Distribution systems separate men from boys as e-commerce grows
Mainland consumers are buying and selling more goods over the internet, prompting the nation's largest online retail players to sharpen their distribution systems to keep customers satisfied and help the industry further expand.
'Only those companies with a mastery of logistics as part of their value proposition will succeed in China's e-commerce race,' Deutsche Bank analysts in Hong Kong said in a recent 'China Internet Insights' report. Logistics, they said, comprised warehousing, trunk transport and delivery.
The mainland's profitable business-to-consumer and consumer-to-consumer e-commerce market segments are forecast to grow an average of 42 per cent annually over five years and be worth 1.523 trillion yuan (HK$1.78 trillion), or 7.2 per cent of the country's total retail sales, in 2014, according to the report.
Taobao, the mainland's leading online retail services provider, has championed what analysts call the 'platform' approach, which involves outsourcing most logistics requirements to specialist third-party partners. The other approach is called 'self-build', which provides more control to the e-commerce player.
Tom Group, the diversified media arm of conglomerate Hutchison Whampoa, in August unveiled what could be considered the best example of the self-build approach.
Tom's new internet retail joint venture with China Post, known as Beijing Ule E-Commerce, had a highly developed, nationwide infrastructure not possessed by the likes of Taobao and Joyo Amazon, owned by United States-based Amazon.com.
The Deutsche Bank report described the mainland's warehousing market as 'underdeveloped'.
'China's warehousing is unable to meet the demand from growing e-commerce platforms, especially business-to-consumer [players], which have more exacting requirements for warehousing than consumer-to-consumer [players],' the report said. It noted that trunk transport, involving the transfer of goods through road networks from province to province, was comparatively developed and dominated by traditional business-to-business e-commerce players.
The delivery part of logistics 'remains a largely labour-intensive industry', the report said, adding that it 'could be fuelled by reasonably low labour costs in the next three to five years'. While the sector might be underdeveloped in terms of equipment and service quality, it was largely driven by the robust transaction volume growth of Taobao, the report said.
According to the China Express Association, Taobao-related transactions generated one billion parcels last year and accounted for 50 per cent of the total market volume.
The analysts predicted the major domestic business-to-consumer e-commerce players, including Joyo Amazon, Dangdang.com, Vancl and the Beijing Jingdong Century Trading-operated 360buy.com, would increasingly widen their product categories, a development that would entail setting up more strategic distribution centres across the country.
That expansion is expected to result in industry consolidation over the next few years.
The report noted that companies that have raised their investment and expertise in logistics would be more competitive in a market where quality user experience is as important as price.
The authors suggested a preference for the 'platform' approach to solve most of the logistics issues of domestic e-commerce players because 'it is more cost-efficient and scalable', and needs less capital.
'We believe that Taobao is the only e-commerce platform that has been able to leverage this approach extensively due to its scale,' the report said.
Taobao, which is Hangzhou-based Alibaba Group's other flagship unit after business-to-business e-commerce giant Alibaba.com, declined to provide the amount of investments it has made in logistics, which culminated in the creation of its 'Wuliubao' platform earlier this year.
'Our platform consolidates logistics information, transaction information and also the enterprise resource planning systems of merchants,' an Alibaba Group spokeswoman said.
'This allows seamless interaction between back-end logistics management systems and offline distribution systems.'
Stars Express and Annto are current third-party logistics partners listed on Taobao's website. Of the 13 distribution centres set up by its partners, six are in Shanghai.
Taobao, which iResearch estimated had a 79.3 per cent share of the mainland's online shopping sector in the second quarter, has also established guidelines for third-party logistics companies that relate to handling inventory, security deposits, customer complaints and penalties.
The standards set were designed to improve the service quality and abilities of logistics vendors, the spokeswoman said. 'Any future expansion plans will depend on these partners and follow customer needs,' she said.
Tom chief executive Ken Yeung Kwok-mung said many mainland manufacturers and merchants were looking for more than just a pure information exchange type of e-commerce platform.
'They need an integrated solution with excellent customer service support and logistics capabilities, especially warehousing,' Yeung said.
Ule, the Tom-China Post joint venture, was able to provide 'individually tailored solutions that combine online and offline requirements', he added.
With a network of 46,000 post offices, 36,000 Postal Savings Bank branches, 150,000 workers, 56,000 delivery vehicles and 17 aircraft, China Post will provide the offline sales channels, logistics support and transaction fulfilment for its 51 per cent-owned joint venture.
Health and beauty chain Watsons, casual garments supplier Giordano, computer maker Lenovo, skin care supplier Vichy Laboratoires and entertainment giant Walt Disney were Ule's launch partners in August. Ule now serves more than 1,000 local and international brands.
By 2014, two of the most profitable segments of the e-commerce sector are expected to account for this percentage of the country's total retail sales: 7.2%