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Insight around the world - September 2019

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EMMA HERROD, EDITOR, INTERNET RETAILING

Amazon is closing its ecommerce marketplace in China, but will continue with its services including Amazon Web Services. Reports claim that Amazon.cn’s share of the Chinese B2C market in the first half of 2018 had dropped to less than 1.2%. In comparison, Tmall and JD.com make up 83.8%.

Meanwhile, hackers gained access to details of almost half a million customers of Fast Retailing’s Uniqlo and Gu sites in Japan in May. While the number may change during the course of the company’s investigation, Fast Retailing has said that at present, a total of 461,091 unauthorized logins occurred between 23 April and 10 May. Access is believed to have been gained by means of list type account hacking whereby user IDs and passwords were leaked from other services, the company says.

The hackers have potentially accessed customer names, addresses, phone numbers, emails, purchase history, clothing measurements and date of birth, as well as the details of anyone who was sent a parcel by a customer. Partial credit card information (cardholder name, expiration date, and either the first or last four digits of the card number) were also accessible.

Customers have been advised to change their passwords – and not use the same ones as they do for other services.

Also in Asia, people’s growing affinity with their pets is driving demand for premium pet care products. Asia Pacific is the fastest growing market with the region forecast to achieve the highest added sales globally by 2023, according to ecommerce insights company Edge by Ascential.

The ‘Household and Pet Care CPG report’ reveals that the Asia-Pacific market currently dominates consumer spending in the category. However, by 2023, sales in the region will expand by 37% to $384bn (£300bn). This is closely followed by North America, where sales will grow to $281bn (£221bn). Household and pet care spending in Europe is also expected to show a similar amount of growth through 2023, increasing by 28% to $203bn (£160bn).

The consistent increase in global consumer spending in the household and pet care categories is attributed to the growing trend of pet humanisation, as consumers increasingly see their pets as family members.

JING WANG, BUSINESS INTELLIGENCE MANAGER, ALIBABA


Consumers in so-called lower-tier cities, China’s less-developed urban centres, and rural areas are driving the next wave of consumption growth in the country. As rising incomes lead to an upgrade in lifestyle, these consumers are increasingly looking for higher-quality goods, yet still at reasonable prices. They often search group-buying sites or cross-border ecommerce channels for these deals, giving international brands a chance to capitalise on a major consumption-upgrade trend playing out in the world’s second-largest economy.

While there are various definitions of city tiers based on levels of economic development, lower-tier markets generally include tier-three cities, such as Guilin, to tier six, which are county-level urban centres and townships. Rural areas are also included. There are four tier-one cities and 46 second-tier cities in China, but there are 193 third-tier cities and 696 fourth-tier cities, according to data from McKinsey Global Institute. And these markets, including China’s rural areas, were home to 934 million people in 2017, research firm Analysys reported. That’s about three times the total population of the US.

Total consumption in these lower-tier cities and rural areas, which reached $3.3 trillion in 2017, is expected to reach $8.4 trillion in 2030, according to a Morgan Stanley study. Of that estimated $8.4 trillion, $6.9 trillion will come from China’s still-growing urban centres, while the rest comes from rural areas. This is being driven by China’s massive urbanisation, as people leave the countryside for steady work and better services in the city and migrant workers return to their home cities for a slower pace of life. About 60% of the 833 million people living in China’s urban areas were located in third-tier and lower cities in 2018, according to McKinsey Global Institute’s calculation.

In its latest earnings report, ecommerce giant Alibaba Group said that more than 70% of its 102 million newly acquired annual active consumers in fiscal 2019 came from these less-developed cities.

But, who are these consumers? For one, they are less worried about spending than their peers in higher-tier markets, not least because lower housing costs bolster their savings. A Nielsen report revealed that consumer confidence in lower-tier cities and rural areas was higher than first-tier cities in 2018. In particular, rural consumers showed the strongest confidence in spending in 2018, which tracked their faster-growing disposable income compared to urban dwellers. According to China’s National Bureau of Statistics, the average disposable income of rural consumers grew 8.8% in 2018 versus 7.8% for city residents.

Also, they are more willing to search for a great deal than their top-city counterparts. A study by Analysys showed that shoppers in lower-tier cities and rural areas say price is one of their top three factors when making a buying decision, while trendiness and novelty were the least important considerations.

However, the perception that lower-tier market consumers want only bargains is quickly becoming obsolete. They are increasingly putting emphasis on both quality and value as their standards of living improve. In fact, quality became the number one factor for lower-tier market consumers when choosing a product, similar to top-tier city consumers, according to Analysys.

Perhaps it is not surprising, then, that they are turning to cross-border ecommerce for better-made, imported products that they can’t buy at their local brick-and-mortar stores. About 64% of lower-tier market consumers have made a cross-border purchase, according to Analysys. Imported products from cross-border channels were among the top five fastest-growing categories for lower-tier market consumers, the study showed.

Group-buying and flash-sale platforms, such as Alibaba’s Juhuasuan, are popular destinations among lower-tier market consumers who want quality products at competitive prices. Nearly half of the first 100 million products sold through Juhuasuan promotions for the mid-year 6.18 Shopping Festival came from consumers in tier-three through tier-six cities, according to Alibaba. Beauty product purchases by lower-tier city shoppers through Juhuasuan, in particular, saw a 143% year-over-year surge during the first two days of the festival, which runs June 1-18.

For brands, there is also an opportunity to introduce their products to a new consumer base. In 2018, new customers accounted for 80% of the gross merchandise volume of products that brands promoted through Juhuasuan, and nearly half of those new customers were from lower-tier cities.

In April, Juhuasuan hosted an “Under the Cloud” concert in partnership with seven international sunscreen brands, including Naris and Mentholatum, in China’s southwestern province of Yunnan, which is known for its high-altitude climate and year-round sunny weather. During the three days of the promotion, the participating brands saw an average increase in sales of nearly 300% from Yunnan-based customers and an average 278% increase in the number of buyers from the region compared with the same period in 2018.

Meanwhile, Apple’s GMV from lower-tier cities grew 170% year-over-year during the first two-days of the 6.18 promotion, significantly outpacing the growth rate of first- and second-tier cities. Most of Apple’s 42 offline stores in mainland China are located in top-tier cities, so Apple’s Tmall store is a convenient way to reach the ‘small town’ customers who are just as enthusiastic about the brand.

In order to help these lower-tier markets find good-quality, affordable products, Juhuasuan launched a “Daily Deals” program that allows factories to sell directly to the end consumer. This allows the factories to cut costs that may otherwise be added as a product moves through the supply chain from maker to buyer.

 

Juhuasuan also offers the factories consumer analytics so that they can adjust their manufacturing to suit demand. For example, Juhuasuan brought consumer analytics and technical support to a Zhejiang-based sock manufacturer to help update its design to better suit consumer preferences. As a result, the factory cut production costs by 7% per pair and sold 1.53 million pairs in three days through Juhuasuan.

So, what’s next? The lower-tier market opportunity is not one-size-fits-all. There are still nuanced consumer preferences in different tiers of cities, as well as rural areas. All of the residents in these less-developed areas are experiencing a consumption upgrade, but from different starting points. That will require brands to create tiered strategies to target consumers that might have different tastes.

The “off-price” or outlet strategies that many international brands use in the West may be an attractive way to engage lower-tier markets in China. Off-season bargains from brands, or products with more basic styles at competitive prices, are well-suited to these markets.

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