China’s gross domestic product growth slowed to 6.9 percent in 2015, one of the lowest increases in decades. But despite that slowdown, China’s growing middle class keeps buying more online, and its thirst for foreign brands and goods is creating a big opportunity for overseas retailers and brands.
Chinese consumers purchased 3.877 trillion yuan ($589.61 billion) worth of goods online in 2015, a 33.3 percent increase from a year earlier, according to the National Bureau of Statistics in China. By comparison, U.S. online retail sales were $341.7 billion in 2015, a 14.6 percent increase over 2014’s $298.3 billion, according to non-adjusted estimates from the U.S. Commerce Department. China’s web sales surpassed U.S. web sales in 2013, making it by far the world’s largest e-retail market. The 500 merchants ranked in the Internet Retailer 2016 China 500—the largest online retailers in China as measured by their annual online sales—grew 59.6 percent in 2015 to $198.30 billion from $124.22 billion, representing 33.6 percent of the total Chinese e-commerce market.
Retailers and brands based outside of China shared in that growth. The 52 U.S.-based retailers ranked in the China 500, for example, grew online sales 24.3 percent to $17.77 billion last year—the bulk of that coming from Chinese customers, in most cases. The 79 retailers based outside China, including those in the United States, grew sales by 24 percent, to $21.31 billion last year.
The growing online retail sales for brands and retailers based outside of China is not surprising given the strong demand among middle-class Chinese for foreign goods, from Apple Inc.’s iPhones to Wal-Mart Stores Inc.’s food and household goods. Alibaba Group Holding Ltd. reported that 33 percent of Chinese consumers bought items from international brands during the 24-hour Singles’ Day event Nov. 11, 2015, with U.S. goods in the top spot.
Among the factors driving growth are growing sales from consumers in China’s villages, and the steady growth in the number of Chinese shoppers who can access the web through mobile phones.
“In China, the major market drivers in the past year have been cross-border e-commerce, mobile shopping, omnichannel and e-commerce in villages,” says Zhang Zhouping, a China E-commerce Research Center senior analyst.
There were 668 million Internet users in China by June 2015, and about 89 percent of them, roughly 594 million consumers, could access the web through mobile devices, according to the China Internet Network Information Center. During Alibaba’s Singles’ Day sales in November, Chinese consumers purchased $14 billion worth of products, and 70 percent of sales were transacted on mobile devices, according to Alibaba.
Rural areas, where there are few physical stores, also present huge potential for online merchants. There were 186 million Internet users living outside of China’s cities as of June 2015, and 60 percent of them had never made an online purchase, according to China’s Ministry of Commerce. To encourage more rural shoppers to order online, e-commerce firms are rapidly improving their facilities in those areas. Alibaba, whose big online marketplaces Taobao and Tmall account for about 75 percent of China’s online retail sales, has built 100,000 service centers in small towns or villages where residents can get help both buying online and in joining the 8 million sellers who offer their wares on Taobao.
Those shops also help farmers sell their products across the country. The Ministry of Commerce says web sales of fresh foods topped 38 billion yuan ($5.76 billion) in the first three quarters of 2015, 50 percent more than all the online foods sales during the whole of 2014.
China’s government has taken a series of steps to make it easier for consumers to buy overseas goods via the web since 2012, including setting up cross-border e-commerce pilot zones—now in 10 cities—where China’s customs service provides fast clearance of small orders sent to Chinese consumers. Foreign companies can ship orders from abroad or store goods in these areas without them clearing customs. Then, as orders are received, they can send them through the streamlined customs process.
In the first two years after their introduction in late 2013, the special zones processed 100 million parcels that generated 15.5 billion yuan ($2.36 billion) in sales for foreign web merchants, according to Chinese customs authority General Administration of Customs of China.
Chinese consumers now can also buy small quantities of imported goods that have not been approved for general sale in China. That opens up opportunities for online merchants, particularly those selling food and nutritional products, as China’s government normally requires that all such items go through an approval process than can take a year or two.
Furthermore, China does not collect sales tax in cross-border e-commerce, and the customs duty tax on items in some categories has been cut by more than half for items purchased from websites outside of China. That makes buying online from foreign web retailers even more attractive to Chinese consumers.
