China Retail key facts and e-Com data

1. China
Retail & Online Overview
Nov 2013
David Westhead

2. Contents
This is a presentation on some personal research I did in China for the
e-Commerce/online business. It covers many area’s and isn’t in anyway designed
to provide solutions to brands or companies planning to enter into the China
market, but it does give some key facts that are worth taking note of.
• China territory
• China retail market
• China retail challenges
• China e-Com overview
• China e-Com partners
• China e-Com sales
• Conclusion

3. China Territory
Capital – Beijing
Largest City - Shanghai
3rd largest country in the
World
1.3bn population (largest)
Single party socialist state
GDP per capita $9,828 (92nd)

4. China retail market
• Worlds second largest retail market
• Retail sales doubled from 2008 to 2012
• Consumers are demanding better quality, more unique products and
services. International brands still sought by local consumers
• Brands closing unprofitable stores and focusing on core competencies
• Private label growth increasing
• Omni channel emerging – online and offline integration
• Mobile e-Commerce up 81% YOY (2013)
• Digital marketing explosive impact on consumer purchasing decisions via
social networking sites (SNS)
• Customer loyalty programme essential – centralised customer database
• Tier 3, and 4 cities becoming a development focus

5. China retail market
1. China retail sales will surpass USA in next 5 years
2. Currently 20 Trillion RMB Retail sales, but signs of deceleration - GDP growth 7.8% YOY and Retail
Sales +11% YOY, down v’s LY growth in 2013 (Loads of opportunity, but slower increases expected)
3. Worlds second largest luxury goods market – surge in number of credit card users and +7% increase
in Luxury goods sales (consumer habits are changing)
4. Domestic players margins at 15.9% and Foreign at 16.8% in department stores- Foreign retailers
often cannot secure prime sites at favourable prices, Regional governments no longer offering
benefits to foreign retailers. Poor local adaption and strategies have an effect on sales and higher
price points are becoming an issue. Oversupply of shopping malls – vacancy levels increasing now
around 8% for Tier 1 and 10% Tier 2 cities (make sure you do your due-diligence for retail stores)
5. Department stores introducing and increasing private label to increase margin and offer different
products for local market
6. Online retail increased 41% YOY, Mobile e-Commerce increased 81% YOY - Alibaba’s Tmall and
Taobao achieved sales of 35B RMB (6.4b AUD) in 24hrs on 11/11 – singles day (all with high levels
of discount though – don’t get caught in the trap of thinking its easy business)
7. 565m Chinese internet users, 91% connected to SNS v’s 67% USA. 57% of surveyed follow brands
on SNS – 500m registered on Weibo and 400m on WeChat – QR codes important part of high street
retailing.
8. VIP recognition, Loyalty cards and service requirements increasing – High CSRM needed
9. 71% of wealth concentrated in South and coastal area. Net incomes in rural areas +9.6% and urban
+6.8% however urban disposable income still x3 higher than rural – T1 cities = Volume

6. China retail challenges
• Increased operating costs
• Tougher competition
• Poor customer footfall (in department stores particularly)
• High store vacancies
• Commercial disputes
• Soaring logistic costs
• Lack of innovation and qualified staff
• Limited consumer loyalty
• Higher footfall in some malls that offer F&B/Entertainment
• Oversupply of Malls, and some are ghost towns

7. China retail challenges
1. Rental costs increased by 5% YOY, Prime locations by 21%
2. Key money and bribes are common place
3. Labour costs increased by 10% YOY due to rising minimum wages
4. Minimum wage in Shanghai 1,620 RMB month – 300AUD – skilled workforce a lot
higher and bonuses paid on performance
5. Staff turnover can be high – motivation difficult to achieve
6. Social insurance costs now 40% of salary – 30% paid by employer
7. Footfall decreasing in some department stores and malls (e-Com increasing)
8. Government curbing luxury spending – BIG effect on some categories and brands
9. Oversupply of malls, vacancy levels increasing
10. Chinese law is never clear and open to dispute – corruption is still common place
11. Unstructured development of retail properties and lack of centralised planning giving
rise to traffic congestion, increased competition, poor customer footfall, uneven trade
mix, high vacancy levels and disputes
12. Logistic bottlenecks are here to stay – high cost and weak transport infrastructure –
foreign companies must partner with reliable and capable logistic service providers to
improve delivery capability and enhance customer experience and satisfaction.
13. China is all about newness – innovation is a challenge and qualified staff/turnover is a
key issue

8. China On-line
Alibaba Group holds the largest local online e-commerce platforms, namely Tmall (B2C) and
Taobao (C2C). Although more and more 'smaller' e-commerce platforms have taken root,
these new platforms only own a small percentage of the online market and can be risky to
invest in due to their often short-lived nature. However, some e-commerce platforms such
as YHD.com and JD.com are steadily gaining more market share and are offering a different
experience to Alibaba. More and more bespoke platforms have also entered the market to
allow specialist retailers to trade online and service consumers accordingly.
Tmall caters for International brands and local businesses that are also license-holders or
brand-owners, and where they have the trademarks or are permitted to sell specific brands
and products. In order to sell on Tmall you will have to own a local company, Wholly Foreign
Owned Enterprise (WFOE) or Foreign Invested Commercial Enterprise (FICE), enter into a JV
with a domestic company or work with a 3rd party provider that has a local presence. In
addition, you will need to be able to prove that you have the legal rights to sell the
respective products in China. Setting up a company in China does take time and can be
costly, but better in the long term.

