According to the most recent data, three quarters of B2C market belong to just two platforms – Tmall and JD, while Taobao enjoys complete dominance of C2C market with 95% market share.

None of the foreign e-commerce players were successful in gaining any meaningful market share: this year Amazon has finally decided to open its branded store on Tmall and Macys and Neiman Marcus decided to shutdown their China online ventures.

With such high market saturation of China’s e-commerce, there seem to be hardly any opportunities left for smaller competitors, especially foreign one. However, one segment in particular still shows promise and this is cross-border online shopping. China’s traditional and online markets have been plagued by series of scandals in recent years – from contaminated baby milk powder to fake cosmetics and medicine. Despite the efforts of online marketplaces, such as Tmall, to ensure that only genuine products are sold there, the public trust has been damaged.

This situation makes large number of Chinese online shoppers turn to foreign markets that are perceived as more trustworthy. One of the companies that is trying to capitalize on this trend is Yihaodian which is partly owned by Wallmart.

According to the company, from 2012 to the end of 2013, the number of registered users grew from 29 million to 57 million. The company has doubled the inventory from 2012 to 2013 during the height of health scare in China and it has sold 250 million imported food items that year. In 2013, approximately one in every three imported baby milk formula cans was sold on Yihaodian.

The site prominently features baby products and brands itself as a primary source for concerned parents who may mistrust goods found in retail or other online stores.

Yihaodian also serves as an online supermarket and claims to offer better quality produce delivered quickly. However, Tmall and JD have also opened their versions of supermarkets leveraging their much larger user base.

It is still not clear whether Yihaodian can be successful in holding up to its niche, especially considering the fact that food safety situation seems to be gradually improving in China – there were no major scandals this year yet.

Another interesting ecommerce opportunity that was gaining momentum outside of Tmall and JD universe was online shopping for alcohol. In 2013, 99% of booze was still sold offline which leaves plenty of room to shift to online sales.

Chinese are increasingly acquiring taste for fine wine, although traditional beverages and beer still dominate alcohol sales. One such e-tailer, WineNice,  has recently raises over $15M in funding and was rumored to involve Rothschild support.

The site initially grew slowly after launching in 2008. WineNice mostly sells foreign wines, but also has a selection of Chinese rice wines and overseas liquors. Most of its stock is in the pretty affordable sub-200 RMB ($32) category, though I spot a 1988 Pétrus for a cool 30,000 RMB ($4,740).

WineNice is also planning to open 100 brick and mortar stores in China and already has its own branded stores on TMall and JD.

There are definitely some e-commerce opportunities left that can be exploited outside of dominant players or pursued in combination with traditional strategies. Mobile segment may further change the ways people search and shop for products online as well as offer new marketing possibilities. We will explore those in the upcoming posts.

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Presently, none of the common Western online payment solutions, particularly PayPal, managed to achieve any significant presence in China. In addition, Chinese skipped credit cards era almost entirely and jumped straight to online cash. This means that credit cards are not nearly as popular as in the West and are rarely used for online transactions, especially for local purchases.

At the moment, approximately half of all online transactions in China are handled by Alipay, which is not surprising considering that Alibaba, the company that owns Alipay, also runs largest online shopping platforms – Taobao and TMall.

In mobile, the fastest growing sector of China’s ecommerce, Alibaba’s dominance is almost absolute, although Tencent is working hard to popularize its own Tenpay system.

Here are some more figures from Go-Globe’s infographic:

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Apart from the obvious fact of continued growth of online commerce in China, a few facts from this presentation could be quite insightful. The first point, that I find particularly interesting, is the fact that 28% of online shoppers turn to online shoppers to find a unique item, perhaps not available or easily found in brick-and-mortar equivalents. This number rises to 41% for people below 25. It means that there is an opportunity for further differentiation of online stores that could take advantage of this trend.

The part on major concerns of online shoppers could also provide an insight on how to improve the experience and make the online shopping process more efficient. Apparently, trust issues, such as the product’s authenticity, is still major issue for nearly 80% of the users.

