Shaun Rein on the State of e-Commerce and Digital Marketing in China

Includes: BIDU, CHL
by: Shaun Rein

This interview first appeared in IMedia Connection.

We meet the founder of the China Market Research Group, Shaun Rein, to get his take on what ecommerce and digital marketing practitioners need to do to survive in the Chinese economy.

Marcel Lee Pereira: What is the state of the ecommerce industry in China today?

Shaun Rein: It's growing, and while there probably will be lower overall retail sales in China in 2009 because of the financial turbulence, ecommerce is still going to boom. We're expecting a 20 percent growth in 2009, and we think it's actually going to be one of the strongest sectors in China this year because of the financial crisis.

What we find is many consumers buy online for two reasons: First, they want products that they normally can't get offline. The second is they want discounts. Because of the financial crisis, we think that many more consumers are going to go online to buy discounted items.

Pereira: What are the main challenges facing this industry in China and how do you see the landscape changing in the next two years?

Rein: I think it's important that you have nice online stores. You need to be "sticky", meaning consumers always want to go back to your site. That's going to be difficult for a lot of companies because the competition's fierce and it is hard to stand out above the crowd. The second is you have to think about whether you want just one store, or if you want to have your own corporate store as well as a store on Taobao or similar sites, which are popular online marketplaces. Companies have to think about how to deal with different product sales on different sites to ensure that you still maintain your brand image without cannibalising sales.

More complex products will be sold online in the coming years. Traditionally ecommerce in China has been about DVDs, books and items that don't really matter if they're pirated. But I think you're going to see a lot more purchases of complex items such as electronics and higher-end clothes.

Pereira: Digital marketers in the US and Europe seem to be having a tough time in the economic downturn. What are the opportunities for them in the Chinese market?

Rein: The good thing in China is that consumers are still buying. We're estimating about 16 percent retail growth year-on-year in 2009. Marketers are still keeping their budgets about the same for China in 2009. They're not decreasing that much, if at all. What they are doing is becoming more ROI focused. So what we're actually seeing is many companies are going to be shifting more of their operations to digital marketing because they think it's more cost effective. The second thing is because there are so many internet and mobile phone users in China, there's probably more efficiency in using digital marketing, whether it be online video ads, search marketing or mobile phone marketing.

Pereira: As an investor, how do you see the level of investment in digital marketing startups?

Rein: It is going to go down. Part of the problem is that may of these digital marketing solution providers are not cash flow positive. A lot of them are going to go out of business this year. It's going to be a very difficult time and you're going to see a consolidation in the industry where several companies will do well and continue to get the dollars, but a lot of them just won't be able to make money.

Pereira: What will interest investors into the digital marketing space?

Rein: Cash flow. The model in past years has always been eyeballs. But how do those eyeballs directly turn into cash flow? Investors are going to ask are you going to go cash flow positive in the first or second year, rather than investing for the longer term because the markets are just too difficult. Getting credit is too hard to continue to invest in companies that don't have strong financial feasibility.

Pereira: What advice would you give to digital marketing companies to improve their cash flow?

Rein: They have to focus more on their sales strategy. Too often a lot of these digital marketing companies focus on how cool their websites are, and they are very consumer oriented which drives a lot of traffic to them, but they don't think about how they can actually sell their services to brands. Instead they focus on how to get a 20-year-old from Sichuan to spend an extra hour a day clicking on their websites. They just need to be more business-oriented. They need to develop a sales team that understands business and understand more what their target accounts are looking for.

Pereira: What have been the strongest developing sectors in the digital marketing landscape in China over the past year?

Rein: Search is very strong, and that's been growing a lot because you see more and more brands are understanding the value of search. Online video is getting a little bit more popular but it's still difficult and you're going to see a consolidation in the industry where only one or two players will be able to last the downturn.

The thing that is hot is mobile phone marketing. It's still hard because a lot of people don't know how to do it well, but I think that's going to be the hotspot that a lot of people need to look at. You have over 100 million people in China who are accessing the internet from their mobile phones. You have over 600 million mobile phone users throughout China. Those numbers are going to continue to grow. And you're going to have 3G coming into China this year. That's what marketers should look at.

Companies need to remain cautiously optimistic about the economy going forward. Downturns are the time when companies can further the distance between themselves and lesser brands. This is also the time that lesser brands can move to the top of the pack by really focusing on effective marketing campaigns.

Companies need to develop the right strategies and stay true to their brands. I don't want to see too much wholesale discounting. When you discount too much, you erode the value of your brand. You should be discounting now to generate sales, but you shouldn't have discounts on every single one of your product lines.

Marcel Lee Pereira is editor of iMedia Connection Asia.