By 2015 or shortly thereafter, China will likely become the largest online retail market in the world, with close to 10 percent of retail sales occurring online, according to a recent report by the Boston Consulting Group (BCG).
　　It already has more online shoppers than any other market, including the U.S. Online retail sales in China will triple to more than $360 billion by 2015, powered both by growing numbers of Internet users and by greater consumer acceptance of e-commerce, the report said.
　　“Companies that want to win in China’s consumer market must understand both the new consumers and their rapidly evolving digital lifestyles. They should have a strong Internet presence and strategy,” the report suggested.
　　 The expanding Internet
　　The report points out that the Internet, once a fascination of the young and wealthy, is fast becoming a mass medium. China will have 700 million Internet users in 2015—nearly 200 million more than today—and twice the online population of Japan and the U.S. combined. In 2011, Chinese consumers spent 1.9 billion hours a day online, an increase of 60 percent from two years earlier.
　　“In just a few years, China has become the largest Internet market in the world. It will shortly be the most significant, too,” said Christoph Nettesheim, a BCG senior partner and coauthor of the report. “Companies with global ambitions need to have an active online presence in China if they expect to succeed.”
　　Average time online per user increased from 2.8 to 3.6 hours per day between 2008 and 2011. Chinese users spend about an hour a day more on the Internet than U.S. users.
　　China’s overall penetration rate will exceed 50 percent by 2015, compared with 38 percent in 2011. The fastest-growing segment will be urban consumers aged 51 and older, a sign that the Internet is spreading through Chinese society. This segment will likely expand by 22 percent annually.
　　According to the report, half of Internet users say that the Internet is their most trusted source of information, followed by television at 30 percent and newspapers at 15 percent. Young professionals and university students lead the pack, with 70 percent and 63 percent, respectively, citing it as their most trustworthy information source.
　　As the Chinese become more comfortable with the Internet, they are becoming more adventurous. For instance, 79 percent of Chinese Internet users send instant messages, compared with just 21 percent of U.S. users. They are also bigger consumers of online music (79 percent versus 61 percent) and e-books (40 percent versus 7 percent). Sina Weibo, a Chinese version of Twitter, has attracted 300 million users in less than three years of operation.
　　“Faster than in any other major economy, the Internet is becoming embedded in Chinese society,” said David C. Michael, a BCG senior partner and coauthor of the report. “The rapid growth represents a once-in-a-lifetime opportu- nity for companies that figure out how to connect with China’s digital generations.”
　　 The growing e-commerce
　　According to the report, in the past two years, more and more Chinese consumers go shopping online. Online buying and selling, including group purchasing, is the second-fastest growing activity next to microblogging.
　　These rapid rises in usage reflect more than just expansion from a small base. Online shopping is now the fourth-most-popular online activity in China, and two of the more popular activities —IM and online games — are declining in usage.
　　Online shopping is booming. Companies cannot have a major presence in China without having an online presence, not only to generate sales but also to engage with customers where they spend so much time. The Internet today in China is similar to television in the 1960s and 1970s in the West, the place where consumers congregate and companies need to locate.
　　China has 193 million online shoppers —more than even the U.S. with 170 million, more than double the number in Japan, and five times that of the U.K. By 2015, China’s e-commerce market will rival that of the U.S. Between 2009 and 2011, the share of Internet users who shop online rose from 28 percent to 36 percent and is likely to reach 47 percent by 2015. E-commerce’s share of total retailing could reach 8 percent by 2015, the report said.
　　Except for teenagers, all segments of Internet users in China spend at least 1.6 hours a week shopping online. University students, young professionals, and young seekers are devoting at least two hours a week to it. University students and young professionals are devoting about 12 percent of their spending to online purchases.
　　Chinese consumers are four times more likely to shop online compared to European shoppers and nearly twice as often as online shoppers in the US and the UK, according to a PwC survey. Around 70% of the survey respondents in mainland China shop online at least once a week, compared with around 40% in the US and UK, and around 20% for the Netherlands, France and Switzerland.
　　One of the findings that stand out in the PwC survey and one heavy with implications for retailers is the self-described sophistication of the online shoppers surveyed. Many of the respondents consider themselves to be highly capable in terms of researching and purchasing via the internet. In fact, 69% of the respondents consider themselves to be either “confident” or“experts” in this regard. In mainland China, the proportion of these “expert” shoppers is highest, at 86%.
　　As “expert” shoppers, mainland Chinese consumers have embraced the online medium far more quickly than shoppers from other countries. Even though online shoppers in mainland China are relative newcomers in terms of the average number of years since their first online purchase, they have the highest level of perceived expertise and shop more frequently than all the other surveyed markets.
　　Chinese online shoppers also had markedly different survey responses than online shoppers in other countries. Chinese multi-channel shoppers in the survey purchase a far higher proportion of their purchases online than respondents from other countries, and do so across all categories. For example, according to the PwC survey, Chinese shoppers purchase about 60-65% of their clothing, footwear, books, music and films online. The comparable figures for the rest of the markets are around 35-45%.
　　Chinese shoppers also lead the way in going direct to brands, with around 60% of online shoppers in mainland China bypassing retailers to buy online directly from the brand. This compares with 36% in the UK and 31% in Germany. Moreover, mobile shopping is significantly more popular in mainland China, as mobile phone usage and network access have outpaced broadband roll-out.
　　Social media also plays a big role in influencing online shopping habits in mainland China. According to the PwC survey results, Chinese online shoppers use social media (90%) far more than those in other countries, meaning that social media will have relatively bigger impact on their purchasing decisions.
