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Fung Online Retailing in China 2013

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  • 1. !"#$%&"'(#)''%*#+),,($)#-)%.)#+/) Online retailing in China June 2013
  • 2. ! Executive summary 3 Market overview 5 Competitive landscape 13 Key highlights 18 More B2C players operate as open platforms 19 Online retailers enrich product offerings 20 Price competition is common… is it sustainable? 21 Boundaries between online and physical channels 21 are blurring…but “seamless integration” is the final goal Developing social media and digital marketing 25 reshapes the online retail landscape Shift from pricing to services: efficient logistics is 26 a key differentiator E-commerce players embark on M&A 27 Government commits support for the development 30 of ecommerce Online retailing still strong… but challenges remain 32 An omni-channel strategy… a retail future 34 Conclusion 36 Table of Contents
  • 3. " Online retailing in China, 2013 nline retailing is quickly transforming the commercial landscape in China. Chinese consumers are increasingly used to buying online; on the other side of the Internet “counter”, retailers are involved in fierce competition. It’s evident that the advent of easy access to digital technologies is changing the way consumers and retailers behave and interact. In this report, we provide an overview of China’s online retail landscape and assess competitive prospects, with key highlights of the dynamic mainland cyber world. O
  • 4. # Market overview market, in transaction terms, totalled 1,304.0 billion yuan in 2012, up 66.2% year- on-year (yoy) and accounting for 6.2% of the country’s total retail sales: China is the world’s second largest online market. mobile shopping, are major growth drivers. China has the largest online population in the world, 564 million in 2012. and they shop more frequently online. Shandong, and Zhejiang. Consumers in tier 1 cities are the top spenders online, but Internet shopping in lower tier cities is growing fast. products are getting particular attention. Competitive landscape retailing market. But the B2C segment is becoming increasingly important. market with over 90% of market share; Paipai and Eachnet take the remainder. secure a firm foothold in the market and have set ambitious development goals. Going the other way, some Chinese retailers are using the online channel to launch themselves globally. Executive summary
  • 5. $ Online retailing in China, 2013 Key highlights platforms to expand the scope of their businesses and become more profitable. categories, or partnering with other brands on an open platform. Reasons for expanding product offerings are threefold: (1) to cater to consumers’ “stickiness” and enhance cross-selling opportunities; (2) to improve overall margins and turnover; and (3) to expand market share. in China’s online retail market. Many retailers have tried to squeeze out weaker competitors by adopting a low-price approach. In the customer-centric digital age, more brick-and-mortar stores are launching their online channels, while Internet retailers are evolving from selling purely online to creating a physical presence. especially the case in China as shoppers are generally more actively engaged with social media than their overseas counterparts. Digital channels such as mobile apps and communication service tools are also gaining in popularity. sustainable and have started to seek differentiation. Some have set up their own warehouses and logistics systems, while providing same-day delivery guarantees and other after-sales services to enhance user experience. logistics bottlenecks, product quality issues, a lack of expertise, unsustainable business modelling and, in short, unprofitable operations. However, more traditional retailers are taking steps to forge closer links between their various sales channels, hoping to complement and enhance customer experience.
  • 6. % Market overview
  • 7. & Online retailing in China, 2013 Online retailing goes full steam ahead China’s Internet retail market continues to grow by leaps and bounds Online shopping’s popularity continues to power ahead in China. According to iResearch1 , the transaction value of China’s online retail market increased by 66.2% year- on-year (yoy) to reach 1,304.0 billion yuan in 2012, accounting for 6.2% of the country’s total retail sales (see Exhibit 1). Particularly noteworthy is the massive online retail sales recorded on China’s “Singles’ Day” on November 11 – a day when many single people buy and give gifts and retailers country’s largest e-commerce platform, hit 19.1 billion yuan in just one day. As Chinese consumers are increasingly getting used to shopping online, the growth momentum of the retail market is set to be sustainable in the coming years. iResearch expects total online sales to reach 3,600 billion yuan in 2016 and account for 10.8% of total retail sales. Exhibit 1: Transaction value of online retailing in China, 2008-2016 (estimates) Source: iResearch 1 http://www.iresearch.com.cn/coredata/2012q4.shtml
  • 8. ' … and China, as the world’s second largest online retail market, is chasing for top spot According to the McKinsey Global Institute (MGI)2 , China’s online retail sales have grown at a rapid compound annual growth rate (CAGR) of 120% from 2003 to 2011, surpassing on the United States in terms of online retail sales. It is expected that China will overtake the United States for the top spot in 2014. Growing number of netizens and increasing popularity of mobile shopping are major growth drivers An expanding Internet population is one of the major drivers for the impressive growth 3 reveals that China’s Internet population grew to 564 million in 2012, with a penetration rate of 42.1%. As shown in Exhibit 2, the number of China’s online shoppers more than doubled over the three years to 2012 to reach 242 million4 . Exhibit 2: Number of online shoppers and online shopping penetration, 2008-2012 Source: CNNIC 2 McKinsey Global Institute, “China’s e-tail revolution”, March 2013 3 4 CNNIC, “China’s online retail market, 2012”, April 2013
  • 9. ( Online retailing in China, 2013 Mobile shopping has become a second driving force for China’s online retailing market. Increasing numbers of Chinese consumers now shop and make purchases from their mobile devices. According to CNNIC, the total number of mobile commerce user increased by 136.5% yoy to 55.5 million in 2012, accounting for 4.2% of China’s total also seen a tremendous leap, from 11.5 billion yuan in 2011 to 55 billion yuan in 2012 (see Exhibit 3). Exhibit 3: Transaction value of mobile shopping, 1Q2011-4Q2012 (estimates) Source: CNNIC Growing confidence in online payments According to CNNIC, the number of online payment users has increased threefold from 94 million in 2009 to 220.7 million in 2012, with a penetration rate of 39.1%. Among the various payment modes, third-party online payment and banking are the most widely adopted methods. Alibaba’s Alipay is the most commonly used online third-party payment method.
