Exploring the untapped potential of China (Part 1)

There has been a lot of discussion about the untapped potential of China as a retail environment.

Just last month, China overtook the United States as the world’s largest economy, according to the International Monetary Fund and has a population that’s four times bigger (1.357 billion vs. 316 million). Whilst the country’s love affair with big luxury goods – thanks to the rising number of high net worth individuals – is well documented, the growing middle-classes also have strong spending power.

The Economist Intelligence Unit expects China’s retail market to grow to $8 trillion by 2022, double what the U.S. market is forecasted to reach over the same period. With this writing on the wall, the West’s largest retailers have been testing China’s retail waters. However, many have tried and failed to leverage the disposable Chinese Renminbi, whether because of a lack of understanding of the cultural differences or the preferred transaction processes. Here we look at some of the largest barriers to entry, but also outline the huge potential rewards to international retailers.

Three key barriers to entry to be mindful of:

  • Cultural issues and the need to switch to Baidu

Companies such as Home Depot and Best Buy have famously tried and failed to undertake an on-the-ground strategy to exploit the lucrative Chinese market, despite presumably armies of consultants and MBAs guiding their footsteps into China. This has led to international retailers now preferring to test the waters by making their first step a virtual one.

However, one of the barriers to entry for retailers wanting to enter the Chinese market has been the difficulty of interacting with the country’s largest search engine, Baidu.com which has an 83% share of China’s search market. This is mainly caused by the company’s reluctance to have an international sales team retailers can get in contact with.

  • Having the ability to facilitate orders

Whilst China’s sprawling metropolitan hubs have increasingly good delivery infrastructure, the country’s full e-commerce potential is currently held back by the unpredictable nature of the delivery infrastructure outside of the main metropolitan hubs, inhibiting the efficiency and effectiveness of the last mile of online retail product delivery.

However, it is just a matter of time before these issues will be overcome. E-commerce has the ability to leapfrog traditional bricks and mortar retailing in the country in the next few years, with the expansion of national chains of physical retail stores being outstripped by the growth of the digital economy.

  • The incompatibilities of payment systems

One of the chief causes for shopping cart abandonment is the lack of payment options. Our own recent research showed that 92 percent of consumers dropped off at the payment page when a preferred payment mechanism wasn’t provided. By facilitating and accepting international payments in multiple methods, online retailers can open the door to more international business.