MORE THAN JUST A WAY TO SHOP. Ecommerce takes China by storm. A FleishmanHillard China report sponsored by

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1 MORE THAN JUST A WAY TO SHOP Ecommerce takes China by storm A FleishmanHillard China report sponsored by

2 If ever there was a match made in heaven, it is China and ecommerce. China added 54m Internet users last year, for a total of 618m, more than any other country in the world. They are doing more than playing games and posting selfies; instead, they treat the Internet like a 24-hour shopping mall. Since 2003, revenue from ecommerce has grown at a compound annual rate of 120% a year I, and although growth has moderated recently, it still clocked in at 70% compounded annually from 2009 to 2011 II. Rapid consumer adoption of digital technology plus a relative lack of brick-and-mortar retailers, especially in lower-tier cities, have fueled torrid growth. By next year (2015), online transactions are projected to reach US $540b, or about 7.5% of the total; and by 2020, according to the Alibaba Group Research Center, China s ecommerce market is expected to surpass the combined ecommerce markets of the US, Great Britain, Germany, and France III. As Alibaba.com founder Jack Ma put it, In other countries, ecommerce is a way to shop. In China, it s a lifestyle. ecommerce in China by the Numbers Revenue Number of online shoppers in China XIV : US$212.4b X 2013: US $300+b XI 2015 (est) $530b XII 2020 (est) $620b XIII : 140m (1/3 of total user base) 2013: 190m 2015: 520m (2/3 of total user base) - Source: iresearch 2011 Hours per week spent online Internet penetration % % : : 20.5 XVI 2013: 25 XV - Source: China Internet Network Information Center (CNNIC) Ecommerce... In China, it s a lifestyle. - Jack Ma, founder, Alibaba.com

3 Characteristics of Chinese online shoppers Like consumers anywhere in the world, Chinese online shoppers have their own particular characteristics. Here are some of their more salient traits: Chinese online buyers shop frequently for overseas merchandise. Online purchases made via websites outside of China have doubled annually over the past three years, according to Bain, while the value of cross-border transactions reached US $510b in 2012, up 31.5% over the prior year IV. This demand is fueled in part by the cachet of foreign brands, but is also driven by Chinese consumers inherent distrust of certain domestic products. Chinese shoppers want to make sure that what they re buying is genuine, and that it is safe to use. For example, Chinese buy 10% of their baby formula and 7% of their make-up and skincare products through overseas websites. The Chinese are avid buyers of luxury goods. By next year, China is expected to be the world s largest market for luxury goods, generating more than 20% of all worldwide sales. Chinese are willing to spend a greater percentage of their disposable income on luxury goods 10% to 15%, compared with only 4% in Japan. By 2020, the number of affluent Chinese consumers (those with annual household incomes between US$20k and US$1 million) will more than double to 280 million. Online channels are a critical way for foreign brands to connect with this growing base of luxury demand in China s lower-tier cities. Sales of luxury goods could soon exceed levels of 500m yuan (about US $800,300) in more than 60 Chinese cities, vs. just 30 cities today. Chinese consumers are demanding. They want the latest, newest, most innovative products available. They expect to be able to return any item purchased online, and the cash-on-delivery payment method popular in China often results in a higher-than-average return rate. In particular sectors, such as luxury, expectations are especially high. A report by Forrester says online shoppers at one of China s top luxury marketplaces expect to receive 24- hour customer service, free insured two-day shipping, and the option to pay and return at their convenience. The report goes on to note that as a result, many business are making an up-front investment not only in marketing but in technical infrastructure that will create a brand dependency that keeps the shoppers coming, even after free shipping and other one-time promotions expire V. China s four ecommerce platforms 1. Marketplaces that provide companies with the tools to display and sell products through an online storefront. The largest marketplaces are Alibaba.com (chiefly B2B), Tao Bao (C2C), and TMall (B2C). 2. Online retail sites such as Jindong Mall/JD.com (formerly 360Buy.com). These are basically online department stores that sell a variety of different branded goods. 3. Online brands such as VANCL, an online apparel company. For a long time, VANCL sold only its own branded clothing. Recently it has begun selling other brands. 4. Offline-to-online (O2O) commerce. Allows skeptical Chinese consumers to see and handle the merchandise in a physical store before they buy it online. Chinese B2C merchants Suning and Guomei exemplify the O2O model, which currently appears to be China s most promising type of ecommerce.

