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China's Young Consumers

E-commerce Rewrites the Rules of Retail

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E-commerce Rewrites the Rules of Retail

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Shrewd online shopping strategies and a growing taste for luxury have made China's youth key players in the country's shifting paradigm of consumer behavior.

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E-commerce Rewrites the Rules of Retail

By Sherry Lee
From CommonWealth Magazine (vol. 472 )

Chinese group discount shopping sites are rewriting the rules of retailing. Forty-thousand egg tarts in two days, 200,000 pairs of movie tickets with drinks and snacks, 30,000 spicy hot pot meals in three days... These deals underline the astounding marketing power and reach of Meituan.com, one of China's booming group buying websites.

The new shopping model, which mobilizes collective buying power, is not limited to food. Cars and even real estate can be bought via group deal platforms. Modeled after U.S. site Groupon, such platforms typically offer daily discount deals that become only effective if a certain number of people purchase an offer. The new shopping pattern is being embraced by hundreds of millions of young urban Chinese with expendable income. They do not yet earn middle class incomes, but aspire to a middle class lifestyle. Seventy percent of these consumption-loving yet budget-conscious young people are women.

Zhou Jie is a typical example. The 23-year-old hails from Hubei Province and came to Beijing a year ago for work. The first thing Zhou does as soon as she gets to the office every day is to surf China's ten biggest group shopping sites to place orders. "I like to watch movies, but tickets for 3D movies are so expensive. One ticket costs 100 renminbi. It's saddening. But when I got two tickets for 45 renminbi on a group deal, which even came with popcorn and Coke, I was really happy. It was the first time that splashing out felt really good."

Zhou makes around 4,000 renminbi a month, which happens to be the average per capita income in China. She pays about 1,000 renminbi for rent, and another 1,000 renminbi for food. So what does she do with the remaining 2,000 renminbi? Without any hesitation Zhou responds, "Of course, I spend it all." As Zhou puts it, young people of her generation could not afford to buy a home even if their salaries increased several times over, so they simply have no plans to do so. And since they do not need to support their retired parents thanks to China's national pension system, they happily spend any leftover income. Zhou wears orange nail polish and a stylish lacy outfit accompanied by a Gucci bag, a gift from her father. Her favorite hobbies are online group deals and buying imported cosmetics.

"Shallow pockets, big consumption," is the lifestyle that many young Chinese born in the 1980s and 1990s embrace. About 400 million Chinese – 30 percent of the nation's population – are younger than 30.

First of all, they are even more into buying luxury goods than their Western counterparts.

Based on the annual 2010-2011 report by the World Luxury Association, the typical urban luxury goods customer in China is aged between 25 and 45, some 15 years younger than the typical European luxury shopper, and 25 years younger than luxury brand consumers in the United States.

Outside of China the typical luxury consumer is around the age of 50, whereas in China 45 percent of luxury brand buyers are younger than 35 (those under 45 account for the vast majority – 73 percent). It's these eager consumers that are driving China's economic growth. Some come from wealthy families, while others scrimp and save and skip meals to buy coveted brand-name goods.

The younger generation of Chinese grew up as only children, doted upon by six adults – their parents and grand parents on both sides. Bob Chen, former general manager of Grey Advertising Taiwan, describes these young Chinese who usually still live in their parents' home as a generation whose "bread is buttered on both sides." Parents who can afford it make a down payment to help their son or daughter buy a home of their own. On average, young Chinese earn less than their counterparts in Taiwan, but have more disposable income.

Today's teenagers and those in their twenties have grown up with the Internet. China has some 266 million netizens under 30. That's about 60 percent of China's total number of 457 million Internet users.

They absorb information quickly and are highly receptive to entertainment and fashion news. They not only like new experiences, but are also accustomed to having their experiences provided to them. Wu Bofan, editor-in-chief of Chinese business magazine 21st Century Business Review, comments that young Chinese demand not only "customer satisfaction," but also the kind of creative design and service that will compel them to let out an enthusiastic "customer scream."

The new shopping and consumption patterns of young urban consumers, who are usually price-sensitive and well informed, have already begun to change conventional consumer behavior in China.