Many international brands and retailers are taking advantage of this relatively low-cost and convenient way to expand their businesses into China. The number of overseas companies operating in China’s free trade zones doubled in 2015, according to the Ministry of Commerce. They include a strong representation of big U.S. companies, including Amazon.com Inc., No. 4 in the Internet Retailer 2016 China 500, and Apple, No. 11.
Meanwhile, operators of large online marketplaces in China, such as Alibaba, JD.com Inc. and Amazon, have responded to these relaxed cross-border rules by creating special areas on their shopping portals featuring imported goods. For example, Alibaba launched Tmall Global in February 2014 to allow foreign companies without a China business license to sell online to Chinese consumers under the new e-commerce regulations. Sales on Tmall Global increased 179 percent in the fourth quarter of 2015 from a year earlier, Alibaba reported in its quarterly earnings report.
The cross-border rules also apply when Chinese consumers buy from retailers’ foreign e-commerce sites. Amazon, for example, translated into Chinese product descriptions for 10 million products and added currency conversion into Chinese yuan and information on shipping costs to China to make it easier for Chinese consumers to buy. Amazon says Chinese consumers’ purchases on Amazon sites outside of China were six times greater in 2015 than a year earlier, although the company did not provide a dollar figure.
While global brands typically launch online stores to move into new markets, that approach is trickier in China than in most other countries because so many Chinese online shoppers start their shopping on the big online marketplaces. These marketplaces offer ready-made storefront templates, order management, and payment and logistics services that can help foreign companies get a quick start in China. They also provide an easy way to reach hundreds of millions of Chinese consumers, especially for big-name brands already known to those shoppers.
Some global e-retailers have gone the marketplace route after trying without much success to build their own e-commerce sites. For example, Macy’s Inc. (No. 213) entered China in 2012, investing nearly $15 million in a standalone apparel site, Oumei.com, and a Chinese flash-sale site. Oumei.com didn’t attract enough shoppers and Macy’s closed it by late 2013. Macy’s mainly sells to China through its U.S. site Macys.com, which shows prices in yuan and provides shipping information to China for those who select it as their country. And in November 2015 it launched a store on Alibaba’s Tmall Global marketplace that facilitates web sales for foreign brands. Macy’s, through its subsidiary Macy’s China Ltd., stores many goods offered for sale through Tmall Global in Hong Kong. It says it expects to generate $50 million in web sales from Chinese customers this year.
Besides opening stores on marketplaces, another common approach for global e-retailers is to launch a Chinese-language version of their home-country sites. This strategy caters to the many Chinese consumers who worry about the authenticity of products offered online in China, and prefer to order directly from a global site, especially if it offers product descriptions in Chinese. One example is iHerb.com, a U.S. web-only retailer of nutritional products that has translated information on about 60 percent of its products into Chinese, as well as four other languages besides English.
Foreign retailers also must localize their marketing. Most global e-retailers open accounts on Chinese social media, including the Twitter-like Weibo and WeChat. Toys R Us Inc., which has operated a Tmall storefront and ToysRUs.cn since 2012, for example, has 850,000 fans on Weibo and more than 1.1 million followers on WeChat. It is No. 308 in the China 500. Also, almost all foreign merchants selling into China accept Chinese online payment options, such as Alipay, Alibaba’s online payment service that is similar to PayPal in that a consumer can link her account to a credit card or bank account.
Chinese consumers also learn about global brands from shopping recommendation sites that specialize in promoting foreign brands, often receiving an affiliate fee when Chinese consumers purchase. Those sites include Dealmoon.com, Dealam.com and mobile app Red.
Among the foreign companies advertising on Dealam.com is The Hut Group, a United Kingdom company whose websites sell cosmetics, nutritional items, accessories and gifts. “We are looking for making alliances with local affiliate sites after we opened our Chinese site recently,” says Sharon Zheng, The Hut Group’s head of Asia affiliates and partnerships. “They can help us educate consumers and increase our sales.”
There are a growing number of ways for foreign companies to reach online shoppers in China. And many of those Chinese web shoppers are actively searching for foreign goods.
Frank Tong is Internet Retailer’s senior editor for China.
(This story was originally published by Internet Retailer)