  • 10. ) Young consumers embrace online shopping, and the seniors market is emerging fast In general, Chinese online shoppers are young – over 60% were aged 30 or below in 2012 (see Exhibit 4)5 group of consumers usually has greater purchasing power and is more willing to pay for high- priced products online. As shown in Exhibit 5, more people in the high-income group (earning by 4.3 percentage points (ppt), from 13.7% in 2011 to 18% in 2012. Exhibit 4: Age distribution of online shoppers in China, 2011-2012 Source: iResearch Exhibit 5: Income level distribution of online shoppers in China, 2011-2012 Source: iResearch 5 iResearch, “Demographics of China’s online shoppers”, April 2013
  • 11. !* Online retailing in China, 2013 Men shop as much as women, if not more. According to iResearch, male consumers accounted for 52.3% of the total number of online shoppers in 2012. While the online shopping market in China is still largely dominated by young consumers, the “seniors” segment is catching up fast and presents huge opportunities. Boston Consulting Group6 put the Internet penetration rate of seniors (aged 51 and over) in China at 20% in 2011, with anticipated growth at 22% per annum from 2011 to 2015. active middle-aged user. So, the huge growth potential of the seniors market cannot be users aged 50 and above. Senior citizens in Shanghai are the most frequent shoppers, followed by those in Beijing and Guangzhou. Chinese consumers shop more frequently online than overseas peers A survey conducted by PricewaterhouseCoopers7 shows that the online shopping frequency of Chinese consumers is four times that of their European counterparts in the Netherlands, France and Switzerland, and nearly twice that of consumers in the United States and the United Kingdom. Moreover, Chinese consumers also make a far higher proportion of their purchases online than shoppers in developed countries. Online retailing is the most popular in coastal regions, and spending is higher in tier 1 cities Most online shoppers are from coastal provinces. As indicated in Exhibit 6, Guangdong 6 7
  • 12. !! Exhibit 6: Geographic distribution of online shopper in China, 2012 Source: iResearch 8 indicates that consumers in tier 1 cities spend the most online. However, thanks to ongoing urbanisation and rising incomes, online consumption in lower tier cities is growing fast. Although consumers in tier 3 and 4 cities spend less online compared with their counterparts in tier 1 and 2 cities, online spending accounts for a higher share of their total disposable income (see Exhibit 7). Exhibit 7: Online consumption and percentage of disposable income by city tiers, 2011 Source: MGI 8 McKinsey Global Institute, “China’s e-tail revolution”, March 2013
  • 13. !" Online retailing in China, 2013 Apparel, bags and accessories remain the most popular category sold online, while kids’ products are getting more attention According to iResearch, apparel, bags and accessories constituted the most popular online retail category in 2012, with a market share of 26.5%. Others most sought-for online items were consumer electronics, with an 18.4% share, and cosmetics products, with a share of 5% (see Exhibit 8). Exhibit 8: The most popular categories consumer purchased online, 2012 Source: iResearch Some industry experts believe that the kids segment will become the next growth driver for online retailers. iResearch9 estimates that the transaction value of the baby and “4+2+1” family mode in China (meaning four grandparents and two parents caring for one child) has led to an increasing demand for kids’ and babies’ products. Eyeing the huge potential of the booming kids market, some online retailers have already stepped into that segment. Recent examples include: – In December 2012, Gome signed a 1 billion yuan cooperation deal with Qinqin Baby, a vertical online retailer for kids’ and babies’ products, nursing and maternity wear and necessities, to launch a new “mummy and babies’” category10 . – In September 2012, Suning acquired Redbaby, China’s largest online maternity and baby products retailer, to enter the maternity and babies’ products market11 . – Dangdang has been focusing on core products including books, apparel and babies’ products since 201212 . 9 http://www.iresearch.com.cn/Report/View.aspx?Newsid=182256 10 http://www.morningwhistle.com/html/2012/Company_Industry_1231/216390.html 11 http://www.scmp.com/business/china-business/article/1047347/suning-appliance-buys-redbaby-part-big- retail-plans 12 http://www.bloomberg.com/news/2013-05-14/dangdang-to-home-inns-advance-on-outlook-china- overnight.html
  • 14. !# Competitive landscape
  • 15. !$ Online retailing in China, 2013 C2C segment represents a dominant market share, yet B2C segment is expanding quickly Currently, the C2C segment still represents the largest segment of China’s online retailing market. But the B2C segment is becoming increasingly important. In 2012, the C2C and the B2C segment were expected to account for 70.3% and 25.3% respectively of growth in transaction value in 2012, with a growth rate of 95.1%. It is expected that the C2C and the B2C segment will each account for half the share of China’s online retailing market in 2016 (see Exhibit 9). Exhibit 9: Share of online retailing in terms of transaction value, 2008-2016 (estimates) Source: iResearch C2C market: a fairly stable market, with Taobao the distinct leader country’s C2C market, with over 90% of market share; Paipai and Eachnet share the competitors in terms of the number of daily visitors to their respective websites (see Exhibit 10).
