After recently receiving a generous gift of toilet pucks and adhesive hooks purchased online by a middle-aged Chinese friend, I realized that online shopping in China is much more than I thought it was. The Boston Consulting Group estimates that the total value of the online retail market in China will reach 2 trillion RMB by 2015, surpassing that of the United States. The industry is growing and people are eager to participate in this consumer phenomenon that is changing China in at least the following five ways.
1) Online retail is driving consumption
It’s hardly news to anyone that the spending power of Chinese people has surged with the growth in the nation’s economy. As the McKinsey Global Institute (MGI) affirms in their March 2013 report, “Millions of newly minted shoppers can now log on and purchase goods they could only dream of acquiring just a few years ago.” Of course, people are still exercising their purchasing power in traditional retail settings (e.g. supermarkets and malls), but more and more are taking to shopping online. According to a joint report by Taobao and the Chinese market research firm CTR, there was a 6 percent increase in online shopping in China in the first half of 2011 alone. Moreover, China’s residential internet penetration is still comparatively low—only 31 percent of the country’s population was online as of 2010, according to a report by the China Internet Network Information Center (CNNIC), meaning that the future holds even greater potential for online retail growth as more and more people gain access to the internet.
This access to online shopping and a vast product offering is driving an incremental increase in private consumption. A 2012 poll done by CNNIC showed that women are the major drivers behind this boom in online retail. A 36-year-old housewife reported to China Daily that she turns to online shopping not because she’s a shopaholic, but because she is responsible for purchasing the family necessities. By shopping online she can reduce costs through savings from bulk purchases, special offers and lower prices than shopping in department stores and supermarkets. Forget hauling armfuls of plastic bags home from the store; Chinese consumers are buying anything and everything they can online and MGI estimates in their March 2013 report, “By 2020, China’s e-tailing market may reach between 420-650 billion USD in sales and add between 4-7 percent to the nation’s private consumption.”
2) Opening doors for innovation
The economic growth and rapid popularization of the internet in China has created a favorable environment for the development of e-commerce. Many analysts believe that the strong growth in online retail is creating incentives for innovation in technology. Not being something that the nation is particularly well-known for, innovation has certainly become a national priority for China’s continued growth and success. The March 2013 report completed by MGI notes that China could potentially forgo the expansion of physical stores as seen in Western markets and move directly to a digitized retail environment.
In a country that exercises tight control over the internet, online retail is an area that the government has allowed to develop without a great deal of intervention, as reported by MGI. They go on to state that encouraging innovation in technology will help boost domestic consumption and move away from heavy reliance on exports and investment. The report notes that growth in online retail has led to the development of a $13 billion service provider industry that includes the areas of online advertising and marketing, payment systems, warehousing, express delivery, and IT services. This industry holds enormous potential for technological advances that could help China gain renown as an innovator, not only as a manufacturer.
3) Giving people access to goods that aren’t available locally
While China’s major cities that many of us call ‘home’ might be filled with shopping malls and big box retailers, that’s not the case everywhere. Online retail is helping this situation by giving consumers access to products that aren’t readily available in the city in which they live. Outside of the nation’s largest cities, brick-and-mortar stores are expanding too slowly to meet demand, according to the March 2013 MGI report. This report goes on to state that even though shoppers in more remote locations have lower average incomes than those in the largest metropolitan areas, they spend a higher share of their disposable income online. In tier 4 cities, MGI data shows that consumers are spending 27 percent of their disposable income online.
People in these areas are buying for ‘face’ too, and they’re willing to spend just as much to claim their position within the social hierarchy. With more people turning to online retail to beat the slow growth and regional-nature of traditional store chains, it is creating unique potential for online shopping in China. MGI predicts that the rapid growth in this industry could possibly “create a ‘leapfrog’ effect in Chinese retail, transforming it into a more digital and efficient industry even faster than traditional store chains are able to expand nationally”. This is opening up yet another door for China to continue growing and innovating into the future.
4) Boosting consumer confidence and satisfaction
Online retailers are doing a lot to gain customer’s trust and set their mind at ease when making purchases online. They offer enhanced services that aren’t always available through traditional retail channels. For example, online retailers hold themselves more accountable for the products they are selling by offering returns, welcoming customer reviews, and making pledges not to sell pirated or counterfeit products. Many websites, such as DangDang.com, offer more flexibility when it comes to payment, giving consumers more options if they prefer not to use credit cards. DangDang allows customers to pay cash upon delivery or make a payment from their bank account by SMS message or touch-tone phone.
In March 2013, Alibaba’s financial subsidiary, Alipay, announced that it would launch a credit service this year, offering credit limits of up to 5,000 RMB that can be used only on their mobile site. Mobile shopping is providing yet another convenience to online shoppers in China and it continues to grow as more people purchase smartphones and make use of 3G networks (for example, in 2012 Taobao Mobile hit over 300 million visitors). These hanging consumer preferences offer some room for speculation that China might be gradually moving away from its haggling culture and opting for a cut-and-dry retail experience. I don’t know about you, but that’s certainly satisfying news to me.
5) Opening up opportunities for the average citizen
Online retail environments, such as Taobao, are also giving entrepreneurs and people who can’t find work an opportunity to earn a living and grow successful businesses of their own. These websites provide a powerful launching pad for entrepreneurs and merchants of all sizes to sell directly to consumers. The March 2013 MGI report concludes that e-tailing is fast becoming an area in which China could lead the world in innovation rather than relying on its labor cost advantage. Many people who were previously involved in labor-intensive work are now turning to computers and the clicks of a mouse to earn their keep.
As China Daily reports, e-commerce has had a profound effect on the lifestyle in villages around the country. The report notes that an online trader opened up his first shop with 40,000 RMB that he borrowed from the bank, and just two years later he was driving a luxury car. A report by Alibaba notes, “While such villages are cashing in on China's online shopping trend, the relatively slow internet speeds and logistics systems are likely to impede their development.” It is worth acknowledging the fierce competition and the time commitment that this type of business comes with as well. Regardless, these hurdles aren’t holding people back. These ‘entrepreneurial towns’ across China have set up their own delivery networks and created opportunities in the service industry, including webpage design among others. They are operating on the principle, ‘If you build it, they will come’, and they are seeing successes that would otherwise be difficult to achieve.
The online retail industry is witnessing astounding growth and is changing the way that retail is done in China. Millions are turning to online outlets to save money and enjoy a convenient shopping experience. If you’re willing to brave the language and dig for the best deals, then there’s no reason why you can’t take part too. You’re sure to find something to suit your fancy and save you money. Take a look at this guide to online shopping for advice on how to get started today.
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