Key eCommerce Implications for Brand Companies

Jing Zhou

Online sales may account for 20 to 30 percent of nonretail sales growth in China through 2015, growing from a market  size of RMB 476 million in 2010 to more than RMB 2 trillion. While many Chinese companies use or are planning to use the Internet as a selling tool, multinational companies have been slow to take advantage of this fast-growing channel. Those that do recognize the opportunity must understand that e-commerce in China will require a specific, customized strategy.

First, Chinese consumers—especially those who are urban and middle class—have shown that they prefer to be multichannel shoppers. In a few years, multi-channel shoppers will make up nearly half of urban China’s consumers (accounting for around 80 percent of GDP). It is therefore not enough for companies to focus exclusively on consumers’ online or offline shopping habits.

 Second, consumer needs vary. Heavy spenders have different concerns from their lower-spending counter- parts, and consumers across city tiers and in urban versus rural areas are looking for different products. Companies have to be clear about who their target customers are, where they live, and what their specific needs are.

 Finally, because e-commerce growth rates and penetration are higher in some product categories than in others, the online opportunity—and the potential role of the online channel—will vary across categories.

  [h2 align=’center’]Strategies for Brand Companies[/h2] 

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 The need for action is especially critical for brand companies that participate in the fastest-growing online categories—travel, consumer electronics, casual wear, and skin care.

 They must first decide what sort of online presence they want to have in China, and what role e-commerce should play in their strategy. To determine this, they must understand their target customers. What are their online and offline shopping behaviors and default shopping destinations? What are their needs, and which of those needs are not being met online? To identify their target customers and determine how best to reach them online, companies can consider a variety of approaches.

Focus on engaging consumers purely on the basis of the brand.

 – Target customers not yet served by the brand’s typical retail channels.

 – Complement the current reach of retail. For example,  push for more consistent replenishment purchases (of skin care products, for example) and expand the range of products typically found in the company’s stores, as well. Here branded companies must consider the implications that an e-commerce strategy has on the offline agenda. For example, if significant fulfillment is possible through e-commerce, then it might be wise to scale back some aspects of the offline presence—stocking enough products in physical stores to drive first- time trial purchases, for example, while dedicating the online channel to repeat purchases.

Supplement the offline presence, which requires tight integration of the company’s online and offline channels.

Brand companies must also choose among many options caring their online presence. Each choice comes with tradeoffs: a dedicated brand site allows full control overthe consumer experience, but it can potentially be difficult or expensive to drive significant traffic. Tmall appears to be the best way to attract traffic, but it can be hard to generate a consumer experience that is distinct from that offered by competitors also selling on the site. And the viability of alternative business-to-consumer significantly, as strong con tenders have not yet emerged in all categories.

After deciding on format, brand companies need to con- sider their go-to-market setup, from the types of products to sell online to the logistics of accomplishing sales. Should they offer the same stock-keeping units (SKUs) on- line as offline, or should they limit the choices or even de- cide to make some items available only online? Should they use distributors to open stores, which makes for greater reach but less control? Or should they directly manage their own stores and logistics delivery? They must also design their margin structure, taking into con- sideration both offline and online trade economics.

Finally, brand companies must navigate a difficult incen- tives challenge. For example, the advantages inherent in not having to pay rent and other operational costs could make it possible to offer lower prices online. Such dis- counts, however, can create conflicts with the franchisees and distributors that handle the same products and sell them at full price. To manage this, a plan for cross-chan- nel conflicts is necessary.

[h2 align=’center’]Strategies for Retailers[/h2] images-15

Retailers can use e-commerce to increase their footprint in China.

Retailers risk losing relevance online to exclusively web- based companies if they wait too long. In China, e-commerce is not yet common among traditional companies. Top retailers Gome and Suning have less than 1 percent of total sales coming through the Internet, whereas in the United States, Best Buy, for example, pulls in 7 percent of its sales from online.

Like brand companies, retailers should first decide on the role of e-commerce within their overall strategy. E commerce in China is important to retailers, because it can be a lever for increasing their footprint – a costly task in China and because it allows them the opportunity to build a true multichannel business model. Unlike the typical pattern in developed markets – where brick and mortar comes first—companies in China can develop offline and online at the same time.

Retailers should also think about how to leverage e-commerce and their offline assets. Rather than viewing online and offline as independent silos or standalone businesses, it is important to treat them as integral components of a single business model and to create long-lasting relationships with the most profitable multichannel customers. To that end, they should do the following.

  • Drive traffic from offline to online and vice versa. Brick- and-mortar retailers must think about how to use their existing stores to best advantage. The ability to direct shoppers in physical stores to their online sites gives retailers an edge over e-tailers. Brand awareness and trust can also boost traffic beyond the confines of the store. In addition, retailers must think about how to influence shoppers online and direct them back to their stores. Consumers frequently decide on a brand and a particular product online but ultimately purchase the item offline—especially when high reliability is re- quired of the product, as is the case with mobile phones, for example.
  • Target consumers with the right assortments and pricing.As mentioned earlier, 20 to 25 percent of online purchases across selected categories are products that consumers cannot find offline. Companies that build trust and credibility regarding their assortment and pricing online may be able to offer a broader range of products online than in their brick-and-mortar stores.
  • Decide on a service and logistics model. Filling online or- ders from physical stores can be cost effective, but it also restricts the online assortment to what is sold offline. Store-based logistics also typically limits distri- bution. Managing purchase orders and delivery for customers outside the existing physical network would potentially require additional investments, since the company would have to either work through a third- party logistics provider or build its own delivery network.
  • Develop an online mindset. It is crucial for retailers to learn to think like e-tailers. When they maintain a brick-and-mortar perspective and see their online presence as merely an add- on, they will likely underestimate the potential rewards.

[h2 align=’center’]Strategies for E-tailers[/h2]

Companies without an active online strategy in China will be missing out.

E-tailers, whether established or new, face
tremendous growth potential as the e-commerce market is going to at least quadruple through 2015. They currently enjoy a window of opportunity to establish brand recognition, loyalty, and share before retailers build their own multichannel capabilities.

They must, however, determine the categories they want to participate in and the customers they want to target. Then they must effectively differentiate themselves from Taobao through innovative business models and address the unmet needs of specific groups of targeted customers. To this end, they will have to do the following.

  •  Include unique product offerings. For example, tap into product categories where Taobao has not yet established leadership, such as high-end fashion.
  • Think about targeted service. It is important for e-tailers to consider how to offer different services to the grow- ing numbers of both heavy and light spenders, as well as to those consumers who each year are joining the ranks of online shoppers.
  •  Offer value propositions to merchants and brands. While brands are selecting the channels where they will build their online presence, e- tailers must offer compelling value propositions—for example, a more customized consumer interface to help brands differ- entiate themselves from competitors.

In addition, e-tailers face an unusual need to distinguish themselves in the realm of logistics capabilities—from back-end warehouse and facility setup, to information and process-management capabilities, to last-mile consumer-facing services.

The e-commerce market in China is evolving both quick- ly and in its own particular way. The next five years rep- resent a crucial period in the development of a young and exciting industry. Any company that fails to develop an active, targeted online strategy will not only miss out on a key opportunity for growth but will also allow brand identity to develop without its input on platforms such as Taobao. The ever-shifting dynamics of this industry require constant monitoring of the competitive landscape and of new consumer needs. Companies able to move proactively within that environment will be the winners in the crucial years ahead.

( Resource: The World’s next eCommerce superpower –  The Boston Consulting Group)

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