9. China On-line
If your planning to work with a local partner in China, you can never not do enough research
and due diligence. You really need to be able to trust the company or partners that you plan
to work with. Take time to get to know them, build a solid relationship, and it goes without
saying a solid contract is a must. Normally the contract will be in both English and simplified
Chinese. Note that the Chinese contract always prevails over the English contract should any
disputes arise.
One word of advice, protect your IP! Make sure you register your Trademark™ in your current
and future categories. Adopting Chinese translations/transliterations of English trademarks
early will help to avoid, amongst other things, costly rebranding exercises and minimise
consumer confusion in the Chinese marketplace. You have been warned!
The Alibaba Group developed Tmall Global sometime ago to help International brands enter
the Market without the lengthy process and complexities of working directly in china. Tmall
Global: (www.tmall.hk). The site still needs to get brand awareness in China but worth
investigating if you wanted to do a soft trial.

10. China E-Com overview
• On-Line retail ¥1,304billion in 2012 +66% growth YOY
• 2014 estimates at U$300m
• 618 million on-line users
• 60% of users under 30 years of age
• 50% of population are on-line
• On-Line is currently mainly driven by price (but this is changing)
• Alibaba group (Tmall/Taobao) sold ¥35 Billion online in one day – Singles
day 11/11
• Mobile shopping increased to ¥55m in 2012 +136% YOY
• Online 3rd party payment methods most popular – Alibaba’s Alipay No:1
• Consumer on-line split 34% male – 66% female
• China population surf the web 25 times a week
• 131 minutes spent on mobile web each day by consumers
• 420m smart phones sold each year in China

11. China E-Com overview
1. 90% of all China VC and Private Equity is put into E-com
2. 73% of smart phone users wake up to an alarm from their smartphone
3. 60% of aps are never used
4. 66% of relationships break up over mobile messaging
5. 86% use instant messaging
6. 49% use video on-line
7. 29% use mobile on line shopping
8. Delivery is becoming key focus for on-line shoppers followed by price and
service
9. Some on-line traders are offering 7 hour delivery service in Cities
10. Consumers spend 1/3 more on-line in T2 and T3 cities (availability)
11. 2/3 consumers will do price comparisons on mobile phones whilst in store
12. 353m weChat users in China
13. Chinese consumers have very low brand loyalty and will purchase from
different stores/brands

12. E-Com partners
• C2C e-Com captures 70.3% of all on-line users
• Taobao has biggest share with 90%, others share the remainder 10%
• B2C e-com is driven through Tmall with 57% share, JD.com 19% share and up and
coming Yihaodian (YHD) having an impact
• Other key 3rd parties are on-line specialists like Amazon
• Boutique sites by major brands available, but traffic is still driven to 3rd parties like
Tmall.
• Most international brands have an on-line strategy of own website and 3rd party
• Asos (UK) will spend £12m to £18m over next 3 years to break into China
• Maceys (USA) invested U$15m in VIPstore.com
• Flash sale sites becoming more popular like VIP and Glamour

13. E-com ranking
Rank Retailer Website 2012 web sales 2011 web sales Growth
1 Alibaba Group TaoBao.com $170,000,000,000 $101,548,761,300 67.40%
2 360Buy.com/ Jingdong Mall JD.com $8,100,000,000 $4,174,000,000 94.06%
3 Suning Commerce Co. Ltd. Suning.com $4,760,000,000 $945,067,900 403.67%
4 Jia.com Jia.com $3,208,000,000 $1,761,991,000 82.07%
5 51Buy.com 51Buy.com $1,605,691,000 $379,628,970 322.96%
6 HappiGo Ltd Happigo.com $1,605,000,000 $800,000,000 100.63%
7 Vancl.com Vancl.com $1,400,000,000 $560,633,500 149.72%
8 Amazon.com Inc Amazon.cn $1,000,000,000 $800,000,000 20.00%
9 360Mart.com 360Mart.com $964,260,000 $642,840,000 50.00%
10 Dangdang Dangdang.com $878,000,000 $575,000,000 52.70%

14. E-Com sales
70%
14%
5%
11%
Sales
Taobao
Tmall
JD.com
Others
26.5%
42.7%
18.4%
5.0%
4.4%
3.0%
Sales Apparel, Bags, Accessories
Others
Electronics
Cosmetics
Maternity/Baby
Books, Music, Video

15. Prepared by David Westhead
Conclusion
• Business in China is not as easy or as simplistic as we may think,
particularly through e-commerce channels
• Volumes in e-com can be huge, but you need to understand the market
and consumers needs
• The market is constantly changing and by the time I’ve completed this
slide, the data is out of date
• When working in China its so important to find a partner that you can
trust and shares your objectives and vision
• Research, research, research and you can never not do enough due
diligence
• Many brands are successful in launching online in China and one of the
key reasons for this is clearly understanding and then adapting your offer
for the local consumer. My advice is to take a long term view for selling
online in China and prepare for an interesting but bumpy road ahead.