When it comes to retail, Asia is where the action is. With a huge market, high mobile use, and integrated ecosystems for social, search, and e-commerce, the opportunities are enormous for companies that can break in. Harikesh S. Nair, professor of marketing, explains the opportunities and the risks of entering the Chinese retail market.
WHAT WE CAN LEARN FROM E-COMMERCE IN CHINA
It’s very important for us in the West to understand that Asia is where the action is, and people in retail will already know this. But the bulk of consumer purchase and growth in retail is shifting towards Asia.
To give you a sense for the scale of China, if you take every dollar that was spent online in the United States last year, that came to roughly $500 to $600 billion, China alone last year was $1.3 trillion, which means China is larger than the US, plus UK, plus Japan, plus Germany, plus Spain and all of these markets combined. So we should spend some time thinking about what’s going on there, especially with respect to retail and to marketing.
WHAT IS THE STATUS OF RETAIL IN CHINA TODAY?
The first thing to understand about China is that it’s a very large population and roughly 50% of that population is on the cell phone and is connected to the internet. So you are looking at roughly 700 to 800 million users who are on the phone compared to about 300 million users in the United States. And the phone is a very potent tracking device, and the phone is actually creating a substantial impact on the lives of individuals through e-commerce. The offline retail experience is quite bad, quite poor in China. Offline stores have poor quality, very little variety. Targetability was very poor, prices were very high.
Enter e-commerce, Alibaba, JD, Tencent, these large companies. For example, for a user sitting in a small town in China who is typically exposed to five retail stores with potentially say 50 different types of shirts. You can log into the phone and get access to 10,000 different shirts available at much cheaper prices and delivered to you within one day.
Unlike the United States where we have now walled gardens in technology, where social is within Facebook and e-commerce is within Amazon and search is within Google, these platforms have kind of merged in China to produce two very large ecosystems, the Alibaba ecosystem and the Tencent ecosystem. And if you are within one of these ecosystems, search, social, commerce, logistics, payments, et cetera, are seamlessly blended together.
WHAT ROLE DOES SOCIAL MEDIA PLAY?
Two interesting things about the social media and retail intersection in China are worth noting. One is that within WeChat, which is a large social media platform, there is now the ability of every small retailer to have a storefront that is seamlessly connected to the social enterprise or the social network. And that store front will allow you to generate engagement with your users and convert that engagement into a selling opportunity.
Another aspect that is worth noting is what is coming out of China referred to as social commerce. And the most famous company that is doing this is a company called Pinduoduo. There is a huge desire by companies in order to get engagement, advertising and messaging amongst users. And the insight of this company is, “Why don’t we just pay users to generate engagement with their friends.” And this always existed in marketing, we call it referral marketing. But the way they implemented it was an interesting business model. You would get a reduction in the price of any product that you want as a function of the number of users that you bring in. Or alternatively, you could get a very massive price reduction if you posted a promotion sent by the brand to your social media feed, et cetera.
So they have been able to bring down the prices of a large number of products quite dramatically and make it affordable to users in tier two cities in China, which is where the massive opportunity arises.
If you look at the United States, if you take all the dollars that are spent on retail and ask what proportion of that is in e-commerce, it’s roughly 12%. In China, it’s about 16, 17%. One way to think about it is 83% of the market is still open, and it’s a massive market. So there’s lots of room for lots of companies, including the Chinese companies.
It’s not easy however, because it’s a local market and models that may work in the West will not work in China without supporting. And some brands have done a great job of this, such as Apple or Walmart. But some brands have failed too, for example, Amazon failed in China so if you have the right kind of localization strategy, it is possible to win in a very large market
WHAT ARE THE RISKS?
Now the risk is twofold. China is a country where government regulation is a substantial source of investor risk and as regulation changes or the government changes its stance on protectionist laws, or how they think about e-commerce or the propagation of content that can have a massive impact on the business, so one has to go in with their eyes wide open.
A second source of risk is a competition with incumbents is not easy. For example, in e-commerce you have two ecosystems which are vertically integrated into content, into payments, into logistics, into social media and into an advertising business. And these competitors are fearsome, they understand the local market well and it’s not that easy to compete.
The marketplace is large enough to allow for many players and I think the general view of a lot of businesses that are looking in this area is of collaboration rather than competition. I think we should all think of it as a massive market.
This article first appeared in www.gsb.stanford.edu