4 Chinese tend to exhibit low brand loyalty, always seeking something newer (and possibly cheaper, depending on the product category). But this may be changing, especially in Tier 1 cities. A widely quoted Bain survey of 40,000 Chinese households concluded that Chinese buyers seldom form attachments to specific branded products. Although they crave novelty and want the best quality, they are also aggressive comparison shoppers. Bain s research showed that Chinese spend more time doing online research before making a purchase than do consumers in other countries: more than 70% of Chinese consumers said they compared prices, regardless of their income level. Bain s study also showed that consumer loyalty is fleeting: the more frequently Chinese consumers shop with within a particular product category, the more different brands they are likely to try. While these Online retailing as a percentage of total sales observations are all valuable, it is nevertheless true that as household income grows, Chinese will become less focused on price and more able to build emotional bonds that lead them to return to specific brands. A positive experience online, such as a well-designed, fast-loading website, could lead shoppers to abandon the quest for bottom-dollar pricing. VANCL, an online apparel company, says that 80% of its customers made repeat purchases in 2012, a sign of growing satisfaction and loyalty. Chinese ecommerce is marked by a low trust factor. Alibaba s Alipay system lets buyers make purchases without divulging their financial information to individual vendors; and only after the customer has indicated satisfaction with the purchase do vendors get their money. Chinese also frequently combine online and offline shopping (the O2O model), often preferring to visit a retailer s physical store before finally buying online. Being able to see the actual merchandise (and the store housing it) is reassuring to consumers who are wary of being cheated. Japan: 3.9% - Source: Bain Germany: 5% China: 6% Online purchases made via overseas sites have doubled annually over the past three years.

5 Mobile commerce: Consumers on the move China has about 1b mobile phone subscribers, and according to the China Internet Network Information Center, more Chinese get online using mobile devices than by using fixed-line connections. Bain says the Chinese are addicted to smartphones, as evidenced by a smartphone penetration rate of more than 50% in China s Tier-1 and Tier-2 cities. Most consumers use smartphones to browse for products more than 60% for the average consumer, and about 75% for those with monthly incomes above 50,000 RMB, according to Bain. Thus far, actual transactions conducted with a mobile device make up a small fraction of total online commerce: just 2% in 2011 and 3% in Yet these low percentages suggest huge potential for growth. According to McKinsey, 55% of Chinese Internet users have already made a mobile payment, vs. just 19% in the US. And research by Forrester shows that 91% of urban web users access the mobile web weekly, more than twice the percentage in the United States. By next year, it is estimated that mobile commerce will make up 8% of ecommerce sales, with sales during the period from 2012 to 2015 growing five-fold, from $7.8b to $41.4b VII. On Singles Day 2012, a combined 39% of TMall and Taobao s sales $1.2b were made on mobile devices. Such numbers are the reason that Alibaba and Tencent are competing fiercely in the realm of mobile payment. With their mobile phones, consumers can use Didi Da Che ( Beep Beep Taxi ) on Tencent s WeChat platform to hail a cab often a surprisingly difficult task in large Chinese cities. They can then use the company s Wei Xin Zhi Fu payment app to pay the fare. Alibaba has a competing taxi app called Kuaidi Da Che ( Fast Taxis ) that lets passengers pay with the AliPay app. And, as Caixin magazine points out, the rivalry extends beyond taxi apps to encompass restaurants, cinemas, and convenience stores VIII. Mcommerce is expected be helped by the advent of ultra-cheap smartphones, such as the Xiaomi, an Android device that retails for as little as $130. Buying with a phone is also faster: data from Taobao indicates that purchases made with mobile phones are completed 67 seconds faster than those made on a fixed-line connection. And that speed will increase as 3G access becomes more widespread: currently, 3G penetration in China remains low, about 22% in Online travel bookings set to double China has long been a popular tourist destination, and currently is the third most-visited country worldwide. Yet it is outbound Chinese travel that is changing the face of the travel industry. China had more outbound tourists last year than any other country: 97m Chinese traveled abroad, about 14m more than in 2012, according to China s National Tourism Administration. This year, China is expected to send 100m travelers abroad. And those travelers have the highest purchasing power of any tourists worldwide, China having surpassed Germany and the United States in this regard in 2012, when Chinese tourists spent $102b overseas. PhoCusWright, a travel industry research consultancy, says that online air travel bookings rose by 50% in 2012, while hotel bookings increased by 37%. Although just 15% of travel bookings are made online today, bookings are growing rapidly and are expected to double by 2015 to about US $30b a year.

