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E-commerce in China

Milan, 8 April 2013

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Within the 1.3 Billion population in China, 40% are internet users and 20% are e-commerce users, which grows at >20% per year

20102011

2012

0

100

200

300

400

500

600

161 194242

457513

564

Number of internet and e-commerce users in China (mn)

E-commerce users

Internet users

The e-commerce transaction amount was 968 billion Euros in 2012

The average time that a Chinese internet user spends online was 20.5 hours per week in 2012

23% CAGR, e-commerce users

Source: CNNIC

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China is the second largest e-commerce market in the region

Middle East &Africa

Latin America

Eastern Europe

Western Europe

Asia Pacific

North America

16

29

32

228

259

284

E-commerce sales worldwide, 2012

Note: e-commerce sales is B2C figure but includes ‘Business” occurred over C2C platformsSource: emarketer

Euro, billions

Others

India

Korea

Australia

China

Japan

20

9

16

28

86

99

E-commerce sales in Asia Pacific,

2012

Euro, billions

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Alibaba is a dominant player in China e-commerce market

40%

33%

12%

15%

E-commerce retail market, 2012

TaobaoTmall360 BuyOthers

Tmall and Taobao, the two major players in B2C and C2C markets, both

belong to Alibaba Group

Total market transaction value = 86 billion euros

Source: CNNIC, CECRC

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The consumer e-commerce market is expected to grow at 40% per year and exceed 300 bn Euros by 2016 largely driven by B2C

Source: iResearch, emarketer

2011 2012 2013E 2014E 2015E 2016E0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

25% 30% 35%41%

46%49%

75%70%

65%

59%

54%

51%

C2CB2C

44

141

342

E-commerce B2C and C2C sales, Euro bn

86

214

279

CAGR, 2012-2016

41%

30%

61%

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Key categories that the Chinese buy online are clothes, shoes and 3C

26.70%

18.20%

4.90%3.10%

47.20%

Market share, 2011

Clothes & shoes3CCosmeticsBooksOthers

Food

cosmetics

books

3C

Clothes and shoes

20.8%

30.0%

32.6%

38.6%

68.1%

% of e-commerce buyers

Note: 3Cs include Computer, Communication and Consumer ElectronicsSource: iResearch

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Annual spending per Chinese e-commerce user is still lower than counterparts in other areas

390

2,790

1,784

1,074

1,356

14% of

22% of

36% of

29% of

Note: e-commerce spending is B2C figure but includes “Business” occurred over C2C platformsSource: emarketer

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Consumers can be driven in mass to buy online with the right promotional effort

Total transaction value of Alipay

Out which Tmall:

Out which Taobao:

11.11 is

• Named to be the “Singles’ Day” (Guang Gun Jie) by the Chinese youth as these four numbers mimic four single men

• However Tmall and Taobao has made successful marketing campaign and made the Singles’ Day into “Shoppers’ Day”

Transaction amount on Tmall after sales started on 2012/11/11, 00:00

10 minutes31 million euros

8 hours617 million euros

End of day1,628 million euros

Source: Tmall official blog, Value Partners Analysis

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Platform, payment and logistics are indispensable elements in e-commerce business

Platform Payment Logistics

Information flow Capital flow Goods flow

• Launch of independent platform can maintain the flexibility of marketing strategy

• Replying on third-party platform can save initial cost

• Third-party payment gateway is widely used in C2C and B2C in China

• Yet due to the relatively slow growth of online payment, cash upon delivery is prevalent too

• Apart from the state-owned Chin Postal, logistics in China has been fragmented

• Some large logistics companies have started their own e-commerce business

Source: Value Partners Analysis

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After harvesting the early investment into vertical integration into payment system, Alibaba is eyeing logistics

Platform Payment Logistics

-96% market share in C2C market

-52% market share in B2C market

-67% of online payment market

-Alibaba started investment in this third-party payment tool in 2004, before e-commerce took off in China

-Invested in two logistics companies in 2010

-RMB100billion was spared in 2011 to develop logistics system

“Will not enter logistics!”

--2001

“Taobao ‘Big Logistics’ plan launched!”

--2010

Source: CECRC, Alibaba official website

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Launch flagship stores on large e-commerce platforms

Typical operating models of e-commerce for foreign retailers in China

1

Run an independent online retail store

2

Establish presence through their retail partners

3

Uniqlo’s flag ship store on Tmall

Zara’s stand-alone web store in China

Dsquared2 creates existence via their partner Yoox

Source: Tmall, Zara, Yoox, Value Partners Analysis

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For a foreign player, the challenges mainly lie within the choice of platform and logistics

Platform

Payment

Logistics

• Building your own platform? High control Consumer confidence Require dedicated resource

• Using third party platform? Quick to market Risk of look-a-likes Low level of customization

• Getting a third-party payment license is extremely complicated for foreign players

E.g. PayPal is still waiting to get its license approved

• Building your own logistics? High control on service level Expensive and time consuming

• Using of third party logistics? Easy to set up Uncertainty of service level

62% of users list

“long delivery time” as most unsatisfying part of online purchase

Source: CECRC, Value Partners Analysis

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Foreign brands take different approaches in opening their online stores building on their physical retail network

Time of online shop opening

April 2009 September 2012

Online platform

Flagship store on Tmall and stand-alone online shop with inter-connected backend

Stand-alone on-line store

Payment

Accepts all common payments including cash deposit at China Post branches

Fewer methods of payment accepted: Alipay, mainland online banking and international credit cards

Logistics

Centralised logistics centre

Delivered by partner logistics company regional officesSource: Tmall, Uniqlo and Zara websites

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Interactivity formats such as social media are increasingly important and converging

Source: CNNIC

Onlineshopping

Instantmessaging

Micro-blog(eg Twitter)

Online Video

Forum/ BBS

Socialnetworking

sites

Searchengine/Portal

Blog/personal

space

Tekst36 % of the internet users

47 % of the internet users

79 % of the internet users

62 % of the internet users

80 % of the internet users

Selected core platforms

Interaction touch points

Receiving touch points

66% of the internet users

40% of the internet users

30% of the internet users

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The new e-cosystem is moving from a controlled ‘push’ system to an uncontrolled interactive system made up of a myriad of influencers

New interactive e-cosystemControlled brand ecosystem

Online forum

Brand web presenter

Shopping engines

/ comparison sites

Interactive promotions

Social mediaKey

opinion forums

Friends

Opinion websites

Press

In store activities

Celebrityendorsement

TV

Brand internet site

Events

Greater range of influencers Interactive environment Low ability to control

Highly controlled / controllable brand environment Mostly push communication

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The mental model of shopping has changed fundamentally and forever

Comparison of traditional vs. new mental model

Stimulus

1st Moment ofTruth (Shelf)

2nd Moment ofTruth

(Experience)

1st Moment of Truth

(Shelf & online)

2nd Moment of Truth

(Experience)

Zero Momentof Truth

The traditional 3-step mental model A new mental model

Stimulus

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Convergence of social media with e-commerce is emerging – e.g. Mogujie allowing users to share photos and provides links to online stores

Channels by topic: clothes, shoes, bags, etc.

Live feed from users

Account tool bar

Different types of products

Link to online store

Comments and reviews

Other users like the products

Social shopping example

Smart phone apps

Link to account of cover page model

Source: Mogujie website, Value Partners Analysis

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Key success factors for retail brands to establish e-commerce in China

Build or partner with the right platform1

Make payment methods as diverse (and locally adapt) as possible2

Work with reliable logistics partner(s)3

Build physical retail presence first and create multi-channel experience4

Have exclusive to online platform items or promotions5

Build social media presence in Chinese platforms6