Trends in China’s E-Commerce Market

June 4, 2014 Posted by China Briefing Reading Time: 6 minutes

By Harun Rauf

SHANGHAI – China is currently experiencing huge growth in e-commerce. It is estimated that e-commerce in China will be worth US$540 billion by 2015, and by 2020 worth more than e-commerce in the U.S., the UK, Japan, Germany and France combined. This is linked with the number of people connected to the Internet in China, be it via computers or smartphones – there are over 600 million internet users and over 500 million mobile internet users in the country. The Chinese government has a target to connect 1.2 billion people (85 percent of the population) to 3G or 4G mobile internet by 2020.

To date, several foreign firms attempting to break into this lucrative market have met with failure: eBay has withdrawn from China, while Wal-Mart and Best Buy are still struggling to compete with local firms. Alternatively, some success may be found through joint operations with a Chinese firm. Shoprunner, a U.S. rival to Amazon.com, recently struck a deal with Alibaba Group Ltd. in which Alibaba Group purchased a 39 percent stake in Shoprunner for an investment of US$202 million. Under the terms of the deal, Alibaba Group will assist Shoprunner’s expansion into China in exchange for allowing Alibaba to supply U.S. goods to Chinese consumers hungry for foreign luxury items.

While there are plenty of physical shopping options in China’s larger cities, lower-tier cities cater less to international luxury brands. In light of this demand, the internet has allowed many retailers to offer goods to consumers in lower-tier cities and further afield without the need and cost of setting up a physical outlet.

China’s economic rise coinciding with the dawn of the information age means its consumers are web savvy and are thus increasingly going online to make many of their purchases. The internet serves as an information source for digital consumers who regularly log on to review sites and use social media to make consumption choices. Furthermore, Chinese consumer trust in online shops is stronger than previously imagined and people are more willing to buy luxury items online.

KPMG recently surveyed 10,200 people on their online spending habits on luxury goods. One of the most striking pieces of information discovered by the report was that the last item purchased online by respondents cost on average RMB 1,515 (US$243). The average price paid for items increased according to customer age. The average amount spent by those in the under-20 age group was RMB726. This jumped to RMB1,657 for 25-29 year olds and continued to climb for the oldest age group surveyed, 45-49 year olds, who spent an average of RMB2,108 on luxury goods purchased online.

Additionally, men were found to spend significantly more on individual items than women; on average men spent RMB2,163 versus RMB1,314 for women. However, women buy more luxury items online and spend more overall than men. This plainly demonstrates the significant sums of money now being spent online by Chinese consumers.

The primary motivation for consumers to shop online is price, and digital consumers were found to be more sensitive to price changes. This is primarily due to the ease of making comparisons online, but also because social networking and review sites allow consumers to make more informed choices. Fifty-one percent of those surveyed felt that when buying online they felt more assured of the item’s country of origin.

Convenience and a greater range of available products were also found to be important consumer motivators. Twenty-eight percent of respondents opted for online shopping to find something unique, and this proportion rose to 41 percent for those aged 25 or under.

There were some common concerns expressed by digital consumers. Seventy-eight percent of respondents were concerned with the authenticity of items sold online. Digital consumers were also concerned about not being able to test out products before buying them (70 percent) and sizing (55 percent). Reliability of sellers was also a worry: forty-eight percent reported concerns that the product shown online would differ from that delivered, 41 percent doubted online sellers’ guarantee of after-sales services, and 37 percent raised concerns about complicated return procedures.

Alibaba has gone some distance to address these concerns. Its Tmall site guarantees genuine products and gives users a more direct route to connect with sellers. Tmall has become so popular that international high fashion brands such as Burberry have established their own shops on the site.

The survey also addressed buying trends such as which categories of products consumers tend to buy online. Cosmetics were found to be the most popular type of luxury product bought online—with 51 percent of respondents having used the Internet to make purchases in this category. The next most popular categories were women’s shoes (39 percent), women’s apparel (36 percent), and accessories and bags (both at 34 percent).

The survey found that 70 percent of online shoppers use their home computers to shop online, 60 percent use their smartphones and 30 percent use tablet computers, with a trend toward greater smartphone use.

With faster mobile internet speeds and websites increasingly catering to mobile users, it is becoming more and more convenient to use smartphones wherever and whenever one desires. In time, with further innovation, drawbacks such as small screen sizes and poor connections will be remedied by improvements to user interfaces and investment into mobile internet infrastructure. Despite these challenges, using phones to shop online is already very popular in China; around 55 percent of China’s smartphone users have made a mobile payment, while the equivalent figure in the U.S. is just 12 percent. This underlines the importance of facilitating access to online shops for smartphone users.

The primary payment method for online purchases in China has changed over time. Previously cash-on-delivery was the favored method of payment, but this has since changed to automated online payments. Around 70 percent of payments are now electronic, a reversal of five years ago when around 70 percent of payments were cash-on-delivery.

The Chinese government has granted over 200 licenses allowing firms to set up electronic payment systems but the market remains dominated by four main players — AliPay, TenPay, Union Pay and 99bill combined account for 85.5 percent of the electronic wallet market in China.

Overall, the survey found that consumers in China are more partial to shopping online, especially through their smartphones. All age groups displayed high confidence in online platforms.The survey found that as people get older their average per-item online spending increases. While men were found to spend more on individual purchases, women spend more overall in their online purchases. Finally, the report found a shift away from cash-on-delivery payments toward the use of online payments.

Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email china@dezshira.com or visit www.dezshira.com.

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