China Sets The World Record for the Biggest Sales Online in One Day

Singles Day China

This was the doorway of an express company in Guangzhou on November 12th 2012. Its warehouse could not accommodate all the packages received from Taobao on “11.11 Singles’ Day – Online Shopping Festival”. Never heard of it?  On that single day, 72 million online-shopping-packages were sent out. This amounted to RMB19.1 billion transactions which is equivalent to about US$3 billion. The Singles’ Day promotion was created by Taoba and targets single men and women of China. It is neither traditional nor official  but for this one special day, Taobao’s Tmall  offered huge discounts to online shoppers.

These results complete eclipse the combined sales online during BOTH Black Friday and Cyber Monday in the US this year:

This year’s Black Friday saw an increase in online sales by 26% to $1.04 billion. Cyber Monday sales reached a record $1.25 billion, up over 20 percent from last year, to become the heaviest online shopping day in American history. According to the Wall Street Journal, this is only the second time a billion dollars in online commerce has occurred in one day. And yet, on the other side of the world, Taobao’s  Single’s Festival delivered nearly three times the turnover.

More than ten years ago, when e-commerce was sprouting in China, some retail professionals asserted that three barriers – “trust”, “payment method” and “delivery” would prevent an e-commerce explosion.. Taobao has conquered the three barriers completely. Founded by the Alibaba Group on May 10th, 2003, Taobao Marketplace facilitates C2C and B2C retail.  The marketplace structure has effectively emulated and built on the core concepts which drive trust in ebay. Tmall’s payment system, Alipay shares similar functionality with PayPal and  Taobao’s delivery system is unsurpassed in China..  This system has made availability ubiquitous, which is essential to online shoppers.

E-commerce still has a long way to go in China: according to the transaction data for the “Single’s Festival”; sales are clustered around the affluent tier one conurbations. But it is not hard to imagine more and more people living in less developed districts  joining this “online-shopping army” in the near future as availability to consume improves.

Transaction by City (unit: million)

Transaction By City

China’s e-commerce world is not only  a huge opportunity for Chinese retailers; increasingly, international retailers also see this trend. The international fashion giants like Uniqlo, Gap and Forever 21 took part in TaoBao’s campaign. Forever21 launched its Tmall on Taobao almost at the same time as they opened   their first bricks and mortar store in China. This underlines the necessity to build multi-channel environments as a critical success factor in China.

China’s e-commerce rise is of global significance; it demonstrates that the massive emerging economies of Asia are ripe for online shopping. With 200 million potential online shoppers in China alone (according to BCG), it’s easy to predict that these markets potentially dwarf the US and Europe combined. Today much of the world’s focus is  on the changes on retail in the developed markets but the changes in emerging Asia  are likely to be faster, more dramatic and more profound. This will require some major re-thinking in sales, marketing and logistics.

What has been seen recently is just the beginning, China’s e-commerce boom is soon to be tested again .  Taoboa has announced another campaign just one month after their succes, the “12.12 Shopping Festival”. They have promised even lower discounts. This could be the biggest online shopping day ever!

 

Researched and written by Irene Luo (engage Shanghai) & Toby Desforges

What Wal-Mart’s Latest Acquisition in China Tells Us About The Future of E-commerce

I’m not a gambling man but I’m prepared to bet that many people who read of China’s approval of Wal-Mart’s acquisition of 51% of Yihaodian this week probably said “who?”. They would most likely be readers from outside China who have never heard of this super-star of e-commerce.

Yihaodian is only four years old and in the last three years it has grown by over 19000% and employs 4200. It sells over 180,000 products which can be delivered within 24hours to the residents of 30 of the largest cities in China (which represent some of the world’s largest cities).

