Standard Life Investments

Published Article

Shop around the clock


 

Worries over a slowdown in China’s economy have also led to concerns over consumption. However, China’s gross savings rate is almost three times that of the US. As a nation, they have more than enough in their ‘rainy day fund’ to allow growth to continue – admittedly at a more conservative rate than in the recent past. As the economy becomes more consumer-led and service driven, we are seeing a divergence as some companies are able to adapt their business models towards the new economic climate more effectively than others. In the third quarter China’s economy expanded at its slowest rate since the global financial crisis to 6.9%. Despite the ongoing concerns, the service sector expanded by 8.4% over the same period and now accounts for over half of GDP according to official statistics.

The recent stock market turmoil has impacted many sectors but in terms of the new economy stocks internet companies have experienced a bout of weakness. However, this is likely to be a short- lived phenomenon in our opinion. Online retail sales are expected to surpass those of the US and Europe combined by 2018 – reaching around US$610 billion*. As consumers become ever more price conscious, particularly those in lower-tier cities, retailers are aware that e-commerce platforms are becoming increasingly valuable, especially those retailers with limited physical stores. Another demographic change is that historically workers in third and fourth tier cities have moved in search of low skilled jobs in the larger cities. Given the growth of online opportunities, some are opting to remain in their hometowns and establish internet business – this could create a significant change in the shape of the workforce over time.

At the other end of the scale, we are seeing the key participants in online retailing adapt their businesses to participate in emerging e-retailing trends. For an effective e-commerce business, scale is important in order to be able to offer the service levels that consumers demand. This has resulted in the growth of platforms such as TMall and JD.com. JD has developed into a fully integrated logistics company with 80% of its orders receiving a same/next day delivery service. Its reputation for reliability, service and the quality of goods on offer has resulted in a period of rapid growth for the company. Furthermore, it has successfully built on its original electronics platform by expanding into higher-margin segments, such as cosmetics.

Shopping habits are also evolving to require an integrated SoLoMo strategy, where social media, location services and mobile marketing are combined. Companies that have strategies combining these key elements are more likely to become leaders in the online shopping revolution, for example the alliances between JD and Tencent or Alibaba and Weibo. This trend is set to grow further as e-retailing via smartphones grows more rapidly than PC (chart 1). While this is beneficial for social media companies, it is also important for internet flash marketing which works considerably better on smartphones compared to PCs. VIPShop is a prime example of a company that uses a SoLoMo strategy to drive flash sales. The nature of its business allows it to have 900 brand partners and dispose of excess inventory at reduced prices without damaging brand value. In fact, during the most recent quarter, 76% of its sales came from mobiles. Furthermore, a recent survey by KPMG highlighted that 45% of respondents purchased most of their luxury goods online, with their average spend up 28% on 2014, a key driver being price/discount strategies.

In conclusion, for businesses that find their niche and deliver on their proposition, the scale of the opportunity is significant. This is irrespective of the highly competitive environment and any slowdown in economic growth.

 

*McKinsey & Company

Magdalene Miller, Manager of China Equity SICAV, Standard Life Investments

First published in Hong Kong Economic Journal, October 2015