6 Social commerce: Twitter meets shopping Forrester Research calls the Chinese hyper-social, meaning they love the Internet in general and social media in particular. Perhaps this is why shopping is a more social experience in China than it is in other countries. Consumers avidly share information about purchases they are considering, soliciting feedback on whether a better deal exists. They also actively seek online help from service representatives while considering and making purchases. This means there is a natural complementarity between social media and commerce. Last year, Alibaba Group Holding Limited, owner of TMall and Taobao, took an 18% share in SinaWeibo, China s equivalent of Twitter and, until the recent meteoric rise of WeChat, its dominant social media platform. The investment is an attempt to monetize SinaWeibo, which often serves as a vehicle for conversations about shopping. Integrating Taobao into the platform allows for the logical next step: consumers talk about their purchases, and then make them (or vice versa). Combining Alibaba s ecommerce power with SinaWeibo s 500m registered users (including 60m who are active daily) is expected to generate roughly $380m in advertising and other revenue over the next three years, the companies believe. But the partnership is also a direct counterstrike to the rising power of WeChat, a fast-growing social media platform that has built a base of about 300m active monthly users since launching in early WeChat (or Wei Xin in Chinese) is owned by Shenzhen-based TenCent Holdings, which also owns ecommerce platforms 51buy.com and Paipai.com and is China s largest Internet company by market capitalization IX. WeChat began as a simple instantmessaging service for mobile phones, but grew quickly into a hybrid social/mobile communications phenomenon whose growth has been astonishing even by Chinese standards. Last year, it expanded its features to produce an integrated suite of offerings encompassing ecommerce, gaming, and financial services. A report by Barclays Research estimates its market value at US $30b far more than the $19b paid by Facebook in February to acquire WhatsApp, an application similar to WeChat. Analysts speculate that Facebook s acquisition of WhatsApp may actually be a covert tactic for breaking into the mainland s social commerce market (from which it has effectively been excluded to date, as Facebook is blocked in China). Any foreign company seeking to sell online in China will need to integrate its offerings with both Sina Weibo and We Chat/Wei Xin as well as any other social commerce platforms that may emerge. The disproportionate influence of social media in China also means that brands must be vigilant, not only in monitoring what is being said about them, but in mining the data collected through social media for consumer insights. Something as simple as analyzing the time of day on which customers post about a brand can increase both the reach and the effectiveness of brand communications.

