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Chinese e-tailers spring to action as the pandemic shifts consumer behaviours

30 November 2020

Chinese consumers’ migration to online shopping has accelerated due to the Covid-19 pandemic. The shift, which is both structural and long-term, is rallying e-tailing operators to compete in a fast-evolving market and unearth new frontiers.


The following article is sponsored by Fitch Ratings.

 

The Covid-19 outbreak may have dragged down Chinese economy at the beginning of the year, but it has also boosted the growth of China’s online retail, or “e-tailing”, sector, Fitch said in a series of reports on the industry.

 

China’s e-tailing sector has been speedily expanding in the past years, and the Covid-19 pandemic accelerated it. In the first ten months this year, national online retail sales of goods   exceeded Rmb7.5 trillion ($1.14 trillion), growing 16.0% year-on-year, despite a retreat of 9.7% in offline retail sales of goods in the same period; and the share of online retail to total retail (goods only) reached 26.8%, versus 20.8% in 2018 and 23.4% in 2019, according to the National Bureau of Statistics (NBS) and Fitch.

 

The pandemic has made the shift from offline retailing to e-tailing both structural and irreversible, from psychological, economic, and demographic angles.

 

“People usually do not change a habit once it has been formed, when there are no adverse factors against their habit,” Karl Shen, Associate Director of China Corporate Research at Fitch, said. “Shopping online makes life easier by saving time and effort, and goods sold online are of fair prices due to transparent competition.”

 

Although China’s online retail market has taken the top spot in the world in terms of size since 2015, it still has much headroom, Shen said. Internet users and online shoppers accounted for only 63% and 49% of China’s total population at the end of 2019, lagging behind over 85% and 60% respectively in most developed economies. That said, China’s internet and online shopping penetration rates may catch up with those of developed countries in two decades given the country’s rising urbanisation and robust economy, according to Fitch. In fact, China’s online shoppers had grown 17.3% year-on-year to 749 million or 54% of the total population by this June.

 

Additionally, China has a younger population compared with most developed nations. As time goes on, the internet and online shopping penetration rates will naturally go up as elders who do not use internet pass away. Besides, elders who are not yet online shoppers can learn.

 

“For example, my mother, 71, is a keen online shopper after I taught her how to do that last year,” Fitch’s Shen said. “Now she buys almost everything with her smartphone. So do my mother-and-father-in-law, who figured how to do that all by themselves during the Covid-19 lockdown earlier this year.”

 

But not all companies benefit equally from the e-tailing boom. Fitch categorised 233 Chinese consumer goods or retail companies (out of over 1,100 examined) with disclosure on e-tailing sales into three groups – “consumer staple” including raw and processed food companies, “consumer discretionary” such as beauty and cosmetics firms, and “retailer” such as supermarkets and hypermarkets.

 

Companies in the “consumer staple” group rely more on traditional distribution models and have lower online retail sales share than companies in the “consumer discretionary” group, which have been keen on expanding sales through online channels. Companies in the latter group also had the highest median online retail sales share of 20% in 2019, compared with only 3% for peers in the former group. However, those shares are very likely understated since online sales by companies’ distributors are usually not disclosed or included.

 

China’s e-tailing sector is highly concentrated with leading operators. Smaller players will have to offer unique features and focus on a niche market to stay in the game.

 

Large operators Alibaba Group, JD.com, and Pinduoduo dominate around 95% of national e-tailing gross merchandise value in 1H20, while Suning.com and Vipshop followed with only low single-digit market shares, according to Fitch.

 

The largest three operators each have their unique business models. Alibaba has created an ecosystem incorporating multiple online retail platforms, offline stores and a wide variety of products while JD.com sells goods directly but also offers platform services to third-party merchants. Meanwhile, Pinduoduo acts as a marketplace-platform operator only and targets lower-income consumers by offering extremely low prices and big subsidies.

 

“Newcomers and smaller players need to cut in with unique advantages and focus on a niche market but not compete head-on with the giants, and they must be prepared to be loss-making for years,” Shen said.

 

As competition intensifies, e-tailing giants have to pioneer new sales models, including new retail, social retail, live video broadcast retail and community group buy retail. Sales generated by these new models are often off the radar for NBS and therefore lead the share of online sales in total sales to be further understated.

 

For instance, offline stores can use the “new retail” model to blur the lines between online and offline sales by conducting sales online but sending goods via on-demand delivery. Sales made by this model are usually recorded as offline sales and attributed to these brick-and-mortar stores.

 

Besides, “social retail” sales are usually not monitored by the NBS at all because many deals that fall under this model are too small and conducted by individuals or tiny e-tailers. The “social retail” model essentially enables consumers, especially those with strong social influences, to be salespeople. Some social-sharing platforms also allow individuals to set up online stores easily, tapping their social networks and earning commissions.

 

Due to these inaccuracies, Fitch proposes to use the national express-delivery volume as a proxy when estimating real e-tailing sales growth since some of these new sales models still need to rely on express-delivery to send goods.

 

The live video broadcast retail model allows anchors (who are often celebrities) to showcase products real-time with more interactions with watchers. Meanwhile, the community group buy retail model enables consumers, who are often residents of the same community and share the same WeChat groups, to make bulk purchases and enjoy low prices.

 

Competition in China’s e-tailing sector is highly brutal despite high concentration, and new frontiers and players such as Meituan, Kuaishou, ByteDance and Didi add to uncertainty in the future industry landscape. But one thing is certain – as online shopping penetration deepens, fierce competition will continue to drive innovations and keep prices attractive for Chinese consumers.

 

For more insightful commentaries about China e-tailing, please visit the Fitch Ratings website here.

To receive monthly updates of Fitch Ratings’ insights on the China market, sign up to “Fitch on China” here.

Fitch Ratings’ research on the China retail sector is produced by Karl Shen, Jenny Huang, Cathy Chao and Kelvin Ho.

 

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