In the past two years, Chinese consumers have opened their wallets and pocketbooks online. Online buying and selling, including group purchasing (through the Chinese equivalents of Groupon), is the second-fastest-growing activity, after microblogging.
These rapid rises in usage reflect more than just expansion from a small base. Online shopping is now the fourth-most-popular online activity in China, and two of the more popular activities—IM and online games—are declining in usage.
Online shopping is here to stay. Companies cannot have a major presence in China without having an online presence, not only to generate sales but also to engage with customers where they spend so much time. The Internet today in China is similar to television in the 1960s and 1970s in the West—the place where consumers congregate and companies need to locate.
China has 193 million online shoppers—more than even the U.S. with 170 million, more than double the number in Japan, and five times that of the U.K. By 2015, China’s e-commerce market will rival that of the U.S. Between 2009 and 2011, the share of Internet users who shop online rose from 28 percent to 36 percent and is likely to reach 47 percent by 2015. E-commerce’s share of total retailing could reach 8 percent by 2015. (See Exhibit 1.)
Except for teenagers, all segments of Internet users in China spend at least 1.6 hours a week shopping online. University students, young professionals, and young seekers are devoting at least two hours a week to it. University students and young professionals are devoting about 12 percent of their spending to online purchases.
One of the key challenges for companies is to encourage their customers to shop online, because, our research shows, once they make the leap, they quickly become avid Internet shoppers. In focus groups, consumers who had devoted only 5 percent of their spending to the online channel in 2008 said they had increased the share to more than 50 percent by 2011.
Even when they are not actually shopping online, many consumers research products online that they eventually buy in physical stores. Twenty-five percent of consumers research online before buying offline—almost as many as the 29 percent who both research and buy online.
While the market for the sale of physical goods is expanding rapidly, the sale of digital content is in a slower growth mode. Sales of online videos, music, games, e-books, and other digital content are expected to rise by 14 percent annually between 2011 and 2013—about one-third the rate of online sales. E-books make up slightly less than a third of the digital-content market and are expected to grow slightly faster than the market. Online video, the smallest slice of the market, is the fastest growing, expected to expand 64 percent annually between 2011 and 2013.
E-commerce in China has developed its own personality. While there are analogues to Amazon and eBay in China, the nation is not on a parallel track to the U.S. or anyplace else. There are three main types of commercial activity:
A galaxy of both consumer-to-consumer and business-to-consumer marketplaces that are frequently compared to eBay and Amazon Marketplace but have their own local flavor.
Business-to-consumer vertical sites such as 360buy.com, which started selling electronics but now sells a wide variety of goods. These are similar to Amazon.com and Buy.com.
Business-to-consumer brand sites, such as Vancl, that sell merchandise directly to consumers and are analogous to the online stores of consumer brand companies in the West.
Marketplaces. Alibaba Group currently dominates consumer e-commerce in China through its Taobao consumer-to-consumer and Tmall business-to-consumer sites. In 2010, 81 percent of transaction value flowed through these portals. More products were purchased on Taobao in 2010 than at China’s top five brick-and-mortar retailers combined, with 48,000 products sold per minute.
Taobao has worked hard to achieve this scale. It has developed extensive data-analytics capability in order to understand buying and usage patterns, created an in-house university to allow merchants to share best practices, and developed an instant-messaging system that allows buyers and sellers to share product information.
Alibaba’s Alipay escrow-payment system has become the most common payment method for e-commerce in China. More than 60 percent of consumers use it on Taobao and Tmall, and approximately 20 percent use it on business-to-consumer sites.
Tmall has created a showroom in Beijing where customers can visit 270 rooms stocked with furniture and other household products that they can purchase at a kiosk or online from home. The showroom satisfies consumers’ desire to see and touch products—an experience that cannot be replicated online.
“I always want to buy furniture online. The price is so much cheaper than at offline stores, but for the expensive, durable stuff, I just cannot decide if I cannot touch it. Tmall solved this problem,” one consumer told us.
Taobao and Tmall’s customer-rating system enables shoppers to judge the quality and authenticity of goods they receive from merchants. About 44 percent of Chinese Internet users post at least one product review every six months, compared with 20 percent of U.S. Internet users.
The Taobao site is referred to as a consumer-to-consumer portal, but it more accurately is a marketplace where the overwhelming majority of products sold are new, not secondhand. Sellers are frequently suppliers that have not found success with other retail channels or distributors selling excess inventory. Many brand companies are still unaware of the extent to which their merchandise is sold by others on Taobao.
Alibaba created Tmall, which features professional merchants, to draw brand companies online and to generate fee income. Taobao is supported by advertising. (See the sidebar “The Sky’s the Limit.”)
Tmall is Alibaba’s answer to the freewheeling experience of Taobao. It is more like a traditional mall, with product categories housed on virtual “floors,” storewide sales, and a loyalty program. Tmall, which means “sky cat” in Chinese, authenticates all merchants and requires them to pay transaction fees, both to generate revenue and to ensure a better shopping experience.
