State of Play: The Chinese E-Commerce Market in 2017

Gross merchandise volume of China's e-commerce market from 2008 to 2018 (in trillion yuan)

GMV of Chinese E-Commerce Market, 2008-2018, Source: Statista  

 

As 2017 draws to a close, the data for China’s burgeoning e-commerce market are in. Topping $1.132 trillion, Chinese e-commerce is a global behemoth that will continue to expand rapidly for many years to come.

Probably no event is a better barometer of the health of Chinese ecommerce than Single’s Day (11/11), an Alibaba pioneered shopping extravaganza for deals and discounts that has spread throughout their commercial ecosystem. This year sales in that 24 hour period topped $25 billion, a 40% increase over last year. What’s more, the Chinese e-commerce market is projected to double by 2019.

So, what are the factors that have contributed to the astronomic growth in Chinese e-commerce this year (and will continue into the future)?  Let’s take a detailed look.

Mobile-Centric Shopping

Because of China’s unique development pattern many Chinese consumers skipped the PC generation and jumped straight to the smartphone as their primary device to access Internet platforms hosting e-commerce sites. Key to China’s booming e-commerce sector is the mobile user segment with its abundant Internet shoppers.

In order to best reach consumers, major Chinese online shopping titans, such as Alibaba, JD, VIP and Meilishuo, have invested heavily in developing their own mobile apps and optimizing their mobile UX.  Five years ago China ranked first in global penetration of mobile commerce.  Today, 75% of all e-commerce sales in China take place on a mobile device.  

Remember, mobile-centric shopping allows for commerce anytime, anywhere. Mobile Internet users do not have to be at their desktop to click “purchase,” thus, the proliferation of mobile shopping effectively enlarges the window for shopping opportunities, resulting in higher average purchases for Chinese e-commerce buyers than for buyers in territories that mostly comprise desktop-bound customers.

Platform Dominance

Platforms are king in the Chinese e-commerce landscape. Alibaba, Alibaba, Alibaba – the Hangzhou based juggernaut continues to own the Chinese e-commerce market via its Taobao and Tmall platforms, controlling approximately 55% of the market. Coming in second is JD.com, which is gaining ground and now has a 33% market share, up from 18% in 2014. Much of that success can be attributed to the fact that JD.com manages its own inventory, as opposed to Alibaba’s approach, which just connects buyers and sellers.

Regardless of the parent companies, platforms dominate the China market, creating whole ecosystems out of their core product offerings. Alibaba, through introducing products like Alipay, Sesame Credit and Alicloud, has morphed into a technology giant with multiple touch points to the Chinese consumer, oftentimes extending beyond the realm of e-commerce. Other major platforms include Suning, VIP.com, Gome, Yihaodian, Amazon China and Dangdang. Given their economies of scale and massive resource pools (for R&D and investment) these platforms, by virtue of the trust consumers place in them, have propelled the Chinese e-commerce market to where it stands today.

Growing Middle Class

Of course, population is a huge factor. China has more than 750 million Internet users, with an astounding 95% mobile penetration rate, resulting in a mobile user market of more than 700 million — much more than the entire population of Europe. At the heart of the e-commerce explosion is the digitally connected Chinese middle class. Clocking in at 400 million consumers (greater than the population of the U.S.) this newly minted segment has both disposable income and a high degree of adaptability to digital media and new technology. By dint of their sheer numbers, per capita income and spending power, they have been the major force catapulting the meteoric growth of e-commerce. Notwithstanding, at back of them is the millennial generation with its 450 million individuals, who, as digital natives and Taobao in their DNA, will surely keep the e-commerce torch alight and expanding in an exponential fashion in China.   

Mobile Payment Growth

China’s mobile payment market is now in the Trillions, almost 50 times the size of its American counterpart. Boosted by Alipay and WeChat pay, the shift to mobile payments and the migration to a largely cashless society has readily facilitated e-commerce growth. All the major platforms are integrated with mobile payment solutions, making the checkout process easy, never lasting more than a few seconds. Hong Kong based CLSA forecasts Chinese electronic payments to quadruple to 300 trillion yuan by 2021, the increasing amount of digital payments perfectly reflecting the astounding growth in e-commerce.

The Cewebrity Economy & Social Commerce

Another element that is not necessarily unique to China but heavily integrated into the fabric of the Chinese shopper’s journey, from product discovery to eventual purchase, is the notion of social commerce. In a market notorious for fake consumer goods and items of subpar quality and dubious origin, Chinese consumers tend to rely heavily on KOLs (influencers or 网红), friends, family and peer groups for guidance and dependable shopping information.

The “cewebrity” economy was valued at ¥58 billion yuan at the end of 2016, and is on track to achieve tremendous growth in coming years. Though influencer marketing is a trend word around the globe, in China, influencers do much more than merely promote the products of others. In fact, many of them open and operate their own stores, even modeling their own clothing lines, and this ultimately yields more significant profit margins for the influencer than simply relying on brand sponsorships or affiliate marketing revenue. 29% of Chinese consumers use social media to glean what brands and products KOLs are promoting, compared to 13% globally. In response to the booming “cewebrity” economy, incubators such as Ruhan E-Commerce Ltd have emerged and are now managing over 50 Taobao stores on behalf of KOLs as well as agency-like platforms such as ParkLU that provide an online marketplace by automatically matching influencers and brands.

