Business & Finance

【E-Commerce】Chinese e-tailers turn to offline market amid slowing growth

China’s e-commerce companies have been expanding its offline sales networks by major acquisitions in recent years amid slowing growth in online sales. Analysts say, e-commerce companies need to develop their brick-and-mortar business, instead of replacing it, and contend for offline resources in the future as online and offline sales are inseparable.

Already holding a 28 percent stake in mainland retailer Intime Retail Group (1833.HK), China’s e-commerce giant and Nasdaq-listed Alibaba Group (BABA) aims to take full control of the department store operator through privatization. In January, Alibaba offered HK$19.8 billion in cash to take the Hong Kong-listed Intime private to expand its offline business. The group’s statement said it was helping transform offline retailers with Alibaba’s large consumer population and abundant data and technical support. However, it might be the slowing down in online business that urged e-tailers to secure offline resources, which they have been competing against.

“Online sales have reached a peak years ago, so it is normal to see the growth rate slow down, suggesting customers’ enthusiasm in shopping online may have declined,” said Luke Chu, chairman of Hong Kong internet & Ecommerce association.

 

E-commerce needs a new boost

It is not the first time Alibaba reaches out to retailers to open up sales channels. On Singles’ Day in 2015, Alibaba partnered with over 180,000 offline stores to get through both online and offline sales channels. The gross merchandise volume for Alibaba’s shopping platform TaoBao surged 32 percent on Singles’ Day in 2016, but the year-on-year growth still lagged behind 2014 when it jumped 59.7 percent.

Last November, the Hangzhou-based e-commerce giant bought 32 percent shares of supermarket chain Sanjiang Shopping Club. What Alibaba valued were the retailer’s widespread store networks and rich operation experience, it said in a statement. With over 160 physical stores, Sanjiang would share its large supply chain with Alibaba to provide more fresh food in return for the financial and technical support from the e-commerce giant.

 

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The change s of Alibaba’s stock price before and after purchase Intime Retail group.

 

The share price of Alibaba rebounded last November and this January as it invested in two large offline retailers.

Moves of e-tailers developing offline business happened in rapid succession over the past few years as e-commerce companies saw signs of saturation in online sales. The growth of online sale of all Chinese e-commerce slowed continually to 23% in 2015 from 26.7% in 2012, data from the mainland consulting company iResearch showed. “Offline and online sales are like two halves on either side, thus isolating them will not work,” said Wu Yiran, an account executive at iResearch.

The corporation with offline stores does not mean e-commerce companies are walking backwards, instead, it shows the balance of an ecosystem in the business world. “The corporation not only improves online stores traffic, but acts as an inevitable process of offline retailers to be digitalized,” Mr. Wu added. Offline stores may share its customer information with e-commerce companies that will channel its offline customer stream to online platforms and expand sales.

 

Offline shopping still dominates

Over 80 percent of consumer consumption occurred offline, Wu said, “Offline sales accounted for about 85% last year. Even though ecommerce is developing fast, the sales online will not go beyond 30% in the future.” Due to the mature offline store operating system, the predominant role of offline shopping may not change in a short time. Meanwhile, Chu added that customers sometimes found the online customer experience unsatisfactory, for example, the quality of goods was not that trustworthy.

Not only e-commerce giants expanded offline business, but young ones like Three Squirrels, the largest pure-play food e-tailer, found the advantages of physical stores. It decided to open more than 1000 hypostatic stores in 2017. A customer service supervisor of the company, who declined to be named, said the idea of opening offline stores had been around since the beginning of 2016, “because physical stores can help customers taste the products free in a way of enhancing customer experience and displaying features of Three Squirrels that cannot be easily presented online.” The food e-tailer now has two existing stores in Anhui and Zhejiang province.

 

Limitations on HK expansion

However, e-commerce’s development in Hong Kong is not as fast as in mainland China, many people are quite confused about the shipping clauses of Taobao. Also, people still trust the goods sold in physical shops more where product quality is more assured. Chu said that there were two main reasons for the less-developed e-commerce, “First of all, the high density of physical stores in Hong Kong greatly fulfilled people’s daily needs. Also, Hong Kong is an international free trade zone so there’s no necessity for local people to shop online to save tax cost.”

When mentioning the difficulties in combining online and offline sales, Wu said offline sales involved interests of different parties, such as product suppliers, intermediate traders and retailers themselves. When moving business online, the distribution of profits and the maintenance of relationships need to be considered. “Because offline companies are not wholly owned by Alibaba, they may lack of trust in each other and not commit to share resources. The process of two working together is also a game course,” Wu added.

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Reported by: Only He
Edited by: Watson Tan

《The Young Financial Post 新報人財經》

The Young Financial Post (TYFP) is a news portal that presents the works of HKBU financial journalism students on Hong Kong and China financial news via text, picture and video.

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