Sector Trend Analysis – E-commerce Trends in China

Socioeconomic profile

Economy

China is the world's second largest economy at US$14.3 trillion (2019). China's economic growth has been subdued due to trade tensions with the United States (U.S.) and the economic impact of the novel coronavirus pandemic, which severely impacted domestic industries and export growth. According to Euromonitor, China's economy has since experienced a v-shaped economic recovery and was the first major economy to see its real economic output, labour market, and consumer spending return to pre-pandemic levels, as of Q3 2020.

Demographics

China is the most populous country in the world at 1.4 billion people (2021). The ten largest cities are located in the eastern half of the country, situated on or near the coast. Shanghai is the largest city with 22.7 million people, followed by Beijing with 20.4 million.

The average Chinese household constitutes two to three persons with the most common type of family being a couple with children headed by a male senior, aged 50+, with secondary education, an employee with a salary, living in a 15-29 square metres apartment.

The pandemic is expected to drive population growth in mid-sized cities, especially as people are exiting large cities in the wake of the pandemic in pursuit of lower costs of living.

Data from China's 2021 census showed that China's urbanization rate grew by 14.2% to 63.9%. That means that China's cities added an additional 230 million residents over the last 10 years, raising the total to 902 million urban residents.

The census also showed regional distinctions in economic vibrancy across the country. In response, China is offering tax and investment incentives for capital to move to the less developed western region, which is expected to attract talent movement. The western region is made up of 12 provinces, such as Guangxi, Chongqing, Sichuan, and Shaanxi, covering more than 70% of the country's land area and nearly a third of China's population.

Consumer income and expenditures

Heightened economic uncertainty due to the pandemic has subdued consumer sentiment and prioritized savings, thus hindering discretionary spending growth. Moreover, demand and supply-side disruptions, due to the pandemic, are expected to increase inflation.

A couple with children remains the key household type according to consumer expenditure. The pandemic has forced these Chinese consumers to spend more time at home, which has boosted expenditure on smart appliances and other home products. The food and non-alcoholic beverage category is expected to be the only category to record double-digit growth in the upcoming years.

Consumers' preferences for smaller cities has created significant differences in spending patterns across China's regions. The coastal province of Guangdong is the largest consumer market and the most populous region in China, but as consumers flock to smaller populated regions, consumer spending growth is forecast to be fastest in these regions.

China's food and beverage trade with the world

In 2020 China imported Can$127.3 billion in food and beverage. In the past five years from 2016 to 2020, the average annual growth rate of imported food in China is 16.5%. Canada is China's eighth largest supplier of food and beverages.

Although the variety of imported food in China is increasing, there are 10 major imported food categories, such as dairy products, edible oil, meat and aquatic products, that have been supplying the Chinese demand considerably.

China's packaged food market overview

The Chinese packaged food market saw steady growth between 2016 and 2020 but growth slowed in 2020 due to the negative impact of the COVID-19 pandemic. Measures to limit the spread of the virus involved store closures and restrictions on public movement, had an adverse effect on sales across most packaged food categories. Categories mostly impacted were savoury snacks, milk and hot cereals.

During lockdown, the closure of stores, workplaces and schools and the imposition of stay-at-home measures resulted in an increase in consumers cooking and eating at home. As a result, some packaged food categories grew in sales, notably products suitable for home cooking. Staple products with a long shelf life, such as rice, instant noodles and shelf stable processed fruit and vegetables were amongst those to see sales bolstered by stockpiling during lockdown. Sales of frozen processed meat and seafood, which have struggled to overcome Chinese consumers' strong preference for fresh products, benefitted from the rise in home cooking during lockdown as an ingredient in hotpots. There has also been a surge in demand for semi-prepared dishes, where the fresh ingredients come ready to be put straight into a pan to cook.

As concerns over safety remain after the pandemic, cooking at home is likely to become a longer-term trend. With increased focus on health as a result of COVID-19, there is a stronger interest in immunity-boosting foods as consumers shy away from more unhealthy ingredients. For example, perceived links between meat and viral diseases have accelerated a move away from meat to plant-based proteins. According to a Euromonitor survey, 8% of China's Gen Z follow a vegetarian diet.

