China’s online retailing market, 2011

October 2011Li & Fung Research CentreLi & Fung Research Centre

I. Market overview p.3

II. Competitive landscape p.17

III. Latest developments p.39

In this issue:

22

III. Latest developments p.39

I. Market overview

3

Transaction value of China’s online retailing market grew by 75.3% yoy in 2010

• Online retailing* is an increasingly important sales channel in China, especiallyamong young consumers. According to iResearch, the transaction value of China’sonline retailing market was up by 75.3% year-on-year (yoy) to reach 461.0 billionyuan in 2010, accounting for 2.98% of the country’s total retail sales (Exhibit 1).

• The transaction value of China’s online retailing market reached 179.2 billion yuan in2Q11, registering a 76.7% yoy growth (Exhibit 2). It is estimated that the transactionvalue of China’s online retailing market will exceed 200.0 billion yuan in 3Q11.

44

• The Ministry of Commerce (MOFCOM) estimated that the transaction value ofChina’s online retailing market will reach 763.41 billion yuan by the end of 2011,accounting for 4.5%-5% of the country’s total retail sales.

* According to iResearch, scale of online retailing market refers to the total transaction value of consumer-to-consumer(C2C) and business-to-consumer (B2C) online businesses. Scale of C2C online retailing market is calculated by thetotal value of purchases, excluding that on the B2C arm of C2C platforms. Scale of B2C online retailing market hasexcluded payments of travel expense, air tickets and online bill payment services.

Transaction value of China’s online retailing market grew by 75.3% yoy in 2010

Exhibit 1: Transaction value of online retailing market, 2001-2010

Exhibit 2: Transaction value of online retailing market, 1Q10 – 2Q11

200%

250%

400

450

500

80%

90%

100%

160

180

200

55

Source: iResearch

0%

50%

100%

150%

0

50

100

150

200

250

300

350

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

billi

on y

uan

Transaction value of online shopping yoy growth

0%

10%

20%

30%

40%

50%

60%

70%

0

20

40

60

80

100

120

140

1Q10 2Q10 3Q10 4Q10 1Q11 2Q11

billi

on y

uan

Amount yoy growth

China’s Internet population reached 485 million by 1H11

• In the past years, expanding Internet population in China has been one of the keydrivers behind the impressive growth of online retailing market. According to theChina Internet Network Information Centre (CNNIC), China’s Internet populationreached 485 million by 1H11, up by 6.0% from the end-2010 (Exhibit 3). However, thegrowth has moderated after years of rapid increase.

• According to the Information Office of the State Council, China's Internet users hasexceeded 500 million in end-September 2011 and the penetration rate was close to

6

exceeded 500 million in end-September 2011 and the penetration rate was close to40%. Rural Internet users totaled 130 million, accounting for 27% of all Internet usersin China.

• In the past few years, the Chinese government has put increasing emphasis on thedevelopment of information technology industry, we expect Internet penetration willcontinue to increase.

6

China’s Internet population reached 485 million by 1H11

Internet users (million)

% Internet penetration

1H05 111 8.42H05 123 9.31H06 137 10.32H06 162 12.1

Exhibit 3: China’s Internet population (million), 1 H05-1H11

7

2H06 162 12.11H07 210 15.72H07 253 18.71H08 298 22.02H08 338 24.71H09 384 28.02H09 420 30.41H10 450 32.62H10 457 34.31H11 485 36.2

7Source: CNNIC

Online shoppers accounted for around one-third of China’s Internet population

• iResearch estimated that the number of online shoppers rose from 108 million in end-2009 to 148 million in end-2010, accounting for 32.4% of China’s Internet population.

• Today, many Chinese Internet users, who are not shopping online at time being, lookfor product information online. The potential of online market is huge. It is expectedthat online shoppers will account for 50% of China’s Internet population in 2014.

88

Profile of China’s online shoppers – age and gender

Age• Over 50% of China’s online shoppers aged 19-30 in 2010.• 22.5% of the online shoppers aged 31-40; the share has increased from 20.8% in

2009 (Exhibit 4).• 52.6% of the online shoppers were male.

Exhibit 4: Age distribution of online shoppers in C hina, 2009-2010*

35

9

Source: iResearch

0

5

10

15

20

25

30

35

below 18 19-24 25-30 31-35 36-40 over 40

% 2009

2010

*Note: share calculated by the transaction value of orders placed by different age groups of online shoppers

Profile of China’s online shoppers – geographies

Geographies

• According to iResearch, the top 3 provinces with the highest number of orders onbusiness-to-consumer (B2C) shopping platforms in Jan – May 2011 were Guangdong ,Zhejiang and Jiangsu (Exhibit 5).

