What are the economic impacts of online shopping on physical store on China’s retail industry?

Introduction

China has created miracle in economic development over the past three decade. As the biggest consuming market in the world, it has acquired the leading position in the e-commerce market. In 2014, 33.5% of total retail growth in China was contributed from online sales with the amount of US$458 billion according to Kantar Retail. It was addressed No.1 in the world and higher than the second USA (US$297 billion) by US$161 billion. In the first two months of 2017, China’s online sales dramatically reached US$124.39 billion according to National Bureau of Statistics of China, which approximately accounted for 14% of total retail sales US$840.3 billion (CIW, 2017).  

In general, e-commerce is
used to be defined with 3 fundamental models, B2B (business-to-business), B2C (business-to-consumer),
C2C (consumer-to-consumer), they will be realized from online shopping. China’s
e-commerce market emerged in 1990s and experienced rapid growth after 2008.
Alibaba can be taken as the leading representative enterprise. It founds Taobao
in 2003, the biggest online shopping platform, and separated Tmall to strengthen
B2C in 2012 (E-Commerce in China, 2016). In
terms of B2C model, Jingdong, Suning, Dangdang were successively emerging and
extremely boosted online shopping development. They currently have dominated
almost 80% market share of China online shopping platform.

Factors boosting online shopping in China

Some
key factors play the crucial roles in booming online shopping market in China.
First of all, it is contributed from the development of internet and mobile
network, as well as smart phone penetration. Chinese consumer can visit online shopping website whenever or
wherever they are. “In the first half of 2014, on
average, 26% of China’s online purchases were made via its 780 million active
mobile devices”. (Morgan Stanley, 2015) In addition, urbanization
is expanding at an unprecedented
scale along with economic growth in China. The majority of consumers are
dwelling in cities. Fast-paced life style gradually influences their shopping
behavior. They incline to convenient shopping even with delivery service to
home rather than traditional store visit in the crowd. On the other side,
traditional business model constraint physical store spreading as consumer’s
expectation especially in rural or remote areas. Consequently, a certain
percentage of e-shopper or e-retailer from such areas can be benefited from B2C
or C2C platform.

Features of online shopping in China

Compared with traditional
physical store, the online shopping is advantaged of convenience, lower price,
and more choices for consumer. Chinese online shopping also has some unique
features. Firstly, the online retailers are entirely online-only retailers
rather than multi-channel retailers with both online and offline presence, such
as Alibaba, its business model initiated from C2C with well-known platform Taobao
and then strengthened B2C with separated brand Tmall. Secondly, Chinese online
shoppers are mostly price sensitive users. To some degree, price difference
with physical store is still the key driver for their purchasing motivation. The
representative example is from Double 11 shopping day launched by Alibaba. “Retailers
on Alibaba’s platforms had recorded $17.8 billion worth of gross merchandise
volume in 2016 “(Ming, C.2016). Furthermore, Chinese online shopping is entering
into a stage implemented with mobile especially smart-phone and promoted by
diverse social medias, which is due to faster and cheaper 4G network penetration.
According to Morgan Stanley report, “In the first half of 2014, on
average, 26% of China’s online purchases were made via its 780 million active
mobile devices.”

Economic impacts on physical store

The online shopping has definitely become unique booster for economic
growth in China. Meanwhile, the hot debate of its disadvantages to
traditional retail industry is significantly increasing. As pointed out by
research firm Euromonito International, the worldwide store-based retailers
faced in 2015 the challenge of the increasing competition from
online retailing and the decrease in consumer confidence. Consequently, a large number of physical
stores in various channels closed. “According to the China National
Business Information Centre, in the first nine months of the year, the top 50
domestic retailers saw sales fall 1.9 per cent, representing a slowdown in
growth of 2.6 per cent compared to the same period of 2015.”(Zheng, S. 2016)

The main causes for physical store collapsing can be theoretically illustrated
in terms of microeconomics model. According to supply-and-demand model, no
matter the quantity of a good that consumers demand, or the quantity of a good
that firms supply, essentially depend on price as well as other factors such as
income and cost of inputs. Consumers usually demand less of a good with higher
price and more when the price is low. Oppositely, firms supply more of a good
with higher price and less when the price is low. Compared with traditional
retail stores, online shopping in China can precisely provide consumers more
goods with lower price, which is due to following reasons.

Firstly, it is caused
by lower operational cost from online retailer, such as no rent for physical
store, which is mainly composed of Internet maintenance, inventory, logistic,
labor. Compared with online retailers, the store rent has been an inevitable obstacle
to reducing the cost of input for the traditional retailers, especially during
the period of soaring house price in China. In addition, the increasing Chinese
labor wages give rise to higher fixed operation cost. As a result, it is almost
impossible for the physical store to drop the commodity price to be same with
online shop. Otherwise, the physical store won’t survive once the profit will
be eventually damaged. Furthermore, more competitors and more options online
can cause more price competition even the elimination of price monopoly, which finally
contribute to price advantages.

Secondly, the weak increase of Chinese economy
since 2013 had negative effects both
on the GDP and export growth. “The slowdown trends can be identified within the
wholesale market, manufacturing industries and commodities markets.” (KYKLO, 2016).
The economic slowdown results in decrease in consuming confidence. Shoppers are
increasing their favor on online commodities with lower prices than ever.