Pushing Sales Online

China's biggest online store Taobao.com last year sold goods worth 400 billion renminbi, about 3.5 to 4 percent of China's entire retail turnover. Youchi Kuo, director of the China Center of Consumer Insight at the Boston Consulting Group, observes that Taobao's turnover already exceeds that of brick-and-mortar electronic appliances retailer chains Gome and Suning. "A lot of customer orders for many different brands are completed online," Kuo notes.

Currently, nearly 500 billion renminbi in e-commerce transactions take place in China every year. From luxury brands to everyday products, enterprises of all stripes are targeting the exploding number of online shoppers. Both Italian designer fashion label Emporio Armani and Japanese casual wear brand Uniqlo have begun to sell online.

One luxury brand after another is scrambling to sell online to tap China's hunger for status symbols. Burberry, Prada and Chloe are trying to attract urban white-collar workers with discount deals on designer shoes and bags, offering rebates between 30 and 70 percent.

Online shopping has captivated young Chinese and office workers not only because of possible bargains and convenient home delivery. As Renmin University associate professor of marketing Ting-Jui Chou observes, many young shoppers distrust the real-world marketplace, and therefore prefer to go window-shopping at brick-and-mortar shops, but then search the Internet to compare prices and research a product's reputation before buying online.

For those who correctly judged the potential spending power of China's younger generation, there are many opportunities. Within just one year some 2,000 group buying sites have sprung up in China.

The China E-Commerce Research Development Center has announced that the Chinese market for online group deals will top 10 billion renminbi this year. In response, several well known venture capital firms, such as GSR Ventures, Sequoia Capital, and Kleiner Perkins Caufield & Byers (KPCB), have invested in such sites.

Online sites offering group discounts are different from online stores like Taobao in that they provide a platform that allows real vendors to reach potential customers. What these sites sell are services, not the products themselves.

Wang Xing is one of China's many young Internet entrepreneurs. After completing his studies in the United States in 2004, he returned to China to launch his own business. Wang founded the Chinese-language Twitter clone Fanfou and China's version of Facebook, Xiaonei, which later changed its name to Renren and has become the country's largest social networking service. The 32-year-old currently heads China's largest group shopping site, Meituan.com. Wang, who has observed the needs of young Chinese for many years, believes, "Quantity, quality and style are the three stages in the development of consumption. Chinese consumers have already progressed from quantity to quality. We enable price-sensitive young people to upgrade their consumption."

Meituan.com has already expanded into 90 Chinese cities, including not only first-tier metropolises, but even third and fourth tier towns in the hinterland. Wang explains that the site plans further expansion into new cities based on three criteria: A city's population, its per-capita income, and the number of people using the Internet and e-commerce.

Within just a year, the number of registered Meituan.com members has risen from zero to 15 million. The site generates revenue worth 80 million renminbi every month. Wang is surprised himself how fast the site's membership has grown. Meituan.com negotiates discounts with vendors of 50 percent and more. Sometimes deals can be struck for just 10 percent of the original price.

Through positive word-of-mouth reputations and effective marketing, many of the Chinese brands that have gained prominence on Taobao, such as cosmetics brand Natural Plant and fashion label VANCL, now enjoy strong positions and are moving aggressively. While continuing to sell online, they are also preparing to go head-to-head with conventional retailers in the brick-and-mortar world.

Group discount sites have also spurred major offline brands to actively seek online partnerships.

Last fall Eric Lin, chairman of Taiwanese children's clothing chain Les Enphants, invested 1.2 million renminbi in the Chinese website muyingzhijia.com, an online vendor of products for mothers and babies. Les Enphants gained two seats on the board of directors and dispatched personnel to work with the website's management team. The company is eyeing the rapid growth of China's online shopping market.

In an attempt to establish rapport with young parents, Les Enphants now also sells its low-priced Nac Nac baby care series online. By taking advantage of the website's distribution and payment system, Les Enphants hopes to "push brick-and-mortar retailing and online sales at the same time," Lin explains.

With their collective buying power, China's 260 million Internet-savvy tweens, teens and twenty-somethings are creating their own distinct consumption patterns and lifestyles. Quietly, these fashion and lifestyle trends are revolutionizing retail in China.

Translated from the Chinese by Susanne Ganz

Keywords:

好友人數