Introduction to E-Commerce

5 min read.

In 2013, China overtook the United States (US) to become the world’s largest market for e-commerce. E-Marketer predicts Chinese consumer spending on retail e-commerce to reach USD 2.09 trillion by the end of this year, maintaining the upward trend with an increase of 16 percent from 2019, despite substantial economic headwinds caused by the COVID-19 pandemic.

Fuelled by such strong domestic demand, it is no wonder that China’s e-commerce marketplace has become so competitive, with local and international brands alike contesting for consumer attention and market share. In this article, we analyze the reasons for the boom in China’s e-commerce landscape and identify a few key trends for the market going forward. 

China has become the world’s largest market for e-commerce since 2013
Source: Marketing to China

Reasons for the Boom in E-Commerce

Rapid Urbanization

According to China’s National Bureau of Statistics, the permanent urban population in China reached 83.137 million at the end of 2018, an increase of 17.9 million from the previous year. This growth was the result of a 59.58 percent urbanization rate (the proportion of the people living in urban areas), and this number has been growing synchronously alongside the growth of China’s economy.

The strong push by the Chinese central government toward urbanization has undeniably paved the way for the viability of e-commerce by giving rise to a growth in the purchasing power of China’s middle class. As the world’s second-largest economy, the Chinese middle class already accounts for half of the global middle class. It has also contributed the most to global middle class growth in 2018, according to the Global Wealth Report of that year. As a result of rapid urbanization, middle class consumers are increasingly turning to their computers and mobile phones to shop, leading to a spike in e-commerce. A McKinsey study conducted in 2019 reported China’s online retail market to have expanded to become larger than the next ten markets in the world combined.

In 2019, China’s online retail market became larger than the next ten markets combined.
Source: McKinsey

Moreover, physical shopping infrastructures have failed to keep pace with the rapid urbanization in lower tier cities across the country. The lack of adequate in-store shopping experiences has driven many middle class consumers in these cities to turn to online platforms, where they are able to make purchases easily and receive their goods promptly via delivery. As such, e-commerce has become increasingly popular among consumers in such cities as a result of urbanization.

Growth of Digital Payment

With an increased mobile penetration rate across the country, Chinese consumers have also increasingly employed the integrated systems on their mobile phones to browse, shop, and pay. Online shopping has surged in popularity, with a PWC report citing that over 52 percent of users now prefer to shop through their mobile devices. With the convenience it is able to bring to consumers, mobile payment has become a go-to option for consumers in a variety of situations, ranging from online shopping, to bill payments and holiday bookings. Undeniably, e-commerce has been one of the biggest contributors, given the ease that comes with purchasing a product and paying for it from the convenience of their mobile phones. 

The market share of online/mobile payments have increased throughout the last decade.
Source: PWC

The integration of mobile payment into already-popular Chinese apps further paved the way for the widespread adoption of mobile payments. In a survey conducted by In The Black in 2018, 92 percent of people in China’s largest cities were found to use AliPay and WeChat Pay, owned by Alibaba Group Holdings and Tencent Holdings respectively, as their main modes of payments. In rural areas, 47 percent of the population is reported to use mobile payments, a number that is growing steadily with the onset of rapid urbanization. 

Key Trends

Social/Group Buying

Chinese consumers are famously voracious users of social media. A survey conducted by McKinsey found Chinese consumers to spend as much as 44 percent of their time on social media apps, the majority of which is spent on social applications such as WeChat and Weibo’s microblogging service, making up 33 percent. Another 11 percent of their time is spent watching, sharing, and creating short videos on video-sharing apps such as Douyin, as well as over-the-top video streaming services like Tencent Video.

Chinese consumers spend a significant amount of time on social media each day.
Source: McKinsey

Notably, social platforms are emerging as drivers of impulse shopping and creating incremental demand, with one of the most prominent in the Chinese market being Pinduoduo. Entering the market in 2015, Pinduoduo has built its success on group buying, a mode of shopping allowing users to shop together, and as a result, enjoy attractive discounts. The group buying experience closely mimics the offline shopping experience by allowing shoppers to build a community via the team purchasing model, driving engagement via fun and interactive games and rewards, and offering personalized shopping experiences via recommendations.

The group buying process on Pinduoduo allows orders made on the platform to be confirmed and shipped within 48 hours.
Source: TechInAsia

This business model has since enabled Pinduoduo to consistently report triple-digit revenue growth since its founding in 2015, which was arguably not an easy feat, considering it entered the market at a time where JD and Taobao/Tmall dominated online commerce in China. Currently, Pinduoduo is China’s second largest e-commerce platform, only lagging behind Alibaba.

Pinduoduo’s tremendous success has since motivated other developers to enter the ever-growing social buying market, with user-generated content (UGC) based shopping app RED currently vying for one of the top spots as China’s leading social commerce channel.

Livestreaming

Although infomercials are a long way from their heyday in the 1970s, China has recently seen a resurgence in these infomercials in the form of livestreaming. This mode of e-commerce has taken off in China, becoming wildly popular among consumers, especially those of a younger demographic.

China’s livestreaming market size (per billion yuan) has grown steadily since 2012.
Source: SCMP

During China’s Singles’ Day shopping festival (11.11) last year, Coresight reported Alibaba’s Taobao Live to have contributed about 7.5 percent of the company’s total sales, which amounts to USD 2.86 billion gross merchandise volume (GMV). Furthermore, the sales conversion rate from live commerce is found to be much higher than traditional content-driven platforms, according to a report by iResearch. With more people shopping from home during the COVID-19 pandemic, this trend has become even more prominent in China in recent months.

In February this year, Taobao Live reported an eightfold growth from the previous month, following an announcement by Alibaba to waive requirements for offline store operators across the country to join Taobao Live and offer operational tools on the livestreaming platform free of charge. In the same month, orders surged by an average of 20 percent each week.

“Lipstick King” Austin Li and Alibaba Founder Jack Ma featured in a live stream session.
Source: SCMP

Apart from its short-term prospects during the COVID-19 pandemic, some experts believe that the livestreaming trend will be here to stay. According to Coresight analyst Eliam Huang, the pandemic will reinforce the use of livestreaming as an effective selling channel. He contended that more merchants across various sectors and industries will start utilizing livestreaming to sell their products and reach customers. Meanwhile, consumers will rely more on livestreaming to shop, for it is entertaining and interactive. Even after the COVID-19 pandemic, he identified livestreaming to be a viable alternative for consumers to acquire a unique shopping experience.

E-commerce is gaining popularity over shopping at physical malls.
Source: Daxue Consulting

As China increasingly embraces technology and urbanization even in its rural areas, e-commerce is likely to flourish. While sales from e-commerce are currently in the trillions, it has yet to become the dominant shopping method in China. A report by JPMorgan estimates e-commerce to account for about 23 percent of overall retail in China currently. However, the country’s internet penetration stands at 54.6 percent, a figure suggesting that there remains untapped potential customers in the world’s largest online shopping market for the e-commerce industry to court in the following years.