  • 16. !% Exhibit 10: Daily reach of the three major C2C players, December 2012-June 2013 Note: As of June 4, 2013 Source: Alexa; compiled by Fung Business Intelligence Centre being college students with relatively low disposable incomes. So products sold on
  • 17. !& Online retailing in China, 2013 B2C market is more fragmented and competition is fierce e-commerce market. Retailers in the B2C segment can be largely classified in three groups: (1) pure-click retailers such as Vancl, Moonbasa; (2) multi-channel B2C retailers supported by a huge offline store network such as Suning; and (3) B2C open platform players are integrated online platforms selling a large variety of goods (see Exhibit 11). Exhibit 11: Market share of B2C market, 2012 Source: iResearch Foreign players secure a foothold in China, while some China retailers seek to go global China’s lucrative e-commerce market has proven to be irresistible to Western retailers. Many overseas players are eager to secure a lucrative foothold in the market and have set ambitious development goals.
  • 18. !' British online fashion retailer ASOS, for instance, is to open a Chinese-language website in October 2013; it is reportedly to spend between £12 million and £18 million over the set up a dedicated distribution hub in China. Another example is Macy’s Inc., the leading department store operator in the United Co, one of China’s leading online retailers of global luxury brands. Macy’s will start business model is to be revamped to become the official distribution channel for Macy’s Inc. While foreign players are pushing to tap China’s online market, some Chinese retailers are using the online channel to go global. Amazon China launched a “Global Store Opening Scheme” in early 2012, which allows suppliers to reach overseas customers13 . Suppliers can place their products in Amazon’s operating centre, and once there is an English website (http://en.jd.com/) in late 2012 to allow its suppliers to sell their products in overseas markets14 . 13 rd_s=center-1&pf_rd_r=1Z68K8M1ECCG7H49SE2M&pf_rd_t=2701&pf_rd_p=67251652&pf_rd_i=home-2012 14 http://www.pmtoo.com/news/2012/1019/1315.html
  • 19. !( Online retailing in China, 2013 Key highlights
  • 20. !) 15 http://news.imeigu.com/a/1362663443754.html 16 http://www.chinaz.com/biz/2012/0217/235800.shtml 17 http://kaidian.amazon.cn/services/sell-on-amazon/pricing/#s_tab 18 http://www.wantchinatimes.com/news-subclass-cnt.aspx?id=20120419000068&cid=1206 19 http://sop.suning.com/ 20 http://news.xinhuanet.com/info/2013-04/17/c_132316576.htm 21 http://www.aliresearch.com/?m-cms-q-view-id-74928.html More B2C players operate as open platforms Competition in the B2C segment is highly competitive, so many B2C retailers are transforming themselves into open platforms in order to expand their business scope and 12 shows some of the major B2C players that operate on open platforms. Exhibit 12: Selected open platform players Company Details strategy. yuan, representing a 156% increase from the corresponding period in 201115 . 16 17 . 18 . entering its platform19 . 20 . shop on Vancl’s open platform. brands21 . Source: News and respective company websites; compiled by Fung Business Intelligence Centre entry fees, annual fees, commissions, advertising and transaction fees, while they provide logistics, warehousing and after-sales services for third-party online tenants. So, B2C players can expand product categories without the need to make significant investments. However, players have to consider the tradeoffs when opening their platforms to other online tenants. Conflicts can arise when allocating limited resources, such as page space to self-operated brands and third-party brands.