Other figures, that deserve closer look, are about online travel booking being the fastest growing sector of ecommerce in China as well as the fact that almost a third of all online purchases is made via mobile devices.

Here is the entire infographic:

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Other rivals, such as Tencent and Baidu with their own ecommerce offers, are still trailing Alibaba which is set to stay as the dominant force in Chinese market for the foreseeable future.

Here I’d like to share the infographic produced by Alibaba from different sources on the state of China’s online shopping. Although, it was compiled at the end 2012 and may be slightly outdated, in terms of market share figures and online shoppers’ behavioral patterns there have been no any significant changes.

Click on the images to enlarge:

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Would opening a Tmall virtual store be a sound strategy for your Chinese market expansion? This depends on several factors which I’m going to discuss next.

The reach

B2C ecommerce market was estimated to be at about 600 billion yuan (~100 billion dollars) in 2013 with Tmall accounting for roughly half of that number. Clearly, if your primary goal is the reach, Tmall platform should be your first choice. Also, Tmall is being positioned for tier 1 and 2 cities, while Taobao covers traditionally less affluent lower tier cities.

Who qualifies

If you are a registered company outside of China, Tmall requires you to be a certified retailer or a trading company and the products should be under your own brand or licensed to you. Also, Tmall has a preference to retailers who have been in business for at least 2 years with the annual turnover of at least 20 million dollars. Of course, if you are a well known international retailer, it would be fairly easy to get approved.

Tmall can be an effective sales and marketing channel for fast moving goods, such as fashion items and apparel. It may not be suitable for companies that want to maintain full control of their brand development and those who seek to project exclusivity, such as luxury goods for instance.

Tmall’s sales conditions

The retailers on Tmall are required to join Tmall’s genuine product protection agreement. If shipped overseas, the products must be delivered with international courier companies through proper customs channels and every shipment must be traceable. All the product specs must be in Chinese and all measurements in metric system. Products should be shipped within 72 hours from order completion and there has to be a return location within Mainland China.

Cost

The costs can be categorized into setup and ongoing. Setup costs include store design at somewhere between RMB6,000 to RMB20,000. Annual fee, aka technical service fee, varies according to product category is set to either RMB30,000 or RMB60,000. The merchant may be able to redeem either half or the full service fee if they reach Tmall’s predefined sales targets for the product. In addition, Tmall requires a deposit which can be set at RMB50,000, RMB100,000 or RMB150,000 based on the chosen store format and the trademark status. The deposit is designed to reimburse customers in case of breach of “Taobao Mall Service Agreement” which prohibits selling counterfeit goods.

Ongoing costs include 5% commission fee on every transaction as well as optional marketing services.

Tmall marketing

Tmall is the part of the larger Alibaba’s ecosystem which actively promotes it within its C2C Taobao platform by pushing Tmall search results to the top. Also, since most Chinese users are already familiar with Alipay payment system, they would feel comfortable using it for Tmall purchases improving conversion rates.

Tmall has its own mobile app for iOS and Android with it’s iPhone app enjoying 4.5 star rating.

Finally, for additional fee, Tmall offers variety of marketing services including banner promotions on its own platform, SEM, and emailing campaigns.

What are the downsides?

Although, Tmall is being actively promoted by Alibaba as the store for genuine products for discerning customers, it still suffers from the perception that it’s just another offshoot of Taobao which focuses on low prices and discounts. Some companies are concerned about their reputation being damaged if they become associated with the platform.

Another drawback is that Tmall allows only limited space and tools to express stores specific brand identity and the expression of a unique marketing message.

In conclusion, Tmall can be an effective sales and marketing channel for fast moving goods, such as fashion items and apparel. It may not be suitable for companies that want to maintain full control of their brand development and those who seek to project exclusivity, such as luxury goods for instance.

One possible strategy to consider is to use Tmall as one of the sales channels that complements the original ecommerce site where customers can go for more information about the brand and, perhaps, more sophisticated buying experience.