• According to Taobao, China’s largest online retailing platform operator, the top 3 citieswith the highest online spending on Taobao in 2009-2010 were Shanghai (US$2.6

10

with the highest online spending on Taobao in 2009-2010 were Shanghai (US$2.6billion), Beijing (US$1.76 billion) and Shenzhen (US$0.99 billion). Shanghai aloneaccounted for 8.7% of the total online spending. As shown in Exhibit 6, top cities withthe highest spending on e-commerce were mostly along the coast.

• It is noteworthy that online sales in inland cities are growing fast. 8 of the top 10fastest-growing cities in terms of total online spending on Taobao in 2010 were inlandsecond- and third-tier cities (Exhibit 7).

10

Profile of China’s online shoppers – geographies

Exhibit 6: Top 10 cites with the highest online spending on e-commerce in terms of Taobaousage, 2009-2010

00.5

11.5

22.5

3

US

$ bi

llion

Exhibit 5: Top 10 provinces and municipalities with the highest spending on B2C shopping platforms by number of orders, January – May 2011

0 2,000 4,000 6,000 8,000

10,000 12,000

Num

ber

of o

rder

s

1111

Source: iResearch Source: Taobao, A.T. Kearney analysis

Rank City Rank City

1 Macau 6 Yunfu

2 Luohe 7 Honghe

3 Ezhou 8 Wenchang

4 Simao 9 Xingtai

5 Qiqihar 10 Guigang

Exhibit 7: Top 10 cities with the fastest growth on online spending

Source: Taobao, A.T. Kearney analysis

• According to the iResearch as shown in Exhibit 8, the most popular categories in2010 were:

• Apparel and footwear1

• Books, music, movies and videos2

• Prepaid cards (e.g., top-up cards, etc)3

Most popular categories

12

• On the other hand, online sales of home products, healthcare food, maternity andbaby products are fast growing.

12

• Prepaid cards (e.g., top-up cards, etc)3

Most popular categories

Exhibit 8: Most popular categories, 2009-2010

Home products

IT/digital/communication

Cosmetics and personal care

Prepaid cards (e.g., top-up cards, etc)

Books/music/movies and videos

Apparel, footwear and bags

1313

Source: iResearch

0 10 20 30 40 50

Others

Jewellery

Toys and gifts

Electronic appliances

Maternity and baby care products

Healthcare food

Home products

%

2009 2010

Reasons for shopping online

• According to iResearch in Exhibit 9, consumers choose to shop online mainlybecause of:

• Lower prices1

• Convenient delivery services2

• Wide variety of products3

14

• Many online shoppers in China are from the lower- to middle-class; they are moreprice-sensitive, and are willing to spend more time to search for best-value deals.

• Average spending of online shoppers were 3,364.9 yuan in 2010.

14

• Wide variety of products3

Reasons for shopping online

Exhibit 9: Reasons for shopping online, 2010

Products only available online,

6.40%

Sufficient product information, 6.10%

Others, 0.60%

1515

Source: iResearch

Price lower than offline stores,

51.80%

Convenient delievry services,

19.30%

Wide variety of choices, 15.90%

6.40%

Product quality remains one of the major concerns

• Product quality remains one of the major concerns for purchasing online. Accordingto iResearch, 70.6% of the surveyed population did not have confidence towards thequality of products bought online; 50.3% worried about the reputation of online stores(Exhibit 10).

Exhibit 10: Reasons for not purchasing online, 2010

70.60%Worry about product quality

1616Source: iResearch

17.60%

18.40%

19.70%

24.00%

25.30%

25.60%

50.30%

70.60%

0% 10% 20% 30% 40% 50% 60% 70% 80%

Can't find the product online

No online banking account

Complicated shopping process

High product price

Insufficient enquiry support

Inefficient deliveries

Worry about reputation of online stores

Worry about product quality

II. Competitive landscape

17

Competitive landscape

• China’s online retailing market can be divided into three segments: consumer-to-consumer (C2C), business-to-consumer (B2C) and group buying.

• C2C transactions accounted for 86.3% of the total value share in 2010.

• B2C transactions accounted for 13.7% of total value share. Between 2008 and 2009,the value share of B2C market has nearly doubled (Exhibit 11).

Exhibit 11: Share of online retailing market in terms of transa ction value*, 2010

1818

Exhibit 11: Share of online retailing market in terms of transa ction value*, 2010

Source: iResearch

* Note: iResearch did not include the sales share of group buying market. Some estimated that transaction value of group buying market is around 4.45 billion yuan, accounting for 0.96% of the total online retailing market (461 billion yuan) in 2010.

