Go online to reap the harvest

Staff at a Taobao shop are busy packaging goods to be sent from Yiwu, Zhejiang province, to different parts of China. Lyu Bin/For China Daily

E-commerce helps Western companies gain a toehold in the huge hinterland

Although it is a relatively new kid on the block, in terms of size and spread e-commerce has no peers in China. But its real strength, as many foreign companies and brands are discovering now, is its ability to be a matchmaker in the vast and untapped Chinese domestic market.

With revenues in excess of $210 billion last year and a steadily growing customer base of more than 500 million, the e-commerce industry in China is fast catching the fancy of big names such as Louis Vuitton, Adidas AG, Samsung Group and The Walt Disney Co. Many others such as the UK-based retailer Marks & Spencer Plc and Mothercare Plc are in talks to be a part of the sunrise industry that deals with the buying and selling of products as diverse as mobiles, fresh vegetables, textiles, dresses, exotic food, machinery and personal care products.

"E-commerce has a key role in bolstering China's economic growth and also in increasing domestic consumption. It is a crucial tool for the government as it charts steps to rebalance the economy and ensure sustainable development," says Qi Xiaozhai, dean of the Shanghai Commercial Economic Research Center.

Pointing out the importance of the industry, analysts maintain that it is one of the few that has been recording consistently high growth rates over the past few years. The e-commerce industry has seen growth rates of more than 78 percent since 2006. Unlike the brick and mortar stores, where physical presence is the key driver, e-commerce relies more on faster, cheaper and better buying experiences and more shopping choices online.

E-commerce sales in the United States, the largest market, last year were around $225 billion, accounting for more than 5 percent of the total retail sales in that country, according to data published by the US Census Bureau. In contrast, online retail revenue in China was around $207 billion last year, representing just 6 percent of the total retail spending in the country. With the population of Internet users in China slated to grow further this year, and the fact that online shopping penetration still lags behind many developed countries, experts says they feel there are enough rich pickings for foreign companies, provided they are willing to weather the competition from domestic players.

Expanding presence

Currently only 41 percent of all the luxury brands present in China have an online presence and most of those present have not been that successful in reaching out to customers. Out of the 564 million people who had Internet access in China last year, only 242 million people placed an order online. This is something that should interest the Western companies searching for new markets to sustain growth, experts say.

While there are no doubts about the vast potential of e-commerce, it is its ability to reach out to customers in remote areas of China, where stores are few and the cost of building a physical retail presence is high. That is proving irresistible to Western companies.

According to a study conducted by Taobao.com, China's biggest customer-to-customer electronic trading website, online shopping has played a key role in unlocking the consumption potential of lower-tier urban residents in the nation. The research, which surveyed 2,006 Chinese counties last year, indicates that nearly 30 million people from these regions bought goods with a combined value of 179 billion yuan ($29.2 billion) on Taobao, up 87 percent year-on-year. That is a per capita average of 6,000 yuan, eclipsing the 4,700 yuan spent by shoppers in first- and second-tier cities. Small-town customers shopped on Taobao 54 times a year, compared with 39 made by big-city buyers.

Yiwu, a county-level city in East China's Zhejiang province, took the top spot in overall spending, with online transactions of around 3.4 billion yuan. People from Qingliu county in Fujian province were among the most enthusiastic digital shoppers, devoting 72.6 percent of their disposable income to online vendors on Taobao. In Beijing and Shanghai, the comparable figure was only 27 percent.

The keenness of county-level shoppers to buy global cosmetics and clothing brands online is also drawing more foreign competitors to China's e-commerce market. Buyers from smaller regions spent an average of 765 yuan for Estee Lauder skin care products last year on Tmall, Taobao's sister unit where business vendors sell to individual customers. In contrast, large city residents spent only 652 yuan on similar purchases.

The findings coincided with a study conducted by global consultancy firm McKinsey & Co in March that indicated online spending has played a key role in lifting total consumption, especially in less-developed areas of China.

"We found that although income in the urban areas is still low, online purchases still tend to be higher because customers have online access to products and brands previously not available, especially in locations where many retailers do not even have physical stores," says Richard Dobbs, director of McKinsey and lead author of the report.

Qi Xiaozhai from the Shanghai Commercial Economic Research Center reiterates that online shopping has been the main catalyst for economic growth, especially when it comes to uncorking the demand from lower-tier cities. "It is important for merchants and companies to build brands that resonate and inspire trust with customers online," he says.

Unlike first-tier citizens whose purchases are largely governed by exposure to products, Qi Xiaozhai says emerging customers are usually novices for whom buying a refrigerator, a pair of jeans or even a box of diapers may be a first-time experience.