  • 21. "* Online retailing in China, 2013 Online retailers enrich product offerings Many online retailers have been actively increasing their product offerings by either adding new categories or partnering with other brands on their open platforms. Reasons for expanding product offerings are threefold: (1) to enhance consumers’ “stickiness” and cross-selling opportunities; (2) to improve overall margins and turnover; and (3) to expand market share. Recent examples of online retailers expanding product categories include: variations of groceries, including packaged foods, beverages and snacks. – Vancl, a B2C clothing website, opened an open platform in April 2013. Other apparel and shoe companies can set up stores on its open platform. Exhibit 13 summarises major categories offered by selected B2C players. Exhibit 13: Major categories offered by selected B2C players Amazon Category Tmall JD.com China Suning QQ Shop Gome Dangdang Vancl Yihaodian Vipshop Apparel, !" !" !" !" !" !" !" !" !" ! shoes and bags. !" !" !" !" !" !" !" !" !" ! and eyewear. Sports and outdoor !" !" !" !" !" !" None" !" !" ! wear. Beauty and personal !" !" !" !" !" !" None" !" !" ! care. Cosmetics. !" !" !" !" !" !" None" !" !" ! !" !" !" !" !" !" None" !" !" ! products. Pet products. !" !" ! None !" None None None ! None Automotive. !" !" !" !" ! !" None None ! None Books, music, !" !" !" !" !" None" !" None" !" None video and games. Consumer electronics. !" !" !" !" !" !" !" None !" ! Furniture and home !" !" !" !" !" !" !" None" !" None improvement. Grocery products. !" !" !" !" !" !" !" None" !" None Pharmacy and !" !" !" !" !" !" !" None" !" ! healthcare products. !" !" None !" None None None None None Musical instruments. !" None None !" None None !" None None None Flowers and gardening. !" None None None !" None !" None !" None Arts. !" None None !" None None !" None !" None Mobile communication. !" !" !" !" !" !" !" None !" None Note: As of May 2013 Source: Company websites; compiled by Fung Business Intelligence Centre
  • 22. "! Price competition is common… is it sustainable? Competing on price to build market share remains the number one marketing strategy in China’s online retail market, as most Chinese consumers are still largely price sensitive. Many retailers have tried to squeeze out others and increase market share by adopting a low-price strategy. earning large profits from consumers. Gome and Suning followed suit by cutting their Development and Reform Commission stepped in and investigated. operators. Many lack the scale and resources to provide a wide range of products and efficient logistics, and they are also less competitive in terms of pricing and reputation. So, for these smaller players, focusing in a specific category may help them to secure a foothold in the market. It seems that they should actively seek ways to differentiate themselves from other competitors. Boundaries between online and physical channels are blurring…but “seamless integration” is the final goal Integration of online and physical channels is gaining more attention. In the customer- centric digital era, more brick-and-mortar stores are launching their online channels, while online retailers are evolving from selling purely on the Internet to having a physical presence. According to the China Chain Store & Franchise Association (CCFA), 62 of the top 100 retail chains in the country opened online stores in 2012 (see Exhibit 14), up from 31 in 2009. Other businesses such as banks and logistic companies are also actively seeking different products or services. Bank of Communications in April 2012 and SFbest (http://www.sfbest.com/), an online shopping website launched by SF Express in May 2012.
  • 23. "" Online retailing in China, 2013 Exhibit 14: List of enterprises among the top 100s that have launched their own online purchasing platforms, as of April 2013 Enterprise Website !" #$%&%'"()**+,-+".,)$/" 011/23344456$%&%'5-)* http://redbaby.suning.com/ http://binggo.suning.com/ 7" .)*+"89+-1,&-:9";//9&:%-+".,)$/" http://www.gome.com.cn/ http://www.dzelec.com/ http://www.coo8.com/ <" =:9*:,1">(0&%:?"@%A+61*+%1"()5B"C1D5" http://www.yihaodian.com/ http://www.samsclub.cn E" @%1&*+"F+/:,1*+%1"#1),+">.,)$/?"()5B"C1D5" http://www.yintai.com/ G" H$*I"J,:%D6"@%-5B"(0&%:"F&A&6&)%" http://www.4008823823.com.cn/ kfcios/index.htm http://www.4008123123.com K" L-F)%:9DM6">(0&%:?"()5B"C1D5" 011/62334445ENNOPG!QPG!Q5-%3 Q" J:&9&:%".,)$/"()5B"C1D5" http://www.blemall.com/ http://www.jaja123.com " C&:%0$:"#$/+,*:,R+1"S)9D&%'6"()5B"C1D5" http://www.lhok.com/index.html O" #0+%T0+%"U+/61:,"(0:&%"F,$'61),+"C1D5" http://www.star365.com/ V" .$:%'W0)$"=:16)%M65"X))D"Y"" http://www.watsons.com.cn/ J+A+,:'+"()5B"C1D5 http://watsons.tmall.com/ !N" L+1,)".,)$/"()5B"C1D5">(0&%:?" http://www.metromall.com.cn/ 11 Beijing Wangfujing Department http://www.wangfujing.com/ Store (Group) Co., Ltd. !7" (:,,+Z)$,"(0&%:"@%-5" 0ttp://www.carrefour.com.cn !<" [:&%)4"F+/:,1*+%1"#1),+"()5B"C1D5" http://www.myrainbow.cn/ !E" U+4"=),9D"F+/:,1*+%1"#1),+"(0&%:"C&*&1+D" http://www.xinbaigo.com/ !G" C&]$%".,)$/"#0:,+0)9D&%'"()5B"C1D5" 011/23344459&]$%60)/5-)*3 http://www.lqyaopin.com/ !K" ^(F"#1),+6">.,)$/?"C1D5" http://www.saite.com/ !Q" #0:%D)%'"()**+,-&:9".,)$/"(),/),:1&)%"" http://www.yinzuo100.com >H&%W$)".,)$/? !O" =$0:%"T0)%':&".,)$/"()5B"C1D5" http://www.zon100.com/ !V" .$:%'W0)$".,:%D$_"()5B"C1D5" http://www.igrandbuy.com/ 7N" "@1)PH)R:D)"()5B"C1D5" http://www.yiteng365.com/ 7!" S&6:/"S&'0"`+-0%)9)'_"(),/),:1&)%" http://huimai100.com/ 77" U)%'')%'60:%'"#$/+,*:,R+1">.,)$/?"" http://www.chblt.com/ ()5B"C1D5 7<" F:9&:%"F:60:%'".,)$/"()5B"C1D5" http://www.66buy.cn/ 7E" 8:6_"a)_"()%A+%&+%-+"#1),+")Z"#@Ub^8("" http://www.ejoy365.com/