93.2% 91.5% 86.3%

6.8% 8.5% 13.7%

0%

20%

40%

60%

80%

100%

2008 2009 2010

B2C

C2C

Domestic vs foreign players

• As shall be seen later, China’s online market is dominated by domestic companies.Chinese companies have definite advantages in language, culture and localknowledge, giving them an edge in areas such as content selection, interface design,and sales and marketing, etc.

• Foreign companies such as eBay and Groupon, has faced huge challenges adaptingto the China market.

19

to the China market.

19

(1) C2C market – overview

• Taobao (淘寶網) is the dominant player in the C2C market, with a 90.3% share in2Q11. Paipai (拍拍網 ) and Eachnet (易趣網 ) had a 9.0% and 0.7% sharerespectively; compared with 2009, market share of both decreased (Exhibits 12 and13).

• Some companies have tried to rival the dominant position of Taobao, but without anysuccess. Baidu Youa (百度有啊), a C2C platform launched by China’s largest searchengine Baidu, was suspended in March 2011; it was later transformed to information-sharing platform in April 2011.

20

sharing platform in April 2011.

Exhibit 12: Market share of C2C market, 2Q11

Source: iResearch

Exhibit 13: Market share of C2C market, 2009

Taobao(淘寶網), 82.49%

Paipai(拍拍網), 10.13%

Eachnet(易趣網), 6.95%

Baidu Youa (百度有啊),

0.43%

Taobao(淘寶網), 90.30%

Paipai(拍拍網), 9.00%

Eachnet0 (易趣網), 0.70%

(1) C2C market – overview

• Number of individuals opening online stores in China reached 13 million in 2010,more than double the number in 2007 (Exhibit 14).

5.27.6

10.413

5

10

15m

illio

n

Exhibit 14: Number of individual online stores, 200 7-2010

2121

0

5

2007 2008 2009 2010

mill

ion

Source: China E-commerce Research Development Centre, 2011

• A number of individual merchants have seen their businesses grow along withChina’s C2C platforms such as Taobao, and have gained resources to build theirown retailing brands. Increasing numbers of online stores on C2C platforms aremoving to B2C operations. Examples include “Tao-brands” (淘品牌) in TaoballMall such as apparel brands Ringnor (言若), Milachic (樂米拉), Qiustyle (斯黛歐)etc.

(1) C2C market – challenges

• Counterfeits and poor-quality products remain concerns. In order to fight againstcounterfeits, Taobao announced that it would join hands with luxury brands such asLouis Vuitton, Gucci and Chanel etc to eliminate counterfeits from its site.

• On the other hand, the MOFCOM, together with 8 other government departments,has issued the Notice for Combating Intellectual Property Infringement andCounterfeits in Online Shopping (關於進一步推進網路購物領域打擊侵犯知識產權和制

22

Counterfeits in Online Shopping (關於進一步推進網路購物領域打擊侵犯知識產權和制售假冒偽劣商品行動的通知) in April 2011.

22

(2) B2C market – overview

• Retailers in China’s B2C online market can be divided into 3 types:– Pure-clicks retailers (e.g. Vancl, M18)– Multi-channel B2C retailers (e.g. COO8 by GOME, intime.com by Intime)– B2C platform operators (e.g. Taobao Mall, 360Buy)

• Taobao Mall (淘寶商城) was the market leader, accounting for 48.5% market share in2Q11. It was followed by 360Buy (京東商城) (18.1%) and Joyo Amazon (卓越亞馬遜)(5.4%) (Exhibits 15 and 16).

2323

Exhibit 15: B2C market share in 2Q11

Source: iResearch

Websites Retail sales (billion yuan)

Taobao Mall (淘寶商城) 30 .0

360Buy (京東商城) 10.2

Joyo Amazon (卓越亞馬遜) 3.0

Dangdang (當當網) 2.3

Vancl (凡客誠品) 1.9

Exhibit 16: Top 5 B2C players by retail sales value, 2 010

Source: iResearch

48.50%

18.10%

2.40%

2.20%

2%

1.30%

1.20%

1.10%0.80%

0.60%

21.80%

Taobao Mall (淘寶商城)

360Buy (京東商城)

Joyo Amazon (卓越亞馬遜)

Dangdang (當當網)

Vancl (凡客誠品)

Iscon (易迅網)

COO8 (庫巴網)

Newegg (新蛋網)

Yihaodian (一號店)

M18 (麥網)

Others

(2) B2C market – category expansion by prominent players

• In the past years, some vertical B2C operators have expanded their productcategories to draw more traffic, improve margin and increase scale economy.

– Gome and Suning have expanded their product categories from electronic appliances to cosmetics andapparel etc in 2011.

