The digital economy has entered the “fast lane” and is progressing at a high speed under a new wave of technology and China has been at the forefront in terms of scale for several years. From 2012 to 2021, the volume of the country’s digital economy grew from $1.52 trillion to more than $6.25 trillion and the proportion of the digital economy in overall GDP rose from 21.6 percent to 39.8 percent.
But even amid this explosive growth the online retail industry has been slowing, with declining profits since the era of the “traffic dividend” has come to an end. At a stage when consumer demands are becoming more focused and personalized, online retail is returning to being a “commodity operation.” Against this background, how can China’s digital retailers evolve to grow beyond relying on sheer scale?
With the largest digital consumer market in the world, all industries in China have seen the need to revise their “internet thinking.” Now the pace of digitally enabled industry iterations is leaping forward even faster.
According to the Digital Retail Report by The Boston Consulting Group, the migration of global consumers to digital channels has advanced three to four years ahead of expectations in recent years due to both technological developments and external pressures. The construction of new infrastructure and payment systems provides a foundation for digital industrialization in China, while the telecom network helps boost the entire economy.
China’s digital retail is regularly ranked first in the world in terms of popularity alone: the online fashion retailing platforms represented by Taobao, JD and Pinduoduo, and the social retailing channels represented by TikTok effectively link the lower tier markets and industrial clusters. International luxury e-commerce platforms represented by Net-a-porter and Farfetch have also won their target user groups with precise marketing strategies.
Data show that in 2021, total online retail sales of physical goods in China exceeded $1.39 trillion, an increase of 12 percent year-over-year; the cumulative number of live broadcasts on mainstream e-commerce platforms reached 24 million with a cumulative total of more than 120 billion views; mobile payment reached 151.228 billion times, an increase of 22.73 percent year-over-year. Digital consumption is gaining popularity year-over-year, forming a unique mega market advantage based on a huge user base.
Online has accounted for an increasing share of China’s overall retail market.
E-commerce, as one of the key segments of digital retailing, has cultivated the online consumption habits of a wide range of users. The client-end choice has pushed back the business-end channels, making retail organizations reconfigure and optimize on the basis of traditional business and internet business, paying attention to digital sales, supply chain and procurement; data-driven product management, and other aspects to optimize the retail experience with technical support.
The new demand has led to a deeper integration of the upstream and downstream of the retail sector, which has also triggered a rapid iteration of consumption patterns and supply structures, turning digital retailing from an “alternative path” into a “must-go”.
Since 2012, the booming development of “internet+” has led to the continuous upgrading of information consumption. By the end of 2021, China’s online retail sales reached $1.82 trillion, making the country’s digital consumption market scale the largest in the world.
As an important transaction vehicle for online retailing, co-branded platforms delivered strong results over the past few years. Stimulated by multiple shopping festivals such as June 18 and Double Eleven, online consumption has gradually become irreplaceable. In fiscal 2021, Alibaba’s ecosystem Gross Merchandise Value reached $1.13 trillion, up another $150 million from the previous year, with the average annual spending of Taobao and Tmall users at $1,277.70. JD’s GMV reached $132.2 billion in the same year, up 27.6 percent year-over-year, with about 570 million active users.
Founded in 2015, Pinduoduo has grown to total revenue of about $13.04 billion in 2021, up 58 percent year-on-year, with around 860 million active users, the largest among the key players. The platform moved to launch its online shopping platform Temu in the U.S. in September, competing for market share against Amazon.
Despite the COVID-19-related lockdowns in China and the inability of consumers to travel, Chinese luxury consumption is bucking the trend against the backdrop of a volatile global economic environment and thanks to the surge in luxury spending online. According to data released by cross-border e-commerce technology firm ESW, cross-border e-commerce sales of luxury goods grew by 17 percent in the first half of this year, followed by South Korea and the United Arab Emirates.
In the more segmented area of luxury online transactions, online spending in the Chinese market also stands out. According to an analysis by Roland Berger Strategy Consultants, the global online market for luxury goods sales will reach $91 billion by 2025, while the Chinese luxury goods market is expected to continue to grow by more than 10 percent over the next five years. Mainstream online business platforms such as Tmall and JD are actively leveraging international fashion weeks to enhance their influence in the industry and expand their resources through investments and acquisitions. The huge purchasing potential and the strength of e-commerce platforms will continue to boost the international position of China’s luxury market.
