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EMERGING TRENDS & DIGITAL OPPORTUNITIES: MOBILE E-COMMERCE FOR SINGAPORE RETAILERS A look at China’s e-commerce retail trends in Shanghai and Beijing _________________________________________ Written by: Ms Chai Pei Shan, 2013

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1.0 Introduction

This report shares on key findings from China’s e/m-commerce partners and logistics partners based on a business mission to understand and assess the feasibility of launching a M-commerce platform. The aim is to understand the growing opportunities in view of the consumer landscape for mobile e-commerce, logistics framework and regulations in China.

2.0 Objectives

The key objectives are:

a) To understand Chinese’s e/m-commerce landscape, trends, and evaluate the suitability

of partnering with e-commerce partners (360buy, 2nd

b) To conduct a feasibility assessment of m-commerce platform as a potential channel to gather insights on China’s consumerism trends

largest B2C, Taobao, Yihaodian, DangDang)

c) To understand value chain integration and processes for eFulfilment in China

3.0 Programme Overview

The list of meetings targets e-commerce value chain partners, from eFulfilment and logistics partners, to brand owners and electronics retailers, to consultancy firms and payment/industry associations to gain insights on the trends and opportunities for strategic collaboration with Singapore companies.

1. Taobao/T-mall 天猫 (China’s largest B2C) 2. 360buy 京东 (China’s 2nd

3. Yihaodian 1号店 (China’s 3 largest B2C)

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4. VANCL 凡客 (China's biggest clothing e-tailer, selling in-house brand fashion apparels and accessories, invested by

largest B2C)

Temasek Holdings) 5. M18麦考林 (Mecoxlane, NASDAQ Listed) 6. DHgate (B2B & general merchandise) 7. Media Markt (Germany retailer expanding footprints in Shanghai and

Beijing) 8. iResearch Consultancy (Consultancy & research on China's e-commerce) 9. 99 Read Club/99read.com (Shanghai 99 Readers Culture Co., Ltd) 10. Creative Knowledge (Associate company founded & invested by

Creative Technology) 11. Shen Tong (Logistics company) 12. PIL Logistics (Logistics company) 13. China Electronic Commerce Association 14. Payment & Clearing Association of China

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4.0 Mobile E-commerce landscape in China

Mobile commerce (M-commerce) is gaining momentum in China. Growing numbers of consumers and retailers are displaying interest in this channel. Research firm, Analysys International, reported that sales made through this route hit 1.67bn yuan ($261m) during the second quarter of 2011, an improvement from 880m yuan a year earlier. More significantly, 1.2bn yuan of revenues generated between April and June 2011 were attributable to purchases from the mobile web, and 27% to mobile transaction terminals installed on wireless devices by retailers.

Analysys International also stated smart phone sales stood at 16.8m units in China in Q2, increasing from 13.5m year on year and aiding the sector's growth.

The view is that this mode of M-commerce can only be a supplement to the traditional distribution channel in the short term because businesses need to develop mobile terminals which will take time. Yihaodian (一号店), one of China’s ecommerce pioneer and leading online grocery store (with 51% owned by Wal-Mart since Feb2012), recently tested digital "shopping walls" in 70 of Shanghai's underground stations, as well as, 500 billboards in Beijing. Large LED screens advertising consumer goods have been posted at nine metro lines. These tools enabled consumers to acquire goods by scanning codes featured on digital "display shelves", with products then delivered in 24 hours. The time-saving shopping/convenience idea is inspired by the subway supermarket in Tesco Homeplus in South Korea, where mobile users are among the highest in the world. Targeting the young tech-savvy consumers, Yihaodian highlighted that the technology is sufficient to support the development of mobile commerce. The number of smartphone users is increasing, but it is not as high as it is in developed countries. Thus, it will take time for the business model to develop. In a news article, Yihaodian mentioned about plans to have permanent shopping walls installed in large cities in the next few years, and consider having the virtual supermarkets installed in local communities.

360buy(京东), another e-commerce retailer focusing on consumer electronics (2nd largest in China behind Taobao), saw some 1m downloads of its mobile transaction terminal tool in the first quarter of 2011, as daily sales reached an estimated 2m yuan by the end of June. Jiepang, a location-based mobile operator similar to Foursquare, is also partnering with 3,000 stores in six cities to roll out near field communications (NFC) wireless payment services allowing traders to set the offers customers receive when "checking in".

