How Chinese e-commerce is redefining the retail landscape
Within China there is a revolution that could change the way we shop, socialize, and interact with the economy around us. The revolution in question is taking place in the field of e-commerce, where China’s market is now larger than that of the U.S. and U.K. combined. China — which had always lagged behind the US’s physical retail infrastructure — has leapfrogged the U.S. in the e-commerce sector. Chinese firms such as Alibaba, Tencent, and JD.com are the main drivers of this growth, using cutting edge data analytics, AI, and innovative business models to reshape how we think about retail and e-commerce.
The rapid growth of China’s e-commerce sector has largely been driven by widespread data collection and data analytics through social media platforms such as WeChat and Weibo. Boasting upwards of 1 billion and 400 million active users respectively, these social media apps are used both by those in highly-developed cities and rural villages alike. WeChat’s services—which include paying bills and sending money, to purchasing train tickets, sharing photos and videos, and even ordering takeout—are used by over ¾ of China’s population, a larger market share than many Western social media apps. The wide spectrum of services WeChat offers allows it to collect data on all facets of a user’s life, and to create a profile of a consumer that businesses can leverage to offer more personalized services, predict future trends, and identify unmet needs of online shoppers. While American e-commerce sites such as Amazon offer users recommendations based on their prior shopping histories, the wide breadth of data available to Chinese e-commerce businesses through WeChat and other social media platforms means that they are able to offer a far more personalized experience to shoppers. Listerine, an oral hygiene company, initially faced setbacks when trying to enter the Chinese market, as many consumers did not respond well to the harsh flavors of the company’s mouthwash. Utilizing Alibaba’s data analytics capabilities, the company discovered that Chinese consumers prefer fruit and floral flavored mouthwash, which they incorporated into their new product launch of rosemary blossom flavored mouthwash.
Online e-commerce apps are also more interactive than their American counterparts. When considering a purchase, consumers are able to post questions to vendors and receive a reply within minutes, providing a more nuanced evaluation of a product than the fivestar rating systems prevalent on American e-commerce sites. WeChat’s user generated Moments function enables links to featured products, allowing users to directly purchase products they see other people using. Many vendors collaborate with celebrities and other social media influencers to provide a more engaging experience to users when shopping online. In 2017, Burberry, a British fashion brand, partnered with a famous social media influencer, Mr. Bags, to sell their limited edition bags over WeChat — within minutes, the bags were sold out. AI-augmented technology furthermore allows prospective buyers to try on the product before purchasing it, with users being able to test different shades of makeup through a digital mirror app. Macy’s introduced a virtual reality version of their flagship New York store allowing customers to browse the clothing racks and complete purchases through Tmall—all from the comfort of their own homes. Similarly, Tmall live streamed a fashion show featuring brands such as Ted Baker and Gap on Singles Day, the largest online shopping day of the year for Chinese consumers. The emphasis on providing an entertaining experience to online shoppers is a major reason for e-commerce’s dominance in China’s retail market.
China’s rapid economic growth in recent decades has created an expanding middle class which seeks to flaunt their newfound wealth through the latest material purchases. As such, vendors are under constant pressure to innovate and reduce inefficiencies lest they be outcompeted by rivals. The established business model of Western firms investing large amounts of time and capital into mass production of a few select projects is thus unfeasible in China. China’s e-commerce business model focuses on speed and agility, with firms investing small amounts of capital across a multitude of projects and leveraging China’s strong manufacturing base to deliver products quickly and cheaply to consumers. Products that fail are quickly abandoned while successful ones are scaled up. Such a business model is further augmented by supply chain innovations such as factory orders for small batches and AI data analytics which predict future consumer trends and manage inventories. In the end, how quickly businesses are able to get their products to the market decides which firms survive and which do not in a highly competitive online retail market.
Chinese e-commerce sites have also sought to integrate with physical retail stores, redefining the role of brick and mortar businesses in the process. Physical stores now serve new functions in China’s rapidly evolving e-commerce space, offering after-sales services for goods bought online and serving as a node for last-mile deliveries. Xiaomi, an electronics company, uses their stores to offer consultation to potential buyers on their various devices, and to survey consumer needs in order to improve future products. Other vendors are using big data to offer more a more personalized experience for in-store customers. A recent report by McKinsey and Co. finds that 92% of Chinese consumers purchase goods offline in physical stores, though they gather information about their purchases online. Staff recommendations and personalized greetings by company personnel are the most impactful influences on purchasing decisions, suggesting a future avenue for e-commerce vendors to increase sales by establishing physical stores.
The Chinese e-commerce sector is also expanding into rural areas of China, which are geographically isolated from the larger cities and whose population generally experiences a lower standard of living. JD.com, an e-commerce giant is employing 200,000 workers from such villages and exploiting the close social bonds that connect people living in such isolated locales in order to make sales and to promote their service. Such initiatives bring the ease and convenience of online shopping to villages traditionally cut off from most consumer goods available to city dwellers. One deliveryman for JD.com highlights how e-commerce has changed shopping in rural areas, stating “Everyone wants the best for their kids. For a long time, there wasn’t any choice. Now there is.” To facilitate deliveries in rural villages, JD.com is trying out a drone delivery system, cutting down time and costs for last-mile deliveries — savings which are then passed on to consumers. For these reasons, residents of undeveloped cities and rural areas (257 million online shopper base and 62% market penetration) now surpass residents of urban areas (183 million online shopper base and 89% e-commerce penetration) in terms of online shopper base, despite having lower market penetration in those areas.
Even given the explosive rate of growth shown by China’s e-commerce sector in recent decades, there are few signs of this industry sector slowing down in the future. With China’s middle class expected to reach 550 million by 2022 and government sponsored infrastructure projects further expanding into China’s rural hinterland, new markets will be opened for e-commerce business to expand.
The possibility remains open for China’ domestic e-commerce giants to expand their operations abroad, though stringent data privacy laws abroad and foreign competition will continue to remain big obstacles for even the most successful Chinese e-commerce businesses. Nevertheless, the future is bright for Chinese firms such as Alibaba, Tencent and JD.com. Growth projections of global e-commerce growth expect China’s e-commerce sector to grow 70.7% by 2023, ahead of the US at 45.7% and France at 45.6% over the same time frame. Though Amazon remains the largest e-commerce company by revenue, Chinese firms are not far behind.