  • 24. "# Enterprise Website 7G" ;$-0:%">(0&%:?"@%A+61*+%1"()5B"C1D5" http://www.auchan.com.cn/ 26 Liaoning Xinglong Happy Family ! http://www.xlgoo.net Business Group 7Q" J+&c&%'"FP/0)%+"()**+,-&:9"Y"" http://shop.dixintong.com/ `,:D+"()5B"C1D5 7O" ^:,R6)%"[+1:&9".,)$/"C1D5" http://www.parkson.com.cn/emall/ index.html 7V" (0+%'D$"S)%']&"(0:&%"()5BC1D5" http://www.hqwg.net/ <N" S+Z+&"F+/:,1*+%1"#1),+".,)$/"()5B"C1D5" http://www.bdemall.com/ <!" #0&c&:W0$:%'"J+&'$)"[+%:&".,)$/""! 011/2334445,$_&')$5-%3 " ()5B"C1D5 <7" .$:%D)%'"a&:,)%'"#$/+,*:,R+1"" http://www.sparlala.com >#^;[".$:%'D)%'?" <<" [+%,+%9+"()**+,-&:9".,)$/"()5B"C1D5" http://www.rrlgou.com/ <E" ;8bU".,)$/" http://eshop.qdaeon.com/ <G" d&%'D:)"=++R9_".,)$/"()5" http://www.diandian.com/ <K" #:%c&:%'"#0)//&%'"(9$"()5B"C1D5" http://www.sanjiang.com 37 Shandong Weifang Department Store ! http://www.92xmf.com/ " Group Co., Ltd." 011/2334445W:645-)*3 38 Chongqing Peace Chain Drugstore Co., Ltd. ! http://www.hp1997.com/ <V" (0&%:"T0+%0$:".,)$/"#-&+%-+"Y"" http://eshop.zhenshang.com/ `+-0%)9)'_"()5B"C1D5 EN" .$:%'W0)$"X,&+%D60&/".,)$/"()5B"C1D5" http://121.8.125.2:6080/ E!" S$%:%"X,&+%D60&/"Y";/)99)"S)9D&%'"" http://www.9448.com.cn/ ()5B"C1D5 newjrdshop/index.php E7" ;PJ+61"#$/+,*:,R+1"()5B"C1D5" http://www.xyj-shop.com/ http://huichaoshi.taobao.com E<" (0:%'-0$%"8$,:6&:".,)$/"()5B"C1D5" http://www.oysd.cn/ 44 Chongqing New Century Department ! http://www.sjgo365.com/ " Store Co., Ltd." 011/2334445-*:995-%3 EG" 8:D&%'".,)$/"()5B"C1D5" http://www.itu4.com/ EK" (0:%'60:"`)%'-0+%'"S)9D&%'6"()5B"C1D5" http://www.dolton.cn/ EQ" a&:%'6$"=+%Z+%'".,+:1"=),9D"(0:&%"" http://www.wfdsj.com.cn/shop F+A+9)/*+%1"(),/),:1&)% EO" J+&c&%'"(:/&1:9"[+1:&9&%'".,)$/"()5B"C1D5" 011/2334445&')G5-)*3 EV" ;%0$&"S$&60:%'".,)$/"()5B"C1D5" http://www.hsnjf.com/ http://www.hzsmall.com/ GN" ("Y"e".,)$/"()5B"C1D5" http://www.rbcs.cn/ G!" =$0:%"=$60:%'".,)$/"()5B"C1D5" http://www.wssmgc.com G7" (0&%:"[+6)$,-+6"f:%'$:,D"()5B"C1D5"" http://www.crvmore.com
  • 25. "$ Online retailing in China, 2013 Enterprise Website G<" #0:%D)%'"U+461:,".,)$/"()5B"C1D5" http://www.xinxing001.com/ GE" d&%'D:)"C&R+9:&"()5BC1D5" http://www.shoplikelai.com/index. html GG" U+4"())/+,:1&)%"a)&%1P#1)-R"`,:D+""" http://www.csckl.com/ (0:&%"()5B"C1D5 GK" =$0:%"T0)%'%:%"()**+,-&:9".,)$/"" http://www.aizsw.com/zs/default. ()5B"C1D5 html GQ" S:%D:%"#$%60&%+"F+/:,1*+%1"#1),+5""" 011/2334445_'11'5-)*3 >.,)$/?"()5"C1D5 http://hdyg.taobao.com/ 58 Shandong Quanfuyuan Commercial ! http://www.sgbhdl.com:8080/ " Group Co., Ltd" +0D60)/34+60)/3&%D+g3&%D+g5c6/ GV" J+&c&%'"X$%1:9R"(+%1$,_"`+9+-)**$%&-:1&)%6" http://funtalk.tmall.com/ 8]$&/*+%1"[+1:&9"(0:&%"()5B"C1D5 KN" h&)%'Z+%'".,)$/" http://hopeful.tmall.com K!" U:%c&%'"(+%1,:9"8*/),&$*"()5B"C1D5" http://njzysc.tmall.com K7" .$:%'D)%'"F:60+%9&%"(0:&%"F,$'61),+"" http://www.800pharm.com/ ()5B"C1D5 Source: CCFA On the other hand, an increasing number of online operators are striving to enhance their consumers’ shopping experience by establishing offline stores to showcase their products. For instance, Moonbasa, a Chinese online apparel retailer, has gone beyond a relaxing shopping experience for customers, a café is located in the store22 . Suning is another good example, showing how retailers are integrating their online and offline channels. In February 2013, Suning announced the change of the company’s name from Suning Appliance Co., Ltd to Suning Commerce Group Co., Ltd, emphatically ending its time in specialised electronic appliances and starting its business transformation. e-commerce, plus retail service provider.”23 Suning has completed the integration of its online and offline business divisions for procurement, logistics and product management. Sales are now generated from various points-of-sales (POS), including its physical stores, focus more on elevating the customer experience such as providing exceptional after- sales and delivery services and include setting up an exhibition/show room. Suning will set up an online shopping counter in its offline stores for customers to pick up the products they purchase online, return the products or receive a refund24 . 22 http://topic.moonbasa.com/article/article_show/3440?&type=1&cn=18294&other=columnid:89|acid:3253| model:forced 23 http://www.cnsuning.com/snsite/sn_contentFront.do?method=contentDetail&id=2206 24 http://paper.wenweipo.com/2013/04/29/FI1304290029.htm
