China’s consumption-led economy is evolving digitally. Online marketplace Alibaba saw sales growth of 39% in comparison with the event in 2016, suggesting that Chinese consumers are confident in their spending and that consumption will continue to rise.
China’s economy continues to grow steadily as it ended 2018 with GDP at 6.8%, according to China’s National Bureau of Statistics (NBS). In line with this positive momentum, at Nielsen, we saw China’s consumer confidence index (CCI) reach a historic high of 114 points in both the third and fourth quarters of 2018, up to two points from the second quarter of 2018 and six points from 108 in the fourth quarter of 2017.
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China e-Commerce platforms
The leaders are:
- Alibaba through its properties Taobao and Tmall, it is the biggest e-commerce platform, used for everything from clothing to the most random objects.
- JingDong (JD) is a competitor to Alibaba with a focus on electronics (they sell everything, but Chinese users would go to JD first when buying electronic appliances)
- Suning is another e-commerce platform focusing on electronics
- Yihaodian is mostly focusing on food and daily groceries
- Jumei is selling cosmetic products online, with a growing cross-border section
- WeiPinHui is selling discounted cosmetic products, mostly foreign brands
- XiaoHongShu is selling imported products, fashion, and cosmetics
China is the world’s largest ecommerce market. What is unique about Chinese cross-border eCommerce is that large amounts of transactions flow both ways. Chinese consumers are heavy buyers of foreign goods, and Chinese merchants sell massive amounts of goods to international markets where people are looking for inexpensive items.
While Chinese businesses sell large amounts of goods online in the B2B market, in this article I will focus on B2C sales.
Total Chinese eCommerce sales (domestic and cross-border) amounted to $1.2 trillion in 2017, an increase of 32 percent over 2016, according to China’s Ministry of Commerce. The ministry predicts e-commerce will grow at an annual rate of 30 percent over the next few years. Much of the growth will occur in cross-border sales.
Tens of thousands of China-based vendors now sell their products internationally online through Amazon Global Selling, a mechanism that leverages the online marketplace’s branches in 10 countries, including the United States, the United Kingdom, Germany, Canada, Japan, and Australia. Most popular products are smartphones, PCs, and electronic accessories.
Prominent Chinese e-commerce marketplaces that host foreign sellers include the following.
Tmall Global is the cross-border version of Tmall — China’s leading domestic online marketplace. Owned by Alibaba Group, it was launched in 2014 and sells only imported merchandise via foreign merchants’ stores hosted on Tmall’s website. Tmall offers country pavilions that bundle products from the same country on one page. It uses Alibaba’s proprietary Alipay for payments.
JD Worldwide operates China’s second-largest cross-border online mall, established in 2015. JD dominates in home appliances and consumer electronic goods. For its marketplace model, JD Worldwide hosts foreign brands’ flagship stores. JD uses Tencent’s online payment escrow service, Tenpay, to complete transactions in U.S. dollars.
Suning Global. Launched in 2014, this is the cross-border online mall of China’s largest commercial company, Suning. It features roughly 300 foreign storefronts and offers store operator and financial support services. The most popular product category is electrical appliances. It uses its own online payment escrow service, Yi-Pay, to complete transactions in RMB or foreign currencies.
All of these marketplaces require security deposits and commission fees. All except Amazon China also collect an annual platform fee. They also offer different business models — either allowing merchants to perform logistics themselves or performing the warehousing and delivery for them.
E-Supermarket directly purchases large quantities of overseas goods. There are no branded storefronts. Overseas merchants sell their goods to hypermarkets at a negotiated wholesale price. The hypermarkets then charge a markup.
Kaola is a cross-border eCommerce hypermarket with the largest bonded warehouses in China. Merchants from roughly 40 countries sell their products on the Kaola platform.
JD.com also operates a hypermarket business. For this model JD Worldwide acts as a middleman, purchasing inventory from overseas companies and reselling it to Chinese consumers.
Suning also offers a hypermarket model stocked by direct sourcing
CCI scores above and below 100 points represent, respectively, positive and negative consumer confidence. An all-time high CCI, coupled with healthy disposable income growth of 7.5%, as reported by the NBS, means that consumers are confident and consumer demand or consumption is expected to remain steady. We see consumption increasing as consumers in China spend more than ever: 43% more compared with five years ago. That’s leagues ahead of the 24% growth in the US and 33% globally.
Five key trends driving China’s e-commerce market
1) E-commerce shopping festivals
E-tailers are creating more shopping festivals and themes to unlock consumer desire. Based on Nielsen’s survey, before Double 11 this year, 79% of consumers said they planned to participate in Double 11. Alibaba saw 168 billion RMB in sales and 39% growth on Singles’ Day, while another main competitor, JD.com, achieved RMB 127 billion during 1-11 November, with over 50% growth.
Alibaba chair Jack Ma with Nicole Kidman at a Double 11 event. Alibaba chair Jack Ma with Nicole Kidman at a Double 11 event. Image: Reuters/Aly Song
Double 11 and similar shopping festivals are an opportunity for local brands, but these are also key opportunities for foreign brands to leverage the collective enthusiasm for shopping among Chinese consumers. On these holidays, consumers are looking to experiment, try new things and buy products that may be new to them. These festivals are a perfect opportunity for new brands entering the market to get noticed.
