Smaller cities in China take the lead in e-commerce

Online retail sales in lower-tier cities and rural areas of mainland China, the world’s largest e-commerce market, started to overtake those in its largest cities for the first time last year, according to a new report from McKinsey.

The global management consulting company estimates the country’s online retail market last year recorded a gross merchandise volume (GMV) – the total value of goods sold on e-commerce platforms – of US$630 billion, 50.1 per cent of which were transactions made in the country’s vast lower-tier cities and rural areas.

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Alan Lau, a senior partner at McKinsey in Hong Kong and one of the three authors of the report, told the South China Morning Post on Monday that findings from its latest “iConsumer China” survey represent a “huge revelation for foreign brands, which need to rethink their strategy in that segment of the market”.

“The lower-tier cities and rural areas are now home to 257 million online shoppers, compared with 183 million in the higher-tier cities,” Lau said.

The McKinsey survey, which was conducted in January with respondents across five Chinese mainland geographic categories, showed e-commerce penetration in the tier-3 and tier-4 cities, as well as villages, reached 62 per cent of people aged 13 and older last year.

“Brands that have historically focused on high-tier cities may benefit from revisiting their geographic strategies and making adjustments to take advantage of opportunities in low-tier cities, where physical retail needs time to mature,” the report said.

Lau pointed out that online retail sales in that market segment have increased on the back of rising transactions made on mobile devices, wide use of social media to do product research and high demand for goods sold by foreign online merchants.

He also said he expected big e-commerce companies to further expand sales for online merchants in that segment.

China’s two leading online retail services providers, Alibaba Group and JD.com, have shown they are well ahead of the curve, based on their separate initiatives to grow sales in the countryside.

Alibaba, which owns the Post, unveiled plans in January to bolster investment in its rural operations this year.

“We are going to ramp up efforts to bring quality goods to rural buyers, and deliver local produce to urban customers,” Alibaba chief executive Daniel Zhang Yong said.

According to New York-listed Alibaba, it has built more than 10,000 village-level service centres to promote e-commerce and provide delivery in more than 20 provinces.

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Zhang said the firm aims to strengthen its online channels for international brands and merchants to sell to Chinese consumers. That will be centred on Alibaba’s Tmall Global, a cross-border shopping platform for Western merchants to sell their goods in China, and g.taobao.com, a niche channel within the company’s Taobao Marketplace platform for consumers to discover quality products sourced from around the world.

Nasdaq-traded JD.com has benefited from its partnership with Tencent Holdings, which runs mobile messaging service Weixin and social network QQ, as these platforms have put its online retail platform at the fingertips of almost every Chinese consumer, according to chief executive Richard Liu Qiangdong.

QQ had 853 million average monthly active users last year, while the combined average for Weixin and international version WeChat was 697 million.

JD.com also claims to have the largest e-commerce logistics infrastructure on the mainland, including 213 warehouses in 50 cities.