E-COMMERCE IN CHINA REACHES A RECORD HIGH PENETRATION OF 11 PERCENT, USHERING IN THE ERA OF THE "BRANDED INTERNET" WITH SMALL REGIONAL, ONLINE BRANDS LEADING THE WAY

Bain & Company's latest research, conducted jointly with Alibaba, identifies the three steps companies must take to evolve into an Internet-enabled brand

Shanghai – Nov. 9, 2015 – E-commerce in China has reached a critical mass that shows no sign of a slow-down.  According to Bain & Company's 2015 China e-commerce report, Branded Internet and Internet-enabled Brands, developed in partnership with Alibaba, online retail penetration across the country reached a record-high 11 percent, surpassing 2.9 T RMB in total value in 2014, and is expected to grow an additional 22 percent to reach 10 T RMB by 2020, driven largely by business-to-consumer (B2C) and mobile commerce.  With this dramatic growth, the Internet is becoming more brand-enabled as consumer preference moves toward an increased emphasis on quality and better after-sale services.  Brands that lack a clear digital ambition in this new online environment are likely to get left behind by the forerunners that are on a clear path to a digital transformation.

Unlike most western countries where traditional brands dominated e-commerce from day one, China's online space started as consumer-to-consumer (C2C)-led, price-focused, and mostly unbranded.  Within the last several years, Bain has observed shift to what it calls, ‘the branded Internet' – one that places a premium on addressing consumers' growing preference for quality over price.  In 2014, the share of online-branded products grew to 65 percent, comprising about 4 percent of China's overall retail market and representing more than 1 trillion RMB in additional branded product sales.

Surprisingly, smaller brands (regional, pure online and less known brands) – not top brands – are the heroes of China's e-commerce growth, gaining 10 percent share on Alibaba GMV. This represents a wake-up call for the top brands, which have historically created a competitive advantage based on size and scale, a strategy that is becoming less effective in the digital world.

The emergence of China's new branded e-commerce is fueled by the explosion of cross-border e-commerce, focused on categories with high safety concerns, such as baby food, or large price gaps, compared to the country's offline prices.

"E-commerce was once the ‘Wild West' of China's Internet, which deterred many global brands from entering the market through anything other than physical channels," said Jason Ding, a partner in Bain's Retail and Consumer Products Practice and co-author of the report. "Since then, e-commerce in China has matured into an international platform that supports brands eager to establish or strengthen their presence here, while avoiding many of the cultural and logistical complexities that can affect the success of brick-and-mortar operations."   

According to Bain, B2C and mobile commerce are the ‘great enablers' for brands in China, allowing them to build direct touch-points that spur greater co-creation with consumers – key to winning in the age of the branded Internet. Yet, Bain suggests more must also be done to align the organization of the company with its digital ambitions.

Based on the characteristics of the forerunners in this space, Bain has identified rigorous criteria necessary to embark on a digital transformation roadmap that can help brands in China navigate the opportunities in front of them:

• Beginner stage – build standalone online marketing and sales systems
• Intermediate stage – integrate online and offline for more targeted, proactive and efficient consumer engagement
• Expert stage – disrupt the industry's business model with an innovative, consumer-led value chain configuration

Weiwen Han, a partner in Bain's China Retail and Consumer Products Practice and co-author of the report said: "In this transformation, it's not enough to simply aspire to be a digital brand.  Companies have to define their digital operating models – what it means for R&D, supply chain marketing and CRM to be digital.  Then, they must insure that they have the right organizational structure and infrastructure in place."

To schedule an interview with Mr. Ding and Mr. Han, please contact:

• International media: Dan Pinkney at dan.pinkney@bain.com or +1 646 562 8108
• Chinese media: Pinky  He at pinky.he@bain.com or +86 21 2211 5585

# # #