China’s online retail sales to double in three years, analysts say
While the offline retail market is expected to suffer in the short and mid-term, China’s online retail sector will grow rapidly in the next few years, with online shoppers to exceed 40 per cent of the total population in 2018 and online retail sales to double by then from current level, according to analysts.
China’s online retail market is a bright spot in the sluggish retail sector, said analysts from Jefferies Group in a recent research note.
“This era is witnessing speedy application of new technology and vigorous cross sector M&A to facilitate e-commerce penetration,” said Jessie Guo, who was lead author of the report by the US investment bank.
She expects the number of China’s online shoppers to increase to 587 million in 2018, up from 413 million in 2015. By then, 42.4 per cent of the total population would have some experience in online shopping.
In the meantime, the gross merchandise volume (GMV) of online retail is forecast to reach 7.5 trillion yuan in 2018, double the 3.9 trillion yuan in 2015, equal to a compound annual growth rate (CAGR) of 24.6 per cent over the three year period.
China’s online retail sales have been expanding at a faster pace in recent years compared with other developed economies. In 2015, online retail sales jumped 39 per cent year on year to 3.9 trillion yuan, accounting for 13 per cent of total retail sales compared with 10.6 per cent in 2014 and 8.1 per cent in 2013, according to data from the National Bureau of Statistics.
By comparison, global online retail sales in the US reached US$342 billion in 2015, up 14.6 per cent from 2014. That accounted for 7.3 per cent of the total retail sales in the US.
“China’s e-commerce is the sweet spot of retail,” said Guo.
In contrast, she said offline retail growth will remain sluggish, due to poor same-store sales growth in the near and medium term.
Offline consumption was weak in the first half of the year, as the sales of top 50 retailers declined 3.1 per cent year on year, according to recent figures from the National Commercial Information Centre of China.
“As the macroeconomy slows and housing prices surge, we expect the consumption data to remain weak in the second half of 2016,” said Junhao Fan and Haiyan Guo, analysts for China International Capital Corp, in a separate report.
Among e-commerce industry players, Jefferies analysts expect market leaders or first movers, such as Alibaba, JD.com, to dominate while “latecomers” may struggle. Online retail is highly concentrated, they added.
Alibaba and JD.com account for a combined 81 per cent of the B2C (business to customer) and C2C (customer to customer) markets for both PC and mobile-based transactions. In the mobile market, the two companies account for 90 per cent of transactions.
“These first-movers enjoy solid platforms aided by new technologies and strong execution, leaving latecomers very limited room to succeed,” Jefferies analysts said.
As traffic remains the key foundation for survival and profitability, specialised platforms may find it hard to win market share and will have to coordinate with market leaders to leverage their consumer base and traffic.
In particular, analysts said leading e-commerce site Alibaba has several key winning factors versus its rivals, including sticky customer base, fast and inexpensive logistics, safe and low-cost payment systems, fast application of new technologies, strong balance sheet to fund its expansion, as well as solid management team with strong execution.
“From these perspectives, we believe Alibaba is more competitive than JD and Vipshop for the time being and even in the future,” Guo from Jefferies said.
Jefferies gave a Buy rating to Alibaba’s New York-listed shares, with a target price of US$101. They predicted the company’s GMV to reach 3.8 trillion yuan in fiscal 2017 that ends in March 2017, up 21.5 per cent from fiscal 2016.
Alibaba is the owner of South China Morning Post.
They also expected rival online retailer JD.com to be profitable in the next one or two years, due to its rising proportion of general merchandise sales and a growth in what it calls “3P” business (product, price and personalised service). In addition, its partnership with Chinese online major Tencent has facilitated an increase of new customers.
JD.com’s GMV may jump 41 per cent year on year in fiscal 2016 that ends in September 2016, reaching 654 billion yuan, Jefferies estimated. It also has a Buy rating on JD’s US-traded stock, with a target price of US$31.60.
Even China’s largest offline retailer Suning Commerce Group, which has expanded into e-commerce in recent years, will benefit greatly from rising online sales in the next few years, analysts said.
Suning announced in June that it completed a private placement of shares to Alibaba for a total of 29.2 billion yuan. After the deal, Alibaba holds a 20 per cent stake in Suning. The deal is aimed at helping Suning further expand into the mobile e-commerce business and improve traffic at Suning’s online stores on Alibaba’s platforms, analysts said.
“Poor management of offline stores in previous years caused losses to widen at Suning’s stores,” said Xinyu Liao and Yunyun Hu, analysts for UBS Securities.
However, after its alliance with Alibaba, Suning expects rapid online sales growth in the next three years, generating 200.3 billion yuan in GMV in 2018, a fourfold increase compared to 50.3 billion yuan in 2015, according to estimates by UBS.