2018 China Cross-border E-commerce Outlook

Rise of 'Costco Model' in China's cross-border e-commerce industry in case of Kaola; Consumption upgrade is an irresistible trend

by AzoyaLab

crowd-2612037_640.jpg

Introduction: Consumption upgrade is an irresistible trend

China’s cross-border e-commerce market has been through 3 years of rapid growth after the ‘take off’ in 2014. With growing disposable income, Chinese consumers have increased the budget for purchasing merchandises imported from Europe and Pan Pacific countries, and the demand continues to grow steadily. Average consumer in China gradually accepted ‘Haitao’[1] model, and have growing faith in international retailers, which is supported by the surging transaction volume of cross-border e-commerce import.

QQ20180110-153639s@2x-2.png

The market share of traditional personal purchasing agents (daigou) was squeezed by the cross-border retailers due to the facts that retailers can provide better shopping experience, more competitive prices, authentic product sources and wide range of merchandises. Many retailers and D2C brands are now actively engaged in selling through Chinese online marketplaces or through their own e-commerce websites.

Chinese policy makers are more confident toward cross-border e-commerce industry, although the April 8th ‘New Deal’ in 2016 had exerted a great impact to the industry, major e-commerce marketplace operators and retailers are still able to rip open the door in line with current regulatory policy of regarding cross-border imported merchandises as 'personal belongings', which saves the hassles of registration and import filing. The cross-border model allows faster import of high-quality merchandises through e-commerce, and more brands are now presented to Chinese consumers, which meets the macro policy on supply-side reform.

Status quo of ‘Haitao’ shoppers

On one hand, the cross-border e-commerce transaction is estimated to have double digit growth in 2018. Most purchased categories will remain to be beauty, personal care, nutrition and baby products, which accounts over 70% of sales both in Tmall Global and Azoya’s retail networks, as monitored by Azoya.

On the other hand, consumer demand in China are also diversifying. As the demand for high-frequency, fast consuming merchandises being fulfilled by e-commerce giants in China, consumers start to search for niche brands from current categories, and also new categories such as professional sports, jewelry, high-end fashion, etc., which may have good potential in 2018. We forecast that these emerging demands will continued to be fulfilled by cross-border e-commerce.

Our Customers Come First 2018 whitepaper concludes that the new trends would be:

  • More customers from lower tier cities will adopt cross-border shopping.

  • Individual shoppers will shift to become family purchaser.

  • Cross-border shoppers will become more mobile.

  • Demands for CBEC imported products will become more diversified.

  • Customers will tend to shop more per order.

  • Customers will demand better logistics and shopping experience.

Cross-border E-commerce Industry Landscape

QQ20180110-153639@2x-2.png

Industry Trends: The rise of ‘Costco model’

We have discovered a growing popularity of the business model of Costco in China’s cross-border e-commerce industry. The Costco model features subscription program, curated SKUs, loss leaders strategy and private labeling. These features allow Costco to maintain strong sales, excellent turnover rate while maintaining profitable. NetEase Kaola, one of the top 3 cross-border multi-brand retailers, is attempting to replicate the business model.

Kaola’s direct sales business is known in the industry for its ‘heavy’ model – who purchase stock directly from manufacturers, and maintain competitive pricing in the industry. Kaola’s 2017 Q3 report stated that the company’s operating margin is around 11.9%, and had stayed below 15% for 3 consecutive months. Strong balance sheet of NetEase allow Kaola to purchase more inventory from international suppliers, which increase their bargaining power against manufacturers. The strategy to only source selective SKUs from the brands and distributor reduces overall risks and improve turnover rate.

We found similar situation with Tmall Global, whose direct sales storefronts Tmall Global Direct Import source best sellers from brands and retailers. Tmall Global’s direct sales business in  November to December 2017 accounts to roughly 40% of sales in mom & baby, beauty and health care categories, as Azoya’s sources tell. Major direct sales businesses in China could become more selective in choosing partners and merchandises.

For retailers and brands that have entered or are about to enter China, it is important to make a differentiation strategy.



[1] Haitao: A Chinese word to describe the activity of buying from overseas suppliers


How Emerging Brands Succeed In China

Download this case study to learn more the best practices from China e-commerce market!

download now