China’s E-Tail Revolution

SHANGHAI – When you think about centers of technological innovation, Silicon Valley, Seattle, and Seoul are probably the first places that come to mind. After all, they are the homes of Amazon, Apple, Facebook, Google, Intel, Microsoft, and Samsung – companies whose innovations transform the way other sectors, from financial services to telecoms and media, do business.

Now, however, the rise of “e-tail” (consumer-facing e-commerce) in China is enabling Hangzhou – the base of Alibaba, China’s largest online retailer – to join their ranks. Indeed, on April 29, Alibaba signaled its ambitions by buying an 18% stake in Sina Weibo, China’s version of Twitter. And, as with technology hubs elsewhere, innovations born in Hangzhou are determining the development path of related industries.

China’s e-tail market is the world’s second largest (after that of the United States), with an estimated $210 billion in revenue last year. Since 2003, the market has posted a compound annual growth rate of over 110%. By 2020, China’s e-tail market could be as large as today’s markets in the US, Japan, the United Kingdom, Germany, and France combined.

Despite a broadband penetration rate of only 30%, e-tail commanded 5-6% of total retail sales in China in 2012, on par with the US. And the sector is already profitable: Chinese e-tailers are logging margins of 8-10% of earnings before interest, taxes, and amortization, which is slightly larger than the average margin for physical retailers.