china e-commerce challenges and opportunities

China E-commerce: Challenges & Opportunities Myths, Realities & Unlocking Potential

Minh-Ha Nguyen October 26, 2012

China E-commerce: Background & Context

China has more than half a BILLION people online

- 2 -

China Internet Users (In Millions)

Source: CNNIC

210

298

384

457 513 538

2007 2008 2009 2010 2011 Jun-2012

China already the world’s largest Internet population

- 3 - Source: Boston Consulting Group

457

238 102 46 38

703

277

110 51 41 0

250

500

750

1,000

China USA Japan UK S. Korea

20102015E

Internet Users By Country (2010 - 2015E) (in Millions)

+1.5% +2.1% +1.5%

+3.1%

CAGR= +9.0%

34% 51% 76% 85% 80% 88% 74% 79% 77% 79% Internet Penetration

China’s e-commerce market expected to become world’s largest by 2015

- 4 - Source: Boston Consulting Group

71

177

38 37 18

305 268

49 64 27

0

100

200

300

400

China USA Japan UK S. Korea

20102015E

E-commerce Market Size By Country (2010 - 2015E) ($Billions)

+8% +12% +5%

+9%

CAGR= +34%

…and China’s e-commerce market still has more room to grow

- 5 - Source: Boston Consulting Group

145 170

62 29 29

329

199

75 37 32

0

100

200

300

400

China USA Japan UK S. Korea

20102015E

eShopper Population By Country (2010 - 2015E) (in Millions)

32% 47% 72% 73% 61% 68% 66% 73% 77% 79% eShopper % of

Internet Users

+2.3x

Chinese Internet users very active across a wide range of online activities

- 6 - Notes: * Data as of June 2012 Source: CNNIC

210 187 251 274

388

OnlineShoppers

OnlinePayments

Users

SocialNetworking

Website Users

MicroblogUsers

Mobile InternetUsers

Chinese Online Behavior & Penetration

(Millions of Users)

39.0% 34.8% 46.6% 50.9% 72.2% Penetration

China mobile Internet usage growing dramatically

- 7 - Notes: * Data as of June 2012 Source: CNNIC

28.9% 39.5%

46.0%

60.8% 65.9% 66.2% 65.5%

69.3% 72.2%

73 118

155

233 277

303 318

356 388

2008.6 2008.12 2009.6 2009.12 2010.6 2010.12 2011.6 2011.12 2012.6

CAGR= +52%

China Mobile Internet Users & Penetration

Internet access via mobile devices surpassed desktop PC, paving way for M-commerce

- 8 - Notes: * Data as of June 2012 Source: CNNIC

73% 69% 71% 72%

Desktop Computer Mobile Phone

Dec-11 Jun-12

China Internet Access By Device Type

- 9 -

Grocery expected to be fourth largest online category by 2016

Source: McKinsey

- 10 -

Consumer acceptance towards buying Food & Beverage online varies by geography

Source: Insights China by McKinsey (2010 update)

- 11 -

Channel shift taking place in retail worldwide

Source: McKinsey

26% Home Improvement

30% Apparel

2016

2.081

2% 1%

1%

Grocery

100% =

Other GM Baby & Mom Toys & Games Health & Beauty

2%

9%

28%

China Online Market Split, 2016 RMB Billions

Grocery

100% =

Other GM Baby & Mom Toys & Games

Health & Beauty

47%

Consumer Electronics

Apparel

2010

7.847

1% 1% 1%

2%

15%

13%

20% 20% 31%

Consumer Electronics

Home Improvement

China Retail Market Split, 2010 RMB Billions

Online Penetration Percent

4

5

4

1

8

7

Grocery

Baby & Mom

Health & Beauty

Toys & Games

13

Apparel

5

20

19

34

16

11

19

2010 2016

Consumer Electronics

Home Improvement

China E-commerce: Challenges

- 13 -

China e-commerce: Myths vs. Realities

• Promise of China E-commerce: o More goods to more people more quickly o Low-cost distribution channel

MYTH True

- 13 -

REALITY: • China e-commerce as low-cost channel

for physical goods is a myth

• However, it’s not all bad news! E-commerce does offer many benefits

- 14 -

1. Immature Logistics Infrastructure

2. High Marketing Costs

3. Difficulty Charging Price Premium Online

4. “Spoiled” Chinese Consumers

5. “Gaming” by Chinese Consumers

China e-commerce faces daunting economics, driven by 5 key factors:

China E-commerce: Opportunities

- 16 -

It’s not all bad news: E-commerce does offer numerous benefits

• Quickly reach large number of consumers across China • Brand awareness, brand building • Instant consumer feedback

− Improve inventory management − Maximize pricing effectiveness − Generate new product ideas

• For multi-channel players: − Complements B&M offering (infinite shelf space) − Increases overall market share (vs. single channel)

• Plus… undeniable trend:

− Channel shift taking place worldwide − Shift moving away from Taobao and towards B2C

- 17 -

Unlocking Potential: Opportunities for E-commerce Retailers

• Employ lower cost marketing channels − Social media − Word-of-mouth

• Sell unique goods • Establish reputation for quality + service • Make your website a “destination” • Have functionalities that drive sales • Smart marketing • Execute well

• Have plan for mobile commerce… now! • Be scrappy (think like a start-up)

Proactively Manage Costs

Increase Topline

Be One Step Ahead

- 18 -

Unlocking Potential: Opportunities for Manufacturers

• Benefits: − Preferential treatment (promo space) − Consumer insights − Combat counterfeit, food safety issues − Increase awareness, trial, usage

• Especially categories that are: − High-involvement − Authenticity concerns

Develop True Partnership With E-tailers

Establish Direct Consumer

Relationship

• Potential ideas: − Price promotions if it drives volume − Non-price value-added benefits − Creative ways to provide unique goods

• Potential ideas: − Direct delivery − Provide related information − Leverage social media

Minh-Ha Nguyen minhha@sinopundit.com Blog: SinoPundit.com

Thank you!