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Picture of a lady shopping via smartphone

4.2 Key Findings & Observations

1. China is the world’s largest e-commerce market

With more than half a billion Internet users, China boasts the greatest number of Internet users in the world. Its online shopping market hit 767 billion yuan in 2011 and, according to a recent report from Boston Consulting Group, China’s e-commerce market is expected to be worth 2 trillion yuan (USD 320 billion) by 2015.

A snapshot of how China e-commerce sales compare with the rest of the world

Globally, e-commerce sales is growing exponentially (ranked): Chinese e-commerce sales were CNY 767 billion (USD 124 billion) in 2011, an

increase of 66% from 2010. E-commerce is expected to rise from 3% of consumption to 7% by 2015. Overall, China’s e-commerce market is expected to be worth CNY 2 trillion (USD 320 billion) by 2015. (Source: BCG, IDC, March 2012).

US e-commerce sales will grow 62% to USD 327 billion by 2016. (Source: Forrester, February 2012).

European e-commerce sales will grow by 78% to USD 230 billion by 2016. (Source: Forrester, February 2012).

Brazilian e-commerce sales will grow 21.9% to USD 18.7 billion by 2012. (Source: eMarketer, January 2012).

Turkey e-commerce sales has reached USD 2 billion in 2010. It will grow to USD 9 billion by 2016. (Source: TurkStat, Deloitte, EIU, August 2012)

India’s e-commerce market is expected to grow to USD 70 billion by 2020,

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from USD 600 million in 2011 (Source: Technopak Advisors, February 2012).

Indonesian e-commerce sales are forecast to grow from USD 120 million in 2010 to USD 650 million by 2015 (Source: Frost & Sullivan, February 2012).

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All the e-commerce players met during the trip expressed key focus on devoting resources on their domestic market and growing their brand, in view of the huge and rising opportunities and fierce competition in the e-commerce space. Top tier e-commerce companies, T-mall and Yihaodian both shared similar sentiments on the growth opportunities in China within the next 2-3 years. Their primary business objectives are to compete aggressively in the domestic market (e.g. bring in better products and international brands) and increase their branding to serve the consumer segments.

Burgeoning growth opportunities for retail in China’s B2C space

China e-commerce companies shared key trends in online shopping and foresee exponential growth in the B2C e-commerce space. Most of them (such as VANCL, T-mall, M18.com) recognised the need to follow the interests of ‘fashionista’ (i.e. fashion conscious consumers). Similarly, Singapore companies looking to expand in this space needs to move fast and response quickly to consumer trends.

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T-mall, Yihaodian, VANCL highlighted consumer insights on online purchases: 50% of their customers bought food, cosmetics and health/wellness products; 30% are fashion or related accessories and 20% for 3C electronics products. They observed that online purchases peaked during and after work hours (normally between 10pm – 1am) and morning period (7am) before work.

Fastest growing segments are consumer-driven, such as electronics, lifestyle accessories, fashion apparel and food

These consumer insights mirrors recent industry reports showing e-commerce sales for skin care and cosmetics that surpassed sales in the US, UK and Japan. Consumer Electronics is another large and growing segment. Hence, this trend implies that Singapore brand owners and electronics companies need to immediately think about where their products fall in this landscape of growth as they devise their internet strategies in China.

China e-commerce growth in the past two years is significant compared with other countries.

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4. Mobile commerce is slowly gaining momentum in China

However, China e-commerce dominant players see M-Commerce developments as a tool for differentiating themselves with competitors due to the intense landscape. Yihaodian and VANCL spent aggressive advertising budget in public spaces. This implies that M-Commerce often serves as additional sales and marketing channels (and not the core channel) to tap on the increased mobility of customers who shop on-the-go.

Online retailers, Yihaodian, T-mall, 360Buy, Vancl, and M18.com have developed mobile apps as an extension of their online portal. They shared that these are targeted at special deals, promotions and e-coupons for mobile-savvy consumers. They further suggested that the range of merchandise on the mobile commerce platform would been to be reviewed and updated constantly to suit the evolving needs and tastes of customers. While M-Commerce development is gaining popularity, sales transaction conducted directly through mobile devices (tablets, smart phones) through mobile apps (i.e. conversation rates of sales) are less than purchases through online portals.

4.3 Assessment & Recommendations Through this study trip, it is assessed that Singapore’s brick-n-mortar/online retailers can collaborate with China’s e-commerce players, by adopting the following approaches and practical tips:

a) Leverage 店中店 (Virtual Mall): This will allow Singapore companies to leverage on the critical user base, high traffic and eyeballs of China portals, as well as, branding channels to reach China consumers. Epicentre, XMI, Bluetree Electronics or other Singapore’s electronics and lifestyle brand owners can leverage on virtual mall (店中店) to sell to China consumers or build brand awareness.