– Dangdang, originally sold books only, now also sells home products, cosmetics, apparel, electronicappliances etc. Dangdang hopes that sales of these product categories will account for half of the companysales by the end of 2012.

– 360Buy, which previously focused on home electronics retailing, expanded into food, maternity and baby,

24

– 360Buy, which previously focused on home electronics retailing, expanded into food, maternity and baby,books categories in 2010

• However, some market watchers also concern that there will be smaller differentiationbetween different B2C platforms.

24

(2) B2C market – players exploring the potential of private labels and proprietary brands

• Most B2C operators in China have low profit margins. Some players are exploring thepotential of private label products and proprietary brands to improve their margins.

– For example, Joyo Amazon has developed its own brand “Amazon Basics” (亞馬遜倍思) in 2010, sellingbackpacks for cameras and accessories, etc.

– According to the IPO prospectus of Mecox Lane, a significant portion of its total net revenue is derived fromthe sales of proprietary Euromoda and Rampage products in China.

2525Source: http://www.amazon.cn/gp/feature.html?ie=UTF8&docId=50438http://static.m18.com/brand/euromoda.shtml

(2) B2C market – traditional retailers increase investment in online operations

• Examples of traditional retailing going online– Gome acquired 80% of COO8 (庫巴購物網) http://www.coo8.com/ in Nov 2010.– Wal-Mart invested stakes in Yihaodian (1號店) http://www.yihaodian.com in May 2011. It also

set up the Global e-Commerce Headquarter in Shanghai in 2010. Regional site of Sam’s clubBeijing was set up in 2010 as well, in addition to its Shenzhen regional website.

– Baidu worked with Rakuten to build the Chinese site of Japanese Rakuten (樂酷天 )http://www.rakuten.cn/ in 2010.

– Li Ning has set up an official online shop www.e-lining.com in 2010. Online flagship shops for

26

– Li Ning has set up an official online shop www.e-lining.com in 2010. Online flagship shops forthe Li Ning brand have also been launched on reputable third-party e-commerce platforms inChina such as Taobao and Paipai.

– Belle Group’s announced investment of USD200 million to re-create a B2C platform Yougou(優購網 ) www.yougou.com, replacing the original B2C platform Topshoes (淘秀網 )www.topshoes.cn in August 2011.

26

(2) B2C market – traditional retailers increase investment in online operations

• Traditional retailers are eyeing the online potential. According to the China ChainStore and Franchise Association (CCFA), in 2010, 52 of the top 100 players havelaunched their own online shopping platforms, the number was up from 34 in 2009.

• Reasons for traditional retailers to go online– By expanding online, retailers can reach a larger consumer base.– Multi-channel retailers have the advantage over pure-clicks counterparts as they can provide better after-

sale services to consumers with the presence of offline stores.

27

• That said, multi-channel retailers should also consider conflicts between online andoffline store in terms of variety of products and price. They have to pay extra attentionto pricing strategy to maintain online and offline consistency in order to avoid onlinechannels cannibalizing sales of their offline stores and potential conflict of interestswith existing distributors and franchisees.

• Many traditional retailers are not familiar with selling online, posing extra challengesfor them to reach breakeven for online businesses

– Metersbonwe announced in Oct 2011 that it will stop operating its e-commerce business on its own. It willentrust Shanghai Banggo Information Technology (Banggo) to sell its products online under the domainname Banggo.com.

27

(2) B2C market – export-oriented enterprises exploring opportunities selling online

• On account of faltering export demand, many export-oriented enterprises in Chinahave begun to explore domestic market potential. Selling online is considered one ofthe best ways to test the water.

• Some export-oriented enterprises have launched their own online shopping platforms.– S.CN (名鞋庫) http://www.s.cn was originally in the export trading business. It launched its

online selling platform to sell off-season footwear, including branded players such as Adidasand Nike.

28

and Nike.

– Foxconn (富士康), a well-known electronic components manufacturer, has introduced anonline store called Feihu (飛虎樂購) http://www.efeihu.com/ selling 3C products.

28

(3) Group buying – overview

• Group buying has grown exponentially in China since 2010. Group buying websitesconnect thousands of online users to sign up together to buy the same products toget bulk discounts. If a certain number of people sign up for the offer, the dealbecomes available to all; but if a predetermined minimum is not met, no one gets the“deal that day”.

• The transaction value on group buying websites reached 1.45 billion yuan in 2010 . Itis expected that the sales of group buying websites will reach 4.35 billion yuan by theend of 2011 (Exhibit 17).

29

end of 2011 (Exhibit 17).

