China, a Rough and Tumble E-commerce Market Ripe with Opportunity
By Randall Mang
Crammed into a packed Shanghai Metro subway car far beneath street level we are speeding towards East Nanjing Road station, gateway to Shanghai’s trendy shopping district, the Bund.
All around us, local passengers – a mere sampling of the millions of commuters who use this service daily and making it the fifth busiest metro rail system in the world – are fixated on their mobile devices. They are texting, watching videos, listening to music, and, no doubt, shopping… the majority of them using oversized tablet devices such as the iPad Mini or Samsung Galaxy Tab 8.0.
On any given day, the e-habits of passengers like those around us offer glimpses into not only modern urban life in China, but also its booming e-commerce trade.
By the time we arrive at our station, many of our fellow riders will have likely priced out items they plan to assess in person in retail stores on the Bund. Odds are they will make their final purchases online afterwards, says Travis Joern, a McGill University-educated executive at CCBC in Shanghai, who runs the Council’s business incubation centre in Shanghai and has spent the past 12 years dealing with China.
“My friends often touch and feel goods in the stores, but then they shop online for the best price.” Joern’s firsthand experience is telling.
According to the July-August 2013 China Briefing by Beijing business consultancy Dezan Shira and Associates, the number of Chinese Internet users rose 10 per cent in 2012 to 562 million. Outpacing this gain, e-commerce in China rose 66.5 per cent, yielding US$190 billion in transactions. The same year, online sales of all consumer goods in China reached 6.1 per cent, compared to five per cent in the U.S.
“Further, 242 million Internet users in China purchased goods online in China in 2012, and this figure is expected to reach 310 million by the end of 2013,” said the report, which cites the increasing use of “mobile devices to browse e-commerce merchandise, in addition to the continued development of popular Chinese social media platforms such as Weibo” among the key drivers of e-commerce growth.
Working in his Shanghai office, Canadian entrepreneur Caleb Balloch has spent the past two years analyzing e-commerce trends in China, and the better part of the last year developing Ledapei.com – a business designed to leverage Chinese appetite for social media, online shopping and “affordable luxury/mid-market fashions.”
Fluent in Mandarin, he describes Weibo as a “half-Twitter/half-Facebook social media information source” that allows users to send short messages, as well as videos and photos. It is also an increasingly popular brand engagement tool.
“There are 400 million or 500 million users on Weibo right now, plus global brands like Coca-Cola, Chevy, Jimmy Chu, Lamborghini, Gap – everyone is on Weibo.”
Despite its heft, Weibo has its competitors. Among them is Weixin (We Chat), an application launched in 2011 that has already amassed more than 300 million users.
“Weixin is all about one-on-one communication. Because brands can also set up accounts, they can send you messages or advertisements. So rather than a message flying by you like it does in Weibo, with Weixin it sits there, ready for you to read,” says Balloch.
While social media platforms facilitate conversations and marketing campaigns, companies such as China’s Alibaba, which runs the popular e-commerce sites Taobao and Tmall, deliver online shopping experiences. Last year, Alibaba generated US$170 billion in sales, outstripping Amazon and eBay combined.
Inspiring opportunism, such dizzying numbers – both consumer and sales data – have contributed to a fiercely competitive and congested e-marketplace, in which Balloch says fewer than 10 per cent of companies in China succeed.
Niraj Dawar, a professor of marketing at Ivey Business School, Canada, says Canadian firms entering China’s e-commerce space “must learn to play on the local platforms, including Taobao, and social media such as Weibo, Qzone, and RenRen. International brands are already very present on these platforms, and competition is stiff.”
A social advantage?
Balloch believes he can help affordable luxury fashion brands that offer goods priced from C$100 to C$1,000 overcome China’s e-marketplace risks, and tap into its growing legions of up-and-coming middle class consumers.
“It is expensive and difficult to build a brand in China. You need a better way to get in touch with consumers; you need to leverage the strength of ‘social.’”