E-commerce market overview

China's internet users are forecast to expand to 97.0% of the total population in 2040, up from 65.2% in 2020. According to Euromonitor, improved digital infrastructure has enabled the majority of homes in China to have a broadband internet connection, which is expected to facilitate the continued boom in Ecommerce and digital payments in China.

China is one of the leading countries in terms of mobile connectivity. Mobile telephone subscribers forecast to expand massively to 2.7 billion in 2040, pointing to ownership of multiple handsets amongst the population. According to the Chinese Ministry of Industry and Information Technology (MIIT), China has more 4G users than the total population of Europe. 5G commercial service was approved by the Chinese government in 2019, which has enabled more consumers to participate in the digital consumer market in China. 5G connection will be pivotal to integrating various technologies such as big data, artificial intelligence (AI) and cloud computing. China Mobile Ltd is the leading telecommunications provider in Mainland China and 5G has become its primary focus.

Ecommerce represents 11.8% of total retailing of packaged food in China and is the fastest growing distribution channel for packaged food products, growing 17.9% annually since 2016. In addition to its convenience and a large base of consumers living under the pandemic's restrictive conditions, Ecommerce's growth has also been fuelled by China's rapid development of internet technology and the ongoing penetration of Ecommerce retailers into lower-tier cities and rural areas. These are all putting pressure on the market share of much largest store-based retailers, which continues to fall.

Consumers' shift away from stores and towards Ecommerce was accelerated by the COVID-19 pandemic, as the retail sales share of Ecommerce recorded its fastest increase in 2020 as consumers looked for convenient and safer shopping formats and to circumnavigate the closure of store retailers. From 2016 to 2020, all packaged food categories experienced strong sales growth that averaged 27.1% annually. Baby food is the largest category sold through ecommerce, followed by rice/pasta/noodles, dairy, and baked goods.

From 2016 to 2020, all packaged food categories experienced faster sales growth through Ecommerce than through store retailers. On an annualized basis, sales of ice cream, processed meat and seafood, baked goods, and breakfast cereals grew fastest through ecommerce, from 28% to 45.7% annually.

E-commerce by food sector

Online retailing

Grocery retailers (for example, China Resources Vanguard, Yonghui, Walmart, Carrefour, Metro) represent 88.1% of packaged food retail sales with nearly all major retailers selling imported foods. During the initial outbreak of the pandemic, when people were forced to self-quarantine and avoid leaving home, retailers with a strong Ecommerce presence saw sales surge. Hypermarkets with local delivery options allowed consumers to place orders via mobile apps and have products delivered to their door within 30mins.

Though the pandemic is largely over in China and people are returning to normal, online grocery shopping habits are expected to remain, especially among the young and old generations. The pandemic also pushed "silver Internet users" (over 50 years old) to learn about online shopping. They mainly access the internet through mobile devices. As of December 2020, there were nearly 260 million "silver Internet users" and 160 million Internet users under 20 years old.

Growing online competition from major Ecommerce platforms in China is also forcing store-based grocery retailers to include an online platform to their business. For example, Sun Art Retail Group, the operator of Auchan and RT Mart hypermarkets in China, has formed strategic alliances with Alibaba since 2017 to digitalise its offline stores. This has resulted in orders placed on Alibaba's Taoxianda and Tmall Supermarket platforms being partly fulfilled by Auchon and RT Mart stores and delivered by Alibaba's Ele.me or Cainiao Network, an on-demand food delivery platforms and logistics business, respectively. The deal with Sun Art has been successful, with Sun Art reporting huge increases in its online to offline (O2O) sales in 2019 and the first half of 2020.

The deal also flags Alibaba's step forward in its New Retail Strategy, which aims to blur the lines between Ecommerce and offline shopping and provide a seamless shopping experience. The acquisition gives Alibaba a fast route to gain offline access in modern grocery retailers. As of 2020, Auchan Group has 500 physical hypermarket stores under the Auchan and RT Mart names across 29 provinces in China.