29

Exhibit 17: Transaction value of group buying websi tes, 2010-2015e*

*Estimated values for 2011-2015Source: iResearch

1.45 4.35

7.21 11.34

19.90

29.83

0%

50%

100%

150%

200%

250%

0

5

10

15

20

25

30

35

2010 2011e 2012e 2013e 2014e 2015e

Transaction value (billion yuan) yoy growth (%)

1,7081,964

2,000

2,500

Exhibit 18: Number of group buying websites, March – December 2010

(3) Group buying – overview

• According to iResearch, the number of group buying websites in China reachednearly 2,000 as of end-2010 (Exhibit 18).

3030

21 85238

366553

7821,008

1,388

1,708

0

500

1,000

1,500

2,000

Mar 2010

Apr 2010

May 2010

Jun 2010

Jul 2010

Aug 2010

Sep 2010

Oct 2010

Nov 2010

Dec 2010

Number of group buying websites

Source: iResearch

(3) Group buying – top players

Group buying platforms Website Transaction value (million yuan)

Taobao Ju Hua Suan (淘寶聚划算) http://ju.taobao.com/ 520

La Shou (拉手網) http://www.lashou.com/ 260

Mei Tuan (美團網) http://www.meituan.com/ 140

Man Zou (滿座網) http://www.manzuo.com/ 120

Exhibit 19: Top 10 players by transaction value, 2010

31

Man Zou (滿座網) http://www.manzuo.com/ 120

Nuo Mi (糯米網) http://www.nuomi.com/ 100

Dian Ping (點評網) http://www.dianping.com/ 90

QQ Tuan (QQ團購) http://tuan.qq.com/ 80

24 Quan (24券網) http://www.24quan.com/ 60

Groupon China (團寶網) http://www.groupon.cn/ 50

58 Tuan (58團網) http://t.58.com/ 30

31Source: iResearch

(3) Group buying – SNS websites launched group buying platforms

• Friends or networks of people are likely to share similar interests and engage ingroup buying activities. Some popular Social-Networking Services (SNS) websites inChina have leveraged on huge traffic of their platforms and started their own groupbuying businesses (Exhibit 20).

Exhibit 20: Select group buying websites launched b y SNS websites

32

Source: iResearch

Renren (人人網)

Nuo Mi (糯米網)

Kaixin (開心網)

KaixinQuan

(開心團購)

Tencent (騰訊)

QQ Tuan(QQ團購)

Sohu (搜狐)

Sohu Tuan(愛家團)

(3) Group buying – challenges

• There are over 2,000 group buying sites in China, but many of which are loss-making.Indeed, according to iResearch, from January to July 2011, 76% of group buyingshoppers in China have visited the top 10 group buying websites, marketconcentration is high.

• It is expected that market consolidation will accelerate.– According to Analysts International, the transaction volume, user activity, number of orders of group buying

33

websites have decreased since July 2011. Many Group buying platform operators found financingincreasingly difficult. Many smaller players are acquired by larger players.

– In 2010, Groupon entered China with ambitious plans. However, it has struggled to compete in the market. Itis reported that it has closed 13 regional sites and laid off hundreds of employees in China in 2011.

• Poor after-sale services and low credibility are primary concerns. According to theChina Business Credit Platform under MOFCOM, 40% of the complaints on onlineshopping in China are towards group buying in 1H11.

33

Snapshots of China’s online retail giant Taobao

34

Alibaba Group restructuring Taobao into three separately-managed companies in 2011

• In June 2011, Alibaba Group restructured Taobao into three separately-managedcompanies, (1) Taobao Mall, engaging in B2C businesses (2) Taobao Marketplace,engaging C2C businesses; and (3) eTao.

Taobao Mall (淘寶商城) enables businesses to sell to customers

Taobao Marketplace ( ) consumers can trade with

35

• Taking into account different business models behind the three platforms,management of the Alibaba Group hopes that the restructuring will allow differentstreams to focus on respective customer bases and better respond to competitivethreats.

35

Taobao Taobao Marketplace (淘寶網) consumers can trade with each other

eTao (一淘網) shopping-related search engine

The launch of “open strategy”

• Taobao Mall launched an “open strategy” in September 2011, enabling other e-commerce companies to establish their own online storefronts on Taobao Mall. Itaims to assembling a wide variety of quality brands and authentic products in a singleshopping destination. 38 leading Chinese B2C websites has teamed up with TaobaoMall, including renowned players such as Vancl (凡客誠品), Redbaby (紅孩子),Newegg (新蛋網) and Yihaodian (1號店). This move helps Taobao Mall reducecompetition.

36

• Taobao Mall also said that it would revise site policies to improve services, includingthe introduction of two new service plans charging vendors 30,000 yuan or 60,000yuan per year, compared to the existing annual technical service fees of 6,000 yuan.