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The most important of those factors are listed below:

1. China’s consumer behaviour changes very quickly. What could have been a correct assumption a year ago may have turned upside down by now. Such behavior changes require constant monitoring coupled with test-and-trial approach;
2. Thanks to abundance of choice, online shoppers become increasingly impatient. If a product page takes too long to load or a description is not clear enough – they simply move on. It is essential to refine your message taking into account that e-shoppers would not read lengthy product description but just scan them for the information;
3. It must be taken into account that men and women shop differently: men tend to be more focused on searching for a specific product or functionality while women may spend longer time browsing through different products;
4. Consumers’ behaviour in 1st tier cities differ from those in the lower tiers. Shoppers in Shanghai or Beijing tend to look for value and are generally more sophisticated. In 2nd and 3rd tier cities, shoppers would rely more on a brand’s perceived image as a guarantee of a good overall value;
5. It is essential making the purchase itself a quick and seamless process with multiple payment and delivery options in order to maximize the convenience for your customers;
6. Trust is the most important decision factor for online shoppers, it is what makes them to chose one brand over the other. Of course, trust is something that is earned over time and the strategy to build it should be a part of the overall marketing plan.

Listen to the online buzz about your brand. Big brands hire entire teams to monitor their online reputation that is tied to managing marketing campaigns through social media.

How can you build trust of your brand? Here are the steps:

1. Integrate your online selling strategy with the social media campaign that engages all major platforms. Nothing works better than a word-of-mouth, especially if the recommendation is coming from a friend;
2. Invest in getting to know your customers better and stay connected with them. Consider offering incentives or gifts if they follow you, share information about the purchase with others, write a review or recommend your brand through social sharing;
3. Listen to the online buzz about your brand. Big brands hire entire teams to monitor their online reputation that is tied to managing marketing campaigns through social media;
4. The last option which is, perhaps, not for everyone is leveraging trusted experts or appropriate celebrities. In China, it has also been a very successful strategy of big brands in building trust;

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Luxury brands have been somewhat slow moving to those markets unwilling to commit to traditional brick and mortar stores model due to its cost and time required to develop brand recognition. However, there is a tremendous new  opportunity that is most certainly going to accelerate luxury brand market entry to those previously neglected markets, and it is ecommerce.

Consumers in lower tier cities still base their purchase decisions less on the value approach and more on the image of prestige associated with a particular brand.

The main factors that make it the right time for luxury brands to consider expansion inland in China are:

1. Buying online is now largely perceived a safe way to shop. More Chinese are buying big ticket items online including cars. Online fraud is becoming less of a problem for online shoppers these days and ecommerce sites are now fairly secure and robust;
2. Chinese government now views ecommerce as a vital part of the economy, selling goods online is becoming less complex compared to the past and there have been major improvements in logistics and payment safety;
3. Buying online becomes less risky to consumers due to flexible return guarantees and availability of after sale service. Shoppers almost always can exchange goods and get a refund in case of problems;
4. Large number of unauthorized retailers are filling the vacuum for lower tier city demand for luxury goods. This often results in  damaging brand image caused by the lack of proper brand management. Genuine brand manufacturers should establish their official presence as soon as possible to stop brand erosion;
5. Competition between luxury brands is already high in 1st tier cities. On the other hand, in 2nd and 3rd tiers, consumers are still hungry for those products. Consumers in those cities still base their purchase decisions less on the value approach and more on the image of prestige associated with a particular brand;
6. Mobile sales are on the way to become dominant the channel for online purchases. In fact, large percentage of internet users in China access internet exclusively via their mobile devices. This trend democratizes ecommerce, making it accessible from practically anywhere anytime;
7.  Only the official presence of the original luxury brand maker can guarantee its authenticity, one of the main concerns of online shoppers. Once such guarantee is in place, the sales will be perceived less risky and are bound to increase exponentially;

In conclusion, it is quite obvious that not expanding to lower tier cities is equivalent to leaving money on the table. Those places in China present a major opportunity for luxury goods makers despite of being poorer regions compared to more affluent 1st tier Chinese cities.

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Some time in 2014, the ecommerce sales are set to cross $300 billion benchmark and reach an estimated level of $348 billion by the end of that year.

Here is some infographic illustrating the historical and projected growth of ecommerce in China (based on research by iResearch, eMarketer and Macquarie Research):

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