Chinese Producer Price Index (PPI) below in blue shows 

In conclusion, the factors of e-commerce revolution,
together with rising operation cost from rental and labor, economic slowdown,
are leading to physical stores closure.

Outlook

“The e-commerce revolution has also
become a dynamic engine of China’s long-awaited shift from a heavy-industry,
export-oriented, semi-command economy into a consumer- and service-driven
market, where private companies large and small have direct access to domestic
consumers” (Morgan Stanley, 2015). Any technical changes will usually lead to mutual
influence on existing practices all along. Whether or not the challenge,
advantage outweighing disadvantage and vice versa, will depend on changing idea
and strategy. Therefore, the attitude taken towards booming e-commerce
development is very crucial for the traditional industry. To some degree, the
online shopping will destroy the physical store expansion. On the other hand, it
is also providing the new business model O2O (online-to-offline) to utilize. The
further exploration on maximizing advantages of physical store and optimizing
O2O platform are better solution for traditional retailer to get rid of
dilemma. After all, there are aspects of shopping experience beyond simply
obtaining goods. “A notable finding of the research was that wealthy Chinese consumers
have a much lower inclination to online shopping”(Lynch, D. 2014). Such as
physically touching merchandise, gorgeous and bright in-store décor, relaxing
atmosphere and entertainment, emotional bond between buyer and seller,
customized service for wealthy consumers. All of these are irreplaceable
advantages of physical store.  

Reference List

• Borsano, P. (2016 August 30). B2B E-Commerce in China: time to shift from B2B Marketplaces to Personal Online Shops. Retrieved from https://www.kyklo.co/b2b-e-commerce-china-time-shift-b2b-marketplaces-personal-online-shop
  • The author illustrated B2B shifting to online shop in China from four aspects, the rise of online market and current status, China B2B e-commerce, traditional industry developing with online strategy, the reason for shifting to online market.
• Cavall, A. (2017), “Are Online and Offline Prices Similar? Evidence from Large  Multi-Channel Retailers”, American Economic Review 2017, 107(1): 283–303
  • This research article illustrated the price difference between online or offline retailers with statistic data collecting from the websites and physical stores of 56 large multi-channel retailers in 10 countries.
• Chine Internet Watch Team (2017, March 17). China online retail grew by 31.9% to exceed US$124 bn in Jan&Feb 2017. Retrieved from https://www.chinainternetwatch.com/19978/retail-jan-feb-2017/#ixzz4cfSFlT7t
  • One of research report from China Internet watch showed China online shopping growth with official statistic data and graph in 2017. Besides it, another similar three reports from CIW also showed the online shopping revenue in 2015 and predicted growth by 2020, which are not shown in this list.
• E-Commerce in China: Opportunities for Asian Firms (2016, October 10), Retrieved from http://www.intracen.org/publication/E-Commerce-in-China-Opportunities-for-Asian-Firms/
  • This articles entirely illustrated e-commerce development in China, especially the history of Alibaba and its strategy for e-commerce business model expanding.
• Ming, C. (2016, November 11), Single’s Day: Alibaba smashes records at world’s largest online shopping event, Retrieved from http://www.cnbc.com/2016/11/11/singles-day-news-alibaba-poised-to-smash-records-at-worlds-largest-online-shopping-event.html
  • It was a special report about single’s day, Alibaba online shopping day in 2016, which was involved with the history of Alibaba Single’s day, significant sales performance and key factors of its success.
• Morgan Stanley Research (2015, March 13). China’s eCommerce Revolution. Retrieved from https://www.morganstanley.com/ideas/china-e-commerce-revolution
  • Morgan Stanley Research reported that the e-commerce was significantly influencing China economic and long-term industry structure. It also illustrated with graph that the engine of e-commerce was from mobile penetration, and briefly summarizing solution for integrating online and offline commerce in the future.
• Noren, E. (2013, February 12), The Non-Traditional Retail Business Model, Retrieved from http://www.digitalbusinessmodelguru.com/2013/02/the-non-traditional-retail-business.html
  • This article explained business model of non-traditional retail, strengths and weakness, components, and analyzing critical success factor.
• Noren, E. (2013, January 29), The Traditional Retail Business Model, Retrieved from http://www.digitalbusinessmodelguru.com/2013/01/the-traditional-retail-business-model.html
  • Compared with the former, this article explained business model of traditional retail, strengths and weakness, components, and analyzing critical success factor.
• Xiaodong Wong David C. Yen Xiang Fang, (2004),”E-commerce development in China and its implication for business”, Asia Pacific Journal of Marketing and Logistics, Vol. 16 Iss 3 pp. 68 – 83
  • This journal articles was a survey during internet’s early days. Which illustrated e-commerce initiation and development and made prediction about its implication for retail industry in the future?
• Zheng, S. (2016, November 10), China’s traditional retail industry to remain weak as shoppers stay home, says Fitch, Retrieved from http://www.scmp.com/business/markets/article/2044786/chinas-traditional-retail-industry-remain-weak-shoppers-stay-home
  • The author stated how the online shopping impacted on traditional retail industry since 2015, and implied that structural challenges facing traditional retailer would persist even they had applied new strategies to attract consumer.