China’s E-tail Revolution
China is leapfrogging traditional retail expansion through ecommerce
China is leapfrogging traditional retail with it’s unique ecommerce model.
Unlike the United States where retail was built upon a strong foundation of national chains, China’s retail model is going to jump or skip the physical store stage, also known as the leapfrog effect .
A new model of retail is emerging. Not one built upon the infrastructure of physical stores, but one built on top of ecommerce that paves the way towards higher levels of retail efficiency.
China ecommerce at a glance
Hard Facts:
• World’s largest online population, with 130 million residential broadband accounts
• Ecommerce produced more than $190 billion in 2012 sales
• China’s commerce industry has posted 120% compound annual growth since 2003
• More than 6 million e-merchants list products on Taobao
Growth potential:
• China’s broadband penetration is only 30% (population 1.3 billion)
• Online sales could reach $650 billion by 2020
• By 2020, commerce could potentially lift China’s private consumption by additional 4-7%
• In Tier 4 cities (small, rural cities), the average online shopper spends 27% of disposable income through ecommerce
• Ecommerce could boost labor productivity in China’s retail sector by 14%
Compare and contrast these with the United States.
Focus on Where do sales happen? Interesting huh?
Most of us don’t differentiate between different types of ecommerce. We all think ecommerce is ecommerce, but clearly this doesn’t tell the whole story. As seen above, marketplaces share of China’s total e-tailing activity stands at a staggering 90% compared to only 23% in the United States. Clearly there is something going on here.
Why the difference? Retail in the United States originated from physical stores and large players grew into national chains. National chains then laid the foundation for ecommerce to be built upon, explaining why 76% of ecommerce activity in the United States is done through individual sites or storefronts. Surprisingly Amazon and Ebay combined only account for 12.5% of the market share.
Evidence of the leapfrog effect is already taking place in China.
Retail in China traditionally has been hyper-local and lower tiered cities didn’t have access to products. With the explosion of ecommerce, businesses can now reach consumers in Tier 2, 3 and 4 cities. People living in tier 4 cities (Beijing/Shanghai are Tier 1 for reference) already spend 27% of their disposable income through ecommerce.
Shipping has also reaped the benefits. True story: I bought t-shirt in the morning, it shipped same day, and was at my doorstep by dinner. Had to be expensive right? Nope, cost me nothing. Can you imagine free same day shipping through Amazon? No one would ever leave their house ever again.
Potential outcomes of an explosion in retail efficiency
- Cities not centered around shopping malls or shopping centers, saving space for an urbanizing population
- Entrepreneurs and existing retail stores host their products only on the marketplace giant — Taobao.com — rather than start their own ecommerce sites (cutting costs)
- Online sales drive offline sales to spur domestic demand
- Less expensive, high-end retail
- An entire retail ecosystem built around efficiency
Growth will be fueled by value-add services
Value chain activities need to be improved, such as marketing/online systems, payment, warehousing, delivery, and IT (ERP or CRM). As of now the majority of value-add activities are done through the major marketplaces themselves, such as Taobao or Paipai.
(To all you entrepreneurs, there is a ton of opportunity for startups in this space. Some of us call it the Wild Wild East.)
Ultimately, China is poised to develop a retail model centered around efficiency, side-stepping or leap frogging the importance of physical stores. Who knows, maybe their unique e-tail system will provide the rest of the developing world with another model to replicate.
I would love to hear any comments, responses, or ideas on the impact of the leapfrog effect and what it means for the world economy.