Key e-commerce players

The lockdown experience has significantly enhanced the role of Ecommerce in the sale of packaged food, with many consumers having become familiar with purchasing a wide range of products online and appreciating the convenience of online shopping. Platforms, such as Tmall and JD.com, operate dedicated portals selling food and beverage products that shoppers use to access a wider choice of international products at lower prices compared to store-based retail channels. Alibaba, JD.com, Pinduoduo, and Suning are the top four food and beverage ecommerce retailers in China, with a combined market share of 83.7% in 2020. These four platforms were the only platforms that saw their market share go up in 2020. Other major online grocery players in China include Dingdong (backed by SoftBank) and Missfresh (backed by Tencent). Given that the return to hectic lifestyles following the pandemic is expected to bolster demand for the convenience provided by Ecommerce, in an effort to drive sales, these platforms are putting more efforts into engaging with consumers through social media platforms and improving fulfilment logistics infrastructure.

Conventional e-commerce

There are two formats to entering China's market through Ecommerce platforms: online hypermarket and online mall, such as Tmall or JD.com's platform. Platforms import products through two methods: "Business to Consumer" (B2C), to consumers directly from the exporting countries, or "Business to Business to Consumer" (B2B2C), where products are sold indirectly to consumers after being stored in Chinese warehouses.

In an online mall (B2C), a manufacturer can setup a virtual store that would either be operated by the company or a partner such as a third-party logistics company with official partnerships with the marketplace (i.e. Tmall). Companies need to first identify a local partner willing to carry their products for selling online or invest in their own online flagship shop, which requires heavy marketing investments and may be more expensive than selling offline via traditional retail channels.

In an online hypermarket (B2B2C), manufacturers sell their product directly to an Ecommerce platform, similar to selling to Amazon. The platform manages all aspects of sales and distribution and the manufacturer is not directly involved in ecommerce in China, but rather only supplying the company running the platform (that is, JD.com).

Ecommerce logistics:

1. Manufacturer
2. Sourcing
   • Large online platforms source directly from manufacturers or distributors (for example, Beijing Maolisheng, Beijing Yougouyoupin)
3. Online platform
   • Platforms that provide online trading, payment and delivery services for B2C and C2C players (for example, Tmall, JD.com, Taobao)
4. Payment
   • Online payment (for example, Alipay, Tenpay, China UnionPay)
5. Delivery
   • Mainly national players (for example, Shunfeng ZJS, EMS, FedEx)
6. Customer

Third party service providers and distributors

Unless a company has significant capacity and expertise in dealing with Chinese Ecommerce platforms, consumers, regulators, etc., companies will need to go through a third-party service provider, commonly known in China as a "TP", to get setup on a Chinese Ecommerce platform, handle marketing, fulfillment, customs clearance, customer service and other aspects of Ecommerce in China.

Choosing a TP carefully and making the required investments are critical to success in the Chinese Ecommerce market. TPs vary significantly in terms of the types of services they provide - although they all can setup a company on an ecommerce platform - and the prices they charge for their services. Some TPs work exclusively with one platform; JD.com and T-Mall can both provide a list of TPs that work exclusively with their platform.

Most Canadian agri-food SMEs either work through a distributor or a TP who helps them navigate the various online platforms. A company may however want to consider a TP that can work with multiple platforms as part of a strategy for future expansion. One can choose to work with a local TP or a Canadian/US-based TP that can more easily help bridge the cultural gap but it will likely be more expensive. Depending on a company's marketing strategy, TPs with a strong roster of famous, but expensive key opinion leaders (KOLs), may be preferable. A company planning to enter the Chinese market via Ecommerce should reach out to several TPs to get a sense of the available services, pricing, and range of opinions on the best marketing strategy.

Building relationships is paramount in identifying and vetting distributors in the Chinese market and to help mitigate risks before engaging in any business venture. This is best accomplished through visiting China and its myriad of trade shows. The Canadian Trade Commissioner Service (TCS) across China, and its ten satellite trade offices, can also be called upon to provide basic due diligence into distributors' backgrounds and reputations. The TCS can also help facilitate more in-depth due diligence by providing a list of in-market service providers who can provide additional services such as credit checks and detailed company reports.

Cross border e-commerce sales (CBEC)

Cross border e-commerce sales (CBEC) is a special government program that governs direct Chinese domestic consumer purchases of specific imported consumer-oriented products. CBEC waives import tariffs and streamlines the customs clearance process for these products meant to be sold directly to consumers.

