China strategy: E-tailing

As a newly emerging channel in retailing, internet retailing has experienced explosive growth in China, with a current value CAGR of 85% from 2006 to 2011; the highest amongst all channels in retailing in the country. In addition to the relatively small base compared with grocery retailers and apparel specialist retailers, internet retailing is unique in many ways, especially in how it attracts young and middle-aged consumers.

Improving online security, convenience of payment method and the mushrooming of various business-to-consumer (B2C) online shopping platforms over the review period increasingly ensured that Chinese consumers felt at ease with purchasing online, resulting in the rocketing growth of internet retailing in China.

Internet services also improved in China over the review period, with broadband service plans becoming increasingly affordable for average consumers. Internet users in China reached 485 million by June 2011, an increase of 15% over June 2010, ranking the country in first place in terms of the number of internet users worldwide. Meanwhile, internet penetration in Chinese households increased to 36% by mid-2011; up from only 4% in 2000.

Current impact

Chinese consumers value the convenience offered by internet retailing. Internet retailing makes shopping is possible at anytime, anywhere, as long as there is a computer or mobile devices with internet access. Product comparisons and price comparisons are just a click away. Home delivery and competitive prices is also good news for time-pressed working consumers. With minimal intermediate links, such as wholesalers and distributors, products sold in online shops are usually cheaper than in store; hence appealing to Chinese consumers, who are very price-sensitive.

To ride on the boom in internet retailing in China, many multinational retailers entered internet retailing over the review period. Wal-Mart’s Sam’s Club started its online shopping platform in 2010, and Wal-Mart also became a minority shareholder in the rapidly growing domestic online supermarket in 2011.

More non-grocery products are being purchased online such as books, electronics and appliances, as well as apparel. This is mainly because the major purchasers online are internet-savvy young and middle-aged people. On the other hand, the presence of grocery retailers in internet retailing was still limited over the review period as homemakers still tended to go to in-store retailers to purchase their groceries.

Pure e-commerce companies dominated internet retailing over the review period in China, led by and Backed up by established logistics and distribution systems, these pure e-commerce companies have wider product ranges and are more efficient in terms of operation. Meanwhile, they also have lower operational costs as they do not run any store-based outlets. Some new medium-sized online retailers in China such as Vancl specialized in the online clothes retailing. Meituan features a daily deal on the best stuff to do, see, eat in different cities in China.


A supporting policy from the central government will further perfect the internet infrastructure in China over the forecast period, possibly leading to faster and cheaper internet services for average households. Trade sources reveal that the Chinese government has invested heavily in information and communication technology, including an investment of at least RMB70.0 billion in the Next-Generation Wireless Broadband Communications Project, to be completed by 2013. According to the government white paper issued in 2010, the internet penetration rate in China is forecast to reach 45% by 2015.

On the basis of the perfect internet service, internet retailing is expected to continue its dynamic development in the forecast period. Although the growth momentum is expected to slow down compared with the review period, the constant value CAGR in the forecast period is expected to remain robust, at 29% from 2011 to 2016. The great potential for internet retailing is anticipated to come mainly from the overall fragmented retail market in China. Consumers’ demand for convenience when shopping may also underpin the buoyant growth of internet retailing in the forecast period.

Future impact

In view of the explosive growth of the channel, more store-based retailers are likely to enter internet retailing, attracting both grocery and non-grocery retailers. This is likely to increase the popularity of online shopping over the forecast period. Consequently, store-based retailing is likely to be dampened. The bankruptcy of many store-based bookshops in China over the review period is anticipated to continue in the forecast period, due to the mushrooming availability of low-priced books online.

In spite of the boom in internet retailing, store-based retailing does have its advantages, and will continue to attract a fixed group of consumers. This is mainly because consumers are expected to continue to rely on bricks-and-mortar stores for grocery products such as fresh vegetables and fruit. Meanwhile, there are consumers who are not internet-savvy.

To consolidate their leading positions, the top internet retailers are expected to strengthen their logistics and distribution systems over the forecast period. Pure e-commerce player will increase its city delivery centres to 500-800 cities in China over the forecast period, to ensure timely and high-quality delivery.

For those companies which are not pure e-commerce retailers, the major issue to resolve over the forecast period will be how to avoid cannibalizing their sales from store-based outlets with sales from their online sales platforms. after all, the investment in setting up an online platform for store-based retailers is not small.

Daxue Consulting China Strategy and Distribution in China


Picture: Online Retailing