Online sales in China could generate $650 billion by 2020, according to a McKinsey Global Institute forecast. And it’s not only Web-savvy urbanites embracing e-commerce, but also residents of China’s smaller cities and rural areas.
Rapid sales of low-cost, high-functionality smartphones—such as Xiaomi’s $130 Hongmi (“Red Rice”) phone—have helped to expand Internet access quickly across China. Consumers in remote areas not served by large shopping malls are increasingly going online, often with their smartphones, to find the products they want. Residents of smaller cities spend a greater portion of their disposable income via e-commerce than those in China’s leading metropolises, where brand-name stores are plentiful, according to research from Alibaba Group.
E-commerce sales of some product categories are flourishing especially quickly, says Yougang Chen, a McKinsey partner in China: “Online penetration of apparel sales in China is higher than in most other markets” in part because “there aren’t any national chains, such as Gap (GPS) in the U.S., that are well-run and very established.” Zara (ITX:SM), the popular fast-fashion clothing brand, is among the most-searched-for terms on Chinese e-commerce sites, by residents of both small and large cities.
In certain product categories, demand varies greatly by location. “Online groceries are developing quickly in Tier 1 and Tier 2 cities,” Chen says. “China’s urban consumers enjoy niche food products, and many kinds of products are not easily available in supermarkets.” Although large hypermarkets, including Wal-Mart Stores (WMT) and Carrefour (CA:FP), have several sprawling locations in China, there is not yet a chain equivalent to Whole Foods Market (WFM), offering boutique and organic products, with wide coverage in China. Meanwhile, concerns about food safety are increasingly influencing the palates of the country’s upscale urban consumers.
The rise of e-commerce will shape how foreign brands enter the Chinese market in the future. “There are still a lot of foreign retailers not yet present in China,” says Chen. Many of those now preparing to enter China have a different strategy than they might have had a decade ago. “They are thinking about building a few flagship stores to create brand prestige, and meanwhile leveraging online sales to tap into lower-tier cities” where building brick-and-mortar stores might not be practical. McKinsey predicts that the growth of e-commerce, which makes a wider range of products more easily available to more people, could lift China’s private consumption by an additional 4 percent to 7 percent by 2020.