• Taobao projected its gross merchandise volume to double to 200 billion yuan in 2012from an estimated 100 billion yuan in 2011.

36

Entry into offline business

• To lure consumers who are not comfortable with online shopping, Taobao announcedentry into offline business in 2010, authorizing supermarkets and school shops, etc tobecome its official physical shopping service stores. Taobao has 1,500 authorizedstores as of July 2011 with total sales exceeding 10 milllion yuan.

• After paying a small amount of service fee, consumers can buy various productslisting on Taobao.com in these offline service stores; and consumers can pay for

37

listing on Taobao.com in these offline service stores; and consumers can pay forpurchases in cash and receive the products within 3-5 days.

37

Overseas expansion efforts

• In June 2010, Taobao entered the Japanese market by joining forces with YahooJapan. Japanese consumers can purchase from Yahoo Japan’s China Mall(http://chinamall.yahoo.co.jp).

• Taobao has launched two magazines, namely “Tao” (淘Tao) and “Taobao Tianxia”(淘寶天下), in Hong Kong in April 2011; the former is a lifestyle magazine and thelatter is a Taobao catalogue.

38

• Taobao has partnered with Circle K in 4Q10 to sell top-up e-vouchers to Taobao e-shoppers in all Circle K convenience stores in Hong Kong and to provide e-fulfillmentservices in 100 selected stores. Starting from 1Q11, online shopping orders can beconsolidated at the Taodot Logistics Centre of Circle K in Dongguan and thendelivered to 100 selected Circle K stores in Hong Kong by the Circle K logisticssupport team.

• Starting from September 2011, Taobao e-shoppers in Hong Kong can also buy top-up e-vouchers in 7-Eleven convenience stores as well.

38

III. Latest developments

39

(1) E-logistics getting attention

• Delayed shipment of goods still bothers many online retailers in China. Indeed,fulfillment of last mile logistics is crucial. To solve the problem, some online retailershave opted for building their own distribution centers to enhance logistics efficiency.

– Dangdang has built 6 distribution centers in Beijing, Shanghai, Guangzhou, Chengdu and Wuhan, and it willbuild 2 more in 2011.

– Vancl has its own logistics team, handling around 50% of product distribution. It has 4 logistics centers in

40

– Vancl has its own logistics team, handling around 50% of product distribution. It has 4 logistics centers inBeijing, Shanghai, Guangzhou and Chengdu, and 10 others in second-tier cities.

– Taobao has logistic centers and warehouses in seven sales regions in China.

– Joyo Amazon runs 9 logistic centers in 8 cities including Beijing, Tianjin, Shanghai and Guangzhou etc.

• Many online retailers see logistics services as a key differentiator. However, someindustry watchers are concerned about the lack of know-how of China’s onlineretailers in warehousing, sorting, picking and packing. Shortfall of e-logisticsprofessionals is another problem.

40

(2) New hotspots in online retailing market – luxury products

• Consumers are now more willing to purchase high-priced items online. Thesignificant growth of online luxury sales is a case in point

• Examples:– Redbaby has developed a platform for selling luxury products on its Binggo platform ( 繽 購 )

(http://www.binggo.com/luxury/) in August 2011. Products from Fendi and Emporio Armani etc. can befound.

– Sina (新浪), the largest Chinese infotainment web portal, also has launched a designer and luxury brand-oriented B2C e-commerce website called Sina Luxury (新浪奢品) (http://l.sina.com.cn/) in August 2011.

4141

(2) New hotspots in online retailing market – luxury products

• According to Analysys International (易觀國際 ), the transaction value of luxuryproducts online reached 2.9 billion yuan in 1Q11 and 3.45 billion yuan in 2Q11(Exhibit 21).

• It is expected that online luxury sales will reach 16 billion yuan in 2011.

Exhibit 21: Transaction value of luxury products online, 2011Q1 -Q4e

4242Source: Analysys International

Exhibit 21: Transaction value of luxury products online, 2011Q1 -Q4e

2.9 3.45 4.15 5.5

19.0%

20.3%

32.5%

0%

5%

10%

15%

20%

25%

30%

35%

0

1

2

3

4

5

6

2011Q1 2011Q2 2011Q3e 2011Q4e

qoq

grow

th (%

)

Tran

sact

ion

valu

e (b

illio

n yu

an)

(2) New hotspots in online retailing market – luxury products

• According to China Venture, there are 12 cases of capital injection into online luxurywebsites in 1H2011, the total financing amount reached a historical high of USD 283million (Exhibit 22).

• For example, Shangpin.com (尚品網) received investment of 50 million USD in July2011. This was the biggest investment in online luxury websites.

