Lessons of e-commerce explosion in China

For the leading department store operators in China, online retailing remains limited and sales growth is weak. While Intime Retail may be best positioned to benefit from online retailing – not least because of its strategic cooperation with Alibaba – several other companies, including Golden Eagle Retail, Parkson Retail and Maoye International Holdings are only getting into the game.

Golden Eagle and Maoye have collaborated with Tencent through the WeChat social platform, whereas Parkson has introduced an online shopping site.

The explosion of Chinese e-commerce has caught off guard not just domestic retail leaders but international industry giants. Initially, these Western giants attributed their losses to China’s growth slowdown and the pullback by shoppers, which presumably accounted for their shrinking profit margins.

However, the rapid explosion of e-commerce and the rising share of consumption in the Chinese economy cast doubt over such interpretations. Most importantly, a closer look at retailing trends in China suggests that it is not Chinese consumers or Chinese economy that accounts for the losses of these international industry giants – but competition.

The famed Unilever, for instance, saw its sales fall off the cliff because it failed to go online fast enough. In June, Swiss food giant Nestle acknowledged that it failed to understand how retail was changing in China. The failure to move quickly and broadly into online retailing proved costly: the company had to burn instant coffee it could not sell in stores.

The same goes for Colgate-Palmolive and Germany’s Beiersdorf, which have been suffering from offline overstocking, even as new online retailers have reaped enormous earnings.

Intriguingly, some of these international giants have missed much of the Chinese e-commerce explosion, even though many have experienced two decades of e-commerce growth in the US, Europe and Japan. In these advanced economies, the e-commerce explosion took place differently, however.

In the prosperous West, the Internet revolution initially relied on fixed-line personal computers and notebooks. In the emerging and developing East, such technologies remain relatively expensive. In these nations, the initial penetration has been fueled by mobile devices, particularly smartphones. In China, mobile drives retail sales growth and currently accounts for half of all e-commerce sales.

The lessons are clear. First, business models that succeed in advanced economies may not work in emerging and developing economies. Second, advanced-economy lessons are vital but they must be adjusted to the Chinese business environment. Third, simple imitation of Western strategies does not ensure success in China. Only innovation can produce the desired results.