China online retail market to adopt new sales model

The move is expected to be led by group purchase websites, mobile e-business and socialised e-business.

While it is difficult for Chinese e-commerce companies to get away from the current low profit situation, there remains strong growth potential and ample room for development in the B2C and C2C market, bolstered by government policies and strong capital investment, as well as the rise of group purchase websites and mobile commerce and socialised e-commerce. These will prompt the Chinese online retail market to adopt a new sales model, according to the major findings from the latest Deloitte report, "Development Trends of China's e-Commerce Market".

Taking reference from different market data, the report reviews the scale of the online purchase market in China, the development trends, the different categories of existing e-commerce enterprises and the expansion of vertical online merchants. It provides an analysis of the development trends to companies and investors with strong interest in or currently conducting e-business in China.

Overall, the report indicates that China’s e-business market is yet to become mature. The Chinese e-business companies operate with light asset investments and low costs. However, it will remain difficult to get away from the current low profit situation, because of weak logistics systems, yet-to-improved transaction security and payment system, and low price competition, etc. Yet, the report finds that there are a lot of business opportunities for online retail market in China, supported by positive government policies and strong capital investment.

Citing information from the China Electronic Commerce Research Center, the report says China (14%) is the world’s fourth largest online purchase market, following Europe (34%), the U.S. (29%) and Asia (27%), reaching a scale of RMB 513.1 billion. In terms of breakdown, the C2C market has a transaction value of US $63.5 billion, much higher than that of the B2C market (US$9 billion). However, the B2C market achieved a three-digit growth over the past two years (2009: 175%; 2010: 150%).

Mr. Peter Koo, Partner of Enterprise Risk Services, Deloitte China, said "China's e-commerce market has strong growth potential and a lot of room for development. The sector has caught the attention of investors over the years. In the first half of 2011, venture capital investment surged to US$2.37 billion, three times higher than US$690 million in 2010. The investment mainly focused on the B2C market for electronics, clothing, and tourism etc. It also enables C2C companies to establish their own trading platforms, reducing their reliance on the Taobao platform. In addition, the Ministry of Commerce has issued the development guidance for e-commerce under the 12th Five-Year Plan, setting goals and directions for the development of e-commerce. These help drive the growth of the entire online retail market in China."

According to the analyses by iResearch, individual group purchase websites and Deloitte, there are about 2,000 group purchase online platforms in China, including online purchase companies, social media network companies, information portals and online communication portals. Deloitte predicts that the imminence of industry consolidation and the rise of the group purchase sector will drive the development of China's e-commerce market into adopting a new online sales model, also known as "Online2Online" (O2O). O2O allows online customers to purchase in a physical store by paying the products and services online and enjoying them offline. Traditional products and services companies can incorporate this online sales model into their business models.

Mr. Koo said mobile e-commerce and socialised e-commerce will be a new driving force for the development of online sales market in China. Currently, China has 920 million cellular phone users and the market of mobile e-commerce (RMB 2.6 billion) is apparently smaller than that of PC e-commerce (RMB 500 billion). In the future, Deloitte predicts that there will be a high degree of creativity and flexibility in the application of mobile e-commerce in different business models.

He also stated that more e-commerce enterprises are setting up their own sales platforms on social networks. With strong differentiation and personalisation, these platforms help drive the socialisation of e-commerce. For companies, social network has become not only another marketing channel, but also a channel to understand in greater details about the habits and preferences of their targets and customers.

Mr Koo said that, "The online retail market in China is huge and is developing rapidly. Alongside the expansion and evolution in sales and operation within the industry, China's e-commerce enterprises are facing different risks. Most commonly, their IT systems are falling short of maturity and they have to take the problem seriously, for instance, seeking advice from professional services firm in order to meet the customers' requirements from various new modes of e-commerce (including the needs in mobile e-commerce and socialised e-commerce). In addition to IT system maturity, e-commerce companies should beware of information security risk, brought about by different sales modes and platforms. On the one hand, they should protect the important internal corporate information and on the other hand, they have to protect privacy of their customers, especially the transaction-related information. By doing so, companies can catch the business opportunities from e-commerce."