Growing trust among Chinese consumers is powering a new generation of online retailers in the country, with trusted e-commerce websites unlocking consumers’ growing spending power and dominating their niches, according to a recent report by China’s media and marketing consulting firm, Z. H. Studio.
While it is no secret that China’s overall population of internet users is growing fast – it currently stands at about 420 million – their main online activities had long been confined to entertainment and gaming.
But in the recent two years, the number of Chinese shoppers willing to buy products online reached a critical mass, fueling the success of a handful of B2C websites that have quickly become "hidden champions" in vertical marketplaces.
"E-commerce has lagged behind total internet development in China because of the make-up of internet users, who are mostly aged under 30," said Peter Lu, managing partner of China Intelli Consulting. "Now it is the main focus."
Although the total value of goods bought over the internet in China was just 1% of the total value of goods bought and sold in China in 2009, it is doubling every year and this rapid growth is predicted to continue for up to five years.
And that’s good news for CEOs such as Zhao Cheng of Boheshop.com, which has carved out a successful niche selling women’s cosmetics and healthcare products over the internet.
Rapid urbanization is creating wealth, but it is also leading Chinese to have sedentary lives and eat more unhealthy processed food. Some 10 million city-dwelling Chinese are becoming obese each year, according to surveys cited by China Economic Review magazine.
As both wallets and waistlines expand, demand for slimming pills and nutritional supplements as well as anti-aging products is on the rise, buoying Boheshop’s sales.
Founded in 2007 with just 50,000 yuan ($7,300), Boheshop made 600,000 yuan ($90,000) in its first year. It now attracts 100,000 users a month and makes between 8 and 10 million yuan per month ($1,175,000 – 1,470,000). And with fewer women than men among Chinese netizens, there is huge scope for further growth.
But while rising internet usage and growing prosperity naturally mean big opportunities across many sectors, Zhao says gaining netizens’ trust is key to success in what is a highly competitive environment. Typically, Chinese consumers may be less trusting than their counterparts in western countries due to the widespread incidence of fake or substandard products.
"You can’t exaggerate the importance of trust," said Zhao. "On the internet trust is important. When dealing with healthcare products trust is even more important. Trust will decide how far your business can go."
"China is a really low-trust environment," said Ben Cavender, associate principal with China Market Research Group in Shanghai. "And with e-commerce you don’t really know what you are getting until you have it in your hands."
Zhao has responded by collaborating with big-name product brands – like TRT and Harbin Pharm – that already have a good reputation, by setting up a call centre and, in September this year, by launching a network of physical stores where customers can find out more about the products Boheshop sells.
"These stores are not sales-oriented," said Zhao. "Face-to-face interaction is very valuable for customer acquisition and it is especially necessary in healthcare, where people might have a lot of questions. It will be useful in secondary Chinese cities, where netizens don’t yet feel comfortable with buying online."
Developing offline "touchpoints", like Zhao’s move, is regarded by analysts as an innovative tool unique to China that serves to build trust with consumers.
The property website Taofang.com has gone a step further. Launched in April 2010, Taofang.com aims to create a trusted network of buyers and property agents in a country currently undergoing its first major modern property boom.
Mature property markets such as the US already have well-established mechanisms to protect the rights of buyers, sellers and tenants. But in China, the secondary property market is relatively new, the rules and regulations surrounding it may not yet be widely-known and, according to Taofang.com’s CEO Wang Huiwen, there is a lack of publicly-available information about property deals. All this leaves consumers more at risk of being ripped off.
"This is exactly where internet can fill the void and play a constructive role," said Wang. "Before the Internet age it was hard to make rating information about property agents available. E-commerce has brought about unprecedented added value in the property brokerage sector."
