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September 20, 2016

China: The Next Global E-Commerce Powerhouse

Posted by Rangarajan V. R. (View Profile | View All Posts) at 4:56 AM

China: The Next Global E-Commerce PowerhouseI read with intense interest that private equity firm Carlyle Group, is one of the leading bidders to buy the McDonald's restaurants in China. It turns out that McDonald's Inc. prefers as a strategy that its locations in China be owned by franchisees who will guarantee stability, and a steady stream of income rather than directly run thousands of fast-food joints from its headquarters in America. On the heels of that, came the news that Yum Brands Inc, China owner of KFC and Pizza Hut had sold part of their stake to Primevera Capital (an affiliate of Alibaba Group Holding Ltd.) for $460 million. This sale is part of a planned move by Yum to spin off their business into a franchisee model. Interestingly, this investment by Primevera Capital will deepen the reach of Ant Financial, which runs Alibaba's Alipay mobile payments platform, into China's restaurant business.

Could this be a sign of the times as China increasingly goes the e-commerce way?

The change in strategy at McDonald's and Yum is in sync with a greater trend in China these days: its e-commerce revolution. Consumer-facing companies are realizing that as the largest single market on earth begins to become digitally savvy, they need to shift the focus from building a bricks-and-mortar infrastructure to having a robust online presence and product delivery mechanism.

From Alibaba, Baidu and Didi, to WeChat and its financial off-shoot, Chinese e-commerce companies are growing rapidly in sophisticated ways, and in many cases outpacing their counterpart's worldwide. For instance, online sales of goods and services in 2015 totaled RMB 3.8 trillion, a year-over-year increase of 37.2 percent.

Today's corporate giants across China have an entrepreneurial culture in which it is quite natural to develop their own social media or computer laptop or software division. So technology firms have competition from industrial companies! This unique corporate culture is what allows Chinese companies to innovate faster and in more interesting ways. WeChat, the easy-to-use messaging service now has a WeBank counterpart. It is a fully online financial services firm that reviews enormous amounts of data from WeChat users to offer customized services like loans and accounts without physical branches. Consumers can do all their banking online, yet they receive personalized service because WeBank leverages its customer data analysis from WeChat. Most companies in other parts of the world can only dream about being able to innovate digital services in such ways. And so fast!

This rapid pace of innovation is paying off: Some 55 percent of Internet users in China have made at least one mobile payment compared to just 19 percent in America. According to the Internet Retailer 2016 China 500 - the largest online retailers in China as measured by their annual online sales - the 500 merchants ranked grew 59.6 percent in 2015 to $198.30 billion from $124.22 billion, representing 33.6 percent of the total Chinese e-commerce market. Now here's the most interesting part: just 40 percent of Chinese consumers currently shop online. Thus, there continues to remain enormous room for expansion, not just for e-commerce, but logistics and IT as well. A consultancy that focuses on China's Internet industry, iResearch, reports that the country's online sales is slated to double in the next three years, reaching RMB 7.5 trillion in 2018.

Thus it is rather obvious even to a casual observer that China's e-commerce market has a lot of potential for growth and is likely to become the world's largest e-commerce market soon. As the industry burgeons, retailers will also need to adopt an omni-channel approach and ensure their in-store and online services are seamlessly integrated and designed to meet the diverse needs of their consumers.

Why omni-channel? Well, although online retailing is growing by leaps and bounds in the country, it accounts for only a small slice of the global pie. In markets like China, figures for 2015 show online sales represented just 11 percent of total retail sales and were valued at the equivalent of $672 billion. E-commerce has made it cheaper and easier for companies and individuals alike to market their products on various online platforms. One of the consequences is the increase in intense market competition and the benefit that consumers are able to enjoy reducing prices.

If Chinese companies are going to protect and continue expanding their market share in the country, they will need to implement robust Big Data and analytics programs. With millions of customers sharing information, companies need to adopt programs that enable them to segment their customers, better understand purchasing behaviour, improve product recommendation, upselling or cross-selling options and implement business strategies that are ever responsive.

We know that the digital Chinese consumer is attuned to e-commerce, but they continue to patronize brick-and-mortar stores as well, so companies need to strategize on how best to combine the online and physical stores into one coherent merchandising plan.

The Chinese enterprise has just a few steps to implement regarding best practices in Big Data and analytics. When it does, those rapidly growing companies will be the envy of the world.

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