China’s e-tail Explosion.
Almost overnight, China has become the world’s second largest online retail (e-tail) market; revenue estimates for 2012 run as high as $210 billion with a compound annual growth rate of 120 percent since 2003.
At the same time, the compound annual growth in Brazil was 34 percent, and in the United States, 17 percent. These statistics are among the key findings of “China’s e-tail Revolution: Online Shopping as a Catalyst for Growth”, a new report by the McKinsey Global Institute.
China’s retail sector already is among the most wired anywhere. Online sales accounted for about 5 to 6 percent of the country’s total retail sales in 2012, compared with 5 percent in the United States. In fact, by the year 2020, it “could potentially lift China’s private consumption by an additional 4 to 7 percent. Here’s why: at 129 million (in 2011), China has the world’s largest online population, surpassing the US’s 81 million by a remarkable 59.3 percent.
In point of fact, most (about 90 percent) of Chinese e-tailing happens on digital marketplaces, megasites similar to eBay or Amazon. “These megasites include PaiPai, Taobao, and Tmall, which in turn are owned by bigger e-commerce groups. “Moreover Chinese e-tailing is not just replacing traditional retail transactions, but it is also stimulating consumption that would not otherwise take place. That stimulus is “the lift” referred to in the previous paragraph.
Although still in the early stages of growth, China’s e-tail ecosystem is already quite profitable, realizing margins of around 8 to 10 percent of earnings, before interest, taxes, and amortization—slightly higher than those of average physical retailers.
Contrasting what’s happening in China is the online retail in the US, Europe, and Japan. There, the dominant model involves a more even combination of brick-and-mortar retailers (such as Best Buy, Carrefour, Darty, Dixons, and Wal-mart) and online merchants (such as Amazon and eBay), which run their own sites and handle the details of commerce.
With this kind of explosive growth, China’s e-tail business is poised for continued exponential growth. The biggest challenge the megasites will face will be staffing. China is already having serious shortages of skilled personnel. US companies with the right products have an extraordinary marketing opportunity.