A series of MNCs have, in recent weeks, unveiled deals with Taobao, the nation’s leading online auction site owned by Alibaba, to operate e-commerce sites. Nokia recently agreed a deal to open an online shop on Taobao, following a similar arrangement by Uniqlo in March. McDonald’s has even launched an online shop on the site, promoting its Super Value Meal and selling mobile phones, digital cameras and MP3 players, along with gift vouchers. The goal is to penetrate new parts of China without having to invest in new stores or new distribution networks.
According to Robert Huo, China sales director at Taobao.com, the target audience for these stores is 24- to 45-year-old netizens with high disposable income and high consuming power. Taobao will support online shops, including design and technical services, in return for between two and 10 per cent of their profits.
There are already 3,000 online stores on Taobao’s business-to-consumer platform, with FMCG, clothing, digital products and cosmetics the top four categories. Dell, Lenovo, Hewlett-Packard, Yili, Mengniu and Midea are already on there, while Procter & Gamble is reportedly planning to open an online store.
China’s rapidly growing internet population and e-commerce market are the motivations for adopting this strategy. Based on data from iResearch, online shopping was worth Rmb 46.7 billion (US$6.8 billion) in the first quarter, a 96.7 per cent increase on Q1 2008. Taobao reputedly accounts for about 90 per cent of all online sales, making it the obvious option for brands selling online. For Alibaba, attracting these brands fits in with its business strategy. Last year it merged its Alimama ad sales platform with Taobao; as a result it can offer advertisers a service that begins with an online ad and feeds through to an online store and payment system.
The main benefit for brands of using Taobao is a trusted selling environment with high traffic. “Taobao is a better choice [than building your own site] as brands don’t need to worry about the traffic. Building and promoting your own e-commerce site can be very expensive,” says Roy Kong, media director at Starcom Worldwide.
There is also the access to the Alipay system of payment, a Chinese version of PayPal. In the past, one of the major hurdles to e-commerce was the absence of payment options, in particular the low penetration of credit cards. That is now changing, says Steven Chang, CEO of Optimedia China.
“A few years back, the problem was security and the limitation of e-payment systems. Now it’s changing,” he says. “As long as credit cards are not the only payment mechanism, then it is viable to do e-commerce in China.”
However, a Taobao deal alone will not be enough for brands to crack lower-tier markets. Liu Ning, principal analyst at BDA China, argues that offline channels will remain crucial, estimating that online will make up only two per cent of Nokia’s total shipment volume in China.
What’s more, says Ben Buxton, partner for invention at Mindshare China, limitations to using Taobao to drive expansion in lower-tier markets include “lack of transparency on sales attribution, no third-party tracking and a lack of control over the environment”.
However, these deals seem like an indication of things to come. Buxton adds: “I would expect that most of the brands see their current use of Taobao as a stepping stone to running their own online stores, as soon as this becomes viable.”
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