Every Nov. 11 in China is Singles' Day, designated as a day to celebrate being unmarried. Last year on the holiday, online sales reached $4 billion—far surpassing, for example, the $1.5 billion in sales on Cyber Monday in the US.
The growth in online sales growth is driven by an expanding Chinese middle class buying apparel, accessories and electronics, but a larger question may be—who turned Singles' Day into a shopping juggernaut?
The answer is Internet giant Alibaba, which in 2009 used Singles' Day as a way to create Cyber Monday-like consumer hysteria in China.
The rise of the middle class in the developing world is intrinsically linked to increased consumer spending. Most measures of what defines a "middle class" count a rise in discretionary spending as a key factor—going back through historical middle-class surges, including the 19th-century Industrial Revolution. (Consider venerable British department store Harrods, established in 1848 to cater to the rising middle class rather than to the rich specifically.)
"The notion of having discretionary money to spend is a new phenomenon in China," said Homi Kharas, senior fellow at the Brooking Institute. "These are people who want to differentiate themselves and are brand-conscious. The middle class is prepared to pay more for quality than the lower classes," he added.
After decades of official disdain for consumerism, the Chinese government is encouraging its citizens to display their prosperity, and Alibaba has seized the opportunity. This year, China is poised to pass the U.S. to become the world's largest e-commerce market. Last year, Alibaba—already China's largest online sales platform—generated $173 billion in sales.
That is more than eBay and Amazon combined, in a country where only 40 percent of the population is online. (Amazon operates in China through a local company, Joyo.com, and has gained less than 1 percent market share after eight years in the country.)
Now that conspicuous consumption is the official policy, the wealthy and mid-range consumers are snapping up luxury brands. China is expected to account for about 20 percent of global luxury sales in 2015, according to McKinsey Global Institute research.
While the very wealthy can shop for luxury goods on jaunts through Europe and the United States, the middle class, particularly those in smaller cities, use the Internet. McKinsey analyst Yougang Chen delineates Chinese consumers as Generation 1 (born in the 1970s, who buy mostly on price) and Generation 2 (confident, younger shoppers who are similar to developed nation consumers focused on quality). Sixty-one percent of China's online shoppers are between 18 and 30.
Will Tao, an analyst with iResearch, said the typical Chinese online consumer is a young middle-class person in a tier-two or tier-three city. Because they live outside major cities, they have a lack of retail choices. E-commerce fulfills unmet demand from increasingly sophisticated shoppers, creating incremental consumption in China by providing a greater variety of merchandise, especially in the smaller cities.
Alibaba doesn't sell merchandise itself but it offers platforms. It was initially a B2B marketplace, connecting overseas buyers with Chinese suppliers.
Sensing unmet demand, Alibaba added two subsidiaries—Taobao, which specializes in consumer-to-consumer commerce à la eBay, and Tmall, which operates as a marketplace linking small and large businesses and brands to consumers, much like Amazon Marketplace. Tmall dominates the B2C market in China, with over 50 percent market share. Foreign brands sell on it to increase awareness.
"Some brands, like Coach, open flagship stores on Tmall as their official channel to test the China market," Tao said.
A primary reason Alibaba figures so prominently in the consumer boom in China is related to payment and shipment logistics—two key areas in which it is gaining influence.
E-commerce vendors there must contend with fairly primitive payment systems. China has a low penetration rate for credit cards, and 50 percent of buyers pay cash on delivery. When clothing is delivered, the courier often waits for the customer to try it on before collecting the payment.
Alibaba offers an alternative. Its Alipay subsidiary, an online payment service similar to PayPal, accounts for roughly half of all online payment transactions within China. Alipay also provides an escrow service that allows shoppers confirm they're satisfied with items before money is released. This extra level of consumer assurance has contributed significantly to e-commerce's growth.
Express package delivery service in China is fragmented and relies mostly on local carriers. FedEx was just granted direct delivery access to eight cities, and UPS has access to five cities. FedEx serves 400 other cities via joint ventures with Chinese companies, but service to any area outside the four tier-one cities can be slow.
Alibaba accounted for 70 percent of package deliveries in China last year, founder Jack Ma said at the Credit Suisse Asian Investment Conference in Hong Kong in March. The figure is based on information from the China State Post Bureau. The company is now establishing the China Smart Logistics Network, which will be able to deliver shipments to any city in China within 24 hours, though it will not be completed until 2021.
All this is occurring in a country where, 30 years ago, the typical wardrobe consisted of one or two Mao jackets and a few pairs of pants—hardly appropriate attire for Singles Day.
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