The New : Lessons from China for the West What China Reveals About the Future of Shopping By Chris Biggs, Amee Chande, Erica Matthews, Pierre Mercier, Angela Wang, and Linda Zou

magine being in the middle of Times series on the future of retail, provides an ISquare, surrounded by flashing lights, overview of e-commerce in China today fast-talking vendors, street performers, live and explores some of those key differences. music, noisy traffic jams, and endless other distractions. Now imagine you’re online and surrounded by the same energetic The Digital Revolution Goes chaos. Welcome to China’s digital market- Mobile place, where shopping is an adventure—a When Amazon and e-tailing disrupted US fire hose of rapidly changing content, offers, shopping in the 1990s, retailers and con- products, colors, and choices. For Western sumers alike had to rethink their deeply in- shoppers accustomed to simple, transac- grained habits. By contrast, physical retail tional online buying, it’s a culture shock. in China was less developed. The digital revolution coincided with the growth of China has more e-commerce activity than disposable income and consumption. As a any country in the world today. According result, e-commerce quickly became the to China’s National Bureau of Statistics, norm, and its development was fast-tracked Chinese consumers spent $750 billion on- to the point where China pulled ahead of line in 2016—more than the US and the the West. (See Exhibit 1.) UK combined. That is a jaw-dropping num- ber, but even more interesting is how dif- China is also a pioneer in mobile commerce. ferently China’s digital marketplace, tech- (See Exhibit 2.) Many consumers skipped nology platforms, and online behaviors the PC era entirely, going right to smart- have evolved compared with those in West- phones. This may explain why Samsung ern markets. These differences provide a phones with larger screens took hold in Chi- glimpse into the future of shopping—and na well before they did in Western markets. offer valuable insights for companies According to industry estimates, online pur- around the globe. This article, the first in a chases made with mobile phones will ac-

For more on this topic, go to bcgperspectives.com Exhibit 1 | E-Commerce Exploded in China from 2010–2015, Pulling Ahead of the West E-commerce share of retail (%) 20

South Korea 15 CHINA UK

10 US

France Japan

5 India Brazil Thailand Malaysia 0 20 40 60 80 100 Internet penetration (%) 2015 2010 Sources: Economist Intelligence Unit, Internet World Stats, International Telecommunication Union, World Bank, Euromonitor, BCG analysis. Note: Internet penetration = the number of internet users divided by the population. An internet user is someone at least two years of age who has been online in the past 30 days.

Exhibit 2 | Mobile Commerce in China Is Growing Far Faster Than in the US

Retail m-commerce sales in China ($billions)

1,500

1,174

1,048 1,000 888

720

521 500 324

151 44 2 11 0 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

M-COMMERCE AS China 2 6 15 34 51 61 68 71 73 74 A SHARE OF TOTAL E-COMMERCE (%) US 3 11 21 27 33 39 41 43 45 46

Global average: 35 Sources: Criteo; iResearch; eMarketer; BCG analysis. Note: Converted at an exchange rate of US$1=RMB6.24. M-commerce = mobile commerce.

The Boston Consulting Group • Alibaba 2 count for 74% of total e-commerce in China merce marketplace, nearly three times by 2020, compared with just 46% in the US. longer than an American consumer typically spends on Amazon. And The pace of e-commerce doesn’t seem to they’re very brand conscious, if not be slowing: the industry is expected to particularly brand loyal. For instance, grow by 20% annually in China over the the typical Chinese teenager can recall next five years—twice as fast as in the US 20 cosmetics brands while the average and the UK. This growth will be driven not US teen can identify just 14. China’s only by increased individual spending but young people are also the most “spend also by an expected influx of hundreds of friendly” in the world: 42% feel the millions of new consumers, many from need to buy more things, compared smaller cities and rural areas, who have yet with 36% in both the UK and the US. to go online. •• Intense brand competition drives As part of this growth, we expect to see constant innovation. Established higher e-commerce penetration in product players and upstarts alike continually categories that may be surprising for the create new offerings and service models West. Today, Chinese consumers buy every- to stay one step ahead of the competi- thing from organic foods to luxury cars on- tion. In highly competitive categories line. Over the next five years, online shop- such as cosmetics, dairy, and confection- ping will spread and deepen across a wide ery, market leadership constantly range of categories. According to some pro- changes as new entrants jockey for jections, just five categories in the US— attention. Online merchants in China are such as books and clothing—will capture not afraid to test new products, fail, and more than 40% of e-shoppers. In China, try again, rather than adhering to a rigid 15 categories, from snacks to financial ser- schedule of product launches. They’ve vices, will reach this level of penetration. become increasingly sophisticated in their use of multimedia and multiple channels to reach and engage consum- E-Commerce Edge ers. What’s more, they’re at the forefront China’s unique retail history has given rise of using data, analytics, and consumer to one of the most advanced digital mar- insights to better understand the ketplaces in the world. With its sophisticat- ­customer—and are moving toward true ed shoppers, massive volume of transac- ­consumer-driven product development. tions, rapid rate of innovation, and integration of social media, multimedia, •• Seamless, integrated platforms make and other channels, China’s online environ- shopping fun—and buying easy. In ment offers a glimpse into the future. China, news sites, games, videos, and e-commerce are all interconnected in A few key characteristics of consumers, the major online hubs, with click-to-buy brands, and shopping platforms in China’s product placements and quick links to online landscape clearly differentiate it payment options. (See Exhibit 3.) Unlike from online marketplaces in the West. online shoppers in other countries, Chinese consumers rarely visit company •• Chinese consumers are eager to or brand websites. Instead, they discov- spend money—and they spend a lot er what they want to buy through of time shopping. In China, shopping online marketplaces such as , is about more than just the transaction. entertainment apps like iQiyi, and It’s about entertainment, discovery, WeChat, China’s most popular social and social engagement with friends, media platform. Taobao and WeChat, cele­brities, and internet influencers. two of the top five apps in China, have On average, China’s consumers spend evolved into all-in-one super apps. almost 30 minutes a day on Alibaba’s Taobao, which began as solely an Taobao, the country’s leading e-com- e-commerce site, now offers social and

