Online retailing in China

July 2012

Li & Fung Research Centre

1

In this issue:

I. Overview of China’s online retail market

II. Competitive landscape

III. Trends and developments

IV. Challenges

V. Government initiatives

2

Overview of China’s online retail market

3

Online retailing registers stunning growth

• The transaction value of China’s online retail market* reached 773.56 billion yuan in 2011 (up by 67.8% yoy).

• The market size of the online retail market in China is expected to exceed Japan in 2012, and overtake the US to become the largest online retail market in the world by 2013 according to iResearch.

26 56 128 263

461 774

1,184

1,569

2,012

2,551 113% 129%

105%

75% 68%

53%

33% 28% 27%

0%

20%

40%

60%

80%

100%

120%

140%

0

500

1,000

1,500

2,000

2,500

3,000

2006 2007 2008 2009 2010 2011 2012e 2013e 2014e 2015e

Transaction value (billion yuan) Yoy growth (%)

* 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 the total value of purchases, excluding that on the B2C arm of C2C platforms. Scale of B2C online retailing market has excluded payments of travel expense, air tickets and online bill payment services.

Transaction value of online retailing market, 2006-2015e

Source: iResearch

4

Share of online transaction in total retail sales still lags behind other developed countries; yet, Chinese consumers shop more often than their counterparts in developed economies

• In China, online retail sales accounted for 4.3% of the total retail sales in 2011, and are set to reach 6.3% by 2015. The share of online transaction in total retail sales still lags behind that of other developed countries. For instance online retail sales accounted for 12% of total retail sales in the UK, 9% in the US and 9% in Germany.

• Having said that, according to a PwC report*, Chinese consumers are more likely to shop online compared to their counterparts in Europe and the US. Around 70% of the survey respondents in mainland China shop online at least once a week, compared with around 40% in the US and UK, and around 20% in the Netherlands, France and Switzerland.

Share of online retailing among total retail sales in selected countries, 2011

Source: China Chain Stores and Franchise Association (CCFA), iResearch

5

0% 2% 4% 6% 8% 10% 12% 14%

United Kingdom United States

Germany Switzerland

Norway Denmark

France Sweden

China Spain

Poland Italy

* PwC, “Customers take control: How the multi-channel shopper is changing the global retail landscape”, Dec 2011

Faster development of e-commerce in first tier cities (1)

Rank City Rank City Rank City

1 Guangzhou 11 Chengdu 21 Xiamen

2 Shanghai 12 Ningbo 22 Taizhou

3 Beijing 13 Wenzhou 23 Jinan

4 Hangzhou 14 Tianjin 24 Changsha

5 Shenzhen 15 Zhengzhou 25 Jiaxing

6 Suzhou 16 Quanzhou 26 Wuxi

7 Nanjing 17 Chongqing 27 Shenyang

8 Jinhua 18 Qingdao 28 Shijiazhuang

9 Dongguan 19 Fuzhou 29 Xi'an

10 Wuhan 20 Foshan 30 Putian

• According to Ali Research, the top three cities in terms of e-commerce development are Guangzhou, Shanghai and Beijing respectively, indicting that first-tier cities lead the way in developing e-commerce activities.

• It is believed that regional imbalance in online retailing is correlated with the development of logistic infrastructure. In general, comparing with the lower-tier cities, first-tier cities have better logistics infrastructure to support the robust development of online retail market. Still, the huge number of orders generated by online retailing may pose significant challenges to many logistics players, particularly the express delivery companies.

Ranking of e-commerce development indexes* among prefecture or above cities in 2011

6

Source: Ali Research, Haitong Securities

* The e-commerce development index includes: (1) development scale index (no. of e-commerce companies and trading volume); (2) penetration index (per capita e-commerce companies and per capita trading volume); (3) business performance index (credit, activities, satisfaction of buyers and quality of e-commerce products); (4) ecological index (coordination of e-commerce companies, logistic support, e-payment support and economic & technical levels and (5) growth trend index (e-commerce companies and trading growth rate).

Expanding Internet population has been a key driver of the rapid growth of online retail market

Source: Boston Consulting Group

7

0

100

200

300

400

500

600

China India Brazil Russia Indonesia United States

Japan

Mill

ion

2009

2011

Penetration (%) (2011)

38 10 47 51 13 80 70

Number of Internet users* and penetration in selected countries, 2009 and 2011

* Internet users are defined as individuals aged 6 and older who went online in the past six months.

