The convenience of shopping online has the Chinese taking onto the trend with equal ease
The convenience of shopping online has the Chinese taking onto the trend with equal ease

China’s economy has grown by leaps and bounds over the past few decades, giving birth to many unexpected phenomenon that has taken the world by storm. One such phenomenon is the growth of online shopping in China.

China’s online shopping boom was born in 1999, with the establishment of a B2B portal known as and a little known B2C website However, it is not until 2003 that Jack Ma, founder of the Alibaba portal, came up with a special C2C operation model called Taobao and captured a 59% market share in 2005. Taobao was Alibaba’s response to eBay’s expansion in China. In order to compete with eBay, Taobao offered free listings to sellers while introducing innovative consumer features such as an instant messaging tool and escrow based payment tool to the consumers.  Within three years, eBay admitted defeat, leaving Taobao with a monopoly over China’s vast e-commerce business.

The rest, as they say, is history. Together with her sister portal Tmall, Taobao handled more than RMB 1.1 trillion in sales in 2012, which is more than the combined sales of ebay and Amazon.

How will it grow from here?

Technological advancements over the last few decades have led to the rise of e-commerce activities, as online sales accelerated from RMB 128 Billion in 2008 to RMB 1.1 trillion in 2012.

In addition to offering cheaper alternatives, e-commerce platforms also allow consumers to share reviews and compare prices across different retailers, providing a more efficient way to shop as compared to traditional retail malls. As such, traditional retailers will face increasing competition with online shopping commanding 5.5 percent of the retail sales market in 2012 as compared to only 1.1 percent of the market in 2008.

Traditionally, retail consumption exhibits striking variations acoss different tiers of city. However, the rise of e-commerce has equalised these differences and increased overall consumption levels across the board. Despite lower disposable income from lower tier cities, the amount spent by online shoppers in Tier 3 cities tend to be similar to those of shoppers in the more affluent Tier 2 cities. This translates to a higher wallet share for online spending in lower-tier cities.

One key driver of higher wallet share in lower tier cities is a wider variety of choices on the online marketplace relative to traditional retailers. A research by McKinsey has shown that the variety of choices is as important as competitive prices in lower tier cities.

The Internet penetration rate in China is related in general to overall economic development. As such, lower tier cities have the greatest potential for improvement as they catch up with the superior digital infrastructure of Tier 1 cities.

Higher Internet penetration in lower tier cities will be a key driver for e-commerce growth over the next decade. However, online shopping is still a habit that does not develop just because one has access to the Internet. It is an evolutionary process that matures over time with better education, sophistication, and cultural influence. The majority of new Internet users still use the Internet for media consumption and telecommunication purpose rather than solely for online shopping.

Face of the Typical Online Shopper

A typical online shopper

  • Lives in a Tier 1 & Tier 2 City
  • Shops online at least once a week
  • Comes from a lower income group with annual disposable income of less than RMB 72,000 annually
  • Spends approximately RMB 300 to RMB 800 online each time
  • Shop online due to price advantages, availability of choices and convenience
  • Shops either at Taobao, Tmall, or 360Buy
  • Usually shops online for Apparel, Daily Necessity, and Home Appliances

E-commerce Growing Pains

The national Internet penetration rate for China stands at a mere 38.3 percent, with more than half of China population lacking internet access.  Therefore, despite the success of e-commerce and its many advantages over traditional retail businesses, it is unlikely to replace traditional retailers in their dominance of China’s vast retail market over the next decade.

In addition, logistics challenges continue to hinder e-commerce growth, as late deliveries, damaged and lost parcels, poor customer relation attitudes, slow cash-on-delivery (COD) processes, poor return procedures, and lack of installation and try-on services continue to plague the credibility and brand image of the e-commerce industry. There is also a lack of competent domestic logistics enterprises that are able to handle large or irregularly shaped shipments efficiently.

Rampant piracy and lack of quality control by e-commerce platforms also plague the e-commerce sector, limiting the price range of most online transactions in China.

Rise of e-commerce and its Impact

The rise of online shopping is not a zero sum game and it has boosted new retail consumption across China. However, it has also cannibalised offline shopping. A McKinsey study shows that up to 60 percent of online consumption simply replaces offline consumption; with the bulk of the substitution effect localised to a group of commoditised retailers with a significant low-income clientele base. As such, Malls with a better tenancy mix; such as those run by CapitaMalls Asia (CMA) tend to mitigate the impact of e-commerce by offering a differentiated shopping experience.

Breakdown of Total Online Spending

Examples of Traditional Retailers Impacted by e-commerce

In the case of casual wear, home appliance and consumer electronics, manufacturers are increasingly capitalising on B2C online platforms to cut out traditional retailers and optimise channel efficiencies with online prices averaging 70 percent to 90 percent off offline prices. Consumers are also becoming increasingly sophisticated, and online shopping enables them to conveniently read independent product reviews and compare prices.

FMCG supermarkets selling affordable apparels, home appliances, consumer electronics and household product mainly target low-income consumers with a disposable income of less than RMB 72,000 annually. They will, therefore, face increasing competition from online retailers which will erode their market share and margins.

Online skin care and cosmetic purchases in China have also surpassed the United States, United Kingdom and Japan to reach more than 10 percent of total retail sales. 32 percent of skin care consumers have purchased online and committed 20 percent to 30 percent of their total skin care budget on online spending, as they find it more convenient and cheaper to make repeat purchases online.

Traditional Food & Beverage outlets are largely unaffected by the rise of e-commerce due to the convenience and unique community experience they offer.


There is a low possibility that e-commerce will fully replace shopping malls in China. As a sign of traditional retail dominance, Alibaba Chairman Jack Ma reportedly rejected Wanda Chairman Wang Jianlin’s offer of a RMB100 million bet on whether online shopping would top 50 percent of China’s retail market over the decade during the 2012 CCTV Economic Person of the Year awards ceremony.

Ultimately, e-commerce complements physical stores and vice versa. Retailers increasingly realise that a good store front in a popular shopping mall is a powerful branding tool. Tenants realise that significant brand premium is created by the in-store ambience and shopping experience.

Article is contributed by Dr Boaz Boon, Toh Shaowei and Joel Lin, Market & Strategy Insight (China) Unit, CapitaLand Limited.