomplishing sales.

Finally， brand companies must navigate a difficult incentives challenge.

As for retailers， they risk losing relevance online to exclusively web based companies if they wait too long. In China， e-commerce is not yet common among traditional companies， such as top retailers Gome and Suning.

Like brand companies， retailers should first decide on the role of e-commerce within their overall strategy. E-commerce in China is important to retailers， because it can be a lever for increasing their footprint and because it allows them the opportunity to build a true multichannel business model.

Retailers should also think about how to leverage e- commerce and their offline assets. Rather than viewing online and offline as independent silos or standalone businesses， it is important to treat them as integral components of a single business model and to create long-lasting relationships with the most profitable multichannel customers.

They should drive traffic from offline to online and vice versa， target consumers with the right assortments and pricing， decide on a service and logistics model， and develop an online mindset.

E-tailers， whether established or new， face tremendous growth potential as the e-commerce market is going to at least quadruple through 2015. They currently enjoy a window of opportunity to establish brand recognition， loyalty and share before retailers build their own multichannel capabilities.

Nevertheless， they should determine the categories they want to participate in and the customers they want to target. Then they must effectively differentiate themselves from Taobao through innovative business models and address the unmet needs of specific groups of targeted customers.

What they should do is include unique product offerings， think about targeted service， and offer value propositions to merchants and brands. In addition， e-tailers face an unusual need to distinguish themselves in the realm of logistics capabilities — from back-end warehouse and facility setup， to information and process-management capabilities， to last-mile consumer-facing services.

“E-tailers should understand themselves. As e-commerce does not limit to only online shopping， e-tailers should design and arrange products and even the supply chain tailored to customers’ needs，” said Kelvein， adding that “They should adopt diversified measures towards different customers.”

“In business activities， enterprises should value informationization including production management， supply chain service and brand operation， instead of only focusing on internet marketing， which is far from enough，” said Xiao.

“At the beginning of our business， we focused on details and gained rich experience in database marketing and strong technical development capability rather than rely on heavy advertising. Now we have warehousing centers and logistics team in six major cities in China，” said Dixon.

Companies able to move proactively within that environment will be the winners in the crucial years ahead， the report said.

“Fulfilling the emotional needs of China’s superheavy spenders will be key to future success in China’s e-commerce landscape. Given the strong emotional ties consumers in China have with shopping， it will be critical to engage them with value propositions beyond mere price savings，” said Hubert Hsu， a Hong Kong-based senior partner at BCG and coauthor of the report.

“For example， by creating a fun shopping experience or by appealing to trend-conscious consumers’ sense of discovery by making them feel they are learning something new in the shopping process，” he added.