• China has the largest online population in the world. China ’s Internet population reached 538 million as of June 2012; according to China Internet Network Information Center (CNNIC). The Internet penetration rate of 39.9%. The growth has moderated after years of rapid increase.

• In 2011, the Internet penetration rate in China lagged behind the US, Japan, Russia and Brazil; however, the number of Internet users topped among these countries.

Expanding Internet population has been a key driver of the rapid growth of online retail market (cont’d)

Year 2008 2009 2010 2011e 2012e 2013e 2014e 2015e

Scale

Number of online shoppers (million)

80.0 109.0 148.0 187.0 227.7 269.0 314.0 363.0

Transaction value (billion)

128.18 263.00 461.00 773.56 1,184.05 1,568.89 2,012.49 2,551.00

Average online spending per person (yuan)

1,602 2,413 3,115 4,137 5,200 5,832 6,409 7,028

yoy growth

Number of online shoppers

45.5% 36.3% 35.8% 26.4% 21.8% 18.1% 16.7% 15.6%

Transaction value 128.8% 105.2% 75.3% 67.8% 53.1% 32.5% 28.3% 26.8%

Average online spending per person

57.3% 50.6% 29.1% 32.8% 25.7% 12.2% 9.9% 9.6%

• According to the CNNIC, the number of online shoppers reached 210 million (up by 8.2% from the end of 2011) as of June 2012, accounting for 39% of China’s Internet population.

• The volume of online purchase also increased significantly in 2011. The average online spending per person in 2011 was around 4,137 yuan, up by 32.8% yoy. This was largely attributed to the fact that consumers have been more familiar with purchasing online and are confident in buying higher-priced products online.

Source: iResearch

Number of online shoppers, transaction value of online retail market, and average online spending per person in China, 2008-2015e

8

Reasons for the fast growing e-commerce market

9

Attractive online pricing

New product categories sold online (e.g. pharmacy, luxury,

real estate, etc.)

Growing popularity of wireless devices facilitate online

retailing

Expanding Internet population

Increasing confidence in online retailing

Traditional retailers set up online stores

Advancement in IT Better logistics infrastructure

Social media platforms provide enormous

opportunities

Profile of China’s online shoppers (1) – Gender and age

Gender • Proportion of male and female online shoppers are similar. • 51.7% of the online shoppers were male. Age • Over 60% of the China’s online shoppers aged 18-30 in 2011. • In 2011, 33.6% of online shoppers aged 25-30; the share increased from 25.1% in 2010. • More middle-aged users have started shopping online; they have strong consumption ability and

are more willing to pay for high-priced goods.

Age distribution of online shoppers in China, 2010-2011

Source: iResearch

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

0%

5%

10%

15%

20%

25%

30%

35%

40%

Below 18

18-24 25-30 31-35 36-40 above 40

2010

2011

Male, 51.70%

Female, 48.30%

Male

Female

Source: iResearch

Gender distribution of online shoppers in China, 2010-2011

10

Profile of China’s online shoppers (2) – Income level

Income level

• Over 50% of the online shoppers have income between 1,000-3,000 yuan in 2011.

• More people in the high-income group participated in online shopping in 2011. The share increased from 9.7% in 2010 to 13.7% in 2011.

Source: iResearch

Income level distribution of online shoppers in China, 2010-2011

11

12.00%

10.50%

27.30%

23.20%

17.30%

9.70%

12.00%

6.50%

24.30%

25.90%

18.50%

13.70%

0% 5% 10% 15% 20% 25% 30%

none

below 1,000 yuan

1,000-2,000 yuan

2,000-3,000 yuan

3,000-5,000 yuan

above 5,000 yuan

2011

2010

Apparel, footwear and bags is the most popular category consumer purchased online in 2011

The most popular categories consumer purchased online, 2011

Others 41.4%

Apparel, footwear and bags 26.5%

Electronic appliances

24.2%

Cosmetics and personal care

4.9%

Books/music/ movies and videos 3.0%

Source: iResearch

• Apparel, footwear and bags 1

• Electronic appliances 2 • Cosmetics and personal

care products 3

12

Payment method

• Cash on delivery (COD) is still the most common payment method.

• According to CNNIC, as of June 2012, 187 million online shoppers used online payment systems to purchase items online.

• Among various online payment systems, Alipay is the preferred one and is frequently the first option offered by leading online retailers. – According to iResearch, Alipay dominated the online payment industry with a market share of 49% in 2011.