For instance, Singapore’s BRAND'S® has partnered with T-mall to launch online campaigns and marketing activities in the malls. T-mall commented that the campaign

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received favorable responses from consumers. International brands like Nike, Adidas are among T-mall’s clients for this virtual mall.

b) Develop multi-channels strategies in their growth plans: Adopt e/m-commerce solutions to increase their footprints in China (i.e. increase mindshare, marketing/branding opportunities for SKU (online and offline) and convert into sales channels. Target customers not yet served by Taobao/T-mall, Yihaodian or typical retail channels.

Recommended Strategies for Retailers – Drive traffic from offline to online and vice versa

Singapore brick-and-mortar retailers (e.g. Epicentre, Charles & Keith) should think about how to use their existing stores to best advantage. The ability to direct shoppers in physical stores to their online sites gives retailers an edge over e-retailers. Furthermore, brand awareness and trust can boost traffic beyond the boundary of the store. This means that retailers should think about how to influence shoppers online and direct them back to their stores. Often, consumers decide on a product/brand online but ultimately purchase the item offline (especially, consumer electronics products). It is important that retailers learn to think like e-tailers (online mindset) to capture the market opportunities ahead.

c) Differentiate on value added services (not solely on pricing). For instance, M18

differentiate their services by personalizing the courier-delivery man; Vancl has a targeted channel aimed at attracting OEM brand owners to open 店中店 (V+ shop channel) which is a popular channel on VANCL that features emerging and new labels for Chinese consumers.

d) Partner with strong logistics players. Strategic partnership with one-stop-shop logistics services that provides last mile delivery/4PL is critical for e-commerce.

Singapore retailers going into e/m-commerce space should decide on a service and logistics model. Filling online orders from physical stores can be cost-effective, but it restricts the online assortment to what is sold offline. Store-based logistics also limits distribution. Managing purchase orders and delivery for customers outside the existing physical network would require additional investments, since the Singapore company would have to either work through a third-party logistics provider or build its own delivery network. The recommendation is to find strategic collaborators, such as partnering China’s one-stop logistical services (likes of VANCL, T-mall) to leverage on their strong established logistics networks and successful models/payment gateways. The following illustrates VANCL and T-mall operational models.

i)

Vancl (凡客誠品) established its own express delivery company, Rufengda (如風達) that provides last-mile delivery services to its customers. They have strong network covering more than 1,200 cities in China (6 distributions centre and 20 warehouses) and door-to-door delivery lead time within 24 hours.

Establish own logistics facilities (Case Study: Vancl)

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ii)

Tmall (天貓), the dominant player in China’s B2C market provides one-stop-shop logistics services to its larger-scale online sellers via its strategic partners such as warehousing services providers, express delivery companies as well as IT solutions providers.

Partner with other Logistical Service Providers (Case Study: T-mall)

4.4.2 Areas of Collaboration with Singapore companies The two tables below list the key interests where China B2C players can collaborate with Singapore companies, in particular, electronics, food, and fashion.

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4.5 Learning Points Apart from the above strategies, below are 3 learning points for retailers who wish to compete with China e-commerce players:

a) Adapt offerings to suit the social habits of Chinese consumers.

Chinese consumers are social online and purchase. Due to a highly collectivistic culture, Chinese consumers rely heavily on social networks. They source for reviews and good/bad recommendations when making a purchase decision. Chinese customers are also avid content providers. Thus, Singapore companies going into e/m-commerce space would have to make customer service a top priority, as any bad word of mouth can spread like wildfire and serves to discredit them.

b) Consider other forms of market entry.

Singapore companies should consider forming strategic partnerships with local China competitors. For example, Walmart, as part of its online strategy in China, has recently led a consortium of investors in buying a $500 million stake in 360buy.com, and invested 51% stake in Yihaodian. Also, instead of building an e-commerce channel of their own, several big-name brands, including Gap Inc. and Levi Strausshave teamed up with Taobao to sell their products online in China. Another form of entry is investing in local companies.

c) Be flexible and creative — in strategies in response to regulations.

China is a fast-evolving economy whose business environments as well as the rules surrounding them are often non transparent and uncertain. So Singapore businesses entering China need to be fully aware of the consequences of operating in such an environment (e.g. e-commerce and payment gateway regulations) and need to be flexible in their strategies.

……………………………………………………………………………………………………….. Written by : Chai Pei Shan