 China is poised to become the biggest online marketplace in the world within the next few years, according to multiple estimates. Online retail generated $121 billion in sales in China last year, up 66% from 2010, according to Barclays Capital. The size of China's ecommerce market is expected to more than triple over the next three years, with sales reaching $420 billion by 2015. That's 20% more than what the U.S.'s ecommerce market is forecast to bring in that year. China has an estimated 193 million online shoppers, more than any other country. By 2015, those consumers will be spending $1,000 per year online -- the same amount that U.S.'s 170 million online shoppers currently spend annually. By that time, ecommerce could account for more than 8% of all retail sales in China, Boston Consulting Group predicts. A number of factors are driving the growth. One is the increase of China's middle class, which is expected to balloon from 200 million to 800 million people over the next 20 years, according to Acquity Group. The spread of government-subsidized, high-speed Internet access and Internet-connected cellphones have widened the pool of potential shoppers to 513 million -- or about 40% of the population. Broadband Internet access costs around $10 per month, compared to $30 per month in India and $27 per month in Brazil. Shipping prices and reliability have also been improved, particularly in urban coastal cities: Shipping costs Chinese corporations about a sixth of what their American counterparts pay, according to BCG. Impressively, China's major online marketplace, Alibaba-owned Taobao, is estimated to account for half of all packages shipped in China. People in China shop online for three main reasons, according to an Acquity Group survey conducted among 1,000 people across roughly 150 cities last year. One, greater product selection. (A separate survey by BCG found that a quarter of Chinese shoppers buy online because they can't get the products they want at brick-and-mortar stores.) Two, the ability to compare prices across vendors: 65% of respondents said they compared retailers before making a purchase. Three, convenience. Still, ecommerce is a young industry in China. Although more people are shopping online in China as the U.S., penetration is much lower, relative to the population; only 14% of China's 1.3 billion residents shop online, compared to about 54% in the U.S. Chinese shoppers are also gravitating towards lower-priced items. What's holding them back? Trust appears to be the primary issue. As was the case with other markets, including the U.S., the early days of online shopping in China have been plagued by credit card fraud and counterfeit goods -- some of which are swapped out for genuine articles during shipment. These two issues have been addressed, in part, by the introduction of PayPal-like payment services, including Alibaba-owned Alipay, which allows users to make purchases without sharing their credit card details with individual vendors. As an extra security measure, Alipay only transfers payments to vendors after clients have received and expressed satisfaction with their goods. Poor return policies are also thwarting growth. Fifty-nine percent of respondents in Acquity's study complained that it wasn't easy to return goods to online stores. And although shipping infrastructure is improving in China, it still has a long way to go, particularly outside major cities. "Literally thousands of Tier 3 and Tier 4 cities do not have the logistics or supply chains to make products easily available locally," Simon Cousins, CEO of public relations firm Illuminant, told Fast Company. Apparel is the most popular buying category, making up roughly half of all online sales in China. (By comparison, apparel makes up about a fifth of online retail sales in the U.S.) And while sales of physical goods are increasing quickly, digital content is growing at a slower rate, making up about one-third of all online sales, says BCG. The Major Players The three big Internet companies in China are Alibaba, Baidu and Tencent, which dominate three different categories of the market: ecommerce, search and messaging, respectively. The vast majority of online transactions in China -- 85% as of 2009 -- take place between consumers, according to AK Kearney's estimates. Approximately 90% of those transactions are executed on Alibaba-owned Taobao, frequently described as the "eBay of China." Like eBay, users on Taobao can purchase and sell new and used goods at fixed or negotiated prices, as well as through auction-style listings. Unlike eBay, most goods are new, and there are no listing or transaction fees -- the majority of Taobao's revenue comes from advertising. Next year, the company will bring in $716 million in pre-tax earnings and will be worth $14.3 billion, according to estimates from Goldman Sachs. Business-to-consumer retail is quickly gaining steam online, however: AK Kearney estimates that B2C transactions will make up 40% of the market by 2015. About half of B2C transactions currently take place on Taobao Mall, or Tmall, another Alibaba property. There, 50,000 merchants and 200,000 brands, including major western brands like Nike and Gap, have already set up shop. Unlike Taobao, Tmall charges businesses fees for transactions. An estimated $16 billion in sales was generated on Tmall in 2011, a figure BCG expects will double this year. Together, Taobao and Tmall were responsible for 81% of online transactions by dollar amount in 2010. Forty-eight thousand products were sold per minute on Taobao that year, more than the number sold by China's top five brick-and-mortar retailers combined. More than 60% of