　　The BCG research shows that one of the key challenges for companies is to encourage their customers to shop online, because once they make the leap, they quickly become avid Internet shoppers. In focus groups, consumers who had devoted only 5 percent of their spending to the online channel in 2008 said they had increased the share to more than 50 percent by 2011.
　　Even when they are not actually shopping online, many consumers research products online that they eventually buy in physical stores. Twenty-five percent of consumers research online before buying offline—almost as many as the 29 percent who both research and buy online.
　　While the market for the sale of physical goods is expanding rapidly, the sale of digital content is in a slower growth mode. Sales of online videos, music, games, e-books, and other digital content are expected to rise by 14 percent annually between 2011 and 2013, about one- third the rate of online sales. E-books make up slightly less than a third of the digital-content market and are expected to grow slightly faster than the market. Online video, the smallest slice of the market, is the fastest growing, expected to expand 64 percent annually between 2011 and 2013, the BCG report said.
　　E-commerce in China has developed its own personality. While there are analogues to Amazon and eBay in China, the nation is not on a parallel track to the U.S. or anyplace else. According to the BCG report, there are three main types of commercial activity:
　　A galaxy of both consumer-to-consumer and business-to-consumer marketplaces that are frequently compared to eBay and Amazon Marketplace but have their own local flavor.
　　Business-to-consumer vertical sites such as 360buy.com, which started selling electronics but now sells a wide variety of goods. These are similar to Amazon.com and Buy.com.
　　Business-to-consumer brand sites, such as Vancl, that sell merchandise directly to consumers and are analogous to the online stores of consumer brand companies in the West.
　　


　　 Actions for enterprises
　　The BCG report indicates that even if companies never intend to sell online, they must embrace China’s online world. Young professionals, a highly desirable consumer segment, average 4.9 hours a day online. The Internet may be more important to brand building and overall awareness in China than television was in the U.S. during its heyday.
　　To date, the business “story” about the Internet in China has centered on the three giants: Alibaba, Baidu, and Tencent. Their moves still matter because they signal where the market is heading: toward mobile, video, and socialnetworking platforms.
　　But the broader focus in China should be on what all companies are doing to reach and hold on to China’s digital generations. All companies with ambitions in China should have a strong Internet presence and strategy. They need to meet their customers in the places where they spend time, and increasingly that is online. The Internet is not just another channel.
　　According to the BCG report, a few key challenges confront companies as they sell to engage with China’s digital generations.
　　New Business Models. Companies cannot necessarily rely on what has worked in other markets, as the stumbles of many Western companies have amply demonstrated. But they can tap into the current fascination of the Chinese people with the online experience to experiment with new ways to build relationships with Chinese consumers. In particular, the popularity of weibos and online videos presents opportunities to both engage with customers and develop new revenue streams through innovative online business models.
　　Consumer Insight. Companies need to develop a deep understanding of digital consumers in China. The market is moving too swiftly and is sufficiently different from any other market to rely on old or imported segmentation strategies. The payoff for taking the time and spending the resources to understand these consumers on their terms will be real and enduring.
　　“One of the biggest overall conclusions from the survey is that consumers are leading the way in multi-channel shopping, with many retailers lagging behind in terms of meeting their needs,”said Stuart Harker, PwC’s Global Retail and Consumer Goods Advisory Leader. “Today’s global retailers have a huge opportunity to enhance the mechanisms necessary to keep up with shoppers who are demanding more customisation in terms of delivery and returns, product choice, and number of channels from which to choose.”
　　Channel Management. The channel conflicts that companies face in the West are magnified in China because of the resale of their goods on Taobao and other online marketplaces. Companies do not completely control the destiny of their own products. Most companies in China have barely started to explore the potential of the mobile channel. Companies need to try to develop a coherent channel strategy and build the systems to trace sales through multiple channels.
　　“With the survey results showing that consumers, especially in mainland China, are becoming ever more sophisticated and making more of their purchases online, retailers need to consider the future roles of their stores,” said Carrie Yu, PwC’s Retail and Consumer Leader for China and Asia Pacific.
　　“The most likely scenario is that stores will serve two distinct purposes. First, they will act as showrooms, where customers come for inspiration and are able to browse and to physically interact with products. Their second purpose will be to provide a convenient transaction and collection point, where customers come to complete a journey started online,” Mrs. Yu added.
　　Digital Marketing. In the online world, brands are built by well-managed conversations with consumers, rather than through the simple broadcast of messages. Companies need to create an integrated digital-marketing plan that emphasizes online presence and dialogue with consumers. They will have to regularly review the alignment between marketing mix and consumer trends. They must monitor and respond to online conversations about their products and services, engaging and building relationships with consumers. They should also review and select the right professional-services partners that understand and can guide them through these choices.
　　Most companies have not yet shifted their marketing budgets and orientation to the online world. The share of overall ad spending devoted to the online channel is expected to rise from an estimated 13 percent in 2011 to 17 percent in 2015, far less than the 64 percent of media time that users now devote to the Internet, according to Magnaglobal, a forecasting firm.
　　Advertisers still plan to increase television’s share from 48 percent to 52 percent in 2015, even though Internet users spend only 24 percent of their media time watching television. By contrast, in the U.S., where consumers spend less time online, advertisers currently devote about 6 percentage points more of their media spending to the online channel.
　　Digital Transformation. Companies will have to build new capabilities and a new organization and culture in order to manage their online presence and multiple channels.
　　Business Development and Partnership. While they certainly should build their internal capabilities, companies will not be able to do it alone. Sooner or later, they will have to partner with other players to fill in gaps in their capabilities, distribution, or technology. The sooner they start educating themselves on their needs and the field of potential partners, the stronger their negotiating stance will be.
　　“Companies cannot win in China unless they understand and embrace China’s digital generations. They are the future of the largest consumer market in the world,” the report said.