Unlike traditionally imported products that go through Chinese customs, brought in bulk containers, and then distributed to retailers, products imported into China through CBEC must be transported through specially designed bonded warehouse zones, and the transaction that is, payment and logistics information) must be able to be checked by customs authorities. Products can be imported into one of 37 approved CBEC bonded warehouse zones across China, usually located near airports or coastal ports of entry in first and second tier cities or shipped from an overseas distribution centre linked to Chinese customs authorities. Only products on the government's "positive list" (PDF, in Chinese only) can be sold through CBEC, including packaged foods such as UHT milk, infant formula and wine.

CBEC is a popular distribution channel for introducing imported packaged food products to China. In addition to regular Ecommerce sales of imported products, Ecommerce platforms, such as Tmall Global and JD.com Worldwide, have designated websites for CBEC. CBEC platforms allow international companies without Chinese business licenses, such as small or niche companies, to initially tap into China. CBEC can be favorable for testing the market before setting up in a broader business model in China or preparing to enter the market through grocery retailers as it can requires less startup costs than going through a traditional retail channel, and lower risk to entering the market (Canadian Trade Commissioner Services, 2021).

CBEC platforms import products through two methods: to consumers directly from the exporting countries ("Business to Consumer" (B2C)), or indirectly to consumers after being stored in Chinese bonded warehouses ("Business to Business to Consumer" (B2B2C)).

Under B2C, products are ordered online by a consumer in China, and then fulfilled and shipped directly from an overseas warehouse. This warehouse is controlled or facilitated by the CBEC platform in the foreign country. The products are sent immediately to the consumer through parcel post.

Under B2B2C, products are first imported in bulk by CBEC platforms and stored in bonded warehouses. Customers order online, and products are shipped from the Chinese bonded warehouse to the consumer. B2B2C is larger volume, and more profitable for platforms.

Most CBEC platforms are now combining the advantages of the direct to consumer and warehouse modes. They do this by first selling directly to consumers from the exporting country, which lets the company test consumer interest without purchasing in large volumes. When that product sells well, platforms can then import larger volumes into the bonded warehouses in China to capture more sales and greater profits.

CBEC buyers are typically looking for authentic imported products that have not been reformulated or repackaged for sale in the Chinese market. CBEC is a process that can be better regulated than the popular and informal Daigou shopping method of acquiring foreign goods through purchasing agents who purchase products internationally and either mail them or return to China with the products in their baggage to avoid customs duties.

The government sets a ceiling on orders to prevent companies or individuals from taking advantage of CBEC's tax policies. Single orders must be under 5,000 RMB (~Can$1,000) and the total annual order per person cannot exceed 26,000 RMB (~Can$5,000). Health, nutritional, and beauty products, baby formula, baby food, pet food, and snacks are the most popular CBEC products. CBEC platforms share sales data in real time with the General Administration of Customs of China (GACC) to ensure consumers do not pass the sales limit.

Foreign Ecommerce sales in China have more than quadrupled since 2016, rising to over US$100 billion in 2020, growing twice as quickly as domestic ecommerce sales. ForeignEcommerce is defined as ecommerce purchases made on foreign websites or websites created specifically for cross-border transactions. Domestic Ecommerce sales, defined as purchases made on domestic retail websites, continue to dominate, reaching US$746.2 billion in 2020. Foreign Ecommerce is forecast to continue outpacing domestic Ecommerce as it closes the gap between foreign based and domestic based purchases.

Device distribution

Increasing internet penetration in rural areas and nearly 100% ownership of mobile and smartphones in China is driving mobile Ecommerce (Mcommerce) sales growth in China. Since 5G launched commercially in 2019, Chinese mobile operators and technology companies have all contributed to advancing digital infrastructure development and improved network bandwidth and speed in rural areas. Rural internet users reached 285 million in 2020, representing a dramatic increase according to the Chinese government. As of 2020, 65% of the population (861 million users) in China use the internet. The ratio of mobile connectivity to overall connectivity reached 96.8% in 2020, and 91% of the population is expected to use the internet in China by 2032, representing a user base of over 1.2 billion.

