E-Commerce (BtoC): A New Platform for Direct Selling

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1 E-Commerce (BtoC): A New Platform for Direct Selling Communications-based direct selling dates back more than 100 years. The purpose of direct selling is to create direct communication between manufacturers and consumers so as to cut the middleman out and lower price. Manufacturers directly send product information to consumers through mediums such as telephone, television, and catalogues. Consumers directly place orders with manufacturers through phone, fax or mail order. The manufacturer sends the goods to consumers in the most cost-effective and reliable way. Direct Selling Works in China While direct selling originated and flourished in Europe and North America, its growth opportunities are greater in China than in these more mature markets because of the quickly evolving retail environment in China, a receptive consumer group, and the limitations that underdeveloped distribution channels make on product accessibility in remote areas. Retail Environment Because of its existing mature retail environment, to Americans, direct purchasing is only another convenient means of shopping. While in a widespread and populous market like China, where the market economy is comparatively new, and retail is at an underdeveloped stage, there is much greater demand for distance selling, like mail order, to cater to a very segmented consumer base. Consumer Behavior In a highly developed, quick-paced and individualistic market like the United States, consumers are bombarded with advertising leaflets and mail order catalogues every day. They rarely respond to these materials, and when they do, they make their purchasing decisions rather quickly, knowing that they will get the goods soon and can easily return them if they do not like them. The situation in China is quite different. Consumers have far fewer opportunities to receive catalogues, therefore, their interest in reading these catalogues is much higher. They are viewed more as personal mail than mass mail. Chinese consumers are more careful in their purchase decision. When Chinese consumers buy, they buy cautiously, understanding that it is a relatively longer and more difficult process for them to receive the goods and to return them later on. This explains why the catalogue response rate in the United States is 3-5%, and the return rate is 20%, while in China, the response rate is about 8~15%, and the return rate is no more than 10%. Distribution Channels Developed markets have relatively mature distribution channels. It is easy for the consumers to get precisely what they want. While in China, especially in inland

2 areas, consumers have a hard time buying high-quality, fashionable products. This creates a significant opportunity for a direct selling method such as mail order. The Mail Order Industry in China The mail order industry started developing in China a few years ago with the entry of major players Mecox Lane, Otto, and Bertelsmann. All of these companies have had considerable growth in the past four years. Shanghai Mecox Lane International Mail order Company was established on January 8, 1996 as a joint venture between European American Mecox Lane Mail Order Co., LTD. and ShangHai International Trade & Service (Group) Co., LTD. It was the first foreign-invested mail order company to receive government approval. In the last four years, Mecox Lane has developed into the largest mail order company in China in terms of investment. The mail order industry in China has matured with the company. Mecox Lane offers everything from apparel, jewelry, and cosmetics, to health supplements, home products and electrical appliances, in its catalogues. With a sophisticated data management system, Mecox Lane has reached more than 2.5 million customers in each and every one of the 31 provinces, autonomous regions and municipalities in China. High product quality, reasonable price, good customer service and an efficient operating system have helped Mecox Lane build one of the largest mail order businesses in China. From Mail Order to BtoC E-commerce: A Natural Evolution Moving from mail order to BtoC e-commerce is a natural evolution because they both involve distance selling. The internet is simply a more modern and powerful tool than catalogues. Better Offering Mail order companies cater to consumers through offering a varied range of products tailored to match the interest and desires of the people that receive their catalogues. The high response rate in China is testimony to the attractiveness and success of this method. However, there is a limit to the amount of information that can be communicated through catalogues. The internet offers a new and powerful medium by which direct sellers can provide consumers with tens of thousands of products, giving detailed descriptions and high-quality visuals to consumers to assist in the purchase decision. In addition, the internet allows the company to provide real-time information to consumers on product availability, while there is a natural time delay in relaying this information using catalogues as a means of communication.