Online payment market breakdown, 2011

Source: iResearch

13

Alipay, 49.00%

Tenpay, 20.40%

China Unionpay,

8.40%

99bill, 7.50%

Huifutianxia, 7.40%

Yeepay, 3.00% IPS, 2.70% Others, 1.70%

Competitive landscape

14

C2C segment represents a dominant share; yet, B2C businesses are gaining attention

• In 2011, C2C transactions amounted to 594.45 billion yuan, accounting for 76.8% of the total transaction value of the online retail market.

• The transaction value of B2C segment totaled 179.11 billion yuan in 2011, accounting for 23.2% of the total value.

• It is expected that the share of B2C transaction will continue to increase steadily in the future.

15

92.20% 86.30% 76.80% 70.20% 66.20% 62.20% 59.30%

7.80% 13.70% 23.20% 29.80% 33.80% 37.80% 40.70%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2009 2010 2011 2012e 2013e 2014e 2015e

C2C B2C

Share of online retailing in terms of transaction value, 2009-2015e

Source: iResearch

Some popular C2C and B2C websites in China

C2C websites B2C websites

16

C2C market (1) – Market share

• C2C market in China is very stable.

– Taobao (淘寶網) is the dominant player which accounted for 95.1% market share in 2011. Although the growth of the C2C market has been slowing down, Taobao’s growth was still faster than that of the industry, according to Credit Suisse.

– Paipai and Eachnet shared the remaining market.

Market share of C2C market, 2011

17

Taobao (淘寶網),

95.10%

Paipai (拍拍網),

4.30%

Eachnet (易趣網),

0.60%

Source: iResearch

C2C market (2) – Statistics

• Taobao is leading the market in terms of number of daily unique visitors.

• Paipai and Eachnet both lag quite far behind in terms of daily visitors; for Eachnet, the number of daily visitors has been on a decreasing trend in the last couple of months.

Taobao.com

18

Paipai.com

Eachnet.com

Source: Google ad planner, as of July 2012

B2C market (1) – Market share

• B2C is the fastest growing but highly fragmented segment in China’s e-commerce market.

• Retailers in the B2C segment can generally be classified into three groups:

– Pure-click retailers such as Vancl (凡客誠品), a prominent online apparel player in China;

– Multi-channel B2C retailers such as Suning (蘇寧易購), which has a large offline store network of Suning Appliances (蘇寧電器); and

– B2C online platform operators such as Tmall (天貓), the distinct leader in China’s B2C online retailing market.

Market share of B2C market, 2011

19

Source: iResearch

Tmall (天貓), 51.00%

360Buy (京東商城),

17.10%

Amazon China (亞馬

遜), 3.30%

Suning (蘇寧易購),

3.30%

QQ Shop (QQ商城),

2.90%

Dangdang (當當網),

2.00%

Vancl (凡客誠品),

1.90%

Yihaodian (1號店),

1.50%

51Buy (易迅網),

1.30%

COO8 (庫巴網),

1.20% Newegg (新蛋網),

0.80%

Others, 13.60% Tmall (天貓)

360Buy (京東商城)

Amazon China (亞馬遜)

Suning (蘇寧易購)

QQ Shop (QQ商城)

Dangdang (當當網)

Vancl (凡客誠品)

Yihaodian (1號店)

51Buy (易迅網)

COO8 (庫巴網)

Newegg (新蛋網)

B2C market (2) – Top 10 B2C players in China in 2011

• In 2011, the two largest B2C players were Tmall and 360Buy, followed by Amazon China and Suning.

• Suning is the only non-pure click B2C players among the Top 10 players in China 2011.

• Most of the top players are integrated online platforms selling a large variety of goods; only a few selling specialized products.

20

Rank Online retail player

Category Transaction value in 2011 (billion yuan)

% yoy growth

1 Tmall 天貓 Online superstore 92.0 206.7% 2 360Buy 京東商城 Online superstore 30.9 202.9% 3 Amazon China 亞馬遜 Online superstore 6.0 100.0% 4 Suning 蘇寧易購 Online superstore 5.9 490.0% 5 QQ Shop QQ商城 Online superstore 5.3 165.0% 6 Dangdang 當當網 Online superstore 3.6 57.1%

7 Vancl 凡客誠品 Apparel 3.5 89.2%

8 Yihaodian 1號店 Online superstore 2.7 235.8% 9 51Buy 易迅網 Home electronics 2.4 196.3% 10 COO8 庫巴網 Home electronics 2.1 320.0%

Source: iResearch

Top B2C players in China, 2011

B2C market (3) – Statistics

21

Tmall.com

360Buy.com

Source: Google ad planner, as of July 2012

Amazon.cn

Suning.com

• Tmall is the most popular B2C platform in terms of daily unique visitors.

