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NetEase’s Kaola plans €3b spending spree on European products

Firm sees huge growth potential for European goods in China, as retail site ratchets up its competition against larger e-commerce players

PUBLISHED : Wednesday, 12 April, 2017, 5:12pm
UPDATED : Wednesday, 12 April, 2017, 10:03pm

As China’s online shopping giants continue adopting their “more the merrier” business model, to build themselves into outlets selling everything from stamps to overseas properties, one relative newcomer in the country’s burgeoning online retail market is taking the very opposite approach.

Kaola.com, the cross-border e-commerce arm of China’s internet major NetEase, is strictly sharpening its focus on bringing new European brands to China – a particular category in which it sees strong growth potential, as it ratchets up its competition against larger e-commerce players, such as Alibaba Group and JD.com.

Kaola plans to buy 3 billion (US$3.18 billion) worth of European products over the next three years, spread across more than 2,000 brands, which it hopes will appeal to high-spending Chinese shoppers.

“We are not looking to significantly boost the total number of foreign brands sold on our site,” Zhang Lei, chief executive officer of the Hangzhou-based Kaola, said in an interview with the Post.

“We want to be choosy, providing only high-quality, hand-picked brands that meet the demands of our customers.”

About 5,000 foreign brands currently sell directly on Kaola’s site, mostly from Japan, South Korea and the United States.

Kaola was launched in 2015 by Nasdaq-listed NetEase, and its founder and chief executive officer William Ding Lei, hopes it can become an online retail powerhouse that can potentially double the size of his business, that has so far been heavily reliant on games revenue.

Less than 20 per cent of NetEase’s net revenue of 38.2 billion yuan (US$5.54 billion) last year came from e-commerce related business.

European brands enjoy high status among China’s international shoppers, their sales lag behind in numbers behind brands from Japan and South Korea, according to Kaola’s own research.

It shows, however, Europe produces some of the bestselling products on China’s cross-border sites. Total online sales of imported European products ranked the second in China, way ahead of imported goods from the US, Australia and New Zealand, it showed.

Previously big brand European luxury products were considered rather ostentatious, but those days are long gone, said Zhang.

The increasingly sophisticated Chinese middle classes have started to pay greater attention to detail, as they strive to enjoy the same quality of life as their Western counterparts.

There is increasing demand among China’s shoppers for Europe’s baby and maternity products, makeups and even products used at home, like kitchenware
Zhang Lei, chief executive officer of Kaola

And the scope of the most-desired products is widening, from German Aptamil baby formula, to French Lancome makeup products, even Lamy pens, also from Germany.

“There is increasing demand among China’s shoppers for Europe’s baby and maternity products, makeups and even products used at home, like kitchenware,” said Zhang.

Despite a slowing economy, online spending by Chinese consumers on foreign goods is expected to remain strong with a compound annual growth rate of 15 per cent to 2021, reaching a total value of nearly 1.3 trillion yuan, according to market research firm Mintel.

Kaola’s plans put it in direct competition with some of China’s biggest online shopping heavyweights, including Alibaba and JD.com, both of which have been fast growing their international capabilities.

Despite year-on-year growth of more than 100 per cent, NetEase’s net revenues from e-mail, e-commerce and other similar businesses hit 8 billion yuan in the fiscal year 2016, around a sixth of Alibaba’s revenue of 53.25 billion yuan, in the quarter ending in December.

But Zhang added she has no fears going head-to-head with such major players.

“Be they well-established players or new entrants, whoever can provide good products, good services at good prices to China’s middle class will gain the upper hand in e-commerce because it will become all about upgrading of consumption in China over the following 10 to 15 years,” she said.

To better stand out from the competition, Kaola plans to built an additional nine warehouses in the UK, Italy, France and Spain as well as making further investments in its European operations centre, which opened in Frankfurt in 2016 – a move that will allow it to not only ship products faster, she added, but guarantee product integrity as well give more peace of mind to its Chinese customers.