On the cusp of a boom

Rapid growth of e-commerce in China provides new growth wind for foreign retailers

The rapid growth of e-commerce has triggered a raft of opportunities for retailers in China. Online interactions and visits to online forums have increased and so also the researching of brands on the Internet.

A recent survey by KPMG shows that about 70 percent of the potential consumers search for luxury brands on the Internet at least once a month. It also notes a surge in online shopping intentions, with 40 percent of respondents indicating they are interested in purchasing luxury goods on the Internet, a substantial increase from the 22 percent in 2011.

While some retailers face challenges when opening physical stores, we expect a growing number of brands to look at doing business through online channels.

Last year, China had an estimated 219.8 million online consumers, representing 43.7 percent of Internet users, data from eMarketer show. The volume of consumers in the US is, in comparison, 184.3 million. These volumes combined with an expected average growth of 3 percent in the US and 21 percent in China from 2010 to 2016, show why the China market is such an attractive place for international companies.

For multinationals looking to benefit from the explosive growth in Internet users in China, it is critical to understand the users who engage in e-commerce.

A key reason for the market's growth has been the increased adoption of the mobile platform because it provides individuals who may not have access to a PC the ability to interact with Internet services through affordable tablet and smartphone devices.

According to KPMG's latest global technology survey, Chinese consumers are seeing the highest take-up of e-commerce and new technologies. In fact, many Chinese consumers engage in online shopping, compared to consumers in the rest of the world.

The interactions are across a wide range of items, from household products to luxury products. Top items include CDs, DVDs, books and video games, as 79 percent of survey respondents said they preferred to purchase goods online, ahead of 65 percent of global respondents.

China has also seen exponential growth in the use of mobile devices for both purchases and payments and is leading the way in mobile banking, because of the rapid take-up of smartphones. The rapid adoption of the smartphone is playing a significant role in terms of customer experience in the retail industry. More than half of Chinese respondents said they use their smartphones at retail outlets to access coupons and mobile gift cards (46 percent), whereas global respondents said they typically use their phone to research products and services or to locate the nearest stores.

We believe the key to success is to understand Chinese consumers and their specific needs. It is therefore important to understand not only what consumers want to buy but also how they want to do it.

E-commerce is poised to become an increasingly segmented industry, and brands will need to adapt. While integrated platforms can attract large site traffic and provide other advantages, being a specialized platform is a solution for some brands.

In KPMG's recent survey on China's luxury sector, respondents cited convenience as the main motivation to buy online (76 percent), while cost saving (65 percent) did not matter as much. In terms of barriers to online purchasing, they cited concerns over authenticity of products (72 percent), payment safety concerns (55 percent) and lack of after-sales service (39 percent).

As the e-commerce industry tends to be unregulated, online sites need to prove their credibility and build a strong reputation. Encryption certificate registration, such as provided by Verisign, and Internet Content Provider licenses provided by the Chinese Ministry of Industry and Information Technology, offers a degree of assurance over the legitimacy of the website, but retailers must take steps to instill confidence among customers that the service they provide can be trusted.

Consumers will often trust information from their community more than they will from any corporate website. With this in mind, many sites have incorporated social media technologies to allow consumers to discuss the latest fashion trends, provide advice on where to buy products and as a means of enabling those who cannot travel the ability to obtain the latest fashions.

We see opportunities for multinational companies in China, and there are a number that have already entered the China market. Amazon has established its own China-based site via its acquisition of joyo.com. Walmart and Bloomingdales have also invested in China through the brand names Yihaodian and glamoursales.com, respectively. Many international brands including Gap, Levi's, Samsung and Uniqlo also use Taobao Mall to access China online consumers.

Before expanding into China, potential entrants must consider a number of factors:

Know your customer: Perform a detailed assessment of your target consumers in the country in order to understand what drives them and what their triggers are.

Determine the best entry strategy: When there are so many existing e-commerce platforms in China, why create a new technology and point of presence when you can utilize the customer base of an existing Internet brand.

Focus on service: Having understood your consumer, you need to provide them with the level of service they expect and want. Don't over deliver since this will eat at your margins, but provide a service that is commensurate with their needs.

Operating requirements: In order to avoid withholding tax issues and to provide local support, a China based operating company is likely to be needed. Make sure this is established efficiently and effectively to meet consumer requirements.

Payment processing: While Visa and MasterCard may be the biggest brands in payments globally, in China support for Union Pay is essential. Being able to process these transactions and in local currency will make a big difference to local adoption rates.

Play on your differentiators: The affluent middle class and increasing level of disposable income in Chinese consumers is firmly attracted to European and US brand names. Use this to your advantage, but remember fashions come and go so keeping at the top will take effort to maintain.

We expect to see continued entry of more companies into China, using the Internet as one of their key channels and focusing on creating and delivering services designed for the mobile platform. Added to this is likely to be a continued expansion of Chinese domestic companies and multinationals looking to target traveling Chinese consumers and provide services to them in China and overseas.

China's e-commerce boom will not occur in the same way as the rest of world, and we expect a number of key developments in this over the next 12 months.

The author is Director of KPMG China. The views do not necessarily reflect those of China Daily.

(China Daily 02/08/2013 page15)