• The number of visitors of 360Buy has increased significantly recently, largely attributed to the launch of its promotion campaign during its anniversary celebration in June 2012.

B2C market (4)

• China’s B2C market is very fragmented. According to the China Chain Store and Franchise Association (CCFA), most of the B2C platform players are still losing money. – For instance, 360Buy was reportedly incurred a net loss in 2011 (a negative profit margin

of 5%); Coo8 also incurred a net loss of around 400 million yuan in 2011; and Dangdang encountered a net loss of 284 million yuan in 2011.

• Having said that, it is believed that the B2C market has a much brighter development prospects than the C2C market due to the following reasons: – Consumers generally demand better product/service quality in B2C platforms than in

C2C platforms.

– B2C players usually provide better service than C2C.

– An increasing number of C2C individuals and SMEs begin to migrate their businesses to B2C platforms.

22

B2C market (5) – Comparison between selected B2C players

23

Tmall 360Buy Amazon China Suning

Cash on delivery √ √ √ √

Payment method

- online payment systems √ √ √ √

- online banking √ √ √ √

- credit card √ √ √ √

Self-owned delivery system x √ √ √

Third-party delivery services √ √ √ √

Invoice √ √ √ √

Free return/ exchange policy 7 days 7/15 days 30 days 7/15 days

Mobile client √ √ x √

Source: Li & Fung Research Centre, company websites

Trends and developments

24

1. Traditional retailers increase investment in online operations

• 59 of the top 100 chain retailers (the Top 100s) have launched their own online stores as of June 2012 (see Appendix). The number has increased significantly since 2009. However, the majority of the top online retail players in China are still pure-click players. – 32 of them provide national delivery; while 27 only provide regional delivery services.

– 34 of them support cash on delivery (COD) payment method.

– Among all, only two partner with other B2C platforms; while the rest set up their own online stores.

• Integration of online and offline business operation is getting popular. On the one hand, traditional retailers are going online to extend consumer reach; on the other hand, online retailers are launching offline stores to enhance consumer shopping experience.

Number of retailers among the Top 100s with their own online stores by retail format, 2011

25

Retail format

Number of retailers

with own online

stores

Department store 26

Supermarket / hypermarket 22

Electronics specialty store 5

Others 6

Total 59

Source: CCFA

Number of retailers among the Top 100s with their own online stores, 2009-2012

Source: CCFA

14

31

52 59

0

10

20

30

40

50

60

70

2009 June 2010 June 2011 June 2012

As of date

Some advantages of launching online platforms…

Examples:

• Target customers of online and offline shops are different. Going online can extend the customer base and capture more customers.

• Online technology can enhance shopper experience – e.g. Use mobile apps to check inventory

Yet, not many are successful at the current stage…

Why?

• Many traditional retailers are not familiar with selling online, posing challenges for their online businesses to breakeven.

• Not many players can develop a successful online platform, many of them just act as “online showroom”.

• Many traditional retailers have no competitive edge going online in terms of product and price.

26

1. Traditional retailers increase investment in online operations (cont’d)

• There is an increasing trend for foreign retail players to enter the China online retailing market by acquiring stakes in big local players.

– Wal-Mart acquired a minority stake in Chinese online grocery store Yihaodian (1 號店) in

May 2011; in February 2012, Wal-Mart announced a further increase in stake in Yihaodian to approximately 51%.

– Macy’s, a leading US large department store operator, has acquired a USD 15 million stake in Chinese online retailer VIPStore. The deal will allow Macy’s to sell merchandise through a dedicated section on Omei.com, a luxury website operated by VIPStore.

27

1. Traditional retailers increase investment in online operations (cont’d)

• Most B2C operators in China have low profit margins. To reap more profits, some vertical B2C operators have expanded their product categories, hoping to draw more traffic, improve margin and increase economies of scale.