But above all its cool – it has marked its territory with an outstanding Ad Campaign, created by Ogilvy and Mather Shanghai which encourages shoppers to ditch traditional retail in favor of the ease of shopping at home. (1)

For China’s young, educated professional class Yihaodian is the only way to go. Irene Luo, a member of our team at sums this up, “Now I buy 90% of my groceries from this e-retailer except fresh food (but they do sell fresh food as well).” She goes on to say “You just need to buy over RMB 100 stuff, then you can get free delivery next day. So you can see how popular Yihaodian is here [Shanghai]”

Wal-Mart’s purchase of conditional control of this player is therefore big news in China. It should be big news worldwide and here’s why:

1) e-commerce is a global story

For most of the last decade most of the big news in eTail has come out of the US and South Korea where great logistics have been matched with great Internet infrastructure. Yihaodian’s success shows the potential for e-commerce in not just in the mega-cities of China but across the emerging economies of Asia and beyond. China’s e-commerce market is set to be the world’s largest by 2015, according to Boston Consulting Group and this demonstrates that the new generation of shoppers markets can easily be served, even in environments where logistics and broadband infrastructure remain a challenge. The days when nay-sayers claim ‘it could never happen here’ are numbered.

2) Global retailers now see e-commerce as the next channel for expansion

Major grocery multinationals have, for at least the last decade, sought new channels to expand into. Many have realized that the time of the hypermarket format is over and many have sought new growth in convenience retail and speciality stores. Some, such as Tesco in Korea and the UK, have made successful forays online already. But what’s happening in China is new, in that it indicates the potential for offline retail consolidation (2) to go online. Such expansion is, in effect borderless, which may lead to retail brands, whose global expansion has been stymied by geographical barriers to entry, launching into markets without the need to gain critical store mass.

3) If you can’t beat them, buy ‘em

Let’s be really clear, Yihaodian has been winning battles in China with younger shoppers. Its cooler, easier, better stocked, more reliable and altogether more attuned to this generations shoppers than the big boxes like Carrefour (3). In other sectors 360buy.com has been kicking bricks and mortar’s ass over the last two years (4) and the potential for grocery to go this same way has clearly been recognised by Wal-Mart. The great lesson here is that with mammoth cash piles the potential to buy upstarts to mitigate the downsides of e-commerce cannibalising existing store sales is absolutely here.

4) Manufacturers, globally, have got to take note

Consolidated retail is a problem for manufacturers now, it will be a greater problem for them in cyberspace. Greater choice will put pressure on brands; global price comparison and competition will force prices down; whilst marketing complexity will increase. Today’s consumer goods companies still rely on marketing models created in the 1950’s for the run of the strategic thinking and these models were never meant to cope the realities of media fragmentation and retail consolidation of the 90’s – let alone the challenges that e-commerce poses. Addressing both the opportunities and the issues will require some major re-calibration of the way people think about marketing and selling consumer goods and time is running out.

Ok so I’ve said this before (5) BUT this not just about the boardroom setting up a task force in key markets, it’s really about operational units addressing the e-commerce potential directly too. How many sales directors have this on their agenda now? In many markets, these guys have not yet got beyond ‘modern trade’ and ‘general trade’. That thinking may cost company’s big time, especially in markets which have avoided the onslaught of global players to date.

Wal-Mart’s move this week is probably not high on the agenda in many HQ’s this week but it is a major shift – it is likely to be the beginning of a new wave.

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Does China’s E-commerce rise signal the future of bricks and mortar globally?

 

 

I don’t own an iPad. I’ve always wanted one but probably more for the kids than anything else.

I guess I’ve just felt that I had better things to do with the cash. So price has been a barrier (especially since I have three kids!) Not anymore – and mostly because of e-commerce. Why? Because here in my second home of Shanghai they’re cheap – Gome one of China’s two leading electronics behemoths has just dropped the price on an iPad 2 to CNY 1999 (that’s just over 300 of your American Dollars) so ok now I’m getting three!

China is fast becoming one of the cheapest places to buy online as Gome, its arch-rival Suning and relatively recent e-commerce entrant 360buy.com seek to beat each other  online. As they do, the incumbents are closing non-performing retail outlets (which less than five years ago accounted for over 80% of Sony’s sales in China) and cutting price across the board.