Before the pandemic, Mcommerce already had high penetration in ecommerce but in 2020, Mcommerce soared as consumers stayed at home amid the pandemic, spending more time on their digital devices to engage with the outside world through social media and messaging, entertain themselves, and shop. In 2020, Mcommerce grew fastest, almost quadrupling from 2016, and is forecast to continue leading growth by almost doubling in size by 2025. Social media apps are the main drivers behind the boom in Mcommerce. WeChat, the most widely used social app in China, and most other major social apps in China, includes all digital social aspects, including private and group chats, posting feeds, making calls and transferring money. For example, international brands like Nike, Burberry and Cartier sell directly to consumers through WeChat. Cooking and food Apps (e.g. Xiachufang, a platform to share recipes and selling cooking ingredients) and gastronomy Wechat public accounts are niche marketing channels for agri-food brands. Weibo, Douyin (Chinese version Tiktok), Kuaishou, Xiaohongshu (or Little Red Book), are other examples of emerging social media platforms / APPs with significant users base. They serve as an important part to influence consumer's shopping behavior and/or generate sales for brands and suppliers with the provided e-commerce function.

Live streaming is another key function of WeChat and most other social apps in China. Live streaming Ecommerce has witnessed explosive growth in China as consumers were forced to stay at home because of the pandemic. Ecommerce platforms like Alibaba's Taobao, Kuaishou and Pinduoduo have reported an explosion in live streaming activity. Live streaming is expected to continue to develop and serve as an important tool for brand owners and retailers looking to interact with consumers, demonstrate products and drive sales, especially in lower-tier cities, where branded physical stores have not yet been opened. Live streaming is also a way to build brand awareness and consumer loyalty. For example, During the pandemic, provincial government officials hosted live streaming sessions to promote local products and help farmers adversely affected during the pandemic. As well, some luxury brand owners are using live streaming. For example, Louis Vuitton hosted its first live streaming event on Xiaohongshu in March 2020.

Conclusion

The pandemic has had a profound impact on the eating habits of Chinese consumers. Chinese consumers are paying more and more attention to the safety and quality of food products and cooking at home more often. Even as China has already emerged from the pandemic much faster than many other markets, this shift in purchasing online is expected to have a lasting effect, as many consumers have become familiar with and are expected to continue buying food and drink via Ecommerce.

For Canadian companies interested in selling products in China through Ecommerce, China's surging use of Ecommerce provides an excellent opportunity to test their product in China and explore China's booming cross-border Ecommerce sales of authentic products with strong reputations for safety and quality. According to a market survey by China Skinny, Canadian brands have a natural, healthy and high quality reputation in China. In addition to providing a relatively straight forward path to gain entry into established and affluent parts of the Chinese market, Ecommerce also provides access to inner provinces, second, and third tier cities, which have been underserved by store-based retailers and that are considered high growth areas for Ecommerce in China. However, similar to traditional sales channels, Canadian companies should invest a great amount of time, efforts, and funding to make their products recognizable and noticeable among Chinese consumers. Branding and marketing are keys to success in China's Ecommerce market.

For more information

The Canadian Trade Commissioner Service:

International Trade Commissioners can provide Canadian industry with on-the-ground expertise regarding market potential, current conditions and local business contacts, and are an excellent point of contact for export advice.

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Resources

• Euromonitor International:
  • Country report, February 2021. Hypermarkets in China
  • Country report, 2021. Digital landscape in China
  • Country report, February 2021. Food and Drink E-Commerce in China
  • Country report, February 2021. Mobile ecommerce in China
  • Country report, February 2021. Packaged food in China
  • Country report, February 2021. Supermarkets in China
  • Country report, December 2020. Retailing in China
• Canadian Trade Commissioner's Service: An Introduction to Ecommerce in China 2021
• United States Department of Agriculture (USDA) GAIN: Using the Crossborder Ecommerce Channel to Increase US Food Imports to China – November 2019
• Australian government: Ecommerce in China
• Dezan Shira & Associates: China Briefing – China's Census 2021: 5 Takeaways for Foreign Investors – May 2021
• Global Trade Tracker, 2021

Sector Trend Analysis – E-commerce Trends in China
Global Analysis Report

Prepared by: Kris Clipsham, Market Analyst

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