  • 26. "% Ideally, the integration of online and offline channels can allow different business units to work under the same umbrella that can share the same pricing system, inventory, logistics and after-sales services. But in reality, it is not always the case. For many retailers, their online and offline channels are operated by different teams, resulting in conflicts over online and offline operations. Developing social media and digital marketing reshapes the online retail landscape SNS websites to promote products and generate sales is especially the case in China as shoppers generally engage more actively with social media than their overseas counterparts. According to the aforementioned PWC survey, 57% of surveyed respondents follow brands or retailers on social media, compared to 38% in the global sample. encourage more customers to purchase goods. Many bricks retailers as well as B2C operators have tried to leverage the huge user databases in SNS websites to promote their products and enhance profitability. Sina Weibo, with more than 500 million registered users, is one of the most popular SNS websites in China. Exhibit 15 shows the number of followers of selected major B2C operators on Sina Exhibit 15: Number of followers of selected B2C operators on Sina Weibo B2C operator Number of “fans” Dangdang 2,085,806 Lefeng 1,494,673 Huaqiangbei shang cheng 325,397 Damai.cn 792,981 Vipshop 1,385,900 Note: As of May 13, 2013 Source: Sina Weibo; compiled by Fung Business Intelligence Centre
  • 27. "& Online retailing in China, 2013 Aside from using Sina Weibo as a marketing tool, some companies have started to sell via the micro-blogging website. China phonemaker Xiaomi was the first to partner with Sina Weibo to sell 50,000 units of its Mi2 smartphone directly via the Sina Weibo platform in December 2012. Payment is made through its own online payment service WeiboPay. Xiaomi has reportedly generated around 1.3 million reservations on its way to selling the allotted 50,000 Mi2 phones in just five minutes. Social forum to share shopping experience Chinese consumers are heavily influenced by friends and experts when making their purchasing decisions. Social media not only serves as a marketing and advertising channel, but also acts as a platform to share product information and shopping experiences. Examples of social forums that allow consumers to share their online shopping experiences and comment on products they buy online include Meilishuo and Mogujie. Mobile apps and communication service tools to reach consumers Many retailers have launched mobile apps or communication service tools to reach out dining and entertainment, is a case in point. It is one of the pioneers to partner with Wechat to do marketing campaigns. Wechat is a popular mobile phone text and voice Shift from pricing to services: efficient logistics is a key differentiator Many online players have realised that aggressive pricing strategies are not sustainable and have started to focus on services to differentiate themselves from others players. Some have set up their own warehousing and logistics systems, and provide same-day delivery guarantees and other after-sales services to enhance user experiences. intelligent warehousing innovation, an extensive logistics network and a multi-channel customer experience greatly improved, with 92% of customers satisfied with its delivery service25 . 25 http://www.fabaowang.cn/portal/gnxw/437.jhtml
  • 28. "' under trial operation in Beijing26 . 51buy has also sought to improve delivery services by offering deliveries three times a day, starting from the end of last year27 . Other players have partnered with convenience stores or metro companies to provide “self-service” facilities at convenience stores or metro stations. For instance, Amazon China has teamed up with Family Mart to provide a self-pick-up service in Shanghai starting from last March. E-commerce players embark on M&A Both vertical and horizontal mergers and acquisitions (M&A) in China’s online retailing market are common. For some traditional retailers, acquiring players that already exist in the market provide a quick way to enter the online retail market. A significant case is the acquisition of Coo8 by Gome in 2010. Since then, many others have followed suit. Some online players use the M&A route to expand product categories or their scope of services. For instance, Suning acquired Redbaby to enter the babies’ products market, Exhibit 16 shows some of the major M&A cases last year and this, involving e-commerce players. China’s online market is still very fragmented and there is a vast opportunity inherent in market consolidation. Ahead, it is expected that more retailers will use the M&A route to expand their market presence in China. 26 http://ec.iresearch.cn/shopping/20130515/199725.shtml 27
  • 29. "( Online retailing in China, 2013 Exhibit 16: Selected M&A in China involving e-commerce players, 2012-13 Date Companies Details May 2012 Gome, Coo828 Gome acquired an 80% stake in Coo8 for 48 million yuan in 2010, and further invested 12 million yuan to acquire the remaining 20% stake in 2012. 29 an unclosed amount. According to Marbridge Daily30 , the company is to connect the backends of its two B2C platforms, QQ Buy and 51Buy, during the latter half of 2013. 31 new company that builds on the respective and products, and Gaopeng in global sourcing and group buy. continue to exist in parallel. Groupon will be a minority shareholder in the new company, as it was in Gaopeng. September 2012 Suning, Redbaby32 After the acquisition, Redbaby will retain its current brand to operate independently in the maternal and child supplies market, but join in the logistics system of Suning. 33 Walmart completed its further investment ownership stake to approximately 51%. Payments34 Beijing-based third-party payer. 28 http://tech.sina.com.cn/i/ec/2012-05-25/18597170040.shtml 29 h t t p : / / w w w. c h i n a s c o p e f i n a n c i a l . c o m / e n / n e w s / p o s t / 1 1 4 2 4 . h t m l h t t p : / / h k . j r j . c o m . cn/2012/05/17021813151921.shtml 30 http://www.marbridgeconsulting.com/marbridgedaily/2013-03-25/article/64489/tencent_e_commerce_to_ merge_qq_mall_with_qq_buy 31 32 http://www.cnsuning.com/snsite/sn_contentFront.do?method=contentDetail&id=1961 33 http://news.walmart.com/news-archive/2012/10/26/walmart-global-ecommerce-completes-increased- investment-in-yihaodian 34 http://callcenterinfo.tmcnet.com/news/2012/10/30/6686501.htm