He says members of China’s rising middle class – with many of them born in the 1980s and 90s – have grown up in relative comfort and no longer feel a need to flout their wealth by purchasing “a luxury Louis Vuitton or Gucci handbag.” Instead, they want brands like Kate Spade, Club Monaco and Michael Kors that are considered “more representative of their personalities.”
Balloch says his business model leverages Weixin to help mid-market fashion brands build followings. He plans to do it through an editorially-rich social platform in which consumers will learn about the latest fashions, access mix-and-match advice and also post images of themselves, show off their attire, and discuss the latest fashions. “They will discover brands in a way that is much more organic.”
He says a similar model now enabling women to talk online about beauty and fashion has proven to be successful in China.
That does not mean Balloch is throwing caution to the wind. Wary of the risks, he says consumer dialogue on his platform will be filtered and supported by content designed to build brands and sell merchandise.
Dawar says while consumers are very price sensitive, he agrees that opinion leaders on social media influence brand preferences and perceptions. He recommends using social media to engage local celebrities, spokespeople and endorsers, but cautions that in order to succeed in China, international brands must “retain their foreign origins and associations.”
Before jumping in, he urges companies seeking to pursue e-commerce in China to invest in capabilities such as market intelligence, local representation and brand engagement.
Been there, doing that…
Chinese-born Allen Wu brings an international perspective to his work as an e-commerce finance manager with Decathlon China, a subsidiary of the France-based sports equipment manufacturer and retailer.
Before joining Decathlon, the 30-year-old spent garnered an MBA from the Ivey School of Business in Ontario.
He says Decathlon established a manufacturing base in China in the 1990s, and in 2002 opened its first retail store in China. Today, Decathlon has 41 stores across the country. In 2010, the company launched it e-commerce business through Tmall, a turnkey platform the company still uses today.
Wu says Tmall’s e-commerce infrastructure and customer-facing tools make it easy to establish an online sales presence in China. “You register, learn how to use the back office tools and upload pictures of your products. In one or two weeks, it’s ready.”
Service provider XingCloud – ranked fifth on the Deloitte Fast 50 list in 2012 – offers another ready way to set up an e-commerce storefront in markets worldwide, including China. Beijing spokesperson Tim Luan says XingCloud’s multilingual translation and publishing platform can translate web pages into 54 languages with the click of a button.
In addition to helping its clients gain market exposure through e-commerce sites such as Alibaba and Tencent, XingCloud provides payment tools and promotional support. The firm’s commission-based fees – typically about 50 per cent of retail mark up – also help clients “manage their risk.”
While Tmall and XingCloud services are easy to use, they also have limitations and are no guarantee of success.
For example, while Wu says Decathlon benefitted from its well-established retail presence and the popularity of its private label sportswear, the company is now seeking to distance itself from its competitors through a more customized and enhanced online experience.
Prompt order fulfillment is another priority for Decathlon, which works with two of China’s largest national couriers. “Most of our customers receive their order within 2 to 4 days after they purchase online.”
He also says after-sales support is an imperative. “If there is an issue with a product, customers can make a phone call or have an online chat with our team. We look after our customers.”
Ultimately, Wu says firms considering entering China must recognize that it is in fact not one, but multiple markets. “China is huge. Consumer behaviour, prices – even the weather – are very different between Shanghai and South China. And things are changing constantly. If you are aiming to build a business for the long term in this market you have pay close attention to changes in price and behaviour.”
Joern says eBay’s failure in China is well documented. Among its fatal errors eBay dispatched executives to China who didn’t speak the local language or fully understand China’s unique business environment and marketplace, including a need to tailor products and services to local tastes. Missing the mark on these and other fronts, eBay was eventually trounced by Alibaba’s Taobao marketplace.
“It’s not just about getting your stuff online. You have to interact with consumers. You need to track what people are saying about your company, respond and provide after-sales service. Authenticity is critical,” says Joern.
Having done his homework and due diligence, Caleb Balloch is confident he is on track. “Our test marketing has shown a great response from consumers. We have already talked to numerous brands and they like what they see. We have a strong team behind us. Our next step is to engage more community leaders and investors. With a little support, we will have this business up and running.”
Randall Mang visited China and Hong Kong in June 2013.