2) Consumption upgrade
Two triggers are sparking a trend known as “consumption upgrade”. Rising disposable income means that consumers are more confident in spending their money on a number of categories – especially food, cosmetics, and clothing. An emphasis on quality and fashion are growing much faster than other consumer demands. Following this, middle- to upper-class consumers are now increasing their demand for goods that are not available domestically. As per the World Economic Forum’s Insight Report on the Future of Consumption in Fast-Growth Consumer Markets – China, online platforms, where international high-end and niche brands are easily accessed, are rising in popularity, while cross-border shopping sites are leading the consumption upgrade movement.
According to Nielsen’s online shopper trend report, the proportion of consumers who had recently made a cross-border e-commerce purchase reached 67% in 2017, compared with only 34% in 2015.
Imported goods are recognized by Chinese consumers for their attention to quality, health and safety, and even package design. Through various online platforms, such as Kaola.com, Tmall Global and JD Global, Chinese consumers now have broad access to products from all over the world. YanXuan by NetEase is a growing e-tailer in China focused on quality and premium products, and it drove NetEase’s e-commerce business by 118% in 2016.
3) New retail: online and offline are merging rather than competing
Since the term “new retail” was coined by Jack Ma in 2016, it has been a hot topic for manufacturers and retailers alike. This concept emphasizes the integration of online and offline retail elements, including products, services, logistics, big data, marketing, management and so on.
Employees sort parcels at a Best Express delivery center. Employees sort parcels at a Best Express delivery center. Image: Reuters/Stringer
Currently, in China, online players are taking the initiative to drive this integration. As the largest e-commerce platform in China, Alibaba recently invested $2.9 billion in China’s biggest offline retail group, Sun Art.
The Online to Offline (O2O) business model is transforming the retail industry and bringing both challenges and opportunities to the market. Hema Supermarket is a good example of how the e-commerce giant Alibaba evolved within the O2O landscape. Hema is a store with fresh foods, imported goods and dining services like other physical supermarkets. Before shopping, consumers are encouraged to download an app, through which products are purchased, and where spending and consumer profiles will be saved and stored online. Consumers can enjoy door-to-door deliveries within 30 minutes if they live nearby. JD.com has just launched a similar offline offering called 7Fresh and is expected to quickly become a key player within this O2O space as well.
Both Alibaba and JD.com are also focusing on the millions of other grocery stores in China, as they believe these shops are places where consumers can be targeted to drive further penetration of payment platforms and e-commerce.
4) Digital payment
Alipay and Wechat pay are the most popular online payments in China, and they are already an integral part of e-commerce platforms such as Alibaba and JD.com.
Online financial companies like Alibaba’s Ant Financial and JD.com’s Baitiao are becoming more popular among Chinese consumers, especially younger borrowers, due to low fees and convenient user experience. As disposable income and consumer confidence rise, availability of consumption loans is encouraging consumers to spend even more online.
A customer tries Alipay’s facial recognition payment. A customer tries Alipay’s facial recognition payment. Image: Reuters/Stringer
Just as credit cards drove demand and enabled consumers in markets like the US to make large purchases, financing from e-tailers will enable a similar trend in China, where traditional credit cards are more rarely used. Moreover, consumption loan providers are expanding their businesses by cooperating with offline channels, providing comprehensive portfolios of services to consumers faced with the integration of new retail.
5) From online platform to media platform
Features of social media, where people primarily come to interact with one another, make it an ideal place to share and comment on products. As the number of mobile users rises, the importance of social media has increased.
The high concentration of mobile commerce has accelerated the transition of the e-tail advertising ecosystem from open to closed loop. Thus social media has become a crucial tool for marketing, especially when communicating and engaging with potential consumers.
Chinese KOLs (Key Opinions Leaders) or Influencers, also called “Wanghong” (网红) are people who have large social media presence and who could influence consumers’ purchasing decisions. They do not only spread information but also life attitudes, thoughts, and ideas.
KOL in China is a massive market and quite different than European’s influencers. They help push products through live streaming Application such as Meipai, Yizhibo, Yinke and other social media like Wechat and Weibo. The biggest difference with European influencers is that they get paid in live from their audience with gifts, they can also sell products during the live show and sells them through their own stores on Taobao. E-commerce live streaming offers them a lucrative source of income.
Selling in China
Online merchants that want to sell to China-based consumers should use a Chinese marketplace that specializes in cross-border sales versus selling from the merchants’ own eCommerce sites.
This is especially the case for smaller sellers without a name brand. Millions of Chinese shoppers are familiar with domestic online marketplaces. But they may have difficulty finding smaller sites. They also have greater trust in the marketplaces. Chinese consumers rarely buy overseas products from standalone websites or third-party platforms located outside of China. More importantly, the marketplaces are in Chinese and sales are in the local currency, the renminbi — RMB.
It is usually necessary to employ a Chinese third-party service provider, called “TP” for “Tmall Partner” or “Trade Partner.” These agencies offer foreign companies without a business entity in China access to Chinese cross-border eCommerce platforms. The larger platforms such as Tmall Global and JD Worldwide only accept foreign merchants who work with TPs who are certified by these eCommerce platforms.
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