  • 30. ") Date Companies Details November 2012 Mecox Lane, Mecox Lane, a leading online platform Giosis35 operator for apparel and accessories, formed a joint venture with Giosis Ltd, parent company of Korean e-commerce player Q0019.com to operate an online platform in China. Giosis would initially hold 60% of stake and Mecox Lane would hold 40% of stake. March 2013 Vancl, Crucco36 Vancl, a leading online apparel retailer, announced its acquisition of Crucco, a B2C apparel retailer which mainly focuses on youth meet the demand of customers, particularly in women’s fashion. April 2013 Alibaba, Xiami37 Alibaba Group’s new music business unit has reportedly acquired an online music website merely a shopping platform to a lifestyle and media platform that satisfies the multi-faceted needs of its users. April 2013 Alibaba, Sina’s Alibaba Group has agreed to purchase an Weibo38 Both companies will work on user-account connectivity, data exchange, online payment and marketing, and will also explore new business models for social commerce based e-commerce platforms. Source: CCFA; compiled by Fung Business Intelligence Centre 35 http://ir.m18.com/releasedetail.cfm?ReleaseID=722716 36 http://www.wantchinatimes.com/news-subclass-cnt.aspx?id=20130307000007&cid=1206 37 http://thenextweb.com/asia/2013/04/19/taobao-embed-xiami-music-functionality-to-its-website/ 38 http://news.sina.com.hk/news/20130430/-19-2956817/1.html
  • 31. #* Online retailing in China, 2013 Government commits support for the development of ecommerce in the country. Over the past few years, a number of key rules and guiding opinions have been promulgated to promote e-commerce development. For instance, in April 2013, Measure for the Management of Online Invoices to better tally an enterprise’s tax bill and better regulate the online retail market. major B2C e-commerce sites, as many have already provided their customers with individual shop owners who previously did not bother to issue invoices are now required by law to do so. Exhibit 17 lists the major e-commerce policy initiatives launched by the government over recent years. Exhibit 17: Major recent e-commerce policies launched by the Chinese government Rules and Effective regulations date Launched by Highlights Measures for the April 2013 State Merchants on online retail platforms Management of Administration are required to issue official invoices Circular on Further April 2013 National Further improve the trans- Promotion of Development departmental working coordination Sound and Fast and Reform mechanism, boost innovation in E-commerce Commission the e-commerce sector, promote a Development with 12 other safe and credible environment for government e-commerce transactions. departments
  • 32. #! Rules and Effective regulations date Launched by Highlights Circular on Issues February National Establish an expert consulting Concerning the 2012 Development committee for building pilot cities for Promotion of and Reform e-commerce, regulating online Sound and Fast Commission payment, promoting application of IC E-Commerce with 7 other cards, promoting e-commerce Development government standardisation. departments on Promoting the 2012 Commerce enterprises to set up online stores; Development of support the establishment of third- Plan Period Guiding Opinions October Ministry of Establish regulations for online for the 2011 Commerce retailing. Online retail sales are Development of forecast to account for 9% of the E-commerce in total retail sales of consumer goods Plan Period e-Commerce 2011 Commerce “e-Commerce Demo Enterprises”. Demo Enterprise Notice for April 2011 Ministry of Online shopping platform operators Combating Commerce should take responsibility to monitor Intellectual Property with 8 other if the goods sold online infringe Infringement and government intellectual property rights and they Counterfeits in departments should ensure that the goods are Online Shopping genuine products. Regulating Online 2011 Commerce information on promotional items. Shopping Promotional Activities Source: Chinese Government websites; compiled by Fung Business Intelligence Centre
