E-commerce China

China’s E-Commerce Addiction Has Serious Market Potential

” I am admittedly an Amazon shopping addict, so it was interesting to have a long conversation recently with Chinese colleagues in Nanning about their own growing addictions to online shopping. They are big fans of Taobao, although they also use other e-commerce sites likeJD.com and Suning.com. My colleagues are representative of a larger trend of Chinese consumers shifting partly from brick-and-mortar shopping to online shopping, and expanding online shopping in its own right. E-commerce now represents a high-growth sector”, said Sara Hsu.

Though relatively new to online shopping, Chinese consumers already make up for almost half of global online retail sales, and are only growing in numbers. Online retail sales amounted to $581.61 billion in 2015, surging 33.3% from the previous year. The volume of online sales in China now exceeds that in the US, and online sales are expected to grow 20% annually by 2020. Furthermore, online shoppers represent the vanguard of China’s growth story, since they tend to be young, urban, and highly educated. They have a different attitude toward shopping than older generations, which were shaped as savers by more challenging political and economic circumstances. Younger shoppers are more willing to spend.

Compared to brick-and-mortar retailing in China, e-commerce sales often experience fewer licensing requirements and quicker customs clearance. As a result, e-commerce is to some extent replacing shopping in physical marketplaces, and will comprise 42% of growth in private consumption by 2020 according to Boston Consulting and AliResearch. For this reason and others, hypermarkets such asCarrefour and Walmart have shut down a number of stores. Online shopping also allows consumers to access products that are not available in stores, including organic foods and some luxury products from overseas.

As consumers in Tier 1 and Tier 2 cities (think Beijing, Shanghai, but also Chongqing and Chengdu) become increasingly savvy online shoppers, there continues to be large potential for online sales particularly in Tier 3 and 4 cities. E-commerce penetration amounts to 89% in Tier 1 and 2 cities, but only amounts to 62% in Tier 3 and 4 cities, as per the McKinsey iConsumer China 2016 Survey. The online shopper base in Tier 3 and 4 cities is 257 million, a population number that is larger than that of almost all countries in the world (except India, China as a whole, and the United States). That is serious market potential.

To keep up with increasing demand from smaller urban and rural areas, online retailers are seeking to expand logistics infrastructure and services. For example, Alibaba ’s logistics arm, Cainiao, now owns 180,000 express delivery stations for the shipment of products and has recently expanded its fresh food distribution centers across China. The firm recently completed its first external funding round and is expected to spend $16 billion over the next five to eight years to expand its network. Growth in China’s underdeveloped logistics sector can certainly be expected to accompany the expansion of e-commerce.

China’s torrid growth in online shopping reflects increasing incomes, higher education, and more sophisticated consumption patterns of the typical consumer. Due to the expansion of online retail shopping and the necessary logistical services, e-commerce is at the frontier of consumption growth in China.

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