Homebuyers in China are now also much more positive about involving the internet in deals than even relatively recently in 2005, when research Wang commissioned found an almost complete lack of enthusiasm. In the US, about 37% of property deals were arranged via the internet in 1999, rising to 90% a decade later in 2009. In China, the percentage of property deals involving the internet is predicted to jump to 90% by 2020. At that time, a total of about 300 billion Yuan ($45 billion) in commission fees for agents will be up for grabs.
Amid such frenzied trading, the Taofang-card System allows Chinese property buyers or tenants to rate the service they have received at the hands of property agents, some of whom have a reputation for conning customers.
"Through this mechanism, it’s fair to say that those agents who have the confidence to show the Taofang-card are ready to be subject to monitoring and criticism," said Wang. "These agents offer a more transparent and trusted service than those without the Taofang-card. We are in the trust-building business."
Wang Huiwen himself is no naïve first-timer. A serial entrepreneur born in China with an electronic engineering degree from Tsinghua University, he launched in 2005 Xiaonei.com, a top brand in China’s SNS sector. Xiaonei.com was acquired by Oak Pacific Interactive Group and through that merge, it’s now known as Renren.com.
Because it doesn’t physically deliver goods to customers, Taofang.com has been spared the headache of having to deal with delivery logistics, which have been behind the failure of some e-commerce companies, according to Wang.
"China still suffers from unsophisticated logistics," echoed Wang Lipeng, vice president of Zero2IPO, a venture capital research company and broker. "But should they be spending resources on in-house logistics or use third-party services and focus on their own area of expertise? It’s a real dilemma," he said.
One company that chose to develop its own logistics service is Redbaby.com.cn, which was founded in 2004 as a retailer for mother and babycare products and now says it has the biggest logistics service of any B2C player in China.
Redbaby CEO Xu Peixin says its 3 million members are fashion-conscious, forward-looking and independent people who care about their lifestyle. "We found that in an ordinary family, usually women are the decision makers for the fast-moving consumer goods," said Xu. "Thus, those who purchase the baby powder tend to be the key decision makers of the family’s purchase of cosmetic products, bed/curtain products, healthcare goods for the elderly, cakes for office staff and so on."
Building upon that kind of customer insight, Redbaby has been successful both in acquiring new customers and selling more products to its existing customer base. It has now branched out into cosmetics, organic food and other daily necessities – a total of about 200,000 products.
In the meantime, however, many Chinese B2C companies are still struggling as they don’t know how to attract new customers. Spending huge dollars on marketing is one thing, but converting the buzz into incremental revenue is another. According to Wang Lipeng of Zero2IPO, every yuan the websites invest in marketing their products translates into less than 2 yuan in sales on average at current stage, a paltry return on investment that is not sustainable in the long run.
And even for domestic entrepreneurs getting customer insight is no easy. The task is made more difficult as the demographics of internet users are changing fast. A few years ago, 30% of netizens had been through higher education – now that figure has halved to 15%. And China’s size and diversity means it is more like several different countries than just one.
The sheer size of the Chinese market makes it a huge prize that many companies are vying for – sometimes using shady methods.
"Our biggest challenge is malignant competition," said Boheshop’s Zhao. "We welcome healthy competition but it’s a phenomenon in China and includes some unfair play. For every single new initiative the next day you can see the same product news pasted somewhere else immediately, even though the product might not be available there. Vicious competition creates a lot of pressure for us, but it also keeps us focused."
Industry experts predict that consolidation may be inevitable. While the e-commerce ecosystem – ease of payment and logistics and the regulatory environment – is likely to keep improving fast, a "winners-take-all" phenomenon will be seen in most of the vertical sectors, which means that a handful of B2C websites will end up dominating China.
At the current stage, what looks assuring is that Chinese B2C players have no worry about financing. "In China the capital available is much higher than the global average. The most attractive thing for VC is the growth rate and scalability," said Wang Lipeng of Zero2IPO. "If companies are having difficulty finding VC now it probably means there are different opinions about the valuation."
This article was provided by Business Wire.
(Source: Business Wire )