Exhibit 22: Select cases of capital injection into online luxur y websites, 2010 - 2011

43

Site Date Amount invested

Shangpin.com 尚品網 July 2011 50 million USD

ihush俏物俏語 July 2011 43 million USD

VIPshop唯品會 May 2011 50 million USD

Milanoo米蘭網 April 2011 10 million USD

Xiu.com 走秀網 March 2011 20 million USD

VIPstore佳品網 January 2011 >10 million USD

ihaveu優眾網 December 2010 11 million USD

Source: iResearch, China Venture

Exhibit 22: Select cases of capital injection into online luxur y websites, 2010 - 2011

(2) New hotspots in online retailing market – luxury products

• There are still a lot of challenges. The reluctance of luxury brand companies toauthorize online selling rights is the major problem faced by many platform operators.Many luxury brand companies prefer launching their own official selling portals inorder to better protect brand image. As a result, many operators have to use bigdiscounts to draw traffic, such as Wooha (呼哈網) (http://www.wooha.com/) and Xiu(走秀網) (http://www.xiu.com/).

44

• Besides, many luxury consumers in China do not have the habits of purchasingluxuries online. They value premium shopping experience and after-sale servicesover lower prices.

• Counterfeit products is another issue. For instance,– In July 2011, Omega has filed a lawsuit with Beijing court against Taobao, accusing Taobao sellers of

trademark infringements.

(2) New hotspots in online retailing market – pharmaceuticals

(B) Pharmaceutical industry

• According to the Interim Regulations on Examination and Approval Drug TradeService on Internet《互聯網藥品交易服務審批暫行規定》launched by the State Foodand Drug Administration (國家食品藥品監督管理局 ), enterprises with both theCertificate for Transaction of drugs online《互聯網藥品交易服務資格證》and InternetDrug Information Service Certificate《互聯網藥品信息服務資格證》can sellpharmaceuticals online.

45

• According to the Interim Regulations on Examination and Approval Drug TradeService on Internet, only non-prescription medicines can be sold online.

45

(2) New hotspots in online retailing market – pharmaceuticals

• According to iResearch, by the end of August 2011, 38 online B2C enterprises haveobtained licenses for selling medicines. See Exhibit 23 for select examples.

Date Cooperating enterprises Websites

August 2010 Yihaodian (一號店), China Pingan (中 http://www.111.com.cn/

Exhibit 23: Select pharmaceutical websites in China

46

August 2010 Yihaodian (一號店), China Pingan (中國平安)

http://www.111.com.cn/

May 2011 Paipai (拍拍), Jianke (健客網) http://www.jianke.com/

June 2011 Taobao Mall http://yao.tmall.com/

July 2011 360Buy (京東商城), Jointown (九州通) http://www.ehaoyao.com/

Source: iResearch

• There are 143 cases of capital injection during January to July 2011 into e-commerce operators, amounted to USD 4.13 billion (Exhibits 24 and 25).

Exhibit 24: Investment in e-commerce (by number), January – July 2011

Exhibit 25: Investment in e-commerce (by value), January – July 2011

Group

(3) Investors riding on China’s internet boom; nevertheless, investment sentiment is not as enthusiastic as a year ago

4747Source: iResearch

Group buying , 21.70%

Apparel, 14.70%

Luxury, 11.20%Service

companies, 4.90%

Jewelry, 3.50%Shoes, 3.50%

Gross merchandise,

2.10%

Others, 38.50%

Group buying, 11.80%

Apparel, 15.00%

Luxury, 5.80%

Service companies,

1.50%Jewelry, 1.80%Shoes,

11.40%

Gross merchandise,

43.40%

Others, 9.40%

(3) Investors riding on China’s internet boom; nevertheless, investment sentiment is not as enthusiastic as a year ago

• Lured by the online retailing boom in China, a number of companies have gonepublic. For instance, Dangdang was listed in NYSE in Dec 2010 and Mecox Lane waslisted in NASDAQ in Oct 2010. That said, share prices of both companies havedropped significantly in the past few months.

• Some market watchers point out that investment sentiment is not as enthusiastic as ayear ago. Indeed, investors increasingly question the profit-making ability of China’sonline players, despite the astonishing sales growth figures.

48

online players, despite the astonishing sales growth figures.

• As investors become more cautious, some platform operators are facing growingdifficulties in financing. It is reported that many platform operators have laid off staff tocut expenses in recent months.

48

(4) M-commerce is fast emerging

• Mobile commerce (M-commerce) refers to transactions conducted on wirelessdevices (PDA) and mobile phones.

