China's E-tail Revolution

China's E-tail Revolution

China's e-tail market is the world's second largest (after that of the United States), with an estimated
$210 billion in revenue last year. Since 2003, the market has posted a compound annual growth rate of over 110 per cent. By 2020, China's e-tail market could be as large as today's markets in the US, Japan, the United Kingdom, Germany, and France combined.
Despite a broadband penetration rate of only 30 per cent, e-tail commanded five-six per cent of total retail sales in China in 2012, on par with the US. And the sector is already profitable: Chinese e-tailers are logging margins of 8-10 per cent of earnings before interest, taxes, and amortisation, which is slightly larger than the average margin for physical retailers.
  Two features of Chinese e-commerce stand out. First, roughly 90 per cent of Chinese e-tail is conducted on ad-funded virtual marketplaces. On these platforms which resemble eBay and Amazon Marketplace - manufacturers, retailers, and individuals offer products and services to consumers through online storefronts. By contrast, in the US, Europe, and Japan, roughly 70 per cent of the market is composed of e-tailers running their own websites, whether onlin-only merchants like Amazon or traditional brick-and-mortar retailers such as Carrefour, Dixons, and Walmart.
   In most countries, the retail sector has typically developed in three stages: first, local or regional players dominate, before a smaller number of national companies takes over, with e-tailers ultimately challenging traditional businesses. But China lacks national leaders, which the top five Chinese retailers in different product categories commanding less than 20 per cent of the market, compared to up to 60 per cent in the US. And establishing a strong physical presence throughout the country will be time-consuming and expensive.

  Finally, e-tail could shape China's urban development and transform leisure activities. Urban centres worldwide revolve around shops, whether on main street or at the mall, with many consumers viewing shopping as a leisure activity. China's evolution will likely etail smaller main streets and malls, with large distribution centres near city limits. Citizens will spend more free time engaging in other activities, such as dining out. All of these changes could alter the use and pricing of real estate.
   China may have largely missed the Industrial Revolution in the nineteenth century. But its approach to e-tail is poised to be one of the forces shaping the emerging market Internet revolution of the twenty first century.