7 Singles Day and other reasons to spend China has three major national holidays each year, and celebrates (at least commercially) some western holidays as well. But for sheer spending power, one holiday stands unmatched: Singles Day. Invented by some university students in the early 1990s, Singles Day is now China s number-one online shopping day, generating sales volume two-and-a-half times greater than that of Cyber Monday, the Monday after Thanksgiving in the United States. A holiday for single people, it is celebrated on November 11 two elevens or four ones representing solitary figures. The Shopping Festival was popularized by Alibaba.com and became so successful that other retailers decided to get in on the action. Singles Day is now a major money-earning event for most retailers in China. In 2013, online retail sales totaled US $5.7b, nearly double the $3.1b generated in By comparison, sales on Cyber Monday in 2013 were US $1.7b. China is a big country with patchy logistics networks, and reaching customers in lower-tier cities can be hard. Delivery companies had 800,000 employees working on Singles Day 2012, including 65,000 temps, according to local media reports citing industry sources. One large company said it would have 30,000 vehicles to handle an expanded delivery schedule of 6m packages for the holiday. Although Singles Day generates the most online sales by far, other holidays present consumers with occasions for buying gifts and spending money on themselves. Chinese New Year, also called Spring Festival, reportedly saw strong online sales in Although China s Ministry of Commerce does not release nationwide figures, it said that sales expanded steadily and quickly, with catering, tourism, and entertainment among the main beneficiaries VI. Mid-Autumn Festival, also known as the Moon Festival or Mooncake Festival, is a harvest holiday held in September or early October. It is a family-oriented holiday similar to Thanksgiving in the United States. Round pastries called mooncakes are given as gifts, and some of the gift-giving takes place online. Recently, however, sales of expensive high-end mooncakes have fallen, owing to government restrictions on the purchase of luxury items. China s online marketplaces: Taobao and TMall China s ecommerce market is unusual in that most of its transactions anywhere from 70% to 85%, according to various estimates are consumer-to-consumer (C2C). Of those C2C transactions, about 90% are made through Alibaba.com s platform, Taobao, frequently referred to as the ebay of China. Created in 2003, Taobao makes money through advertising and charges no commission fees for products sold through its site. It now accounts for more than half of online sales in China in Most foreign companies are more interested in China s business-to-consumer (B2C) market, which saw compound annual growth of 160% from 2009 to 2012 and is forecast by Bain to grow by 53% through next year. Here, the dominant platform is TMall, also owned by Alibaba, which says that TMall sells 70,000 Chinese and international brands from 50,000 merchants. A presence on TMall has been viewed as obligatory for any retailer in China. The logic was that it was a necessary first step toward getting Chinese shoppers accustomed to buying a company s products online. Some foreign brands, such as Coach, have found that they can use TMall as a stepping stone en route to their own dedicated site. Others, such as Japanese clothing retailer Uniqlo, sell both through TMall and a dedicated Uniqlo site, both of which use the same layout, pricing, and payment systems in order to present a unified brand experience. TMall charges a technical service fee and takes a 5% commission on each sale. In return, it offers what it claims is retailers only hope of reaching consumers in lower-tier cities. For less well-known brands, this could be true. TMall also promotes its retailers to 4.5 million followers through SinaWeibo, a Chinese micro-blogging platform. And vendors who sell through TMall don t require an Internet Content Provider (ICP) license. Retailers that prefer to use their own branded websites must constantly innovate to provide services that differentiate them and attract customers who might otherwise browse on TMall. Online apparel company Vancl, for example, came up with the concept of an online fitting room that enabled customers to try on clothes before paying, and to return anything they don t like. Coach, which expects China to become its number-one market by the end of this year, opened a TMall store in late 2011 but closed it down in favor of a dedicated site in To attract customers, the site offers products not available in the company s physical stores, and marked its launch by selling limited-edition handbags signed by Coach s brand ambassador in China, popular actor and singer Leehom Wang.