  • 33. #" Online retailing in China, 2013 According to the State Administration for Industry and Commerce, China’s first e-commerce law is being drafted and has been put on the agenda of the 12th competition, lack of intellectual property rights protection and tax evasion. to the consumer rights law. It is proposed that consumers should have the right to return goods within seven days and get a full refund. However, some industry experts believe that the unconditional right to return goods within seven days may damage smaller online businesses39 . Online retailing still strong… but challenges remain businesses. However, competing in the online retail market is becoming more challenging and the following issues should not be overlooked. Logistics bottlenecks services, especially express delivery services. However, many consumers have complained about the poor services from express delivery companies such as long delivery lead times, the poor attitude of delivery people, damage and loss, complicated return processes and lack of product try-on services. According to a survey by CNNIC40 , nearly half the number of online shoppers are dissatisfied with their Internet shopping experiences because of long delivery times and inconsistencies between the products constrained the development of online retailing. 39 http://www.npc.gov.cn/npc/lfzt/xfzqybhfxza/2013-04/23/content_1792693.htm 40 CNNIC, “China’s online retail market, 2012”, March 2013
  • 34. ## Exhibit 18: Reasons for dissatisfaction towards online shopping, 2011-2012 Source: CNNIC Lack of an effective mechanism to ensure credibility of online retailers and product quality Counterfeit goods sales remain a continuing sore point in China, and the quality of products sold online is also of major concern to consumers. Although the government has increased efforts to protect online consumer rights, there has been little improvement. Lack of properly trained professionals in online retail operations distribution system as an example. Since online retailers usually offer broader product have a professional team with in-depth market knowledge to design the logistics flow of products. Currently, there is a lack of qualified staff in this segment, and the turnover rate is also very high. Unsustainable business model Similar to many large-scale traditional retailers, e-commerce operators also rely heavily on fees from suppliers as their major sources of income. Many B2C platform operators charge their online tenants entrance fees, platform rental fees, commission fees, also affect the overall profitability of the operators.
  • 35. #$ Online retailing in China, 2013 Hard to generate better profits While many large online retailers enjoy robust market expansion, some also suffer weak operating margins as they spend excessively on promotion, marketing and category expansion to improve market share. Some companies even operate at a loss. For instance, online shopping site Dangdang41 2011. Brand and multi-channel retailer Mecox Lane42 An omni-channel strategy… a retail future Omni-channel retailing has been discussed hard and long in developed countries. Many global retailers are launching omni-channel strategies and seeking to pull together multi- and cross-channel offerings, including physical stores, online platforms, kiosks, catalogues, and social media, to create a seamless shopping journey for consumers. engage customers. In China, the concept of omni-channel retailing is still very new and no retailer has yet put in place a seamless and integrative omni-channel strategy. Having said that, more retailers are starting to take a closer look at various aspects of omni-channel strategies and impact on their businesses. Some traditional retailers have stepped up efforts to forge a closer link between their various sales channels, hoping to complement and enhance customer experience. provide accurate, consistent and current information. Retailers must be able to make full use of “big data” they collect from multiple POS use of big data allows retailers to spot trends and better adapt to the changing needs of 41 http://ir.dangdang.com/phoenix.zhtml?c=241200&p=irol-newsArticle&id=1793475 42 http://ir.mecoxlane.com/releasedetail.cfm?ReleaseID=745032
  • 36. #% Omni-channel retailing is … available shopping channels. profits, is the ultimate goal. simultaneously via access channels to perform different tasks. It is essential that brand experience is consistent across all platforms. Online platform Physical stores Kiosks Computers Social media Catalogs Mobile devices
  • 37. #& Online retailing in China, 2013 Conclusion
  • 38. #' Online retailing is certainly one of the most popular channels by which retailers extend market, retailers have to concentrate on product variety and price structuring, as well as more efficient logistics and quality fulfillment. has affected customers’ shopping habits. With new digital technologies, consumers are increasingly connected to both the physical and online space. From product awareness to seeing and touching the product, making purchasing decisions, finessing easy product delivery and even product returns, consumers today are becoming used to optimisation. be “delightful”, as Internet code writers often explain. Hence, the ability to use different channels to engage customers, elevate their shopping experiences and ultimately increase sales, are all key factors for retail success.
  • 39. © Copyright 2013 The Fung Business Intelligence Centre. All rights reserved. Though the Fung Business Intelligence Centre endeavours to ensure the information provided in  this publication is accurate and updated, no legal liability can be attached as to the contents hereof.  Reproduction or redistribution of this material without prior written consent of the Fung Business Intelligence  Centre is prohibited. Fung Business Intelligence Centre 10/F, LiFung Tower, 888 Cheung Sha Wan Road, Kowloon, Hong Kong Tel: 2300 2470  Fax: 2635 1598 Email: lfdc@lf1937.com http://www.funggroup.com/

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