In particular, Tmall and Taobao have made concrete efforts to shift from a transaction driven marketplace model to one that is more focused on enabling merchants to create richer and more interactive consumer experiences. Though sometimes hailed as the Amazon of China, Tmall is much more about content, commerce, search and discovery, with 61% of Chinese consumers starting their product journey on this platform. Weibo, too, the microblogging platform which has peaked and crested many times during its turbulent evolution, continues to remain a platform crucial to  social commerce. Over one fifth of Weibo users purportedly shop online, especially in the deals and coupon segment of that platform.

Related to the concept of social commerce is the notion of “retail-tainment.” The lead up to Single’s Day in China has become somewhat similar to the Oscars. Star studded, the countdown event this year featured the likes of Nicole Kidman, Fan Bingbing, Pharrell Williams and, of course, the ever-charismatic Jack Ma as the “retail-tainment-in-chief.” Centered around the goal of creating excitement and buzz, the show allowed consumers to enjoy “See Now, Buy Now” fashion shoes, download deals and interact with one another via apps.

In essence, the highly social, interactive and entertainment-fueled nature of online shopping in China not only creates stronger relationships between Chinese consumers and brands, but also boosts sales and overall brand loyalty which, according to this business strategy, will retain customer fidelity over the long term.

Online & Offline Integration

Alibaba’s buzzword this year was “New Retail,” which uses big data to help seamlessly integrate online and offline activities. Always the pioneer, Alibaba has integrated offline loyalty programs of partner brands into the Alibaba program, to better close the brand to channel loop and allow a more consistent brand experience for its consumers. Partners in this new initiative include beauty brands La Mer, SK-II and Lancome. In addition to Alibaba, other brands and retailers have embraced the oftentimes complicated relationship between online-and-offline, using online channels to drive consumers into their stores and vice-versa.

According to PwC’s Total Retail 2017 Survey, 24% of shoppers say they shop less often at brick-and-mortar stores as a direct result of Tmall.  In many ways this is a natural evolution given the consumer’s typical busy work schedule and the ease of online shopping. In response to this decline, retailers have begun to toy with omni-channel strategies by turning physical store networks into fulfillment hubs for eCommerce sales, as Uniqlo did recently with their “click-and-collect” initiative, activated in 400 Mainland stores in China. This trend is still in its infancy stage, as retailers, brands, and platforms strive to figure out how to optimize their often divergent offline and online business models, involving, as they do, substantial resource allocation, strategic planning, and a significant period of iterative improvements.  

Optimized Logistics

In China, you are only as good as your package delivery time and power shoppers in Beijing, Shanghai and Guangzhou are used to taking receipt of their orders within as little as 24 hours. Propelling major growth and satiating consumer demand, increased logistics optimization helped support e-commerce growth. For Alibaba and it’s Cainiao network, 11 logistics companies that handle all Alibaba orders using outsourced services, though always compliant with Alibaba’s standards, saw better and quicker delivery times.

Growth Trends: 2018

After analyzing the factors and main elements of the e-commerce market in 2017, here are the major trends likely to emerge in 2018.

We saw the lines between eCommerce, social and mobile begin to blur in 2017, and it is likely that they will continue to merge and join together in 2018, resulting in greater convergence between online and offline retailing. Digital will not just be a channel for online growth, but THE platform for an entire brand ecosystem, including brand building, customer engagement, and supply chain management.

Growth in rural e-commerce infrastructure will also be a major trend in 2018. As China continues to pour resources into developing its countryside, e-commerce giants will continue to execute “going rural” strategies. Of course, mobile use and mobile optimization will continue a dominant trend, with more international players likely seeking opportunities in the China mobile internet space.  

Furthermore, an expanded deal season is likely to emerge.  As 11/11 has now become synonymous with the first 11 days of November, combined with the rise of 12/12, it is likely that the core holiday deal season will grow further from just one day into a much longer period of time.  As the “cewebrity” economy continues to grow, it is likely that micro-influencers, smaller scale opinion leaders, will likewise grow in stature and authority. The authenticity of major influencers likely may get diluted because of too many brand partnerships and over commercialization, allowing emergence of a new space for micro-influencers to rise in prominence.  

Lastly, mining big data, automation and AI will continue to help retailers, brands and platforms better target and personalize their consumers.

By 2020, China will account for more than 60% of global e-commerce. For global retailers and brands, China, increasingly, is a must-play and must-win market.

 

Sources:

CNBC: Cash is already pretty much dead in China as the country lives the future with mobile pay

The Diplomat: China’s Digital Economy: E-Commerce Consumption Trends

The Drum: China’s ecommerce market to pass $1.1tn in 2017

eMarketerRetail: Alibaba’s Tmall Maintains Reign Over China’s Retail Ecommerce

Forbes: Alibaba’s Singles’ Day By The Numbers: A Record $25 Billion Haul

Forbes: China’s Biggest Mobile Payment Solutions Are Taking Root In U.S. and Europe

Fung Business Intelligence: Spotlight on China Retail

McKinsey: China’s e-commerce soft spot: Logistics

PWC: eCommerce in China – the future is already here

Statista: Gross merchandise volume of China’s e-commerce market from 2008 to 2018 (in trillion yuan)

Seeking Alpha: JD.com gaining on Alibaba’s Chinese e-commerce market share

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