8 Interview with Porter Erisman, ecommerce consultant and director of the documentary film Crocodile in the Yangtze: the Alibaba Story You were a VP at Alibaba from 2000 to 2008, and now consult on ecommerce in China. What should companies do (or not do) to increase their odds of success in this market? The first thing I'd say is to forget everything you know about ecommerce in the west and concentrate on understanding Chinese consumers and their online buying habits. Too many companies have failed in China by simply trying to adapt an overseas model to the local market. Far better to start with the customer, and work backward from there. Apart from sheer size, what are the biggest changes that have taken place in China s ecommerce market since your time at Alibaba? For years, we argued that ecommerce would be bigger in China than in more developed countries. Skeptics countered that ecommerce would never catch on in China owing to a lack of payment systems, logistics infrastructure, and trust between online buyers and sellers. But in the last few years, China has proven that the potential for ecommerce was always there it just needed innovative entrepreneurs to build the infrastructure. China has essentially leapfrogged beyond the ecommerce environment of developed countries. Rather than building out stores to third-tier cities, brands are simply building online shops. While ecommerce in markets like the US has been evolutionary, in China it has been revolutionary. What are some of the challenges of dealing with inconsistent internet connectivity and reliability in China? Alibaba had some major challenges with internet connectivity. It s a global platform, and in addition to connecting rural and urban Internet users domestically, we were also linking Chinese users with counterparties around the world. One problem we encountered a lot was ensuring consistency of the users experience. If we put servers in rural areas, buyers had a better experience, but advertisers in the cities complained about poor website performance. The same was true when we were connecting sellers from rural areas in China to buyers worldwide. For a while, we had to choose which side we would serve better. We had to keep this in mind as we designed our sites. From our headquarters in Hangzhou, videos and intensive graphics looked great, but users in the rural areas had to wait forever to download the pages. In the end, for the global markets, we decided to set up servers in both China and the US. Through our mirror sites, we were able to serve users in both markets equally well. In China we took similar steps to ensure a quality experience for all users. Chinese tourists are changing the face of the global travel industry. What important trends do you see in online travel booking? I'm starting to see better integration between Chinese travel sites and their international counterparts. Also, international travel booking sites are integrating an increasing number of Chinabased payment platforms, such as AliPay. If you re involved in the online travel booking industry and don t have a specific plan to serve Chinese customers, you re missing a major opportunity. What are some of the more interesting commercial uses of mobile and social media you re seeing used in China? The most interesting development has been the takeoff of mobile commerce and the fascinating ways it is being used. For example, when a group of friends goes out to dinner and wants to split the bill, they can use AliPay's Go Dutch feature. Or when relatives want to send cash as a gift on Chinese New Year, they can do it through Tencent's Weixin mobile app. The integration of mobile and offline retail is going to be fascinating. Any final thoughts? People used to view Chinese ecommerce companies as imitators, but we are now seeing that they have truly become innovators. The Chinese market is a laboratory for innovation in ecommerce, and increasingly we ll see ideas that start in China being copied by companies elsewhere. The most exciting thing is, we re really just getting started. There should be a lot of exciting innovations and opportunities to come.

9 Giving banks a run for their money: Yuebao and Licaitong 余额宝 In seeking new revenue streams, China s leading ecommerce companies are coming up with innovations that disrupt traditional businesses including some of the country s most well-established industries. Alibaba has used its Alipay platform (analogous to Paypal) to create a virtual fund management product called Yuebao that is causing concern among China s massive state-owned banks. Yuebao takes money in users online accounts and invests it in short-term financial instruments that pay returns far higher than the rockbottom interest rates available from banks. Since it was created just nine months ago, Yuebao has attracted about 500b yuan, or US $81b. In January, TenCent Holdings, which operates the hugely successful QQ and WeChat platforms, unveiled a competing product called Licaitong, which by the end of February reportedly had pulled in 50b yuan (US $8b). In response, traditional banks are said to be rolling out moneymarket products to compete with Yuebao and Licaitong. Case Study: Bally in China Bally knew early on that one day, China would be a growth market for its products. The Swiss leather luxury goods maker opened its first Hong Kong store in 1978 and its first shop on the mainland in Today, it operates 60 boutiques in Greater China, a market soon expected to be the world s largest for luxury goods. To capitalize on the rapid growth of ecommerce, in 2011 Bally launched its China website, The site features high-resolution images and videos of runway models with Bally apparel. Having established an early presence in China, Bally now faced a more technical challenge: to optimize performance on Bally.cn, while scaling up the site s ability to accommodate the deluge of traffic that hits on Singles Day, Chinese New Year, and other big shopping days such as mid-autumn Festival and Chinese Valentine s Day. Obstacles to meeting this challenge included some features of the Chinese Internet effectively functioned as speed-bumps : limited peering points and fragmented network topology, either of which can cause patchy Internet connections and slow page downloads. CDNetworks helped Bally.cn optimize its performance through the China Acceleration Service, a content distribution infrastructure built specifically for use in China. Spanning 25 points of presence (PoPs) on the mainland, CDNetworks China Acceleration routes Bally s content for optimal delivery, while minimizing user wait times. By caching images and videos across the network of PoPs, Bally has decreased the amount of data that must be transferred from their origin data center by 97%. As a result, Bally.cn has reduced page download times by 81%. Bally now enjoys enhanced reliability, as Bally.cn continues running even if the origin website goes down.

