Cashing In on Click and Buy

Nov 11, 2011

By Franklin Yao and James Button

In the past four years e-commerce in China has been booming, growing 75 percent annually and reaching $78 billion last year. 

Jack & Jones, a fashion brand owned by Denmark’s Bestseller, has been a poster boy of this success, having posted record single-day sales of $3 million through its authorized online store. 

Vera Moda and ONLY, two of Bestseller’s other brands, netted $56 million in combined online sales in Q4 2010.

While part of these brands’ online success can be attributed to having 10 years of China experience and heavily localized product assortments, the products that they sell are particularly well suited to China’s e-commerce space. 

These brands target young consumers, are inexpensively priced, and do not stress quality as a key attribute. 

China’s economic success has been a relatively recent phenomenon. Generational differences among China’s 400 million internet users are even more acute than in developed countries, and in the e-commerce space this gap is even more apparent: 87 percent of users on Taobao, China’s dominant C-C and B-C e-commerce platform, are under the age of 30. 

Our perspective is that 30 is the approximate cut-off between consumers who prefer online shopping and those who prefer physical stores. 

While cultural differences between generations are certainly at play, differences in disposable income are another key factor.

In China, salaries tend to start very low and grow very quickly, giving consumers in their 30s three to four times the buying power of those just entering the workforce. 

This difference is significant, for in China, consumers primarily choose the online channel, because it is inexpensive. 

The mentality that “online shopping is inexpensive” has its roots in the origins of China’s e-commerce market. 

Taobao had the first mover advantage in China’s e-commerce space and defined it as a channel where individual sellers with close links to factories could sell inventory cheaply. 

Not only has Taobao trained consumers to expect the lowest prices online, but it has perpetuated this mindset among other online platforms. Dang Dang, an online bookstore similar to Amazon, offers a roughly 30 percent discount from retail shelf prices. 

Another limitation is more structural in nature. Due to rampant fraud, the majority of banks and credit cards have a low daily limit for online purchases, typically around $75 a day.

Unlocking a card for unrestricted use often requires paying $30 for upgraded security features, an investment that many China’s price-focused, online consumers have been loath to make. 

The result is that the items being sold online are inexpensive. 

360Buy, a respected online electronics retailer, has an average unit transaction price of only $53. The idea that e-commerce is more than a bargain basement has yet to gain wider acceptance in the market. 

Closely correlated with price is quality. Our research has consistently shown that consumers almost always choose to buy from physical stores when they consider quality a top attribute.

We also found that wealthy individuals in tier 3 and inland cities tend to travel to tier 1 cities to make luxury purchases. They rarely purchase online.

Conversely, consumers are more than willing to shop online when quality is not important. In an extreme example, one consumer interviewed by our firm never bought daily clothing online because she didn't trust the quality, but purchased her wedding gown on Taobao. 

In her own words, “why spend $1500 on a wedding dress from a mall when I can buy a $30 dress online? It only has to look good for a few hours.” 

Cash-on-delivery payment mechanisms have emerged as one way to accommodate consumers’ demand to try before they buy better quality goods. Retailers for more expensive items are increasingly implementing cash-on-delivery as a payment option, and some have gone so far as to use their own logistics team in order to engage customers through the delivery process.

Chinese consumers in their 20s and early 30s are highly connected, and spend about 14 hours a week on online social media and entertainment platforms. Brands that understand the Internet usage habits of their target users are able to effectively engage consumers and build brand awareness. 

For example, Japanese brand Uniqlo has 167,000 friends on RenRen, China’s Facebook; wedding store I Do has 224,000 followers on Weibo, China’s Twitter; while Victoria’s Secret has garnered fame on Youku, a Chinese video website, with over 1.5 million viewers of its fashion shows. Many high end brands, such as Coach and Giorgio Armani, use websites and online marketing to build brand awareness although e-commerce is not a significant sales channel. 

Online marketing, however, is not an investment to be made lightly. Online clothing retailer VANCL, one of China’s most famous online retail brands (which, incidentally, sells inexpensive, trendy clothes to young consumers), has been in business since 2007 but has yet to turn a profit for its investors. China’s e-commerce market is not an instant cash cow, but requires investment for a brand to properly develop it. 

An additional factor to consider is the image of a brand. While Taobao Mall has an endless stream of user traffic, it is also highly promotional. Consumers judge brands by the company that they keep, and brands need to weigh the benefits of high traffic with the potential downside of being “cheapened” by a presence on an overly promotional platform. 

While there is a large opportunity for foreign brands in China’s e-commerce space, foreign brands must not take this opportunity for granted. Success in e-commerce, like everywhere else in China, is driven by strategy and market insights. In order to effectively utilize the online channel, foreign brands need to have a very clear understanding of who their Chinese consumers are, what these consumers are doing online, and how their brand should be positioned in the China market.

For more details, please see here.

Franklin Yao is Managing Partner of SmithStreet, a Shanghai-based strategy consulting firm, and James Button is Senior manager at SmithStreet with expertise in consumer products.

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