• Some examples include: – Suning launched its online book channel in October 2011

– Dangdang set up its electronic book platform in December 2011

– 360Buy started its hotel reservation services in February 2012

– Tmall re-launched its pharmaceutical channel in February 2012

28

2. B2C retailers expand product categories

2. B2C retailers expand product categories (cont’d)

29

Tmall 360Buy Amazon China Suning QQ Shop Dangdang Vancl Yihaodian COO8

Menswear √ √ √ √ √ √ √ √ √

Womenswear √ √ √ √ √ √ √ √ √

Children's wear √ √ √ √ √ √ √ √

Maturity and Baby

products √ √ √ √ √ √ √ √ √

Sportswear √ √ √ √ √ √ √ √ √

Underwear √ √ √ √ √ √ √ √ √

Footwear √ √ √ √ √ √ √ √ √

Cosmetics √ √ √ √ √ √ √ √ √

Home electronics √ √ √ √ √ √ √ √

Homeware √ √ √ √ √ √

Food √ √ √ √ √ √ √

Book √ √ √ √ √ √

E-book √ √ √ √

Online travel √ √ √

Airline ticket √ √

Movie √ √

Real estate

Pharmacy √

Healthcare √ √ √ √ √ √

Source: Li & Fung Research Centre, company websites

Categories offered in selected B2C websites (as of July 2012)

3. Migration to open platform

• Major vertical B2C companies are transforming into B2C e-commerce platforms. They allow third parties to sell their goods on their platforms; the platforms will provide logistics, warehouse and even after-sale services for the third parties.

• The platforms charge credit deposit, entry fee, annual fee, technology service fee, advertising and charging transaction fees, etc.

• Major advantage: companies can easily expand product categories without increasing capital requirements.

• Tmall, QQshop, 360Buy, Dangdang and Amazon China, Suning are some of the platforms that open to third parties.

30

Example of Tmall

• In September 2011, Tmall signed an agreement with 38 e-commerce companies, including Yaodian100, Coo8, Okbuy, Letao and Tiantian. These e-commerce companies have established their own online flagship stores on the Tmall platform. – e.g. Redbaby on Tmall: http://redbaby.tmall.com; Coo8 on Tmall: http://coo8.tmall.com/

31

3. Migration to open platform (cont’d)

38 vertical websites signed agreement with Tmall

3C

Coo8

Footwear

Okbuy newegg letao.com 51Buy s.cn Lusen xijie.com

Cosmetics Jumei.com

Maternity Redbaby

lafaso.com Leyou

Apparel

Tiantian.com Mamabkoo.com Yihaodian.com

Luxury goods

yintai.com homew.com VIPshop.com vcotton.com xiu.com VJIA.com ihaveU.com La Miu shopin.net crucoo.com vipstore.com Nop d1.com menglu.com xdsc.com m18.com vipku.com

Food uya100.com luxstore.com quwan.com jiuxian.com

Source: Credit Suisse, company website

4. Players explore the potential of private labels and proprietary brands

• Most B2C operators in China have low profit margins.

• Some players are exploring the potential of private label products and proprietary brands to improve their margins. – Dangdang has launched its private label (當當優品) in May 2012. The company hopes

that its private label can achieve 100 million yuan sales revenue at the end of 2012, accounting for 20% of the total revenue of Dangdang. Its product categories covered apparel, homeware, bedding and cushions, etc.

32

5. Mobile commerce is fast emerging

• With the growing popularity of wireless devices and mobile phones, m-commerce has expanded rapidly in China.

– Online transaction through mobile purchase was estimated to reach 11.46 billion yuan in 2011, five times more than the transaction value in 2010.

• Many retailers develop application program on wireless devices to facilitate transaction on those devices.

Market size of mobile retailing, 2009-2015e*

0.53 2.22 11.46

55.78

114.28

188.55

304.95

0

50

100

150

200

250

300

350

2009 2010 2011 2012e 2013e 2014e 2015e

Bill

ion

yu

an

Source: iResearch

* Figures for 2012-2015 are estimated by iResearch

33

6. Some players increase investment in e-logistics infrastructure

Build own distribution centers and/ or logistics facilities

• Delayed shipment of goods still bothers many online retailers in China. To solve the problem, some online retailers have opted for building their own distribution centers to enhance logistics efficiency. Some examples include 360Buy, Dangdang and Amazon China.

• Some online retailers have established other logistics facilities.

– Vancl, a pure-click apparel retailers, has established its own express delivery company, Rufengda to provide last-mile delivery services to its customers.

– 360Buy, Dangdang and Amazon China also have their own logistics teams and warehousing facilities.