10 Keys to success in China s e-tail market Foreign e-tailers in China must prepare to face intense pricing pressure from local competitors. Developing a unique brand is one key to success. Investments needed to achieve this goal may include analytics capabilities; enhanced/automated customer service systems; seamless order fulfilment across online, offline, and mobile platforms; and other investments to strengthen their value proposition. Expert counsel on regulatory and legal issues is also necessary, as is a strategy for attracting top digital talent. Good communications are also critical. Counterfeiting and erratic product quality are perennial problems for online retailers in China, said Li Hong, President of FleishmanHillard China. This can cause crises, fueled by social media, to erupt overnight. Logistics are also a concern, since supply chains are fragmented and local operators often fail to ensure quality control. Yet even this is not enough. Foreign companies will have to meet the rising expectations of Chinese consumers who want a seamless cross-channel experience, one where social, mobile, and online commerce sync up. One way to make this happen is to harmonize product categories, pricing, delivery times, and after-sales service, regardless of the sales channel employed. Another key to success: making the necessary investment in a high-functioning, rapidly loading website. Chinese consumers are impatient, and expect websites that integrate with social media to give them real-time contact with friends, customer service reps, and others who may be involved in a purchasing decision. As Chinese online retailers move away from a low-cost-provider mentality, they will begin seeking ways to enhance the experience of their customers. Research shows that one way to make an ecommerce site appealing to Chinese is to make it visual. Detailed, high-resolution images, photographs, and other visual elements help e-tailers overcome the trust barrier by showing buyers exactly what they are getting. Since images take longer to load, a fast site is a clear necessity. With continued investment in broadband and 3G+ infrastructure, together with rising disposable income and more widespread use of bank cards, e-tailing in China is likely to keep rising, eventually accounting for anywhere from 10% to 16% of total consumption. That s good news for foreign retailers who want to sell into this market. But in China, it is easy get sucked into competing on price, especially online. Smart e-tailers will avoid this trap by investing in content delivery infrastructure, website design, and data analytics. Giving users an optimal online experience through better performance and superior customer insights are the keys to success in this fast-growing market. Most popular items to buy online Clothing, cosmetics, consumer electronics, and books are big sellers. Forrester estimates that about 40% of all items bought online in China are shoes, handbags, and make-up. From 2010 to 2012, according to estimates by iresearch, apparel rose from 1.6% of total online value to 13%; cosmetics from 2.5% to 11%; consumer electronics from 4% to 17%; and books 4.5% to 30%. Buyers are typically younger urban women with white-collar jobs. When it comes to the average amount spent online per buyer, China comes in ahead of every other country in Asia Pacific. According to Forrester, average online expenditures will reach US $1,000 per consumer by 2016 an amazing number given that census data show the average disposable household income in China to be US$3,000.

11 About CDNetworks CDNetworks enables Global Cloud Acceleration. Our mission is to transform the Internet into a secure, reliable, scalable and high performing Application Delivery Network. CDNetworks unique position as the only multinational CDN with expertise and infrastructure in China, Russia and other emerging markets, enables us to be trusted partners in local markets, while serving as foremost experts on extending into global markets. Accelerating more than 40,000 global websites and cloud services over our 140 PoPs, CDNetworks serves our ebusiness customers across industries like finance, travel, ecommerce, learning management, high tech, manufacturing and media. CDNetworks has been serving our enterprise customers for more than 13 years, and has offices in the US, Korea, China, Japan, and the UK. Contact us Tel. (877) info@cdnetworks.com URL: End notes I II III IV V VI VII VIII IX X XI XII XIII XIV XV XVI XVII XVII XIX http// Issue E-commerce-in-China.pdf growth-of-the-chinese-e-commerce-consumer-base/