3 Better Service When a traditional brick and mortar mail order business becomes a click and mortar BtoC e-commerce business, it is able to provide more timely and satisfactory customer service. Through online inventory control, the likelihood of consumers placing an unrealizable order is dramatically reduced, if not eliminated. Consumers also have real-time, customized service online through the availability of 24-hour customer service representatives. Lower Costs A significant part of a mail order business operating costs is in the production and mailing of its catalogues. The internet eliminates this expense, passing the cost savings on to consumers through lower prices, which leads to a higher purchasing rate. A Wider Consumer Audience With the adoption of the internet as a new tool, mail order businesses are now able to attract consumers that are innovators -- a fashion-savvy and sophisticated group of consumers, that has greater discretionary income. Many of Mecox Lane's mail order customers are now also online customers. Factors that Contribute to E-commerce Success Mail order businesses have some unique strengths when converting to BtoC e- commerce. These strengths make them more competitive against other BtoC e- commerce operators. Direct-selling Experience Mail order and BtoC e-commerce have similar order processing patterns. Consumers make purchasing decisions without physically touching the products or seeing the sellers. Sellers collect payment, process consumer and product information, and deliver the goods. The business model for a mail order company is similar to that of an e-tailing business. Mail order companies ability to market intangible product, keep inventory, process orders, and the skills of its employees are all relevant and easily transferable to online selling. Consumer Database An established mail order business has developed a sophisticated consumer database and data-analyzing skills that a BtoC e-commerce business needs to understand its customers, their needs, shopping patterns, and special requirements, and to provide them with a customized offering and the best possible customer service. This can be capitalized on with e-commerce as the computer is better able to make the real-time customization of offer to customers while they are logged in and shopping online.

4 A Credible Brand & A Loyal Customer Base An established mail order business has developed important goodwill: a good corporate reputation, a powerful brand image and a loyal customer base. All of these intangible assets are critical in driving and sustaining business results. This is something other BtoC e-commerce operators spend much of their time and money trying to develop. Having this head start is critical in a competitive and fast-paced field like BtoC e-commerce. Proven Solutions to Traditional Problems Faced in E-commerce An established mail order business has already encountered and solved the traditional China problems facing e-commerce, such as payment, distribution and customer service. Payment Distribution Customer Service A developed mail order company like Mecox Lane offers flexible payment options, including postal remittance, bank remittance, credit card authorization, COD and online payment. A developed mail order company like Mecox Lane has developed a mature distribution system using the nationwide postal service, EMS and also door-to-door delivery in certain cities. The customized services mail order companies offer such as a consumer hotline, letter reply, and customer data search can be easily transferred to an online call center, reply and online tracking by an e-commerce businesses. Mecox Lane's Successful Adoption of E-commerce Mecox Lane has taken a gradual approach to build an e-commerce business onto its mail order business. It launched two trial websites in 1999, and focusing on different product categories, and established dedicated content, sales, marketing and customer service teams. The websites tried various payment options, such as postal remittance, manual credit card payment, COD as well as online payment through partnerships with local banks including the Merchants Bank. In the first month of the trail run, with no marketing other than a notice to its mail order customers, the websites received an average page view of 120,000 per day and had 6,000 registered users. Based on this successful trail run, Mecox Lane expanded its investment and its Chinese-language shopping portal site, launched on April 15, It is quickly becoming the premier online shopping mall for Chinese consumers through its convenient and high-quality online selling and services.

5 The first-month results of m18.com are encouraging. An average of 25,000 people visited the website every day, with the peak day of page views reaching 1.3 million. An average of 2,500 people have registered each day. In the last month, the site has generated over 10,000 effective orders with a value of more than RMB8 million. This quick success is based on having a solid business foundation through the experience gained in Mecox Lane's mail order business. Opportunities for Shanghai Shanghai offers great potential for the development of e-commerce. It is why companies like Mecox Lane have succeeded, and will continue to succeed in the future. An Open Economic Environment As the commercial center and a showcase of reform and development in China, Shanghai provides an open economic environment which benefits virtually all business sectors, including e-commerce. Ever-improving Infrastructure Shanghai has maintained a leading position in China in terms of information infrastructure. It is a vital condition to the development and success of e- commerce. Strong Government Support The city government of Shanghai has put information development, especially e- commerce, as one of its top priorities in Mecox Lane currently bases its production and distribution in Shanghai. With the Shanghai government s support, consumer trust, and a solid business foundation, Mecox Lane is confident of its long-term success in e-commerce.

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