– Suning is reportedly going to establish 12 regional automatic warehouses within two years.

• Many online retailers see the provision of logistics services as a key differentiator. However, some industry watchers are concerned about the lack of know-how of China’s online retailers in warehousing, sorting, pick and pack, and distribution. Shortfall of e-logistics professionals is another problem.

34

B2C platform Number of warehouses

360Buy 13

Dangdang 10

Amazon China 11

Comparison on number of warehouses of major B2C platforms

Source: Credit Suisse, China Wuliu.com, 21st Century, company data

6. Some players increase investment in e-logistics infrastructure (cont’d)

Set up self-pick points to facilitate last mile logistics

• An increasing number of online retailers have set up self-pick points in recent years due to high door to door delivery cost.

– Dispersed delivery locations may involve high transportation and storage costs.

– Couriers have to make multiple visits if receiver is not at the delivery address.

• Some examples include:

– Dangdang announced in July 2012 that it would set up 120 self-pick points in 9 major cities, including Beijing, Shanghai and Guangzhou, to facilitate the “last mile” logistics.

– 360Buy also set up self-pick points in metro stations in Beijing in early 2012. It also has many self-pick points* in major cities such as Beijing, Shanghai, Guangzhou, etc.

• Apart from building their own self-pick points, some online retailers may ride on the wide-spread network of existing partners. Convenience stores or metro stations, for instance, can serve as convenient self-pick locations. As such, online retailers can save the costs for developing their own networks.

35 * List of self-pick up points of 360Buy: http://help.360buy.com/help/question-64.html

7. Some logistics companies enter the online retail market

• While a number of leading online retailers have started to provide logistics service to customers, some logistics companies have ventured into online retail operation. – SD Express, one of the largest courier companies in China, launched a new e-

commerce website, ShunFengYouXuan (順豐優選) (http://www.sfbest.cn/) in June 2012. The website focuses mainly on high-end food category.

36

8. Shut down of many non-profitable e-commerce websites

• In 2011, many e-commerce websites were shut down due to difficulties in raising finance. Many of them had long been competing on price and kept losing money. – According to Lingtuan.com (領團網), 33.5% of the group buying website have been shut down by end-2011;

– Luxury B2C platforms such as http://l.163.com (網易尚品) and http://huha.com (呼哈網) were shut down in December 2011;

– Integrated B2C platform http://pinju.com (品聚網) was closed in January 2012;

• According to China Venture, investments from venture capitalists in e-commerce websites have decreased tremendously since 2H11. In 1Q12, VC/PE investments in e-commerce websites in China amounted to 725 million USD, down by 57.1% yoy.

• Some big players in the market also cannot survive as a result of adopting the wrong strategy in China. For instance, many people attributed the failure of “Tao Japan” (淘日本) and “Rakuten China” (樂酷天) to the minimal localization efforts these companies had made.

• It is expected that weak players would continue be forced out of the market and the market will further consolidate in coming years.

37

9. Price wars are still commonplace; yet, some online players start to differentiate by offering other value-added services

• Price-cutting promotions are very common among B2C players. – For example, Amazon China launched a two-week heavy price cutting promotion in May 2012. Over 100,000

products, varying from 3C goods, home appliances to furniture, were offered at an average discount of more than 30%.

– 360Buy launched a promotion campaign on June 18 to mark the company's anniversary, triggering a fierce price war with its rivals such as Tmall, Dangdang and Coo8. 360Buy offered discounts equal to 1 billion yuan to customers, in addition to coupons worth of 618 million yuan. Tmall then joined the price war by distributing coupons worth of 50 million yuan to consumers.

• Indeed, many online retailers realize that low-price is no longer the only key factor that impacts customer’s choice. Some of them have sought to enhance customers’ online shopping experience by providing more value-added services or expanding product categories.

38

Challenges

39

1. Product quality remains one of the major concerns

• Quality of products sold online is less assured and it remains the largest concern for many consumers. – 65.9% of the online shoppers worried about product quality;

– 42.6% of them worried about reputation of online stores.

• Counterfeit goods are prevalent in the online retail market space. Consumers may not realize until the product is delivered to them. – In June 2012, Dangdang was reportedly being accused of selling counterfeit watches. Dangdang stated that their

watches are genuine, but Casio said it had never authorized the selling rights to Dangdang.

