Harness The New Ecosystem Of 2 Trillion Online Shopping Market

China's e-commerce market ranks the second in the world and will have an explosive growth. Enterprises that lack online products and Internet services must respond and adjust to the uniqueness of China's e-commerce market and actively manage their network business.

China has the largest number of Internet users in the world, and the number of online consumers is 145 million, ranking second in the world, second only to the United States (170 million people), 2 times more than Japan, and more than 5 times that of the United Kingdom. By 2015, the number of Internet consumers in China will surge to 329 million, and Internet consumption expenditure is expected to exceed 2 trillion yuan, surpassing the United States and becoming the largest e-commerce market in the world.

However, many enterprises in China have not grasped this huge growth opportunity very well, resulting in the consumer cognition and the whole market being influenced by Chinese shopping website giant Taobao (Taobao.com) and other e-commerce enterprises. "In China, the coverage of the Internet has far exceeded the coverage of the top entity retailers," Ye Yonghui, a partner in Greater China of Boston Consulting Group (BCG), said. Companies that want to compete not only need to understand the possible impact of Taobao and other shopping websites on their network business, but also have to attract consumers through multiple online and offline channels.

Consumers, especially the urban middle class and affluent consumers, are rapidly using "multi-channel" shopping, which brings opportunities and challenges to brand businesses, retailers and e-commerce enterprises. Companies that can quickly win such consumer attention have begun to gain significant gains. For example, Vancl.com has become one of China's ten largest casual wear brands (sportswear is not included) through online sales, and its sales in 2011 are expected to reach 8 billion yuan (4 times of 2010 sales).

However, enterprises such as Vic are rare. Most enterprises fail to respond quickly, and have lost a lot of growth opportunities. BCG's latest report shows that if there is no active e-commerce strategy, enterprises will not be able to exert any control or influence in the process of rapid growth. To gain profits from the rise of China's online shopping, enterprises need to understand the factors that make China's e-commerce environment distinctive and the trend of future development and consumer behavior. The development strategy must be tailored to the unique behaviors, needs and challenges of China's network ecosystem.

A distinctive Chinese market

China is a unique e-commerce market. In 2006, less than 10% of China's urban population was shopping online. This proportion has jumped to 23% in 2010 and will increase to 44% by 2015. Every year, the number of new Internet consumers in China is expected to reach 30 million by 2015. The proportion of e-commerce in China's total retail sales will increase from 3.3% to 7.4% in 2015. It took 10 years for the United States to achieve the same growth. By 2015, the annual average consumption of most Chinese Internet shoppers will double to 6220 yuan (980 US dollars), close to the current average of 1000 US dollars.

The demand for e-commerce in China up to 1/4 is for consumers to get products that can't be found in real stores - which is also China's unique situation, mainly because the real retailers are unable to cover the vast territory of China. In fact, many consumers, especially young consumers, are the first to contact a brand or product of the Internet.

The relationship between search engines and retail websites has its unique characteristics in the Chinese market. In most markets in the world, shopping begins with search on Google (Google). In China, Taobao, the online retail website, has blocked the top search engine Baidu (Baidu.com) web crawler. Therefore, most consumers start their search in Taobao. In 2010, Taobao occupied nearly 80% of the total volume of e-commerce transactions. One of the report's authors, Mr. Wei Jiehong, director of BCG Greater China, said: "Chinese consumers are developing the habit of finding products on the Internet without relying on search engines."

Among global consumers, Chinese consumers are most likely to view product reviews on social networking sites, largely because Chinese consumers are cautious and have no confidence in online businesses. 40% of Chinese Internet consumers said they had read or published online reviews, which is more than 1 times the number of American consumers. On the contrary, only 19% of Chinese consumers visit the official website of the brand or manufacturer, and this proportion is 41% to 60% in Japan, the United States and the European Union.

Chinese shoppers are not just looking for discount products online. Now they also want to find unique products that are not available online, get better customer service, enjoy convenience and experience real pleasure in search.

By category, China's e-commerce market is less concentrated than other countries. The top five categories account for only half of the total market value, while in the United States, Japan and the United Kingdom, this proportion is close to 70%.

The time for China's e-commerce environment to take off is ripe. However, if enterprises want to take advantage of the rapid growth of the market, we need to understand the various factors of China's network consumption pattern. The unique environment of China's explosive economic growth has brought about the same unique e-commerce ecosystem.

