Online retail in China has penetrated deeper into and extended farther across society than previously realized, all while becoming increasingly dynamic in both its offerings and the methods used by consumers to make purchases. These are the findings of two recently released reports that offer new insights into the development of e-commerce in China. All of this is good news, not just for China’s e-commerce platforms, but also for the government’s domestic economic rebalancing plans, as well as for foreign companies looking to tap into the Chinese market.
Last month, the McKinsey Global Institute released “China’s E-tail Revolution.” Last week, the China Internet Network Information Center (CNNIC), a Chinese government body responsible for Internet information and operations, released its 2012 e-commerce market research report. The combination of these reports provides a new look at the rapid development of e-retailing in China. Here are the major takeaways:
1) Growth continues to be rapid, and the momentum is likely to continue moving forward.
The value of online transactions in 2012 increased 67 percent over the 2011 total, reaching $190 billion. As contextChina reported in February, China will almost certainly overtake the U.S. as home to the world’s largest e-commerce market sometime this year. Yet, with only 242 million individuals buying goods through the web and an overall Chinese population in excess of 1.3 billion people, there remains significant room for growth. Indeed, McKinsey expects the market to be valued between $420-$650 billion by 2020.
2) Alibaba remains the dominant force; Amazon is still very far behind.
Alibaba’s consumer-to-consumer (C2C) e-commerce platform, Taobao, and its business-to-consumer (B2C) marketplace, Tmall, accounted for $170 billion of the $190 billion of total online sales. That’s a market share of almost 90 percent (89.5 percent). Moreover, with major foreign companies, such as Microsoft, joining Tmall in greater numbers, this dominance is likely to be consolidated. Amazon, meanwhile, is headed in the opposite direction. While no official statistics were provided in either report on Amazon’s market share, a recent Bloomberg article places it at below one percent.
3) E-commerce’s penetration of society is deepening and broadening.
Despite the relatively small percentage of Chinese citizens who made a purchase online last year, online retail accounted for a higher proportion of total retail sales in China (about 6 percent) than it did in the U.S. (5 percent) last year. Moreover, growth in Chinese e-tailing has been particularly prominent in lower-tier Chinese cities, with the average e-shopper in fourth-tier Chinese cities spending 27 percent of their disposable income online.
4) E-retail is generating consumption, not simply changing the way it occurs.
Online retail is generating consumption that would not otherwise be taking place. According to McKinsey’s report, 61 cents of every dollar spent online in China last year replaced consumption that would have otherwise occurred in brick and mortar stores, but 39 cents of every dollar comprised money that would not otherwise have been spent at all. This effect was even more pronounced in third and fourth-tier cities, where only 43 cents was replacement consumption while a whopping 57 cents represented new consumption.
5) Foreign goods are in demand.
According to CNNIC, 12 million Chinese consumers shopped online for foreign goods during the second half of 2012. In aggregate, 60 percent of online foreign goods purchases were made on Chinese domestic e-commerce platforms. This is the first year CNNIC has recorded these statistics, so there is no way to tell how much of this interest is new, but it does show that foreign-produced products certainly have their place in the Chinese e-commerce market.
6) Clothing is the most popular online purchase.
About 82 percent of e-commerce users reported buying at least one clothing online every six months. Daily necessities ranked second in the list of most popular online purchases, while computers and other digital electronics ranked third. Companies such as Export Now, which facilitates the sale of imported goods through Taobao and Tmall, report that products such as food and beverages, clothes, and auto accessories have proven to be best sellers on their Tmall department store. Overall, clothing, cosmetics, and milk powder comprised the largest percentage of foreign goods purchases.
7) Mobile apps and social media are important gateways to e-commerce.
More than 40 percent of online shoppers reported using a mobile phone to browse e-commerce sites during the last half of 2012. Nearly 42 percent of shoppers said they saw an advertisement or reference to a product on a social media site before purchasing it.
What does this all mean? In short, a lot of different things to a lot of different groups. Let’s look at three of them: e-commerce providers in China, the Chinese government, and foreign companies looking to tap into the Chinese market. For all three of these groups, the data revealed in the two reports constitutes good news.
For all Chinese e-commerce providers, and particularly Alibaba, all of the emerging trends are positive: more people are buying products online and the average amount spent per online consumer is rising. These increases benefit Alibaba’s competitors as well. Here, the proverbial saying “a rising tide lifts all boats” applies. For those companies, such as Amazon, that are maintaining a steady share of the market, no matter how small, market growth in aggregate is goods news for their bottom line.
For the Chinese government, this data seems to indicate that e-commerce is one viable method for promoting economic rebalancing. One major component of the Chinese government’s economic development plan is the stimulation of higher levels of domestic consumption, an aim e-commerce seems to be helping make possible.
For those international producers looking to connect with Chinese consumers, these numbers not only underscore the growing importance of e-commerce in Chinese consumption, but also highlight Chinese e-shoppers’ thirst for foreign products. As e-commerce grows in importance in China, the question for foreign producers wishing to tap into the Chinese market is likely to be transformed from “should we explore the option featuring our products on Chinese e-commerce platforms?” to “should exporting through e-commerce become a fundamental part of our strategy for achieving success in the Chinese market?”
Published April 26th, 2013