Five ways Chinese e-commerce is disrupting global consumer brands

Feasts from the East

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GAM Investments' Swetha Ramachandran and Amanda Lyons examine how global consumer brands are responding to China's innovative e-commerce landscape and consider the potential implications for technology and luxury investing.
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Chinese connectivity

E-commerce in mainland China is projected to have grown by over 30% in 2019 alone, to reach a total size of almost $2trn – eclipsing the circa $275bn e-commerce spend across the US, UK, Germany and Japan combined.

That said, internet penetration remains China relatively modest at 60%, compared with levels across the EU (85%) and US (90%). Even at such levels, the sheer scale of the market in its entirety means there are nearly three times as many internet users in China as in the US.
 
In the mobile payments space, the gap is even wider; more people pay with their phones in China than live in the US. In our view, rising online penetration underpins the long runway for growth for Chinese e-commerce, which the Chinese government views as an effective tool to catalyse the country's continuing transition towards becoming a consumer-led economy.
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Chinese tech leaders have redefined the internet

While China has enthusiastically embraced e-commerce and social commerce, the country's digital ecosystem has developed in ways that make it quite distinct from its counterparts in the West. In place of the West's so-called 'FAANG' stocks (Facebook, Apple, Amazon, Netflix and Google), the 'BATs' (Baidu, Alibaba and Tencent) dominate in China.

Unlike the FAANGs, which have remained in the ascendant and have been growing their market share, China's technology leaders are more dynamic because the landscape is ever evolving.
 
Baidu, for example, has declined steadily since failing to transition successfully from desktop to mobile, ignoring the rise of the so-called 'walled garden' (or closed platform) model. By the time Baidu realised its strategy was failing, it was too late for the company to catch up.
 
China's internet is now dominated by four sectors: e-commerce, led by Alibaba; online entertainment, led by Tencent; online services, led by Meituan; and digital advertising led by ByteDance (which owns TikTok) – with the latter two being mobile only. The mobile-first behaviour of Chinese consumers has required global brands targeting them to substantially modify their approach to the Chinese market.
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'Consumption upgrade' effect

Just 37% of China's lower tier city populations (under 3 million people) are currently estimated to have internet access, highlighting both the disparity in e-commerce spending levels across China, but equally the significant headroom for domestic catch up in line with continued economic growth across smaller Chinese cities. China's Tier 3 cities house more than 50% of China's population (around 650 million people in total) - roughly equivalent to 75 New York Cities in total scope.
 
Given that e-commerce in China remains primarily platform-driven – Alibaba has a circa 62% share of the e-commerce market and JD a 24% share  –  and in light of high mobile wallet penetration (3.5% of all transactions in 2011 were mobile versus 83% in 2018), we see significant potential for upside growth  in the spending power of lower tier city consumers, from a currently low base.
 
Multiple companies in China have highlighted the 'consumption upgrade' effect from consumers in lower tier cities, a prominent feature of last year's 'Singles' Day' festival, which saw multiple e-commerce spending records broken. Alibaba saw gross merchandise volumes worth $38bn (+26% year-on-year) transacted on its platform over a 24-hour period, while international brands such as Estée Lauder, Nike and L'Oréal grossed more than RMB 1bn ($143m) in sales on Alibaba's platform during the one-day festival.
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Market scalability

China's internet and social media expansion continues to be decentralised, with niche platforms catering to targeted sections of Chinese society thriving thanks to their market scalability. 

These platforms range from Kuaishou – a short-form video app that draws its users overwhelmingly from lower tier cities – to Wanwuxinxuan, a social e-commerce community focusing on 'post-1990s' new mothers, offering advice and enabling them to buy recommended baby products.
 
Chinas socially-oriented digital ecosystem has lent itself well to influencer (or KOL – Key Opinion Leader) marketing. Indeed, KOL marketing has fast become an indispensable way to win over Chinese consumers. A further wave of social-led growth is being driven by KOCs – or Key Opinion Consumers, ordinary consumers whose product reviews are trusted by a niche audience. 

These KOCs have been one of the driving forces behind the success of the 'Red' (Xiaohongshu, pictured) app, which has developed into a recommendation-based social e-commerce platform. Two-thirds of Red's users are estimated to be under 30, with 57% living in Tier 1 cities – making it a target platform for luxury brands seeking to gain traction with young, wealthy women.
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'New retail' blurring the online / offline divide

Since its launch in 2017, Tencent's WeChat's 'mini-programme' functionality – or apps within its super-app – have grown significantly to more than two million today, with the messaging and social media app attracting more than 300 million daily active users. 

Several luxury brands have been quick to recognise mini-programmes' potential to bridge the online-offline experience. For example, LVMH brand Celine's mini-programme incorporates the ability to browse Celine's latest runway collections and to virtually experience its international flagship stores as well as, crucially, enabling consumers to make digital appointments to visit offline stores.
 
Omnichannel strategies, where online and offline presences combine, are the buzz word in retailing and here China is setting the pace for the rest of the world. 

Back in 2016, Alibaba coined the phrase 'new retail' and it has subsequently been transitioning its business model so that the lines between online and offline are increasingly blurred. In China, the omnichannel experience is all about providing a seamless, fast and convenient service where the customer is at the forefront of the solution. 

Technology is embedded into the entire experience, rather than being a late addition to an existing solution. Facial recognition software, digital payments, big data analytics-driven personalisation and self-service are becoming standard in Chinese stores.
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Implications for technology and luxury investing

The challenges facing global luxury brands - the dominance of data-led marketing and distribution, the growth of omnichannel and rising demand among consumers for experiential retail among them - may be further heightened by the rise of social commerce, which could level the playing field for domestic brands in several categories.

International retailers in this space to step up their efforts to win over Chinese consumers and we monitor which brands are doing so most effectively to identify potential outperformers. 

We believe that companies leading the way through innovation and disruption of traditional retail models will be best placed to thrive in China in the years ahead.

In our view, it requires active management and extensive research to identify the companies with such potential.
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GAM Investments' Swetha Ramachandran and Amanda Lyons examine how global consumer brands are responding to China's innovative e-commerce landscape and consider the potential implications for technology and luxury investing.

The evolution of the $2trn Chinese e-commerce market has redefined how global brands target Chinese consumers, creating a new wave of opportunities for investors in both technology and luxury stocks.

In the gallery above, we observe five key dynamics underpinning the meteoric growth of domestic Chinese consumer demand and the pace of innovation across the relatively nascent e-commerce landscape.

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