The State of E-commerce in China - HSBC · O2O services grew 43% in 2014 and we should see a continued trend towards growth in O2O services and integrated online/offline brand retail

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CMR China Market Research Group

The State of

E-commerce in China

Ben Cavender

China Market Research Group

October 2015

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Key Factors in E-Commerce Growth

Retail Trends

Consumer Needs

Evolution

Looking to the Future

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The China Dream

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China’s GDP Growth 1978-Present

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Source: World Bank

∎In the last decade GDP per capita has tripled from $1000 to $3000

China Real GDP Growth, 1978-2013

10%

∎Government investment has accounted for much of recent growth, but consumption is accounting for an increasing portion

11.7%

5.2%

15.2%

4.1% 3.8%

14.2%

7.6%

14.2%

7.8% 7.7%

0%

2%

4%

6%

8%

10%

12%

14%

16%1978

Reform and

Opening

begins

1989

Tiananmen

Incident

1992

Deng’s

Southern Tour 2001

China

accedes

to WTO

2008

Beijing

Olympics

∎Grew 7.4% in 2014, slowest since 1990, looking at sub 7% this year….so what?

∎Shift toward more sustainable, consumption-driven growth

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Wage Growth Slowing but Still Substantial

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China Retail Market Growth

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Retail sales grew 13.1% in 2014 to 26.2 trillion RMB

“I don’t think I need to buy luxury brands for status, what I want is something that fits me well and which has very good quality.”

∎So far China retail sales are holding up in 2015 and are expected to grow between 10-13% annually over the next 5 years

∎5 years ago the strongest performance in terms of annual growth was coming from luxury brands. Now it is from mid-market brands

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Defining Middle Class Consumers

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∎China’s middle class is continuing to grow. There are currently ~280 mln families with annual incomes of 9000 to 34,000 USD. By 2020 that number will increase to 340 mln families

∎This group of middle class consumers are extremely important as they are the main driver of retail spending in China

China’s middle class and upper

middle class consumers will

account for ¾ of the urban

population by 2020 “I think I will definitely spend more this year but I will also really look at what I am getting for my money.”

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10% of retail sales in China come from e-commerce, compared to

less than 9% in the US

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Retail sales in China increased 10.8% YoY in August 2015 after averaging 13.7% from 2010 until

2015

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China E-Commerce GMV grew to 12.3 trillion RMB in 2014, a 21%

increase over 2013

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Online shopping increased 49% YoY in 2014 and represented 10%

of all retail sales in China

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O2O services grew 43% in 2014 and we should see a continued trend towards growth in O2O

services and integrated online/offline brand retail

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Key Factors in E-Commerce Growth

Retail Trends

Consumer Needs

Evolution

Looking to the Future

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Middle class consumers will be driving future online retail growth in China

But future growth will come from

rural areas too

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Consumer Optimism Lagging

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∎In ongoing consumer confidence studies that we conduct women are consistently the most optimistic consumers

∎In H2 2012 80% of consumers expected China’s economy to improve in 2013 and 75% expected to spent more in 2013 than they had in 2012. In H1 2015 these numbers dropped to below 65%

Consumers remain

optimistic overall but are less sure about

the future

“I think I will definitely spend more this year but I will also really look at what I am getting for my money.”

∎For the first time in 8 years we are seeing savings rates in the under 35 group start to increase

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This is the first generation of core consumers who are afraid that their children will

not have better opportunities than they have had

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Education

7 Million expected graduates this

year vs. <1 million in 1999

2.5x US

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Pollution

96% list pollution as

a major concern that affects their

daily lives and decisions

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Urbanization

By 2020 ¾ of middle class consumers

will be in Tier 2 or Tier 3

cities

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There are more than 150 cities in China with populations over 1 million

and government plans to encourage urbanization will continue the trend

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60% by 2020

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Luxury spending is shifting back overseas reversing a trend towards buying in China

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More than 2/3 Overseas

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Consumer Fear and Safety Issues

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∎80% are willing to pay a 20-30% premium for products that their children use or that are ingestible or touching skin if they trust them to be safer

∎Product safety fears are the number one consideration for consumers purchasing products for children

∎Branding and brand origins are important in determining what consumers buy, but retail channels are also extremely important

More than 90% say that product safety fears have a direct impact over which

brands and products they buy for their families

“I really worry a lot about safety. I’d rather spend more to get something I know will be safe and not risk hurting my child.”

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For ingestible products mid-market is difficult, for most consumer goods there is room

to grow and differentiate

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Individualism

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Growing Emphasis on Value and Style

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∎Consumers are looking for functional value, and production value

While consumers are continuing to spend more, they are also focusing more on finding

good value “I don’t really need to buy LV anymore, I think that is for Nouveau Riche. I’d rather get something that is well made that I actually like the design of.”

∎Consumers will pay a premium for products that are durable, that provide value in terms of tailored design, and that offer variety

∎Value is no longer just about being the most well known brand

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Entry level brands are being squeezed by mid-market

brands with clear brand propositions

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The Shift to Self Expression and Niche and Specialty Brands

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∎57% have growing perception that niche brands may be better at making a specific product compared to 3 years ago when only 44% shared this sentiment

∎Consumers want brands have specialized expertise and want to know why brands are best at what they make

Consumers are Increasingly Seeking out

Niche Brands, Specialty Brands

“I would rather buy the best camera or the best camping products than a copycat. The designs are more original and they have been the best at it for a long time.”

∎Self expression more important than spending lots of money, unique designs are becoming more important than brand labels

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In a survey conducted with over 5000 consumers over the last 6 months, 73% of consumers said that they expected to increase

online spending over the next 6 months

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64% also said that they expected to increase online spending at a

faster rate than they would increase spending in physical

stores

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57% of consumers now say that they completely trust or mostly trust that they will receive real

products when buying online and that they are willing to make

purchases of food, or big-ticket items because of this

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89% said that a key reason they are purchasing more online is better access to product and

brand variety

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94% said that a key reason for increasing purchases online is convenience. Pollution, traffic

congestion, crowding in malls, are all contributing factors to

consumers choosing to purchase via the internet instead of visiting

a physical store

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Key Factors in E-Commerce Growth

Retail Trends

Consumer Needs

Evolution

The Future of Online

Retail

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So what are the future trends that will be shaping e-commerce

development in China?

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Creating an integrated shopping experience and investment in O2O

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Local Services

After Sales Service

Integrated Retail

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Fixing the last mile problem, finding new customers, and

solving the logistics challenge

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Heavy Investment in Logistics

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Haitao Solutions: Offering easy access to overseas markets and

products

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Evolving Customs Rules

Cross Border Payment Solutions

Consumer Demand Needs

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Future trend towards better access to current season brand

products rather than only discounted overstock

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Brand Attitudes Towards E-Commerce are Evolving

Slow Move Towards Global Strategy

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Contacts

CHINA MARKET RESEARCH GROUP (CMR)

China Insurance Building 166 Lujiazui Dong Lu

Suite 2806 Shanghai, China

200120

(86) 21 6326 9991 [email protected]

www.cmrconsulting.com.cn