The information revolution of the 21st century undoubtedly brings infinite possibilities in retail, from big data prediction to precise marketing, from online boutiques to virtual try-on, from e-commerce shopping festivals to livestreaming sales to social retailing and even metaverse retailing. Technological development and innovative sales not only bridge the gap between online and offline retail but also help break down regional barriers and promote the flow of resources. A unified and open market system is the basis for innovation and development, while high-tech practices are the inner force to promote market vitality, both of which complement each other and are indispensable.
Taking Farfetch as an example, it has been pursuing a “digital-first” strategy since its Chinese website launched in 2014, followed by its flagship store in Tmall in 2021. Referring to “turning competition into synergy” with local online giants such as Tmall and JD, Farfetch chief executive officer José Neves expressed his agreement of the bilateral cooperation to WWD, saying, “These platforms can attract traffic for major foreign companies and let more people know about [the brands].”
Farfetch’s flagship store on Tmall.
In fact, since 2017, more and more international fashion brands have chosen Chinese e-commerce platforms as the primary location for localization and digital transformation, attracting consumers with new product debuts, limited-edition collections, customization services and other benefits. Tmall Luxury features more than 200 international brands, and these brands have debuted more than 30,000 new products a month on average over the past year. JD Luxury attracted nine high-end luxury brands represented by Dior and Bulgari under LVMH Moët Hennessy Louis Vuitton and the single-day turnover of many brands during the most recent shopping festival was four times the norm.
In addition to the introduction of international brands, the increasing growth of Chinese design is also gaining momentum year-over-year.
The main channels for Chinese products to go abroad are via online platforms and self-management. The former is mostly a two-way choice between designer brands and overseas platforms, such as local designer Huishan Zhang selling dresses and showing designs on Net-a-porter. Self-management mostly relies on exposure in magazines and events, the introduction of popular bloggers to generate extensive discussion on social media and eventually attracting fans to their own websites.
Successful cases include JW Pei, a newcomer in the handbag industry that has gained Gen Z consumers in Europe and the U.S. with sustainable materials and popular styles; Mukzin, a brand with innovative Chinese styles that attracts many European and the U.S. artists and celebrities, and the fast-fashion leader Shein that has gained significant market share against the likes of H&M, Zara and others.
From 2015 to 2020, the compound annual growth rate of China’s cross-border e-commerce reached 15.6 percent, during which time Shein’s growth increased by 189 percent. Last May, the number of downloads of Shein software briefly surpassed that of Instagram and Amazon, jumping to the top of all categories of app downloads in the U.S. In the first half of 2022, Shein had 22.4 million downloads in the U.S., ranking first in the shopping app category
Shein, which was founded in 2008, utilizes an intelligent system to detect trends and collect user feedback in real time thanks to its founder Xu Yangtian’s search engine optimization experience. The system can calculate and guide production on the supply side “from the bottom up.”
In terms of product development, the finished products led by consumer preferences and market insights are highly welcomed by Gen Z. In terms of sales and supply chain, the front-end sales and back-end stocking cooperate to create a very short shipping cycle and a very low inventory backlog. In terms of marketing, different products are promoted according to local conditions in different regions, and cooperation with KOL and KOC helps to increase exposure. It is reported that in the first half of 2022, Shein’s sales reached about $15.38 billion.
In the first half of 2022, Shein’s downloads in the U.S. ranked it first in shopping apps.
C-pop is also blooming on the world stage. Take the new Chinese style brand Mukzin as an example. The company uses clothing as a way to show traditional culture as well as intangible cultural heritage. The brand has staged shows in London, Milan and New York Fashion Week ever since the launch of the “Chivalrous Woman” collection in Paris in 2018. The company has also gained a group of overseas fans who love the “New Orientalism aesthetic.”
Mukzin’s show during New York Fashion Week in 2020.
When talking about its overseas retail strategy, founder Feng Guang said that, in addition to cooperation with department and multibrand stores, Mukzin relies on its own website to drive e-commerce. Traffic to its site mostly comes from online search, so continued exposure through international fashion weeks and the fashion media is key. For brands planning to go abroad, he stressed that overseas consumers pay significant attention to the shopping experience, and mature CRM tools can help maintain customer flow and fan screening to achieve accurate reach. In addition, the best method of going abroad is to look inward first to discover the brand’s own style as well as competitive barriers in the overseas market, before finding one’s own breakthrough.
Both the unicorn Shein, which is worth an estimated $100 billion, and the C-pop brand Mukzin demonstrate the two-way empowerment of Chinese design, Chinese manufacturing and overseas expansion, and the front and back-end industry chain of digital retail in the new era.