Reasons for not purchasing online, 2011

Source: iResearch

40

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

Worry about product quality

Worry about reputation of online stores

Inefficient deliveries

Insufficient enquiry support

High product price

No online banking account

Complicated shopping process

Can't find the product online

2. Conflicts between online and offline stores

• Multi-channel retailers may face possible conflicts between their online and offline stores in terms of product variety and price.

• There is a possibility that online channels may cannibalize sales of their offline stores and lead to potential conflict of interests with existing distributors and franchisees; retailers should pay extra attention to pricing strategies and product offerings.

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3. Logistics bottleneck

• The robust growth of online retailing has generated significant revenue for the logistics industry, particularly the express delivery industry. However, the huge number of orders generated by online retail has overloaded many express delivery companies.

• According to survey conducted by the State Post Bureau on the performance of China’s express delivery services, on-time delivery remained dissatisfactory for over half of the respondents.

– 52% of the complaints were related to delay of delivery

• The logistics crunches have constrained the development of online retailing and increased the logistics costs of many online retailers.

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4. Lack of professionals for online operation

• China is experiencing an online retail boom, however, the supply of qualified employees in the field is insufficient and could not meet the increasing demand in the market. The turnover rate is also very high in the industry.

• The operating models of online and offline channel are totally different. Take the distribution system as an example. The supply chains for online stores are usually more complicated than that of offline stores; retailers may need to cooperate more closely with suppliers or re-design the logistics flows such as backward logistics, etc. This may require additional investment in human resources.

• Management should view online retailing as a different retailing channel. It should be managed by a professional team with in-depth market knowledge, rather than solely by IT team.

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5. Online retailing is less popular in lower-tier cities

• Development of online retailing in inland and western regions lags behind the coastal cities. – Most logistics facilities are located in first-tier cities and provincial capitals, complicating

the delivery of products to lower-tier cities or rural areas.

– Internet penetration is lower in lower-tier cities .

– Consumers in lower-tier cities are not yet familiar with shopping online.

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Government initiatives

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Recent government policies/ initiatives related to online retailing and e-commerce (1)

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Rules and regulations Effective date Highlights

The Circular on Issues Concerning the Promotion of Sound and Fast E-Commerce Development (關於促進電子商務健康快速發展有關工作的通知)

Feb-12 Establish an expert consulting committee for building pilot cities for e-commerce, regulating online payment, promoting application of IC cards, promoting e-commerce standardization, etc.

Guiding Opinions on Promoting the Development of Retail Trade During the 12th Five-Year Plan Period (商務部關於“十二五”時期促進零售業發展的指導意見)

Jan-12 Encourage and support large retail enterprises to set up online stores; support the establishment of third-party transaction platforms for SMEs.

Guiding Opinions for the Development of E-commerce in the 12th Five-Year Plan Period (商務部“十二五”電子商務發展指導意見)

Oct-11 Establish regulations for online retailing; online retail sales is forecast to account for 9% of the total retail sales of consumer goods by the end of 2015.

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

Jul-11 83 enterprises were selected as the “e-Commerce Demo Enterprises”.

Recent government policies/ initiatives related to online retailing and e-commerce (2)

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Rules and regulations Effective date Highlights

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)

Apr-11 Online shopping platform operators should take responsibility to monitor if the goods sold online infringe intellectual property rights and they should ensure that the goods are genuine products.

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

Jan-11 Online retailers must offer sufficient information on promotional items

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)

Jul-10 Real-name registration is required in online bulletins.

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)

Apr-10 Consumers are allowed to cancel orders within a certain period of time.

Appendix

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List of enterprises among the top 100s that have launched their own

