China’s Commerce Opportunity: Why Now?

As the recovery of the US economy continues to stagnate the days of unbridled consumer spending in the US are all but gone.   The US retail market is simply not as attractive as it used to be, due to decreased consumer spending and slower economic growth.  For the first time in nine years, consumer spending dropped almost 3% from 2008 to 2009 versus its generally steady growth of 3-6%.  And over a ten year period from 1999 to 2009, consumer spending as a percent of income after taxes dropped by 7%.  The apparel category was hit particularly hard with spending at its lowest point since 2004.  With consumers focused on the price of gas, groceries, and the wavering value of their stock portfolio, US retailers who once achieved double digit growth, with a primary focus on the US market, must now look to other geographies.

The BRIC countries (Brazil, Russia, India, and China) are promising engines of economic growth given their strong forecasted GDP growth and large populations.

Real Gross Domestic Product – % change from prior year

Population Estimate – 2011 Source: CIA World Factbook

Of these four countries, China is best positioned to offer significant growth opportunities for US retailers.  In addition to strong GDP growth and the largest population in the world highlighted above, China’s per capita consumer expenditure rose by 8% in 2010 signaling that the Chinese have money to spend – and are spending it.  Looking out over the next decade or two, the Chinese middle class is expected to wield enormous spending power as it reaches 600-800 million people, with a disposable income of more then $2.7 trillion.[i]

Aside from China’s large population and its rising purchasing power, there are several other important aspects that make China an attractive market for US retailers.

  • Allure of Foreign Products. Consumers from the Asia Pacific region continue to hold foreign products in high esteem, believing they possess premium quality. As a result, branded products from the US and Europe have become favorites. Simon Cousins, CEO of Illuminant, a Beijing-based PR and communications firm agrees. “The contemporary Chinese middle class and a majority of those who aspire to become middle class have an aversion to domestically made products and local brands. The local brands are generally viewed as being less fashionable, reliable, or technically advanced than their foreign counterparts. E-commerce has enabled mainland Chinese consumers to buy many foreign products that are not available.”
  • Conspicuous Consumption. Chinese society is increasingly prone to wearing its wealth. Associated purchases such as jewelry, perfumes, watches, accessories, and even sports equipment and wider lifestyle and recreational purchases will be intrinsically linked to the rise of designer and lifestyle fashion in China.  In fact, demand for retail and consumer products is expected to double from $40 billion in 2010 to $90 billion in 2014.[ii]  And by 2015, China will account for 20% – $27 billion – of the rapidly growing luxury market.[iii]
  • Widely Distributed and Wired Population. China’s population is geographically disbursed with 87% living in the lower-tier cities.[iv]  Over the next twenty years, some 350 million people will move from rural to urban areas, making an urban population of almost one billion.[v]  With mobile and internet penetration rates growing at over 15% per year in the near term, there is a rich opportunity for eCommerce in the Chinese market as many consumers do not yet have access to the same retail outlets of the top tier cities.[vi][vii]  “E-commerce today allows this gap to be bridged efficiently and cheaply through low-cost local couriers,” says Cousins.
  • Significant eCommerce Growth. B2C eCommerce sales in China, excluding travel, are expected to increase from $6.9 billion in 2010 to $223.6 billion in 2015, a growth rate of over 3,140%.[viii]

While the Chinese market does present a significant growth opportunity for US retailers, there are some risks and difficulties when doing business in China.  Some of the common issues companies worry about are:

  • Cash is Still King.  While 81% of online buyers in the US have completed their purchase using a credit card[ix], China is underdeveloped relative to other geographies when it comes to eCommerce transaction security and credit-card use which is not common.[x]  Per Cousins, “If usage of credit cards is employed to represent the development of a civilization, China is somewhere between the primitive and bronze ages.” Cash on Delivery remains one of the leading online payment types in China and is frequently the first option listed at leading online retailers.[xi] The most prominent eCommerce sites, such a Taobao a virtual shopping mall, use an online payment system that holds customer payments until the purchaser receives the product and is satisfied.  Commerce sites that require credit cards also typically charge fees of anywhere from 5% to 10%, obviously raising the cost of the merchandise for the consumer.[xii]
  • Fulfillment Capabilities Fragmented and Limited beyond Larger Cities.  According to Forrester, a large percentage of online orders are delivered by courier in the larger metropolitan areas.  While courier deliveries can be low-cost, delivery times are not often guaranteed and can be erratic.  In addition, a courier delivery model might not scale in a country where a significant percentage of China’s population lives outside of urban areas. “Literally thousands of Tier 3 and Tier 4 cities do not have the logistics or supply chains to make products easily available locally,” says Cousins. True success in eCommerce will require efficient means to house and deliver product across the country. 
  • Extensive Government Bureaucracy that is Difficult to Navigate. Establishing operations in China is not quite like setting up shop in the US.  The Chinese government exerts more control over what can and can’t be done in market – think of Google as an extreme example – and many decisions and approvals needed along the way are based on having strong relationships with various government officials and entities. “Government PR is very important…grab every opportunity for building good government relations,” agrees Cousins.

Although these risks are well publicized it turns out that many if not all are more myth than reality.  Over the coming weeks we’ll be publishing a myth-buster series in which we explore commonly held beliefs about doing business in China to get at the ‘real’ story.

And while figuring out where to start can be overwhelming, all hope is not lost.  The opportunity in China is well worth the up front investment in time to better understand the marketplace and learn from others who have gone before.  Acquity Group’s network of partners and relationships can help your organization take its first steps toward building a successful commerce presence in China.

_____________________________

[i] Analysis of Consumer Expenditure Survey results available at through the US Government, Bureau of Labor Statistics, http://www.bls.gov/cex/#tables.

[ii] Helen H. Wang.  The Chinese Dream:  The Rise of the World’s Largest Middle Class and What It Means to You (2010)

[iii] PriceWaterhouseCoopers. 2011 Outlook for the Retail and Consumer Products Sector in Asia

[iv] McKinsey Research. Tapping into China’s Luxury Goods Market.

[v] Karthik Rao. Economics Special:  Nielsen: Lower-tier Cities Beckon Retailers.  China Daily (2011)

[vi] Helen H. Wang.  The Chinese Dream:  The Rise of the World’s Largest Middle Class and What It Means to You (2010)

[vii] Zia Daniell Wigder.  A Snapshot of Emerging Mobile Commerce in China, Forrester (2011)

[viii] eMarketer.  Internet Users and Penetration in China, 2009-2015

[ix] eMarketer.  B2C and C2C Ecommerce Sales in China, 2009-2015

[x] eMarketer. Payment Methods US Online Buyers Have Used to Make a Purchase Online, 2008 & 2010

[xi] PriceWaterhouseCoopers. 2011 Outlook for the Retail and Consumer Products Sector in Asia

[xii] Zia Daniell Wigder.  Trends in China’s eCommerce Market, Forrester (2011)

[xiii] PriceWaterhouseCoopers. 2011 Outlook for the Retail and Consumer Products Sector in Asia


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