Taobao occupies the leading position. In 2010, up to 79% of the transaction volume came from Taobao. In China, Taobao is actually synonymous with the e-commerce market. In contrast, most other markets are more dispersed. In Japan, Rakuten, a leading e-commerce company, accounts for only 30% of the market share, while Amazon.com accounts for only 14% of the total in the US.

The BCG report points out that enterprises must understand Taobao's possible impact on its network business, and even enterprises that engage in physical retailing alone. Many businesses fail to realize that their products have been sold by other businesses on Taobao. If enterprises do not have a clear network strategy, they can not exert any control or influence in the process of rapid growth of network channels. To manage the products sold on Taobao, enterprises can use Taobao to measure which products are most popular at all prices. Enterprises also need to carefully evaluate how to manage product flow in different channels, regions or countries. At the same time, enterprises need to decide whether to set up an independent network sales website, or to create a website hosted by Taobao, or to use authorized retailers as channels.

Logistics and distribution challenges. So far, the development of e-commerce in China has been benefited from low transportation costs. The average freight rate of 1 kilograms of packages is only 1 US dollars in China, while in the United States it is 6 dollars. But on the other hand, the distribution infrastructure of this industry is still very weak. Internet sellers have to rely largely on local small independent express companies, whose main business is to deliver newspapers to individual subscribers. In fact, the e-commerce industry seems to drive the growth of the infrastructure of the express business. According to BCG estimates, 60% of the express business revenue in 2010 came from consumer e-commerce. The Taobao family may occupy half of the total number of domestic distribution packages.

Due to the lack of infrastructure development, the worry about express business is not surprising that it occupies 3 seats in the 6 main reasons consumers resist online shopping. Consumers say they are not just worried about the cost or risk of damage due to transportation. Up to 45% of consumers claim that they are even worried about the use of fake goods in transit. For these reasons, consumers who dare to shop online often choose e-commerce providers with distribution centers in their cities.

Companies like Taobao and Jingdong Mall (360buy.com) are adopting various ways to deal with these problems. First of all, these companies invest heavily in the construction of distribution centers nationwide. Taobao parent company Alibaba group has announced that it will invest 25 billion yuan in the next 10 years. Ma has publicly stated that its goal is to deliver products to customers within 8 hours after online shopping. Jingdong mall has announced that it will invest 8 billion yuan in 5 years. In addition, many network providers are building their own terminal distribution networks in cities with a certain scale of business. In cities that have to rely on third party distribution services, network providers are taking measures to make couriers look more professional. For example, people who request their products to distribute products are wearing standard waistcoat vests.

Unique network behavior. There are significant differences between Chinese consumers' online shopping and offline shopping (for the purpose of investigating goods or viewing evaluation), and the type of website chosen is different from those of other countries. In China, only 19% of consumers visit the official website of the brand or manufacturer, and this proportion is 41% to 60% in Japan and Europe and the United States. Chinese websites of foreign brands are often translated directly into their own websites, and are rarely customized or localized for the Chinese market. Few foreign brands create any kind of platform to create a sense of belonging. In fact, the establishment of platform will attract consumers to visit more frequently. Chinese consumers are likely to be the most socialized consumers in the world. The BCG report points out that Chinese consumers are most likely to say that they have read or published online reviews, almost twice the number of American consumers. In addition, although social networking is just emerging, Chinese consumers are most likely to view product related suggestions on social networking sites.

The fundamental driving force behind these behaviors may be that consumers are not at ease about products sold online and have no confidence in online businesses. Comments and suggestions from friends help to alleviate this distrust. In fact, consumers' trust in online information sources (such as blogs, commented websites and social networking sites) is much higher than that of offline information sources, such as TV advertisements or manufacturers' printed materials.

Unique online shopping ecosystem. As mentioned earlier, the relationship between search and online retail websites is unique in China. Taobao occupies nearly 80% of the total e-commerce transactions in 2010, and Chinese online shoppers are developing the habit of finding products on the Internet without relying on search engines.

Social Networking provides another way to attract consumers to participate online, but in this respect, China is also different from other parts of the world. The decentralization of Chinese social networking sites poses the biggest challenge -- there are no top competitors like Facebook in China, such as Kaixinoo1.com for white-collar workers, Renren.com for college students, Douban.com for QQ, QQ for young people and active adults, and many social networking sites for more user groups. Another extremely powerful website is the popular Sina micro-blog (micro-blog website used by celebrities and all walks of life).

