The unique China eCommerce landscape

More than 300 million online shoppers made over $300 billion in transactions in 2013,1accounting for around 8% of China’s entire retail trade. Growing at an average annual rate surpassing 70% over the past few years,2 China overtook the US as the largest eCommerce market in the world in 2013. China’s eCommerce market is forecasted to be larger than those of the US, the UK, Japan, Germany and France combined by 2020. The enormous scale and the strong policy support for eCommerce from the government under the 12thFive-Year Plan (2011-2015) presents extraordinary business opportunities to both local and multinational retailers.

While eCommerce is more developed in the US, the UK and Canada, industry leaders are seeing the biggest opportunity in emerging markets like China. eCommerce in China is growing much faster than in mature markets. Convergence of mobile eCommerce and the internet is still evolving and presents huge opportunities to retailers. With more than 500 million users, mobile internet accounts for over 80% of the total online population in China.3Yet less than 30% today are mobile shoppers. The proliferation of smartphone and tablets, along with the stronger push by eCommerce providers, will accelerate the growth of mobile commerce in the next few years.

The prevalence of local markeplaces (such as Tmall and Taobao) is a striking characteristic of the China eCommerce market. Although some retailers are seeing marketplaces as a long-term global threat, the high traffic, low start-up costs and ease of entry to the marketplaces provided an appealing shortcut for innovative entrepreneurs and SMEs to launch businesses in China.
 

The rise of omni-channel retailing

Retail is increasingly being defined not by the retailers, but rather by the consumers. Digital technologies and smartphones have changed shoppers’ “path to purchase,” turning shopping into a more personalized and interesting experience. The social aspect of shopping also adds to the momentum. Social media has a greater influence on consumer’s purchasing decisions in China, particulary among the younger generation, than elsewhere in the world. The need to adapt to the ever-changing customer behavior therefore drives retailers to invest increasingly in eCommerce and to take on an omni-channel strategy, allowing customers to choose among all available shopping channels. Research has shown that companies with the strongest omnichannel retailing and customer engagement strategies retained an average 89% of their customers versus 33% for companies with weak omni-channel strategies.
 

eCommerce as a consumer experience                                  

The decision on the purchase channel is driven by the customers, not the retailers. It is therefore the customers who provide category insights through online platforms for pull-based assortment planning. Regardless of which channel retailers deploy, customer engagement is the key theme for all. To some retailers, eCommerce not only offers a commercial opportunity, it complements their core businesses by increasing customer convenience rather than solely focusing on growing sales. From the customer perspective, eCommerce is an extension of their offline shopping experience. It is therefore critical, especially for luxury brands, to maintain a consistent experience across all touch points, online and offline, in both assortment and pricing, to ensure customer engagement and brand loyalty.

For many retailers, offline shopping experience is still vital to their customers. However, communicating product messages consistently could be challenging as the retailers expand their shops in China. Retailers view eCommerce as an opportunity to communicate the message about their brands efficiently and consistently to their consumers without having to worry about the bottleneck at the point of sale.

Some global retailers face a challenge of not getting physical space quickly enough to expand their brick and mortar stores. With limited physical space, global brands are hard to bring to a new market while keeping a local flavor. eCommerce therefore offers a significant benefit to retailers for bringing additional assortments to the market.
 

Technology enables experiential shopping

The road to eCommerce is far more complex than simply building an online website. It needs to be integrated with the stores, mobile app, fulfillment and other key functions to generate a holistic view of customer experiences and enable ongoing innovation of products and services. Succeeding in eCommerce in China also requires companies to have a clear strategy, driven in turn by the business model. This strategy needs to consider integrated and scalable technology platforms and back-end processes, cross-channel marketing capability, organizational flexibility and collaboration, and data analytics to detect changes in shoppers’ behavior.

Experiential shopping is a hot topic for retailers. It is about how to enable consumer interaction and participation in the shopping experience with supporting technology. The potential for retail technology to enhance the physical shopping experience is already being demonstrated in a number of different ways, such as interactive kiosks and augmented reality. However, the success of this technology is partly dependent on spontaneous decision-making by consumers.
 

Building up analytics capability

Business leaders view customer data as their most valuable asset. Big data is critical for retailers to better understand customers’ shopping behavior so that they can identify and tailor services for individuals, and fine-tune their marketing investments and priorities. Advanced analytics are among the most important battlefields for retail companies today, but not many of them have the right people and tools to draw meaningful insights from the data — and to act on them. Companies must invest in the right set of capabilities to turn this potential into actual value.

Insight into customers is vital, as is the insight into employees (internal operations). Retail companies need to balance purchasing, manufacturing and delivery based on the predictive analysis of the next phrase. Enterprise resource planning (ERP) can give more insight to employees and more power to make a quick decision and respond to the dynamic market and changing buying behavior.
 

Distribution network is a key differentiator    

Logistics remains a major challenge as eCommerce players attempt to reach more customers over wider geographic regions while improving the quality of their offerings. Retailers have to handle the operational issues, as they need a bigger warehouse and distribution force when they sell more. The major cities are getting saturated and highly competitive. To further expand into smaller cities, retailers need to continue investing in distribution networks — which is more difficult for inner cities with underdeveloped infrastructures.

Managing logistics may be a key differentiator in winning in the eCommerce market. For example, Alibaba teamed with a group of partners last year to create a delivery network in a bid to reach any place in China within 24 hours.4 Likewise, online direct sales company JD.com recently partnered with Tencent to build its own delivery network.5 While some invest in supply chain and logistics to support better product delivery, others work with partners to achieve more effective customer fulfillment.

Going forward, eCommerce will play a bigger role in China’s retail market. New business models are evolving as new players and platforms continue to enter the market. For example, we have seen new players leveraging global product deployment trends, offering past-season luxury products from other markets in China. While the rapid emergence of increasingly affluent consumers in China’s urban cities has created unprecedented opportunities for retailers, eCommerce will be more appealing if companies can tap into the tremendous growth potential in tier 3 and 4 cities. However, with a changing population mix and the growing middle class in China, maintaining the relevant product assortment will be increasingly critical.

As China’s community of online shoppers grows, so will the traditional and online players that make smart and strategic moves. Making  cut-throat investments to generate rapid profit growth in the short term may not be conducive to sustainable, profitable growth in the long term. Developing insights into who’s buying online, and tailoring the value proposition to attract and retain select customers will make a strategic difference to winning online. Retailers and consumer products companies need to make the most of the evolving ecosystem and consider product dynamics when developing strategy.