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Selling to China’s E-Shoppers

November 10, 2011 by Jeff Walters, Youchi Kuo, Waldemar Jap, and Hubert Hsu
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    In This Article
    • The spending of China’s online consumers is expected to surge over the next five years as personal incomes and comfort with online shopping increase.

    • No longer just bargain hunters, more and more of China’s e-shoppers are looking for unique products, better service, and an engaging online experience.

    • Companies without an active, targeted online strategy will miss out on a major opportunity for growth.

     

    Already home to the world’s largest population of Internet users, China now has 145 million online shoppers—second only to the U.S., with 170 million e-shoppers. (See Exhibit 1.) Online spending in China is expected to surge over the next five years as personal incomes and comfort with online shopping increase. As a result, the size of the country’s e-commerce market could reach RMB 2 trillion ($315 billion) by 2015, surpassing even that of the U.S. And nearly half of China’s urban consumers, accounting for about 80 percent of the country’s GDP, will be shopping both on- and offline within the next five years.

    exhibit

    The Boston Consulting Group recently surveyed more than 4,000 online shoppers in China. According to an upcoming report on the survey’s findings, experience is a key driver of online spending, even when income levels are factored in. Within five years, most of today’s online shoppers in China will be experienced, and their average online spending per year will nearly double to RMB 6,100, or about $940—close to the U.S. average of $1,000 per year. As their sophistication increases, their needs will change. No longer just bargain hunters, more and more of China’s e-shoppers are looking for unique products, better service, and an engaging online experience. This is especially true for the country’s heaviest online spenders—consumers who purchase a wide range of products online. 

    Before jumping in to grab a slice of the pie, however, foreign companies must develop a customized online strategy that accounts for the unique behaviors, demands, and challenges of China’s e-commerce shoppers.

    Factors Driving China’s E-Commerce Growth

    E-commerce is growing in China owing to a combination of factors that go beyond the increasing levels of disposable income. First, the Internet is affordable and widely available, thanks to government efforts to modernize the country’s telecom infrastructure.

    Second, physical retailing has a limited reach in China because of the country’s massive size. By 2015, about 365 cities will have 100,000 or more middle- and affluent-class consumers, but China’s largest retailers have stores in only about 260 cities today, and Wal-Mart has stores in fewer than 120 cities. China’s top 20 retailers account for only about 13 percent of total urban retail sales. By contrast, the Internet has almost unlimited reach.

    In addition, physical stores are costly. Skyrocketing real estate prices mean that rent accounts for a larger proportion of operating costs in China than in more developed markets. Moreover, the multiple layers of middlemen and wholesalers needed for distribution eat away at profit margins. By selling directly to consumers online, companies can avoid these outlays. The low cost of shipping helps, too. Shipping by mail costs an average of $1 in China, compared with $6 in the U.S., and the delivery infrastructure is developing rapidly.

    For consumers, online shopping provides access to a range of products far beyond what local stores carry. Chinese consumers are also price sensitive, and online channels typically offer discounted goods. Because of the retail industry’s convoluted distribution structure, visibility into inventory levels throughout the supply chain is lacking. As a result, most stores have large amounts of excess inventory at the end of the season—especially in categories such as apparel—and these goods often end up online.

    All these factors are fueling the rise of e-commerce in China. Still, only a small percentage of consumers shop online today—about 23 percent of the total urban population—leaving much room for growth. According to BCG’s analysis, e-commerce as a percentage of total retail sales will increase from 3.3 percent to 7.4 percent by 2015. At a compound annual growth rate of 33 percent, China’s online sales will reach more than RMB 2 trillion (about $315 billion) by 2015, surpassing the U.S. to become the largest e-commerce market in the world.

    Understanding China’s Differences

    To capitalize on the rise of online shopping in China, however, companies must understand the country’s unique e-commerce environment, as well as the trends and consumer behaviors that will shape the future. Four factors in particular make the online shopping landscape different in China than elsewhere in the world:

    • Taobao’s Dominance. Taobao.com has virtually defined the e-commerce landscape in China. In 2010, it sold more than China’s top-five brick-and-mortar retailers combined. The site offers more than 800 million items, most of which are new. The sellers are often either suppliers that have not succeeded with other retail channels or distributors selling excess inventory. Shoppers say that they like Taobao’s customer service; its instant-messaging tool, which allows buyers and sellers to communicate in real time; its seller rating system, which fosters buyers’ trust; and its escrow service for payments, Alipay. In 2010, Taobao accounted for 79 percent of China’s online transaction value. By contrast, most other e-commerce markets are far more fragmented. In Japan, for instance, the leading player, Rakuten, has just a 30 percent share of online transactions, and Amazon has only a 14 percent share in the U.S.