Chinese shoppers are reaping the rewards but the retailers are hurting – according to The Global Times “Suning Appliance Co, China’s largest home appliance retailer by market value, saw its net profit drop 15 % year-on-year during Q1 this year, while the profit of Gome plunged some 88% over the same period”.

Youngchinabiz.com reports that Suning saw its share value drop 10% on 16th July alone. What does this tell us? 

The move to online costs hurts incumbent bricks and mortar retailers most. 

I blogged about the urgent need for manufacturers to recognize and address this rapidly  and I predicted that as online sales boom traditional retailers would have to fight hard to sustain their position. China’s appliance retail sector shows how global retailers will pursue price hard and they illustrate the consequences. Ultimately manufacturers can expect to foot part of the bill, if not in the search for direct contributions towards discounts, they will pay as the price positioning of their brands erode.

Manufacturers need to gear up for price competition to become more intense and for the gap between gross and net sales to widen rapidly in the coming years. If this is not yet on the radar for your business – it needs to be – and so do the huge upsides that the global re-structuring of retail offers.

In the last decade the Top 10 global retailers have doubled in size, accounting for over USD1 trillion in sales (see Deloitte’s “Global Powers of Retailing 2012”) . This has lead to a global acceleration in trade spend to fuel this expansion. Global manufacturers have felt the profit pinch and margins are at an all-time low. As the global economy slips back into recession, manufacturers will be hit harder, not just in the top line but the also in the bottom line. Its time manufacturers got smart to the potential to re-invent their retail model. And now is this time to act. Today 9% of UK retail sales are online – this will increase exponentially from now on.

So if you are a manufacturer what should you do?

Focus on your target shoppers – who are they? Where are they buying? What will make them choose you? The days of generic approaches are gone – it’s now time to create clear specific targets and chase the ones who produce the most value for your brands.

Re-calibrate your channel strategies now – look not at where you sell most today, but where you will sell most tomorrow. Seek out only those retail environments where you can really win with your target shoppers and build your route-to-market strategies to anticipate the shift in buying behavior.

Seek alternatives to price – chasing price points can never add value to your brand, nor does it guarantee a sale. Avoid the pressure to support retailer’s demands for keener price points just because they are in a pickle and focus on activities that will cement loyalty. E-commerce will be a part of this, its inevitable, so now is the time to build your competence in the virtual world as well as the bricks and mortar one.

Invest more wisely – simply put – stop supporting retailers who have no future and shift your expenditure to those who are best equipped to whether the storm. Remember that the retail model depends not just of front margins but also on back margins. This is true both offline and online so take maximum care to avoid repeating the mistakes of the past as retail evolves.

China is still considered by most as a ‘developing market’ so this massive change shows how quickly e-commerce will impact on the fastest growing markets – this is a global imperative for manufacturers not just an western market phenomenon so it’s time to act!

Why Carrefour Could Fail In China

Whilst busy setting up our new office in China, my team and I have spent several days walking stores. Last week we focussed in on one major global retailer, Carrefour to get a sense of their relative positioning in China.

Carrefour was one of the earliest global players to enter China, founding its first store in 1995 and within 12 years had reached 100 stores. Rapid development and early success made the  company one of the major retail players in the market and an important customer for nearly 22,500 suppliers. In recent years it has been buffeted by bad press, pricing scandals and increasing pressure from rebellious shareholders. The recent offer for sale of South East Asian business units and the resulting closure of the company’s Thai business and restructuring in Indonesia leave many analysts asking whether Carrefour has lost its way in Asia. Having spent many hours wondering around the aisles of stores in Shanghai its increasingly apparent to me that there is a real potential that Carrefour could also fail in China.

I believe there are three major reasons that suggest this could quite easily happen.

  1. Carrefour no longer appears to sustain a coherent market position.
  2. Stores seem to be overlooking the fundamentals of efficient retail operations
  3. Carrefour runs a serious risk of losing supplier’s goodwill and support.

