Insights

3 Trends Fuelling China’s Trillion-Dollar E-Commerce Market

China’s retail e-commerce market is already pretty big. Here’s how it could get even bigger in the next decade. – Pinduoduo China e-commerce

China’s retail e-commerce market is huge. According to McKinsey estimates made last year, the total amount of online retail transactions made in China in 2019 was larger than the online retail transactions of the next ten largest markets combined.

In 2019, McKinsey estimated that China’s online retail transactions amounted to around US$1.5 trillion, versus US$600 billion in the US and US$115 billion in Japan.

Due to China’s retail e-commerce market size and fast historical growth, many Chinese e-commerce companies such as Alibaba Group Holding Ltd (NYSE: BABA) (SEHK: 9988), Pinduoduo Inc (NASDAQ: PDD), and JD.com Inc (NASDAQ: JD) (SEHK: 9618) have been great investments in the past.

Given the importance of the market, here are some key trends that could continue to fuel retail e-commerce growth in the country for the next decade.

Increasing urbanisation

China has urbanised substantially in the past. China’s urbanisation rate increased from around 46.5% in 2008 to 59.15% in 2018 according to Statista.

The trend is expected to continue as China continues to develop. According to Bain, China’s urbanisation rate could rise to around 70% in 2027.

China’s increase in urbanisation is important because incomes are generally higher in cities than they are in rural areas.

As a result, higher urbanisation rates generally translate into higher incomes. Increases in incomes have translated into higher demand for retail e-commerce in the past and could so in the future.

Rising incomes

Speaking of incomes, China’s average income per capita has increased in the past ten years. It’s expected to continue to increase in the future due to factors such as increased productivity.

If average incomes per capita increases, consumer disposable income could increase and demand for retail e-commerce products could increase too.

New Retail

“New Retail” is an emerging trend where consumers use physical retail stores as regular stores or showrooms, and have the option to order groceries in those physical stores online.

After the order, the goods/groceries are often delivered very quickly. With the coronavirus outbreak, Alibaba’s new retail division, which includes Freshippo and Taoxianda, has benefitted substantially.

Alibaba said in its quarter ended 31 March, 2020 earnings call that:

“In the past quarter both Freshippo and Taoxianda delivered stellar growth of more than 100% year-on-year. Approximately 60% of Freshippo’s GMV came from online orders up by 10 percentage points year-over-year.”

Alibaba believes the strong demand will continue even after the outbreak. The company added:

“As lockdown measures eased in China starting in April demand and the popularity of our grocery business have remained strong.  

We believe the consumer habit of buying fresh food and groceries online will continue after the pandemic and online and offline integration will drive the new retail model to the next stage of development.“

Foolish takeaway

The secular trends of increasing urbanisation, rising incomes, and the rise of new retail will help fuel growth in China’s retail e-commerce market for the next ten years.

How well Alibaba, JD.com, and Pinduoduo position themselves to benefit from those secular trends could be a key factor in how their stocks do over the next decade.

More reading

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Jay Yao doesn’t own shares in any companies mentioned.

The Motley Fool Hong Kong Limited(www.fool.hk) 2020

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