China – online overtures

China’s web portals and search engines are driving sales for international cosmetic brands. Mark Godfrey reports from Beijing

With some researchers (most recently Credit Suisse’s China analysts) predicting Chinese e-commerce revenues will grow 100% a year to 2015 it’s not surprising that international brands are scrambling to understand and tap the dynamics of the country’s web portals...

China’s web portals and search engines are driving sales for international cosmetic brands. Mark Godfrey reports from Beijing

With some researchers (most recently Credit Suisse’s China analysts) predicting Chinese e-commerce revenues will grow 100% a year to 2015 it’s not surprising that international brands are scrambling to understand and tap the dynamics of the country’s web portals. Top of the local business-to-consumer pile Taobao has evolved from an eBay knock off to a massively popular resource for wholesalers and B2C operators.

Some 450 million Chinese use B2C portals, but Taobao, a subsidiary of Alibaba, has sidelined competition such as Japan’s Rakuten, which has a China-based joint venture with Baidu, China’s leading search engine. Taobao has a 70% share of China’s B2C market according to research house Analysys International, a Beijing-based research agency.

Held privately by Jack Ma, the same mercurial internet entrepreneur who started product sourcing platform Alibaba, one wing of the group Taobao Market has been very successful for small C2C businesses, while the B2C platform, Taobao Mall sells goods at fixed prices.

While often worried by the prevalence of counterfeit products on some of China’s e-commerce sites, international personal care product brands are finding that thriving local portals like Taobao are a viable sales driver. Justine Chao, a spokesperson for Taobao, says “more and more multinational brands” are using the portal, among them leading cosmetics labels.

One is China Unilever. Some of its brands are sold on Taobao and other online stores explains spokeswoman Helen Zhu: “Online sales are growing very fast in China and we will follow where our customers are and fulfill their needs.”

Analysys valued Chinese B2C

e-commerce in 2010 at US$15bn across all sectors but predicts that figure to rise to $100bn in 2013. Total online transactions on Taobao Mall exceeded Chinese Yuan Renminbi CNY30bn (about $4.6bn) in 2010, with second and third placed 360buy and Amazon.cn at CNY10.2bn ($1.5bn) and CNY3.2bn ($492m) respectively.

Chinese luxury market website Jing Daily sees 2010 as a pivotal year for online cosmetics sales in China, arguing that “higher-end online shopping has made its way firmly into the mainstream”. Estée Lauder, a favourite cyber-purchase among mainland tourists in Hong Kong (no sales tax), topped Taobao’s sales rankings in 2010, followed by Mary Kay and Clinique.

L’Oréal took fourth spot, followed by Avène and Lancôme. Among the direct selling giants Avon was eighth while Asian brand Shiseido came in just before tenth placed The Body Shop. South Korea’s Missha, popular in China for its blemish balm BB Cream line, topped the best selling make-up brand list.

Cosmetics and toiletries retailers have also got in on the act, with Hong Kong-owned chain Watson’s launching e-commerce via ule.com.cn, a local retail platform. “It is our first shot to be a co-op e-retailer,” explains April Feng, spokesperson for Watson’s mainland China operations. “For sure, our further step will depend on the development of Ule Watson’s page but we have made e-commerce a strategic focus for us”.

Indeed, Credit Suisse says booming online sales are helped by China’s robust retail figures as retailers benefit from rising Chinese wages and consumer spending, both trends being encouraged by government in the latest Five Year Plan as a means of shifting China away from its heavy reliance on exports to a GDP more driven by domestic consumption.

Credit Suisse predicts GDP growth of 9% a year from 2011 through 2015 will lift China wages by 19% annually. Ultimately wages will equal 62% of China’s gross domestic product by 2015 from 50.5% last year. Private consumption may climb to 41.7% of GDP in 2015 from 35.6% last year, according to Credit Suisse.

All this aside, brands are still worried by the prevalence of fakes and counterfeit products on sites such as Taobao. While some fake products are to be found on Taobao, “it is not a fatal problem” says Will Tao, analyst at iResearch in Beijing. Taobao, he says, has been taking moves to deal with the problem. Walmart-invested 360.com, by contrast, cooperates with official producers, “thus they don’t have fake products”.

Taobao’s most effective way of regulating against violation of intellectual property on its C2C site is by deducting points from an offending store. “The store’s credit point is deducted 4-48 points based on the amount of money... because of the deduction, the store would be listed in a lower rank among Taobao search results because the default rank is based on credit points of each store,” explains Tao. To join Taobao Mall meanwhile each store has to be vetted by Taobao offline and must deposit CNY10,000 ($1,539) prior to joining. “If a dispute happens, Taobao deducts payments to the claimer from the deposit,” notes Tao.

Another piece in the jigsaw – search engine Baidu – has withdrawn from online retailing but has done well from advertising by brands. Big foreign brands use Baidu regularly, says Tao, and Baidu and Google “don’t have much difference” in their operating models. “Brands can’t pay for special places in search results. Companies only purchase adverts from Baidu and these ads are marked as ‘ads’,” he says.

The internet remains a powerful tool for driving sales in online or conventional retail stores. Chou also points to a popular local practice among leading portals such as Sina and Sohu of selling press releases and advertorial to brands, which is then published as news on the portals.

Stephen Chou at China Online Marketing, which advises brands on internet marketing, suggests a pay per click marketing campaign on Baidu.com remains the most efficient way of creating buzz around a brand, as well as google.com.hk – the Hong Kong-based arm of the search engine, which has no mainland China presence.

While fewer than 10% of Chinese consumers do their luxury goods shopping online, some companies have launched websites for shoppers who use the internet to research luxury products before buying – a group of shoppers that has grown 30% since 2006, according to research by Bain.

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