Alibaba wants shoppers to be able to visit a wide variety of stores, not only those of big brands such as adidas, Ray-Ban, and Gap but also smaller merchants that have outgrown their Taobao storefront. The formula seems to be working. Tmall is home to about 50,000 merchants and 200,000 brands. About 10 million people visit the site daily. On Singles Day, a big shopping day in China, Tmall stores recorded more than $500 million in sales, thanks to heavy discounts and promotions. Transaction volume was estimated to reach about $16 billion last year and should exceed $30 billion in 2012. Tmall is already more than twice the size of 360buy.com, the number two business-to-consumer site.
Tmall benefits from its ties with the main Taobao site. Searches on Taobao automatically return Tmall shops, and the majority of Tmall users say they know about and trust the site because of Taobao. Although consumer perceptions of Tmall’s delivery and fulfillment are still not as favorable as those of other business-to-consumer sites, they are quickly catching up and vastly better than the perceptions of Taobao.
Tmall’s success is not unblemished. When the site announced higher fees in October 2011, smaller merchants mounted online protests. The smaller merchants were worried that the fee hike would jeopardize their business and favor larger companies. They protested by buying goods from larger vendors on Tmall and then demanding refunds, hurting those vendors’ ratings, and communicated their displeasure on microblogs like Sina Weibo. After hearing this feedback, Tmall adjusted its policies and began helping qualified Taobao merchants migrate to Tmall.
Business-to-Consumer Vertical Sites. For higher-quality goods and after-sales support, consumers have begun to visit more traditional business-to-consumer sites such as 360buy.com and Dangdang. Business-to-consumer revenues are expected to grow twice as fast as consumer-to-consumer revenues between 2011 and 2015.
360buy.com is the second-largest business-to-consumer site in the country, after Tmall, and the largest that sells inventory directly to consumers. In 2011, it generated about $4.9 billion in sales by discounting prices and providing speedy delivery.
The company received a $1.5 billion cash infusion in 2011 from private investors, including Russia’s Digital Sky Technologies—one of the largest institutional investors in Facebook. It is putting the investments to work in building customer-service and logistics operations. It can process 300,000 orders a day, and in 25 cities it offers same-day delivery for items ordered before 11 a.m. and next-day delivery for those ordered before 11 p.m. Within three years, 360buy.com’s logistics network will cover 95 percent of China’s cities. The company is also focused on making the customer experience easy and satisfying. It offers cash-on-delivery payment, a simple Web interface, and a guarantee of product quality. The company pledges that if a customer complains about a product, a delivery person will return within 100 minutes to take it back. Analysts expect 360buy.com to go public in the next year.
Business-to-Consumer Brand Sites. Vancl is the largest business-to-consumer brand site in China through several innovative online approaches to generate sales and engage with customers. The company has been an active advertiser. In 2008, the year it was founded, Vancl’s advertising budget was nearly as large as its revenues. By 2010, Vancl was the largest advertiser on online video sites and the fourth-largest online business-to-consumer retailer in China.
The heavy online push has been paying dividends. Vancl generated more than $500 million in sales in 2011—up sharply from about $300 million the previous year. The company has been willing to sacrifice margins in order to build scale. But it is not just trying to be a low-cost provider. It experiments with ways to improve customer satisfaction, such as offering free trials when products are delivered and free delivery.
The company also has an active presence on Sina Weibo. The chief executive, designers, and regular employees all write posts, and the company encourages fan clubs to form and discuss clothing on Sina Weibo. As part of its weibo strategy, Vancl has offered free merchandise to celebrate Chinese Valentine’s Day.
To encourage customer engagement, Vancl created its Star program. Customers post photos of themselves modeling Vancl clothing, and other users get to vote.
Vancl complements these online approaches with traditional billboard advertising aimed at its youth clientele that features well-known blogger Han Han and actress Wang Luodan.
Online shopping in China is quickly becoming a social experience. Consumers—and venture capital—are flocking to sites on which conversations about and comparisons of products are the centerpieces.
While general group-buying sites, akin to Groupon, have been experiencing a shakeout in China, where it is estimated that thousands closed last year, more focused outlets are finding footholds in the market. In particular, there has been a proliferation of three types of sites: group-purchasing-based business-to-consumer sites such as Jumei, a cosmetics group-buying site; social-networking-based business-to-consumer sites such as Meilishuo, which targets female online shoppers; and review and mobile commerce sites such as Dianping. These sites help consumers navigate the often-confusing and cluttered online marketplaces.
When consumers buy products on Jumei, they are encouraged to write reports on their experiences and share pictures. They receive coupons for their reviews.
Meilishuo, meaning “beauty talk,” is just that: a place where women—and only women—can gather online to converse about clothing and cosmetics. By following other users, women can view their purchases and recommendations, and find links to buy products from various online merchants. According to the company, Meilishuo has more than 9.6 million registered users and generates $100 million in monthly sales for Taobao.
Dianping is a local lifestyle and consumer review site that has been a pioneer in mobile services. It provides location-based business information, consumer reviews, and discounts, and allows users to “check in” to stores and locations. At the end of 2011, it had more than 42 million active monthly users and 1.5 million merchant members, and it covered 2,300 cities. It receives more than 600 million monthly visits, about 80 percent of them from mobile users.