March 2013 | Elsie Chang, Yougang Chen, and Richard Dobbs
China’s retail sector is among the most wired anywhere—e-tailing commanded about 5 to 6 percent of total retail sales in 2012, compared with 5 percent in the United States. Yet it is distinctly different from that of other countries.
First, most Chinese e-tailing occurs on digital marketplaces, instead of sites that directly connect consumers and retailers. These virtual marketplaces are sprawling e-commerce platforms where manufacturers, large and small retailers, and individuals offer products and services to consumers through online storefronts on megasites analogous to eBay or Amazon Marketplace. Concurrently, a large and growing network of third-party service providers offers sellers marketing and site design services, payment fulfillment, delivery and logistics, customer service, and IT support.
Chinese e-tailing is not just replacing traditional retail transactions but also stimulating consumption that would not otherwise take place, particularly in less developed regions. By analyzing consumption patterns in 266 Chinese cities accounting for over 70 percent of online retail sales, we found that a dollar of online consumption replaces roughly 60 cents of sales in offline stores and generates around 40 cents of incremental consumption. Thus this unique e-tailing engine is enabling China’s shift from an investment-oriented society to one that’s more consumption driven.
Finally, China’s retailing industry, coming of age in an era of digital disruption, will probably follow a trajectory different from that of retail sectors in other markets. In developed nations, the industry typically followed a three-stage path. It began with the rise of regionally dominant players. This field then consolidated into a smaller number of national leaders. Eventually, online players challenged them, and the industry became multichannel. Some brick-and-mortar players (Tesco and Wal-Mart Stores, for instance) have embraced a multichannel strategy, while others (such as Borders in the United States and Jessops and Woolworths in the United Kingdom) have been driven from the market.
China differs from these developed markets, however, because a crop of national leaders has yet to emerge in traditional retailing. Building stores across China’s considerable geography, with its many smaller cities, takes both time and high levels of investment. As a result, China’s largest brick-and-mortar retailers have captured a smaller share of the country’s overall retail market than have major players in the United States and elsewhere: the top five retailers by category hold less than 20 percent of the market—much lower than US levels of 24 to 60 percent in comparable categories.
In China, the combined effects of the complexities of store expansion and a distinctive model of e-tailing could lead to a different retail dynamic: as e-tailing continues to grow, China’s industry may leapfrog the second (national) stage, passing directly from the regional to the multichannel one. In fact, China’s online ecosystem of marketplaces and agile support services has grown rapidly precisely because it can exploit the inefficiencies and higher costs of China’s existing retail market. Already, the major online companies Alibaba (which owns marketplaces such as Taobao) and 360buy.com (focusing on sales of electronics) have established a prominent national role, ranking among China’s top ten retailers.
The view forward is impressive. We estimate that by 2020, as 15 to 20 percent annual growth rates (before inflation) continue, e-tailing could generate $420 billion to $650 billion in sales, and China’s market will equal that of the United States, Japan, the United Kingdom, Germany, and France combined today.
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