China’s online shopping market is continuing to see strong growth. Over a period of two years the market has become 80% larger than that of the US and in 2015 totalled almost $630 billion in sales. A new report by McKinsey explores the major trends in the Chinese e-commerce market as well as the opportunities for both national and international vendors, finding that consumers in low-tier cities are outspending high-tier cities as online shopping channels further diversify.
The big news on China is that its economy is slowing down, as the Chinese Government engages in a rebalancing act aimed at increasing internal consumption. One area through which internal consumption is being stimulated is the country’s rapidly expanding cohort of digital consumers. Last year, around $630 billion in sales passed through China’s online shopping channels. The Chinese retail market is now 80% larger than the US’ market, which it overtook only two years ago. As it stands, e-commerce accounts for 13.5% of all retail spending in the country, with only the UK having a higher online market share of retail at around 20%.
A new report from McKinsey & Company, titled ‘How savvy, social shoppers are transforming e-commerce’, explores changes within the Chinese e-commerce market, highlighting potential opportunities as well as challenges. The survey involved 3,120 respondents, divided evenly between men and women and among five geographic categories (Tier 1 cities, Tier 2 cities, Tier 3 cities, Tier 4 cities, and rural areas).
The way in which the online market is being accessed has changed considerably over the past year. Of those surveyed, merely around 1% use only computers (desktop, laptop) to engage with companies on social media, down from 19% last year. The proportion of people using both computers and mobile has increased considerably, up from 60% last year to 83% this year. Those using only mobile channels fell slightly, from 21% last year to 16 % this year. The research highlights that, for businesses, the trend is relatively positive, with dual medium users having 14% more interactions on average with businesses than single channel users.
The research also found that dual channel users were much more likely to explore more shopping categories (29% more on average), and are also more likely to spend money (17% more on average). The number of users that took part in this year’s survey leveraging both means to access online shopping channels increased from 56% last year to 78% this year.
Scaling the market
The research also finds that certain market segments, in terms of the broadly defined city tier system, are seeing considerable growth and development opportunity differences. Tier 1&2 cities in particular have high internet usage, up to 83% of residence; and high e-commerce penetration, up to 89% of internet using residents. The cities represent an online shopping base of 183 million users and have seen growth of 43% over the past years.
The next two tiers, tier 3&4, have in recent years caught up to high tier cities in terms of GVM at around 50% apiece. However, given the generally lower income status of their residence, the potential online shopper base is considerably higher, at 257 million. The level of e-commerce penetration in the cities is considerably lower however, at around 62% of online users.
According to the research, the two high- and low-tier cities pose different challenges and opportunities for retailers seeking to increase sales. High-tier cities, with their already high online shopping penetration, may need to find new ways of engaging customers, including increased shopping frequency, expansion of online shopping categories, and larger purchases through use data analytics to better understand the needs of different customer segments and engage them with tailored upselling and cross-selling efforts. In addition, the low-tier cities present a considerable opportunity for expansion – as it stands around 160 million people have internet access but are yet to use it for online shopping. Creating the infrastructure required to access this potential market, as well as the products they demand, has become a priority for companies.
The analysis also finds that online shopping channels are diversifying further, with new channels through social media on the rise. WeChat users* surveyed, for instance, are more and more often using the embedded sales functions to buy goods. In 2015, around 15% of users used the service for shopping, by 2016 this had increased to 31%. Users of the platform are using a variety of means within the platform to make purchases, including moments or chat groups at 23%, links to other apps at 22% and JD.com entrances at 32%. The top categories for WeChat users were apparel and personal care, through which users spend between a quarter and a third of their respective spend for the categories.
The research also found that more and more users, from across the city tiers, are buying products from outside China through online channels. The kinds of goods sought through the channels differs considerably between tiers however. Around 24% of tier 1 city shoppers buy from vendors outside of China, with the major category of interest being healthcare products at 40%, followed by luxury at 36% and apparel at 29%. 23% of Tier 2 shoppers buy cross-border, with luxury the major interest holding a 50% share of total spending. In the tier 3 and 4 cities, the category with the highest % of total spending is apparel at 39% and 38% respectively, while luxury spending from respondents in both tiers is almost non-existent.
* The social network platform had around 700 million users in 2015.