online purchasing platform, as of June 2012

Enterprise Website

Suning Appliance 蘇寧電器 http://www.suning.com

Gome Electrical Appliances 國美電器 http://www.gome.com.cn/

http://www.coo8.com/

Intime Department Store 銀泰百貨 http://www.yintai.com/

Yum! Brands 百勝餐飲集團 http://www.4008823823.com.cn/kfc/index.htm

http://www.4008123123.com

McDonald's China 麥當勞 https://www.4008-517-517.cn

Carrefour China 家樂福 http://www.carrefour.com.cn/DefaultNew.aspx

Bailian Group 百聯集團 http://www.blemall.com/

http://www.jaja123.com

Rainbow Department Store 天虹商場 http://www.myrainbow.cn/

Renrenle 人人樂 http://www.rrlgou.com/

New World Department Store 新世界百貨 http://www.xinbaigo.com/

Hisap High Technoloty 宏圖三胞 http://huimai100.com/

PARKnSHOP China 百佳超市（中國內地） http://www1.parknshop.com/WebShop/LoginPage.do

Shandong Inzone 銀座商城 http://www.yinzuo100.com

Walmart China 沃爾瑪 http://www.samsclub.cn/sams/homepage.jsp

http://www.yihaodian.com/

Liqun 利群集團 http://www.liqunshop.com/

http://www.lqyaopin.com

Beijing Wangfujing Department Store 王府井集團

http://www.goonow.com

Nepstar 海王星辰 http://www.star365.com/

Dalian Dashang 大商集團 http://www.66buy.cn/

Metro China 錦江麥德龍 http://www.metromall.com.cn/

Huiyin Household Appliances 匯銀家電 http://www.pinyi108.com

Haihang Business 海航商業 http://www.yoye.cn

http://www.msegou.com/

Golden Eagle 金鷹國際商貿集團 http://www.goodee.cn/eshop/

PCD stores 中國春天百貨集團 http://www.saite.com/

RT-Mart 康成投資（大潤發） https://www.rt-drive.com.tw/

Auchan China 歐尚（中國） http://www.auchan.com.cn/

Chongqing Peace Chain Drugstore 重慶和平藥房

http://www.hp1997.com/

Guangzhou Grandbuy 廣百股份 http://www.igrandbuy.com/

Handan Sunshing Department Store 邯鄲市

陽光百貨

http://ygttg.com/

http://www.365sunshop.com/

http://hdyg.taobao.com/

Nonggongshang Supermarket 農工商 http://www.chblt.com/

http://emall.chblt.com/ngs/

D.Phone 迪信通 http://www.dixintong.com/default.asp

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Enterprise Website

Wuhan Zhongbai 中百集團 http://www.zon100.com/

C.P. Lotus 卜蜂蓮花 http://www.ourlotus.com/

Chengdu Hongqi 成都紅旗 http://www.hqls.com.cn/netshop/webindex.asp

Anhui Huishang 徽商集團 http://www.hzsmall.com/

Beijing Capital Retailing Group 北京首商集團

http://www.igo5.com/

Nanning Department Store 南寧百貨大樓 http://www.nnbh.cn/

Qingdao Weekly Group 青島維客 http://www.weeklydd.com

Hefei Department Store 合肥百貨大樓 http://www.bdemall.com/

Ito Yokado 伊藤洋華堂 http://shop.iy-cd.com/

Sanjiang Shopping Club 三江購物俱樂部 http://www.sanjiang.com

Shandong Weifang Department Store 山東濰坊百貨

http://zbbl.zhong100.com/

Changchun Eurasia 長春歐亞集團 http://www.oysd.cn/

Zhongshan One Plus One Supermarket

中山市壹加壹

http://www.zsyijiayi.com/

ShijiaZhuang Beiguo Renbai Group 石家莊北國人百

http://www.ruyigou.cn/

Liaoning Xinglong Happy Family 遼寧興隆大家庭

http://www.xlgoo.net

Oriente Home 東方家園 http://www.ohome.cn/

New Century Department Store 重慶商社新世紀百貨

http://www.sjgo365.com/

Chongqing Department Store 重慶百貨大樓 http://www.cbmall.cn

China Resources Vanguard 華潤萬家 http://www.crvmore.com

Jiangsu Wenfeng Great World 文峰大世界 http://www.wfdsj.com.cn/shop

A-Best Supermarket 新一佳 http://www.xyj-shop.com/

http://meitianhui.taobao.com/view_page-244647683.htm

Hunan Friendship & Apollo 友誼阿波羅 http://9448.net/newjrdshop/

C & U Group 浙江人本超市 http://www.rbcs.cn/

Wuhan Wushang Group 武漢武商集團 http://www.wssmgc.com

Shandong Quanfuyuan Commercial Group 全福元商業集團

http://www.sgbhdl.com:8080/ehdshop/webshop/index/index.jsp

Shandong Newstar Group 山東新星集團 http://www.xinxing100.net/index.php

Zhongnan Commercial 中商集團 http://www.aizsw.com/zs/default.html

Guangzhou Watson's 廣州屈臣氏 http://watsons.tmall.com/shop/view_shop.htm?prt=1337154081657&prc=1

Nanjing Central Emporium 中央商場 http://njzysc.tmall.com

Guangzhou Friendship 廣州友誼集團 http://121.8.125.2:6080/

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