China's Big Gains In E-Commerce

Summary

• World's largest and fastest growing online retail market is China.
• China consumers trading up to higher quality products.
• Lower tiered cities present large growth opportunity.
• Aspirational purchases lead to uptick in sales of upper end products.

China’s online retail market, already the world’s largest at approximately $1.1 trillion according to an estimate by eMarketer, is also the fastest growing. Wow, just think about that fact, the biggest and fastest growing e-commerce market is in China.

For the past three years, its compound annual growth rate has been 38.1 percent, almost three times the US growth rate of 13.6 percent, according to a study conducted by McKinsey & Company. According to the study, in 2017, China’s e-commerce market is expected to surpass Europe and the United States combined. Another Wow, but not too surprising when considering the population of Europe (pop. = 738m) and the United States (pop. = 324m) and their combined population (pop. = 1.06b) versus China's population (pop. = 1.38b) according to the World Population Review.

eMarketer also estimates that ecommerce sales in China accounted for over 23% of sales during 2017, but this percentage will rise to over 40% by 2021.

And Chinese consumers aren’t just buying Chinese products from Chinese websites. Also, cross-border e-commerce is experiencing explosive growth, powered by Chinese consumers’ desire for lower prices and higher-quality products. Cross-border e-commerce is projected to account for 9.2 percent of the country’s total online retail market by 2018, according to McKinsey.

Additionally, more than two-thirds of Chinese consumers shop Online-to-offline and back again, according to the McKinsey study which also found that more than half of Chinese consumers switch between online and offline three to four times before making a purchase.

The Chinese Consumer is Trading Up!

Chinese consumers aspire to a better life and want to trade up their purchases, they are becoming more discerning and gradually more individualistic.

This is leading to a shift toward healthier choices, more user-friendly products, with products and brands that better fit their personality. This could be a big opportunity for niche brands—and a threat to the mass-market brands that had won big in previous years and ubiquitous availability, supported by the trust gained by heavy advertising.

McKinsey reports that in 2015, the online share of consumer electronic purchases, has reached a whopping 39 percent in 2015, and it now looks possible that by 2020 it will be about 50 percent of overall sales. But as the great Yogi Bera says: Making predictions may be difficult, especially about the future.

It's Not Just Affluent Consumers in China’s Large Cities

The McKinsey study found that shoppers from China’s third tier cities and below have caught up with that of consumers in higher tier cities in 2015. The study noted that lower tier cities are home to 74 million more consumers than higher tier cities. And to highlight the latent potential, the study noted that some 160 million people in lower tier cities have yet to begin shopping online. That’s nearly as many people as the number of online shoppers in upper-tier cities.

Quality is the Key

In reviewing much of the McKinsey data, we can see certain key trends. One of these trends is that Chinese consumers are purchasing an increasing amount of higher-end, higher quality products. This is not just in premium categories like luxury good. Even in everyday staples, such as food, consumers are willing to spend more for healthier versions of the same products.

In other categories like apparel, people are buying more special-occasion and premium brands. The Chinese consumer is trying to stand out from the crowd by going premium. Other beneficiaries of these changes are in the more discretionary and aspirational categories, such as skincare and automotive. People want to have better skin, hair, and clothes.

A separate McKinsey study showed that premium categories have really accelerated over the past five years. For example, comparing cosmetics purchases between 2011 and 2015, 44 percent of consumers have traded up their purchases. Even for rice, a basic necessity, 25 percent of consumers have traded up.

Automotive really stood out, according to the Traffic Management Bureau of the Ministry of Public Security in China data which suggests that there was a significant amount of trading up within automotive.

Cars selling for 100,000 to 250,000 RMB grew twice as fast with a compound annual growth rate (CAGR) of 19 percent (2015) versus 9 percent in 2011. And cars with price tags between 250,000 and 400,000 RMB grew the fastest of all, with 23 percent CAGR, according to McKinsey.

Summary

Online retails sales are booming in China. Many companies are at the forefront of this trend. China’s large internet companies such as Alibaba and Tencent are poised to benefit from this trend. Additionally, funds that invest in China E-Commerce companies, such as EMQQ which focuses on internet and e-commerce companies in emerging market, are positioned to benefit from this trend.

The growth in China is just beginning! Stay tuned.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.