The Boston Consulting Group • Alibaba 3 Exhibit 3 | China’s Digital Ecosystem Is Highly Integrated

DIGITAL COMMERCE PAYMENTS SOCIAL MEDIA VIDEO STREAMING SEARCH

Taobao WeChat iQiyi, PPS China’s biggest mobile China’s largest online Messaging app with China’s leading video China’s biggest search commerce platform, with third-party payment system, integrated shopping platforms engine (similar to Google) integrated entertainment with more than 450 million features (a much- and social features active users, compared expanded WhatsApp) ~20% share ~75% share with about 12 million for China’s largest third-party Apple Pay ~800 million platform for brands and monthly users , retailers ~50% share Mobile search engine ~20% share ~75%–80% share QQ ~5% share WeChat Pay Popular messaging app Payments integrated into with a greater focus on Tencent Video popular messaging app integrated games/blogging JD (similar to WhatsApp) A direct sales e-commerce ~15% share Search engine platform, JD manages such ~20% share ~550 million ~5% share functions as merchandising monthly users and pricing (similar to LeTV, Sohu, Amazon) Baidu Wallet Payments system from ~25% share ~10%–15% share largest search engine China’s biggest social ~5% share media platform (Twitter-like microblogs) Suning, Vipshop, Gome ~400 million ~5%–10% share China UMS, 99bill, ChinaPnR monthly users

~25% share

Baidu Alibaba Tencent Services independent of Alibaba, Baidu, and Tencent

Source: BCG analysis. Note: Other social media and search sites were omitted because of their relatively small market share.

entertainment features. WeChat, which shoppers come to Amazon looking for a started as a social platform, now allows specific item. The site’s virtually unlimited users to buy and sell products. These selection, excellent search engine, low pric- super apps also provide a wide variety es, user ­reviews, product recommendations, of online and offline services. Users can easy payment, rapid delivery, and first-rate send money to people, order food, call a service have built a base of very loyal cus- taxi, set up a doctor’s appointment, pay tomers. Over the years, Amazon has ex- bills, and get movie tickets. In the US panded into many different lines of busi- and UK, consumers would need a ness and services, such as Kindle e-books different app for each of these activities. and ­e-readers, video streaming, original TV shows and movies, and food delivery.

A Tale of Two Giants: Alibaba By contrast, Alibaba doesn’t carry invento- and Amazon ry or buy and sell merchandise. The com- Another way to better understand the dif- pany operates like a virtual mall, providing ferences between East and West is to ex- wholesalers and retailers with platforms amine the key players in each market: that connect buyers and sellers. In this ­Alibaba and Amazon. On the surface, they e-marketplace model, brands “own” their seem very much alike. Both offer online relationship with customers and create on- marketplaces, each holds a leading market line experiences appropriate to their indi- share, and each is continually expanding vidual brands. Alibaba offers tools and ser- into new ventures. Although both compa- vices to help brands and small businesses nies are enormously successful, their busi- navigate the world of e-commerce and con- ness models are quite different. nect directly with consumers through games, news, video, live-streamed talk Amazon is the quintessential online retail- shows, celebrity events, and online commu- er, carrying its own inventory and focusing nities. Consumers go to these sites to be en- almost exclusively on the consumer. Most tertained and to explore new trends—as

