The China online retail market is growing tremendously due to an increase in online payment options and also improved distribution channels for brands.

Consumers in China are still big fans of traditional luxury brands, yet are also demanding a wider selection of brands to choose from.

The lack of physical store presence and the high level of internet penetration in China makes consumers outside of Tier 1 and 2 cities more dependent on online shopping.

The online retail market benefits from the fast growing spending power of the affluent class in China, and this is being matched across mobile usage within this sector.

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The Chinese retail market is one of the fastest changing retail markets in the world. But the big question is what should foreign brands do if they want to enter this market where competition is already fierce? With an increasing number of affluent consumers coupled with fast growing online shopping habits, the potential opportunity across online retail is one not too be missed.

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01 The online retail market benefits from the fast growing spending power of the affluent class in China, and this is being matched across mobile usage within this sector

China’s Affluent Class Will Consume as Much as Many Major Countries By 2020

Source: BCG, “The Age of the Affluent: The Dynamic of China’s Next Consumption Engine”, 2012.12

4

3

2

1

0

2015 20192014 20182013 20172012 20162011 2020

China’s Affluent Class

France

Germany

India

Japan Total private-household consumption ( $ Trillions )

Consumption of China's affluent as a percentage of

global private consumption ( % )

To define the affluent class in China, an average household earning is in excess of USD$40,000. These consumers are willing to pay more for better services and products. The affluent class is growing fast and the total private-household consumption in 2013 was around USD$1 trillion and will go up to USD$3.1 trillion by 2020, higher than Germany and France, and close to that of Japan.

Regarding the data from iResearch, the number of online shoppers in China has been growing rapidly since 2010, and it is estimated over half of the internet population will become online shoppers this year.

Internet users were also very active on mobile within the retail market. In 2013 there has been over 168% growth and this has accounted for 9.2% of total retail. The growth has not stopped and is projected to rise further, reaching 13.4% of total retail in 2014.

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02Internet Access has far outpaced the reach of the Top physcial retailers - A dynamic unique to China

the affluent class is growing from outside tier 1 and 2 cities, it is becoming harder for foreign brands to reach this growing audience. There is an insufficient presence of physical stores and the expansion rate never meets consumers’ demand. The expansion is becoming especially hard as rental rates for stores are increasing along with salary demands. The consumers from these tier 3 and 4 cities are looking for brands with higher quality, so online shopping is a perfect alternative for them to reach the brands they desire. In many developed countries, the top twenty retail brands accounted for 30% – 50% of total retail sales, whilst that in China only occupied 13%. This implies that China is nearing a developed country’s internet reach but having a developing country’s level of physical retail buying habits.

As

7%

51%

33%

81%

87%

78%

80%

76%

81%

3%

13%

26%

27%

30%

44%

49%

51%

52%

India

China (Urban)

Brazil

Japan

US

Korea

Germany

France

UK

Retail Consolidation (Top 20 retailers’ share of total retail sales, %)

Internet reach (% of total population)

Source: BCG, “The World’s Next E-Commerce Superpower: Navigating China’s Unique Online Shopping Ecosystem”, 2011.11

100%80%60%40%20%0%

The lack of physical store presence and the high level of internet penetration in China makes consumers outside of Tier 1 and 2 cities more dependent on online shopping

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analyzing the spending habits from online shoppers, the percentage that is spent for online shopping of Tier 4 cities is way more than Tier 1 or 2; as they have less choices compared to offline but plenty of choices from online.

WhenTier 4 cities have the highest wallet share directed to online spending

27

21

17

18

4,467

4,624

4,922

6,819

Tier 4

Tier 3

Tier 2

Tier 1

Online consumption per online shopper(RMB)

Wallet share directed to e-tailing(% of disposable income)

Source: MGI, “China’s e-tail revolution: Online shopping as a catalyst for growth”, 2013.3

02 The lack of physical store presence and the high level of internet penetration in China makes consumers outside of Tier 1 and 2 cities more dependent on online shopping

China e-tailing consumption by buyer location

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03 Consumers in China are still big fans of traditional luxury brands, yet are also demanding a wider selection of brands to choose from

“What’s your most wanted luxury brand?”

in Tier 1 and 2 cities, are getting used to renowned international brands and looking for new choices, this trend is especially apparent within the luxury goods consumption. From the research “What’s your most wanted luxury brand?” the ranking of the top 10 brands in Beijing and Shanghai consumers’ minds changed quite a lot when comparing 2012 and 2013. For the rest of the cities, only 1 new brand got a place in 2013 top 10. This may due to the difference of accessibility of brands within Tier 1, 2 and other cities. Within Tier 1 and 2 cities, consumers have access to a wider range of brands compared to tier 3 cities where only a handful of traditional brands are accessible. To avoid high rental rate and wages, online retail is, again, another way for new brands to enter China market and reaches larger group of consumers, with lower cost and a faster manner.