    • Logistics Challenges. Although e-commerce benefits from low shipping costs in China, the industry is hampered by an inadequate delivery infrastructure. Online vendors must rely on small local courier companies that mainly deliver newspapers to individuals. In fact, e-commerce appears to be driving the growth of the package delivery industry, accounting for about 60 percent of industry revenues in 2010. Interestingly, consumers are concerned about more than just cost or damage when they buy online. An incredible 45 percent say they worry that their purchases will be switched for fakes during delivery. For these reasons, online consumers tend to prefer vendors that have distribution centers in their city.

    • Online Behavior. Chinese consumers approach online transactions quite differently than consumers in other parts of the world. For instance, only 19 percent of online shoppers in China go to official brand or manufacturer websites, compared with 41 to 60 percent in Japan, the U.S., and Europe. Chinese consumers are also the most prolific reviewers and readers of online reviews, most likely owing to issues of trust—China’s online merchants often sell fake brands and low-quality merchandise. Chinese shoppers were more likely than their counterparts in any of the 20 countries surveyed to say they had read or posted reviews online (more than 40 percent had done both). This is nearly double the rate in the U.S. Chinese consumers search differently, too. China’s top search engine is Baidu.com, but Taobao blocks those searches so that buyers go straight to its online mall. Since Taobao accounts for nearly 80 percent of online purchases, Chinese e-shoppers are learning not to rely on search engines to find products online.

    • Social Networking. Although social networking is just emerging, Chinese shoppers are the most likely of the world’s online consumers to check for product recommendations on these sites. In fact, consumers’ trust in online information sources such as blogs, review sites, and social-networking sites is far higher than in offline sources like TV ads or printed materials from manufacturers. But social networks in China are highly fragmented. Instead of one top site like Facebook in the U.S., there are multiple social networks that appeal to different demographics, such as office workers, college students, and artistic types.

    Catching the E-Commerce Wave

    What does the future of China’s e-commerce market look like, and how can multinational companies capitalize on it? We expect to see rapid growth in e-shopping overall, with 44 percent of the urban population buying online by 2015. Shoppers are purchasing an expanding range of products, but the fastest-growing online categories are travel, consumer electronics, casual apparel, and skin care.

    The rise of a category we call superheavy spenders is another trend to watch. This demographic buys more often across more product categories and currently accounts for 40 percent of total online spending. These shoppers already complain about delivery speed, reliability, quality assurance, cost, and lead times. Websites able to meet their needs will win in an increasingly competitive online environment. Moreover, China’s heavy and superheavy spenders have strong emotional ties to the experience of online shopping, so it will be critical to engage them with value propositions beyond just price savings. (See Exhibit 2.) Ways to do this include creating a fun shopping experience or appealing to consumers’ sense of discovery by offering the trendiest merchandise.

    exhibit

    Another trend that smart companies can capitalize on is the growing tendency of e-shoppers to make multiple stops as they browse and shop online for different products. This desire for multiple options will only increase. To win, companies must actively manage their online presence and engage consumers with diverse online options. The e-commerce landscape is changing quickly, with many businesses developing new offerings with better quality and service. As a result, consumers that once had to rely on Taobao now have a growing number of choices. But online shopping alone doesn’t meet all of a consumer’s needs. Offline, in-store experiences are still important and have a strong influence on purchase decisions. Therefore, companies must integrate their online and offline offerings and create long-lasting relationships with their multichannel customers, who are three to five times more profitable than single-channel shoppers.

    Creating a Winning Strategy

    Given its unique characteristics, e-commerce in China requires a customized strategy. Different types of businesses—brand companies, retailers, and exclusively Web-based e-tailers—face distinct challenges and choices. Brand companies must decide what type of online presence they want in China and what role e-commerce should play in their strategy. Moreover, they must take quick action if their products fall in the fastest-growing online categories. To move forward, brand companies must understand their targeted consumers’ needs and buying habits, decide which mix of products to offer online, develop a full understanding of the economics and tradeoffs of online versus offline sales, and determine the optimal online format. Although an owned site will give a company full control over the brand experience, Taobao generates enormous traffic, so each approach has its benefits.

    Retailers risk losing relevance to e-tailers if they wait too long to develop an e-commerce strategy. Although traditional retailers have a minimal online presence in China, e-commerce is a potentially powerful lever for increasing sales—especially given how costly real estate is. A key challenge is how to create a strategy that integrates online and offline channels, driving traffic to each and creating a flexible, seamless shopping experience. Like brand companies, retailers must also think about which products to offer online.

    E-tailers have a window of opportunity to establish brand recognition, loyalty, and market share before retailers build their multichannel capabilities. But e-tailers must effectively differentiate themselves from Taobao by segmenting their targeted consumers, providing unique products and services, and offering a better value proposition to merchants and brands.

    Companies that fail to develop an active, targeted online strategy will not only miss out on a major opportunity for growth, but will allow their brand identity to be shaped without their input on platforms such as Taobao. By providing exceptional products, memorable service, engaging websites, and innovative business models, companies can win the hearts of China’s online shoppers—and a growing share of the e-commerce market—in the critical years ahead.

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