buyers on Taobao and Tmall pay for their transactions using Alipay, a payment system comparable to PayPal. Twenty percent of transactions on B2C sites are also paid for using Alipay. Other players in the space include 360buy.com, a multibrand retailer often described as the online, Chinese equivalent of Best Buy. It is the second largest B2C site in China, generating around $5 billion in sales in 2011. Individual brands are also setting up shop to sell directly to consumers. Social Media's Role Because Chinese consumers distrust advertising and news sources, recommendations from online reviewers and peers on social networks have heightened roles. Ninety-five percent of Internet users living in Tier 1, 2 and 3 cities in China are registered on at least one social media site, according to a study released by McKinsey in April. They're active, too: 91% of the survey's 5,700 respondents said they had visited a social media site in the previous six months, compared to 67% in the U.S. and 30% in Japan. They spend 46 minutes per day on social media sites, compared to 37 minutes in the U.S. and seven minutes in Japan. More than 40% of online shoppers in China consume and post product reviews online -- about double the percentage of online shoppers in the U.S., according to BCG. Why the distrust of advertising? "Advertising is associated withpropaganda," Calvin Soh, a former chief creative officer of Publicis Asia, told me in a conversation at Asia's Fashion Summit in Singapore this week. "Social media is the people." In terms of volume of users, MySpace-like Qzone leads with 536 million, followed by microblogging platforms Tencent Weibo (310 million) and Sina Weibo (250 million), according to a November 2011 report from we are social. Renren, a Facebook-like site particularly popular among students, has 137 million users. Kaixin, another Facebook-like site popular especially among white collar office workers, has 116 million. Demographics vary among networks: Consumers who identify Sina Weibo as their favorite site tend to have higher incomes and are more likely to live in Tier 1 cities, McKinsey finds. McKinsey believes that social media has a greater influence on purchasing decisions for consumers in China than for anywhere else in the world. "People rely more on word-of-mouth from friends, family and key opinion leaders, many of whom share information on social media," the study reads. But many companies in China have yet to leverage social media properly, McKinsey says. There's a lack of familiarity with online social platforms at the executive level. Many companies are also failing to mine consumer insight data from these platforms -- and many who are have yet to act on the information they've gathered. International Entry Given the growth projections for China's retail market, it's no surprise that foreign brands are increasingly upping their investments in the region. Investment began in earnest in the 1980s, when sports apparel brands like Nike and Adidas, luxury and accessory giants such as LVMH, and fast food franchises including Yum! Brands (and later, in 1990, McDonalds) began moving into the region. At the time, real estate in Tier 1 cities was comparatively cheap, and foreign brands established themselves through aggressive brick-and-mortar expansion, says Maureen Mullen, head of research and advisory services at L2. Nike, for instance, now has more than 6,000 stores in China. In a report on fashion and China, BCG describes China's consumer markets in the '80s as "unsophisticated, yet eager," one "hungry for highly recognizable brands." Sportswear brands did particularly well because they complimented "the low-key wardrobe needs of consumers at a time when there were very few occasions that required more fashionable apparel." By 2008, between 20% and 25% of the average Chinese consumer's wardrobe was composed of sportswear by dollar amount. Foreign luxury brands have also fared well, particularly apparel, accessories, beauty and auto brands, as well as watchmakers. These categories are favored in China as channels for conspicuous consumption. "People don't have homes to invest in in the China; homes are small, not spaces to invite your friends and display your wealth," Julie Harris, global managing director of trend forecasting agency WGSN, tells Mashable. "As a result, conspicuous consumption manifests itself in what they wear." Mid-range brands like Gap and Abercrombie & Fitch have had a tougher time in China. The former, for instance, has only about 15 stores in the country. "There is not a clear ground for mid-range brands to stand," says Angelia Teo, content director of WGSN's Asia-Pacific region. "China understands luxury and heritage, it understands best-in-class product, it understands value," she says. Brands that simply do a look well, like Abercrombie & Fitch or Hollister, are not as appealing. You have to be cheap, or "you have to offer craft or technique or a unique point-of-view," she explains. What's Next Mullen says it's increasingly important for Chinese companies to focus on ecommerce, whether they're established international conglomerates or young retail startups. "If you look at wealth creation in China, 75% is expected to come from some 200 Tier 2 and Tier 3 cities. To build out an aggressive brick-and-mortar presence would be a huge challenge, at this point." Those investments might not pay off in the short-term, says Mullen, but that will change as the online retail market grows. One thing's for sure: China's ecommerce market is certainly a very different beast than the U.S.'s. Images courtesy of Flickr, Kent Wang, Robert Ennals | 
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