• Chinese retailers are paying close attention to M-commerce. According to AnalysysInternational, sales revenue generated through purchases made by mobile phonesreached 1.67 billion yuan in 2Q11, an increase from 880 million yuan in the sameperiod of 2010.

49

period of 2010.

• With the growing popularity of smart phones, M-commerce is expected to becomemore popular in the near future.

49

(4) M-commerce is fast emerging

• Online retail giants including Taobao, 360Buy and many others have developedapplications for smart phones such as iPhone and Android mobile phone for easybrowsing and online transactions.

5050Source: http://itunes.apple.com

(4) M-commerce is fast emerging

• Yihaodian has introduced "shopping walls" in about 70 subway stations in Shanghaiand it has placed more than 500 advertisement boards in public areas in Beijing sincelate July 2011, launching a so-called virtual supermarket with "display shelves".Consumers can buy the products by scanning codes on the shopping wall through atransaction terminal installed on mobile phones.

51

Source: http://www.yihaodian.com/

(5) e-Marketing is getting attention

• There are restrictions on foreign SNS websites such as Youtube, Facebook andTwitter in China; nevertheless, their Chinese equivalences are flourishing.

– Online streaming website: tudou etc.– SNS website: renren etc.– Microblog: weibo etc.

• Many Chinese Internet users are active participants in online social media. Manyconsumers actively participate in online discussions about products and services ofcompanies.

52

companies.

Source: http://weibo.com/crfchina, http://weibo.com/officialvancl,

(5) e-Marketing is getting attention

• Besides launching online marketing campaigns through websites, more and moreenterprises are using “SNS marketing” or “weibo marketing”.

– Many retail players have set up accounts in weibo, the most popular microblog in China, aswell as fan pages in SNS websites such as renren.com

– B2C retailer 360Buy has recently co-operated with weibo to sell different products including3C and general merchandises on its microblog page. Weibo users will be redirected to360Buy website.

5353

Source: http://page.renren.com/metersbonwehttp://weibo.com/jingdong

(6) All third-party payment service providers must obtain licenses before September 2011

• To regulate third-party payments via non-financial institutions in China, the People'sBank of China (PBOC) announced in June 2010 that all businesses involved in thethird-party payment services must obtain licenses before September 1, 2011. TheInternet payment market will be better regulated.

• In May 2011, PBOC announced the first batch of electronic payment licenses to 27qualified third party platforms such as Alipay, Tenpay and 99bill, hoping to improve

54

qualified third party platforms such as Alipay, Tenpay and 99bill, hoping to improveonline transaction security.

54

Rules and regulations Effective date

Notes

Establishment and Basic Code of Conduct for Third-party Transaction Platforms (第三方電子商務交易平台服務規範)

April 2010 Consumers are allowed to cancel orders within a certain period of time.

Interim Measures for the Trading of July 2010 Real-name registration is required in online bulletins.

(7) The Chinese government supports e-commercedevelopments

• The Chinese government supports e-commerce developments. Exhibit 26 lists some initiatives launched by the Chinese Government in 2010 and 2011.

Exhibit 26: Select rules and regulations in 2010 an d 2011

55

Interim Measures for the Trading of Commodities and Services through the Internet (網絡商品交易及有關服務行爲管理暫行辦法)

July 2010 Real-name registration is required in online bulletins.

Circular on Regulating Online Shopping Promotional Activities (關於規範網絡購物促銷行爲的通知)

Jan 2011 Online shopping enterprises must offer sufficient information on promotional items

Notice for Combating Intellectual Property Infringement and Counterfeits in Online Shopping (關於進一步推進網路購物領域打擊侵犯知識產權和制售假冒偽劣商品行動的通知)

April 2011 Online shopping platform operators should take responsibility to monitor if the goods sold online infringe intellectual property rights and counterfeits.

List of e-Commerce Demo Enterprise (關於“電子商務示範企業名單”的公告)

July 2011 83 enterprises were selected as the “e-Commerce Demo Enterprises”.

55

For more information

Li & Fung Research Centre

11/F, LiFungTower, 868 Cheung ShaWan Road, Kowloon, Hong Kong

Tel: 2300 2470 Fax: 2635 1598

5656

© Copyright 2011 Li & Fung Research Centre. All rights reserved.

Though Li & Fung Research Centre endeavours to have information presented in this document asaccurate and updated as possible, it accepts no responsibility for any error, omission or misrepresentation.Li & Fung Research Centre and/or its associates accept no responsibility for any direct, indirect orconsequential loss that may arise from the use of information contained in this document. Reproduction orredistribution of this material without Li & Fung Research Centre’s prior written consent is prohibited.

Tel: 2300 2470 Fax: 2635 1598Email: lfdc@lf1937.comhttp://www.lifunggroup.com/