The Boston Consulting Group • Alibaba 4 well as to shop. Underlying these capabili- ­descriptors, so that merchants can home in ties is Alibaba’s technology, which inte- on their target customers with extraordi- grates its e-commerce marketplaces, such nary precision—and increase the effective- as Taobao and Tmall, with digital market- ness of their consumer engagement efforts. ing, payment, and logistics services, as well as social media, entertainment sites, and Alibaba also uses this data to provide a news portals. ­truly personalized shopping experience for the consumer, to a degree not yet seen Unilever China’s experience offers an ex- in the West. So while Amazon offers prod- ample of the power that Alibaba can har- uct suggestions based on a consumer’s ness for merchants. Unilever used a live- searches or buying history, Alibaba may streamed game show video to promote its suggest new brands, promotions, or content soaps and shampoos, as well as a techn­ that consumers didn’t even know existed. ology that allows merchants to distinguish And those suggestions tend to be spot on, regular shoppers from new ones, displaying driving exceptionally high click and follow-­ tailored shopping pages when consumers through rates. Few companies—if any— ­visit the company’s online stores. In the in the US or Europe have elevated data an- first two weeks of using Alibaba’s tech­ alytics and artificial intelligence to nology, Unilever saw the average time this degree. spent by shoppers at its virtual stores in- crease by 26%. New Retail Data and analytics are crucial to both Today, retailers in China and the West face ­Amazon and Alibaba, but they are used in the same challenge: how to achieve ongoing, different ways. Amazon uses data primarily profitable growth. Many of the costly big- to refine its product and service offerings box stores and shopping malls are losing on the basis of consumer buying patterns. customers and profits to online sales. In Chi- The company also shares data with mer- na, many homegrown brands have existed chants to help them list the right products, only online. To achieve growth, they must price competitively, and manage inventory. expand offline—especially in urban areas. Ali­baba provides a broad data set on ­consumer behavior that enables merchants The solution for both Chinese and Western to improve their marketing ROI and in- retailers is to develop an integrated omni- crease the conversion rate on their digital channel model that capitalizes on online storefronts. For example, the data might and offline strengths, delivers a seamless ­reveal that a merchant’s highest-value and compelling customer experience, and ­customers visit after work—so a campaign increases efficiency in inventory manage- might have a greater impact in the evening ment, product selection, and logistics. In than in the daytime. this new world, the distinction between on- line and offline commerce disappears, and Alibaba can provide these powerful analyt- the way the consumer thinks and behaves ics because of the rich data it draws from across all channels determines the way the its large ecosystem. As consumers move merchant runs its business. Players focus seamlessly through its various sites, Ali­ on engaging the customer through person- baba collects information on their shop- alized content. And they develop capabili- ping habits, digital media consumption, lo- ties across marketing, innovation, and logis- gistics needs, payment and credit history, tics to adapt to ever-evolving customer search preferences, social networks, and in- needs. Alibaba calls this new retail. ternet interests to better understand their behaviors and needs—using a “unified ID” to link consumer data across different sites. uture articles in this series will Drawing on its detailed data on nearly F­explore the concept of new retail at 500 million monthly active users, Alibaba length and dig deeper into critical dimen- has identified 8,000 different consumer sions of China’s vibrant digital market-

The Boston Consulting Group • Alibaba 5 place, such as the customer journey, inno- want to understand China’s unique differ- vation, and omni­channel optimization. ences and apply that knowledge to their These articles will offer important insights own domestic ­markets—and get a head for companies in the US and Europe that start on their competition.

About the Authors Chris Biggs is a partner and managing director in the London office of The Boston Consulting Group and the digital topic leader for the Consumer practice. You may contact him by email at [email protected].

Amee Chande is the managing director of global strategy and operations with Alibaba. You may contact her by email at [email protected].

Erica Matthews is head of corporate relations for Alibaba. You may contact her by email at erica [email protected].

Pierre Mercier is a senior partner and managing director in BCG’s London office and a core member of the firm’s Consumer practice. You may contact him by email at [email protected].

Angela Wang is a partner and managing director in the firm’s Beijing office. You may contact her by email at [email protected].

Linda Zou is a project leader in BCG’s London office. You may contact her by email at zou.linda @bcg.com.

Acknowledgments The authors would like to thank Liyan Chen of Alibaba’s corporate relations team and Andy Rowe of BCG for their assistance with this article.

About BCG’s Center for Customer Insight The Boston Consulting Group’s Center for Customer Insight (CCI) applies a unique, integrated ­approach that combines quantitative and qualitative consumer research with a deep understanding of business strategy and competitive dynamics. The center works closely with BCG’s various practices to translate its insights into actionable strategies that lead to tangible economic impact for our clients. In the course of its work, the center has amassed a rich set of proprietary data on consumers from around the world, in both emerging and developed markets. The CCI is sponsored by BCG’s Marketing, Sales & Pricing practice and Global Advantage practice. For more information, please visit https://www.bcg.com/expertise/centers-accelerators/center-customer-insight/default.aspx.

The Boston Consulting Group (BCG) is a global management consulting firm and the world’s leading advi- sor on business strategy. We partner with clients from the private, public, and not-for-profit sectors in all regions to identify their highest-value opportunities, address their most critical challenges, and transform their enterprises. Our customized approach combines deep in­sight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable compet­itive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with 85 offices in 48 countries. For more information, please visit bcg.com.

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