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McKinsey: 5 Keys to Digital Commerce in China

In three years, China’s e-commerce market will probably exceed the U.S. and Europe’s combined—and online sales are slated to reach $610 billion by 2020. The e-tail market there is undoubtedly vast, but retailers hoping to capitalize on the rapid growth will need a better understanding of the unique Chinese consumer first.

According to a new McKinsey & Company report on connecting with China’s wired consumers, some Western companies have been successful in snagging a share of the country’s e-commerce growth, but many have made basic mistakes like equating the Chinese companies to U.S. counterparts (calling Alibaba China’s Amazon, for example) and keeping consumer targeting the same from one market to the next.

But China is “simply different,” as McKinsey puts it.

The first step in infiltrating the country’s e-commerce market, according to the report, is to first learn about its existing industry players.

There’s Alibaba, of course, JD.com, another cross-category e-tailer, VIP.com, a fashion-focused online discounter, Baidu, the country’s largest search engine and Tencent, the leader in social networking and gaming.

“While each may appear as though it plays in a different arena (search, e-commerce, and social, respectively), in reality, the companies compete more directly with one another,” the report noted. “Through organic and acquisitive growth, each has a role throughout the online consumer’s decision journey: generating demand, finding and comparing local merchants, moving customers from consideration to making a purchase, paying, and then reviewing or telling a friend and building loyalty.”

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And none of China’s players are quite like their supposed counterpart American companies.

The only resemblance Alibaba bears to Amazon, for example, is that both are digital retail platforms. But unlike Amazon, Alibaba has multiple platforms, including its Taobao business-to-business marketplace, and Tmall, its business-to-consumer site. None of Alibaba’s platforms keep inventory or run fulfillment centers. Amazon buys products and takes a cut from the products it on-sells, and Alibaba charges companies a fee to list merchandise and charges them for the search engine and digital advertising placement.

“Perhaps it’s no wonder that creating a complete digital-commerce strategy in China can seem excessively complex when viewed through the lens of practices in other economies,” the report noted, adding that the effort, however, is worth it.

Mastering China’s e-commerce market comes down to five key strategies, according to McKinsey.

1. Adopt an integrated platform strategy

“Retailers know that e-commerce platforms can compensate for limited physical-store networks. This is especially applicable in China, where our research shows consistently that up to 70 percent of Internet users shop online regardless of the size the cities in which they live, despite significant differences in Internet penetration (which averages 86 percent in Tier 1 cities, compared with 52 percent in Tier 3 cities),” the report said.

Brands should also consider selling through sites outside of their own, a prevalent model in China. In addition to selling on their e-commerce sites, some Chinese consumer companies will have a flagship store on Tmall and also sell on multi-category sites like JD.com and category-specific sites like VIP.com.

2. Understand China’s vast network of distributors

China’s e-commerce market is made up of a sizeable number of small distributors who have opened shops on multiple online platforms. And though consumer-to-consumer commerce is losing its share of China’s total e-commerce market, it still represents roughly 50 percent of e-commerce sales in the country.

So despite the challenges sites like Taobao present for global brands as far as maintaining control over how products and presented and priced—not to mention the surfeit of counterfeiters—those platforms are still critical spaces to play in.

Alibaba has taken efforts to curb counterfeits on its sites, but according to McKinsey, some brands have already found alternate ways to make things work in China’s e-commerce market.

Instead of getting tough and trying to crack down on inventory leaks using official complaints, say, American personal care company Kimberly Clark partnered with its largest local distributors on Taobao, sent them store certificates, consistent supply and provided certain benefits ahead of product launches in exchange for a pledge from those distributors to comply with its branding and pricing guidelines.

3. Harness the power of social media

Chinese consumers do not trust official sources, such as government and big corporations, and as a result, their purchasing decisions are influenced much more by word of mouth,” the report noted.

Which is why two-thirds of China’s consumers say recommendations from family and friends hold the most influence over their purchasing decisions (compared to one-third of American consumers), and that’s where social media comes in.

China’s Tencent transformed its WeChat messaging from simply a platform for social networking to one where customer relationship management, commerce and payments are possible.

According to McKinsey’s iConsumer survey, 15 percent of WeChat users have bought things through the platform and 40 percent said they’d be interesting in doing the same soon.

4. Leverage China’s growth in location-based services

Nearly two-thirds of Chinese consumers have made mobile purchases, according to McKinsey, and mobile commerce is expected to surpass PC commerce as soon as next year.

And with it, the growth of mobile will bring a greater demand for location-based services that make online to offline transactions increasingly important.

Lodging chain Pudding Hotels, for example, used WeChat’s “people around me” function to recommend its hotel to nearby users and the service generated more than 10,000 WeChat-enabled bookings within three months.

“We are finding that winning brand-building and e-commerce strategies increasingly require leading-edge capabilities to partner with digital platforms in social media, location services, and mobile marketing (“SoLoMo”) and, ideally, mobile commerce and payments,” the report noted.

5. Work with platforms to understand China’s consumers

To better serve China’s e-consumers, brands will need to know more about them, and collaborating with digital platform business in the country is one way to do so.

According to the report, P&G, which is China’s biggest digital advertiser, partnered with China search engine Baidu to develop tailored ad campaigns for its products. In analyzing search patterns, Baidu found that users’ search queries pointed to strong concerns about skin care and aging, and so developed a campaign that said Olay products could help older women “hold on to age 25” a concept that resonated well with consumers.

“Global brands will not maximize their digital-commerce potential in China solely with practices and formulas that have worked for them at home,” the report said. “In fact, success may require unlearning what you know to understand how to operate across China’s multiplatform e-commerce environment.”