Let’s think about Carrefour’s positioning – Carrefour’s name in Chinese can be loosely translated as “happy and lucky family” and the company’s early success in both mainland China and Taiwan was based on its ability to deliver a localized hypermarket solution that met the needs of Chinese families. The company employed a number of strategies to deliver this, but two positioning approaches that were particularly resonant in China were a compelling fresh food offer and a keen focus on price. Looking at stores today, there’s no doubt that price has become the major strategy. It is impossible to ignore the massive volume of ‘yellow tickets’ used to communicate price promotions throughout the store but the enormous volume of price deals available makes it impossible to determine what is on offer and what is not. I suspect that the net effect is that shoppers ignore these messages – certainly in our observations, major off-shelf promotions and gondola ends are poorly shopped – one massive display in “the power aisle” remained untouched for the entire 90 minutes we were in store – despite being passed by 288 shoppers.

What’s perhaps more concerning though is the retailer’s complete dereliction of its fresh offer. Carrefour’s original concept was to bring the benefits of wet markets into a hypermarket environment – the original concept offered an excellent range of market-fresh veggies, meats and particularly fish. In the early days, stores offered a mix of live and recently caught fish in attractive displays which delivered on Chinese shoppers’ demand for super-fresh product. Fast forward to today and you’ll the tanks which once brimmed with live fish now often contain a few decidedly unhealthy looking specimens floating belly-up and beside this an attractive display of recently defrosted Norwegian salmon – hardly fresh by anyone’s standard!

Overall there’s little doubt that the business has lost its edge with shoppers in China.

The next problem Carrefour faces is that store managers appear to be ignoring the fundamentals of profitable retail. In a nutshell you make money in retail by selling out stock before you have to pay for it; efficient retailers balance shopper demand with lean stock holding and careful ranging. These principles appear to be completely lost on Carrefour’s store managers – the range of product on offer is staggering but so is the sheer volume of stock and the shambolic fashion in which its merchandised. We found Lipton’s tea in 8 locations throughout the store, breakfast cereals in five locations, a huge variety of locally manufactured dairy products in a chiller labelled ‘imported goods’ and a mountain of promoted paper tissues filling an escalator well. Almost every aisle was filled with additional promotional displays adding further confusion and stock weight.

My simple conclusion: the stores  are massively over-stocked and what I infer is that the only way the stores can be making money is through forward buying gains (where a retailer buys stocks at a reduced price for a promotion and sells what is left over at the normal retail price, hence increasing the margin on these sales). Which brings me to the last reason why I feel Carrefour’s business in China is under threat – the risk that the company will lose supplier support.

According to Deloitte,  Carrefour’s net operating margin globally is 0.62% as compared to an industry average of 3.8% – not a great performance for the second biggest retailer in the world and a very poor performance when one considers Carrefour’s ability to extract funding from its suppliers. With such a fine margin, its relatively easy to infer that Carrefour is highly dependent on suppliers’ funds as a source of profit. In China, this presents a major risk: if the retailer continues to lose its way with shoppers, market shares and like for like growth will wither, making the business a less attractive investment proposition. Add to this what appears to be a fairly cavalier attitude to suppliers’ funding, apparent forward buying of promoted stock and low-levels of in-store execution and pretty soon you would conclude that continuing to support Carrefour in the medium term is unlikely to deliver significant value. As a result Carrefour can expect to see less funding from vendors in the future regardless of how hard its buyers bang the table.

It seems to me that the world’s second largest retailer is at a turning point in China  – either the business will re-invent itself and its relationships with vendors or its shareholders will seek to divest. In either case, manufacturers in China should be extremely reticent in their approach to Carrefour; unless there is a wholesale turnaround ROI will remain in negative territory and growth will be poor. Manufactures should be seeking to build relationships with retailers who have a clearer connection with Chinese shoppers and greater potential for growth.