Understanding China's Decentalised eCommerce Landscape
China’s cross-border eCommerce (CBEC) ecosystem has long been dominated by major B2C platforms – in particular Alibaba’s Tmall Global, and to a lesser extent the Tencent-backed JD Worldwide. Challengers have come and gone – examples include Kaola, ultimately acquired by Alibaba from Netease in 2019 and now reportedly down to just 20 staff, or smaller players like Secoo whose rise and fall has become well discussed after a promising start and major IPO. The barriers to launch for international brands remain stubbornly high (see figure 1) – with the core challenges being customer acquisition and the often long time to profitability after launch.
Since 2019 the internal and external pressures on the Chinese economy have changed considerably. China was hard hit in early 2020 by the initial Covid outbreak, but quickly recovered and had a strong period of relative stability throughout the second half of 2020, and all of 2021. As new variants of Omicron took hold, it became harder for China’s borders to remain impervious. Shanghai underwent an almost three-month total lockdown from March-May 2022, and during that time logistics networks struggled to adapt. Shanghai is by no means alone - Beijing, Xi’an, Chengdu, Shenzhen, and scores of other major cities have all experienced their own Covid disruption. A result of this – and other challenges including high youth unemployment, difficulties in the real estate sector and a potential global recession decreasing demand for Chinese goods – is a drop in consumer confidence, which Dominic Lai, the Group Managing Director of Watsons Pharmacy expects to take ‘some time’ to recover. At the time of writing, it remains to be seen what future policy course China will choose, and how quickly it will open up to the rest of the world and loosen Covid controls. AN UNCERTAIN DOMESTIC AND GLOBAL OUTLOOK This means that international brands can no longer rely on their previous assumptions when entering China. It was previously common to feel a halo effect from listings in major global retailers in London, Paris, New York, Tokyo, and Hong Kong. However, thanks to Covid travel restrictions, the proportion of luxury purchases made overseas shrank from 55% in 2019 to just 10% in 2021. Correspondingly, eCommerce purchases of luxury trebled from 13% to 39% in the same time period.
TRUSTWORTHINESS HAS LONG BEEN THE SECRET DRIVER BEHIND CHINA’S CBEC GROWTH
Around 90% of sales happen on four leading marketplaces, but consumer trust remains staggeringly low – with the best rated platform scoring just 39/100 on ‘trust in product authenticity’ in a 2019 survey[1]. Consequently recommendations from trusted vendors, friends, family, or other credible sources is incredibly important as part of the purchasing journey – and is reflected in the average 8 touchpoints required by a Chinese consumer before making a decision, double the number you see in most markets. This journey often takes them through multiple social platforms, online and offline locations, brand official websites, chat boards, and review sites. TRUSTWORTHINESS HAS LONG BEEN THE SECRET DRIVER BEHIND CHINA’S CBEC GROWTH ‘Social Commerce’ is one antidote to the epidemic of mistrust. This vast word-of-mouth or recommendation driven sales network, where the vendor is not the brand-owner, but a friend, family member, influencer, or celebrity, is set to grow to $474 bn by 2023. Vendors on social commerce are typically specialists in their sector, and have a loyal following of consumers – some of whom will exclusively shop with their preferred vendor.
The tallest tree catches the most wind
REGULATORY CHANGES
Without doubt, Alibaba is the tallest tree in Chinese eCommerce and it has consequently borne the brunt of the cyclone of regulatory enforcement sweeping the sector. In April 2021 the company was fined in excess of USD $2.75bn for monopolistic behaviour, and in its FY22 annual report described the external environment as the “most severe in decades”. This regulatory focus has allowed others to grow into the gap as Alibaba adapts its business model under increased scrutiny. In addition to the pressure on the wider company, some of the most well-known faces who operate on the platform have also faced their own challenges. Alibaba’s domestic eCommerce success was personified by its most successful livestreamers – Austin Li and Viya. Both have suffered calamitous falls from grace - Viya removed indefinitely from the platform in Dec 2021 for tax evasion, and Austin for three months from June 2022 for the euphemistically self-described ‘technical issues’ of political sensitivity. 4 It remains to be seen if Li’s allure and ability to merchandise international products will bounce back after a subdued start – although with 50m consumers tuning in to his return show, Alibaba will be grateful for the enhanced traffic he can bring. The sudden and unexpected fall of these major salespeople left a lot of brands with stock in the wrong place, and often without alternative channels available as a ‘Plan B’.
When the wading bird and the clam fight, the fisherman wins
COMPETITION CREATES OPPORTUNITY FOR MERCHANTS
Leveraging the established audiences of social commerce vendors is a vital tactic in any international brand’s playbook in China. It is also essential to look for growth opportunities across all platforms to meet the consumption patterns and preferences of a changing shopper. As emerging platforms look to expand their brand portfolio, there is a burgeoning opportunity for international merchants to diversify their sales channels. From a risk management perspective, a decentralised approach to eCommerce avoids the difficulties of being overly reliant on one channel or influencer to drive revenue. Different challenges arise around pricing management and ensuring no SKUs become over-distributed and devalued. Both can be managed with adequate planning and resource. It can be a complex job to manage a wide network of clients, and to understand which channels are best suited to your brand, category, products, and target audience. It is advisable for brands to seek a partner with strong brand adjacencies and quality seller networks in order to exploit this booming market. Chinese consumers have already changed their purchasing behaviour. International brands cannot afford to ignore China’s trend of Decentralised eCommerce.
This blog submission is an extract from Samarkand's white-paper report 'Understanding China's Decentalised eCommerce Landscape' which can be found here.
[1] Statista: 100ec.cn - Chinese Retail e-commerce Market Data Monitoring Report 2019.