The way to win the leader

A few years ago, when credit cards were not so popular in the Chinese market, one of the key obstacles to the use of e-commerce was the lack of satisfactory payment methods. Taobao solved this problem by launching an innovative Alipay account. Alipay takes care of the payment of goods before consumers receive the order. On the contrary, Paypal transfers the money to the merchant when the order is placed, and the merchant delivers the goods only after receiving the payment. More than 60% of consumers use Alipay on Taobao. Cash on delivery (COD) is also a common way of payment for Chinese Internet shoppers.

So far, Taobao, the Alibaba group's most notable e-commerce company, has sales in 2010 higher than the sales volume of China's five largest entity retailers, making Taobao the largest retailer in China. The website has more than 800 million kinds of network products, and sells as many as 48000 items per minute.

Although western media call Taobao China's eBay, the difference between Taobao and eBay is that Taobao does not sell secondhand goods. Most of the products sold on Taobao are brand-new products. Sellers are often those who fail to succeed through other retail channels or distributors who sell excess inventory.

Taobao's affordable pricing (online shoppers say that it can find 25% of the product price lower than the other channels on Taobao), convenience and many other features create consumers' high stickiness, which makes Taobao profitable. One of the advantages is that Taobao has a large number of business sources. Although Taobao did not enter the C2C market in China until 2003, it gained more than 60% of its market share in just 2 years, thanks to the "free" strategy that Taobao does not charge any registration fees or transaction fees. Driven by the network effect, Taobao has achieved further growth: a large number of merchants owned by Taobao have brought a large number of consumers' access, which in turn has attracted more businesses and brought more consumer traffic.

Taobao's customer service also reassured consumers. Taobao has the largest customer service center in the world. In addition, an innovative instant messaging tool called Taobao Wangwang enables online merchants to communicate with consumers in real time. On average, every shop on Taobao has 2-3 customer service representatives, totaling millions.

Finally, through Taobao's business credit rating system, buyers can score and publish feedback for sellers, which establishes a higher degree of trust for their products and brings word of mouth effect to the website. At the same time, Taobao adds attractive social interaction elements.

In order to diversify its original free market mode, Taobao launched Taobao Tmall in 2009 and transferred its resources strategically to this new platform. Like physical shopping malls, Taobao mall also displays different product categories in different virtual "floors". It also promotes shop promotion activities and promotes loyalty integrals. Compared with the original Taobao, the choice of Taobao mall is more stringent, customer service is more excellent and reliable. Participating merchants must authenticate through the website and pay the registration fee and transaction fee at the same time. Many brand suppliers have established official stores directly or through distributors in Taobao mall. This pattern has proved to be very successful.

In the process of diversifying, Alibaba reorganized Taobao in June 2011 and divided it into 3 independent companies: Taobao, Taobao mall and eTao. This initiative helps to provide a more mature consumer experience and enables companies to innovate more rapidly in the future. Because this popular platform has huge customer base and huge traffic, all these measures have strong profit potential.

Competitor's network strategy

By 2015, Internet sales will account for 20% to 30% of China's non retail sales, and its market value will increase from 476 million yuan in 2010 to more than 2 trillion yuan. Many Chinese enterprises use or plan to use the Internet as a sales tool, while multinational enterprises have been unable to take advantage of this fast developing channel. BCG reports that those enterprises that have realized this opportunity must understand that e-commerce in China will need a customized strategy.

First, Chinese consumers, especially the urban middle class, have shown willingness to become multi-channel shoppers. In just a few years, nearly half of China's urban consumers will become multi-channel shoppers. Therefore, it is far from enough for an enterprise to deal with consumers' online or offline shopping habits.

Secondly, the demand of consumers is different. High consumers have different concerns, and there are significant differences in consumer demand for products in different levels of cities and many other aspects. Enterprises need to have a clear understanding of who the target consumers are, where they live, and what their specific needs are.

Finally, because the growth rate and penetration rate of e-commerce in some product categories are higher than other categories, the potential role of online opportunities and network channels varies with different categories.

China's e-commerce market is developing rapidly in a unique way. The next 5 years represent the most critical period of development for this exciting young industry. If an enterprise can not have an active and targeted network strategy, it will miss important growth opportunities, and can not control its own brand development on platforms such as Taobao. The ever-changing dynamic of e-commerce industry requires continuous monitoring of competition and emerging consumer demand. Enterprises that can actively take actions according to environmental changes will become winners in the future.