EXPLORING THE UNTAPPED POTENTIAL OF CHINA

Tobias Schreyer, co-founder and CCO, The PPRO Group

There has been a lot of discussion about the untapped potential of China as a retail environment. Just last month, China overtook the United States as the world’s largest economy, according to the International Monetary Fund and has a population that’s four times bigger (1.357 billion vs. 316 million). Whilst the country’s love affair with big luxury goods – thanks to the rising number of high net worth individuals – is well documented, the growing middle-classes also have strong spending power.

The Economist Intelligence Unit expects China’s retail market to grow to $8 trillion by 2022, double what the U.S. market is forecasted to reach over the same period. With this writing on the wall, the West’s largest retailers have been testing China’s retail waters. However, many have tried and failed to leverage the disposable Chinese Renminbi, whether because of a lack of understanding of the cultural differences or the preferred transaction processes. Here we look at some of the largest barriers to entry, but also outline the huge potential rewards to international retailers.

Three key barriers to entry to be mindful of:

• Cultural issues and the need to switch to Baidu

Companies such as Home Depot and Best Buy have famously tried and failed to undertake an on-the-ground strategy to exploit the lucrative Chinese market, despite presumably armies of consultants and MBAs guiding their footsteps into China. This has led to international retailers now preferring to test the waters by making their first step a virtual one.

However, one of the barriers to entry for retailers wanting to enter the Chinese market has been the difficulty of interacting with the country’s largest search engine, Baidu.com which has an 83% share of China’s search market. This is mainly caused by the company’s reluctance to have an international sales team retailers can get in contact with.

• Having the ability to facilitate orders

Whilst China’s sprawling metropolitan hubs have increasingly good delivery infrastructure, the country’s full e-commerce potential is currently held back by the unpredictable nature of the delivery infrastructure outside of the main metropolitan hubs, inhibiting the efficiency and effectiveness of the last mile of online retail product delivery.

However, it is just a matter of time before these issues will be overcome. E-commerce has the ability to leapfrog traditional bricks and mortar retailing in the country in the next few years, with the expansion of national chains of physical retail stores being outstripped by the growth of the digital economy.

• The incompatibilities of payment systems

One of the chief causes for shopping cart abandonment is the lack of payment options. Our own recent research showed that 92 percent of consumers dropped off at the payment page when a preferred payment mechanism wasn’t provided. By facilitating and accepting international payments in multiple methods, online retailers can open the door to more international business.

It is imperative to provide the payment options that are common in China, so that customers feel comfortable to complete the purchase. While there are currently 200 million credit cards and 2 billion debit cards; alternative payment mechanisms – Alipay being the largest – make up almost half of all transactions completed online.

Three of the biggest opportunities for UK retailers:

• The opportunity goes both ways

A recent survey conducted by consumer delivery company, Hermes, revealed that shoppers continue to expand their horizons with 84% of Brits having ordered from a foreign retailer’s website. The results also showed that well over a third of German and French shoppers have bought from the UK, with numbers from China steadily growing.

This trend can’t be underestimated. China’s online population of 650 million, including 300 million shoppers, means the scale of its market is huge. Especially when you consider that not even half of the 1.4 billion Chinese population is connected yet. With a sharp increase in demand for established Western brands, there is now a considerable opportunity for retailers to reach this market. Online shopping growth is fast, having increased by a remarkable 60 million customers since last year.

• China will be worth almost £1 billion by the end of the decade

Chinese consumers are expected to spend £177 billion online this year, surpassing all other countries. But their shopping is not restricted to domestic suppliers. Purchasing habit data shows the percentage of people choosing to buy direct from foreign merchants (rather than marketplaces such as eBay) has increased exponentially over the past few years. By 2020, the Chinese market is forecasted to be worth £0.9 billion for UK online retailers, with Hong Kong predicted to be worth a further £0.4 billion.

• Learn to love China Singles Day:

Much of the talk in the UK is about the emergence of Black Friday and Cyber Monday themed sales hitting our shores. Yet, neither come close to China Singles Day which is now the largest online shopping day in the world, with sales in Alibaba’s sites Tmall and Taobao increasing from US$5.8 billion in 2013 to US$9.3 billion in 2014. Last year, Worldpay saw a whopping 455 percent increase in spending on the day itself with 2,123 transactions per minute, spending £95 per person.

The numbers are already staggering. 1.4 billion population. Almost $10 billion spent online in just one day last year. Yet, with internet penetration in China being a mere 45% of the population, the online shopping demographic representing less than a quarter of the total population, and smartphone penetration increasing exponentially the numbers will only grow.