Consumers30 20 10 0

0 10 40 5020 30

#3

#1

#2

#10

#9

#8

#7

#6

#5

#4

Rolex

Bottega Veneta

Cartier

Dior

Burberry

Armani

Gucci

Louis Vuitton

Prada

Chanel

Hermes

#9

#2

#7

#22

#8

#4

#14

#5

#3

#1

#4

#8

#7

#6

#3

#1

#10

#2

#5

#14

#9

#8

#4

#6

#3

#1

#7

#2

#5

#10

8%

12%

24%

18%

25%

43%

12%

41%

20%

New to top 108%8%

7%

11%

20%

24%

24%

9%

10%

12%

12%

19%

New to top 10

New to top 10

New to top 3

New to top 3

7%

11%

Mentioning (%)

2013 Ranking2012 Ranking 2013 Ranking

Mentioning (%)

Other CitiesBJ/ SH

Source: Bain & Company Inc., “2013 China Luxury Goods Market Study”, 2013.12

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The China online retail market is growing tremendously due to an increase in online payment options and also improved distribution channels for brands04

2012 - 2014 online retail sales

2012, just 6.3% of total retail sales were conducted online, but this rose to 8% in 2013 and is predicted to rise again to 9.8% by the end of 2014. In comparison, US online retail market reached 5% of total retail sales only, and the expected growth in 2014 is still not comparable to China’s. Supported by various online retail resources and services, including a constantly improving logistic and distribution channels, both EMS and SF Express will continuously expand their air express team to improve services. Also the improvement of third party online payment process, will mean an estimated total spend of in excess of RMB 7,000 billion in 2014.

All of the above show online retail is potentially a very exciting market in China for foreign brands to enter despite the complexities.

In2012 - 2014 China online retail sales (% of total retail)

12 9 6 3 0

0 3 6 9

2013

2012

2014

e

5.2%

5.8%

6.4%

6.3%

8.0%

9.8%

Source: 100EC, “2013 China online retail sales report”, 2014.3 (L)Source: eMarketer, online retail sales (% of total retail) Comparative Estimates, 2014.4 (R)

2012 - 2014 US online retail sales (% of total retail)

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Source: China EMS, SF Express, “China’s 12th Five-Year plan” 2011.3

China EMS, SF Express air express team comparison China 3rd party online payment market 2012 -2017

2015

2021

2014

200150100500

27

32

46

69

90

196

Unit: planeSF ExpressEMS

2017e2016e2015e2014e20132012

20,000

15,000

10,000

5,000

0

RMB billion (Yuan)

Source: iResearch, “China Third-Party Online Payment market”, 2014.4

18,480.4

14,143.9

10,406.6

7,436.9

5,372.9

3,658.9

The China online retail market is growing tremendously due to an increase in online payment options and also improved distribution channels for brands04

Due to stronger spending powers and increasing volume of online shoppers, coupled with an increase in overall demand for more brands online, the golden age of Chinese online retail is upon us and consequently now is a great time for foreign brands to enter the market.

From this, iClick have some recommendations for marketers:

Find a trustworthy media partner that can help increase visibility of your brand within relevant environments:

Aside from the eCommerce platform, it’s important to advertise well and efficiently. China is a large market and it’s critical you reach the right audience through search, display, social and mobile and achieve your marketing goals.

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Integrate with O2O resources:

When brands start their online retail channel, they also need to consider how to maximize the effects of O2O business – overcoming the disadvantage brings by cost and location, at the same time, keeping the service quality and consumer experience to secure your brand reputation.

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Leverage the power of 3rd party eCommerce platforms:

Initially, all brands may not be able to set up their own online retail channel, so leverage on eCommerce giant like Tmall to get a foot into the market. Utilize all their support such as online payment to satisfy customer needs.

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