Alibaba Group’s massive IPO has underlined that the e-commerce trade in China is booming. Significantly for packaged food manufacturers, online retailers offer a way to circumvent some of the challenges of distribution in this massive market, enabling them to reach out directly to China’s population base. However, the soaring popularity of such enterprises also means competition is intense. Food makers must battle to stand out in the crowded online marketplace. Katy Askew reports.
Chinese e-commerce giant Alibaba Group has completed the world’s largest ever initial public offering. Having already broken the record for the largest ever US-listed IPO on Friday (19 September), the company revealed yesterday that its underwriters had exercised the option to purchase additional shares at the listing price of US$68, boosting the total amount raised from $21.8bn to $25bn.
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The number of shares sold in the offering totalled 368m, or 14.9% of the company. Founder Jack Ma, vice chairman Joseph Tsai and Yahoo hold the remainder of share capital.
Shares began trading on the New York stock exchange on Friday, when shares opened up more than 35% above the IPO price. Shares dipped more than 4% today as the initial excitement waned, dropping back to below the $90 mark.
The huge investor appetite for Alibaba underscores the potential offered by China’s e-commerce sector.
According to the company’s prospectus, Alibaba’s sites account for around 80% of the country’s e-tail sector. For the year to end-June 2013 Alibaba reported 279m active buyers on an annualised basis, up from 185m in the prior year. With an average of 52 transactions each per year, these buyers made 14.5bn orders per year to the value of $296bn.
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By GlobalDataThe potential size of this market and its ability to reach Chinese consumers is hard to overstate.
Alibaba – and the e-commerce sector as a whole – expects to benefit from growing spending power among Chinese consumers.
As consumption grows, online shopping penetration is also likely to rise. Researchers CNNIC report that China has the largest internet population with 618m users at end-2013. However, they add, the country only has 302m online shoppers.
“We believe that the number of online shoppers will increase, driven by continued growth in the number of internet users as well as by the higher percentage of internet users making purchases online,” Alibaba predicts.
Alibaba is also working to capitalise on growing mobile usage in the country, where more than 500m users connect to the internet through mobile devices. “Increased usage of mobile devices will make access to the internet even more convenient, drive higher online shopper engagement and enable new applications,” the company says.
Figures supplied by Alibaba highlight the rapidly growing importance of mobile devices to the group’s model. In the three months ended 30 June, the company revealed that purchases made via mobiles accounted for 1.5% of gross merchandise volume, up from 0.58% in the comparable year-ago period.
Alibaba operates a number of divisions including: Taobao Marketplace, China’s largest online shopping destination which is C2C and B2C focused and can be accessed by international branded manufacturers as well as Chinese sellers; Tmall, China’s largest third-party platform for brands and retailers; and Alibaba.com, China’s largest online global wholesale marketplace and an important stream for global wholesalers and manufacturers to reach Chinese customers.
Through these platforms, Alibaba affords international CPG firms the opportunity to reach out directly to Chinese consumers. For example, in Tmall brands can open their own “store fronts” – virtual retail outlets where they can directly pedal their wares.
While Alibaba is the largest online retailer in China, a number of other players also compete in the space, such as Walmart-owned Yihaodian, JD.com and SF Express-owned Shunfeng First Choice. All offer a wide array of products, including food items.
All this bodes well for the packaged food makers who are able to leverage China’s evolving shopping habits.
Indeed, Euromonitor International research points to a significant increase in online food sales over the last five years. According to the research firm, online food sales in the market rose to $6.77bn in 2013, up from $67.7m in 2008. Euromonitor expects growth to continue, with a forecast CAGR of 37.5% through to 2018.
Growth is being driven by the wider expansion of the e-commerce sector. However, there are some specific trends in Chinese food consumption that also underpin expansion.
ATKearny partner Torsten Stocker tells just-food that China’s e-commerce giants have responded to growing concerns over food safety by using the online channel to shorten the supply chain and increase traceability.
“While food hasn’t been at the forefront of what consumers are buying online and had been largely limited to packaged food, this has changed in the past couple of years, in part driven by anxiety about food quality,” Stocker suggests. “Several of the large e-commerce players source directly from farmers, cutting out the middleman and making items more traceable.”
E-commerce also opens up consumers in smaller cities and rural areas. Packaged food manufacturers can use the channel as a means to gain access to areas where they might otherwise struggle to gain distribution due to the fragmented and under-developed bricks-and-motar channel.
China’s physical retail market is characterised by few nationwide retailers and a patchy back-end infrastructure, problems that intensify outside the country’s more developed (but slower growth) tier one and two cities. This can be contrasted against the rapid development of China’s nationwide, regional and local delivery services.
According to Alibaba, this is a major factor driving Chinese consumers online: “Challenges in China’s retail infrastructure, which we believe are particularly acute outside of tier one and two cities, are causing consumers to leapfrog the offline retail market in favour of online and mobile commerce.”
However, while online sales are a significant growth opportunity for packaged food firms, there are also challenges and limitations to expansion.
E-commerce accounts for just 8% of China’s total consumption. Penetration of food sales is lower still with the vast majority of food transactions taking place in physical shops. In order for food multinationals to build critical mass in China, a physical presence is a must.
While delivery services have come on leaps and bounds, arguably developing at a rate that outpaces the infrastructure supporting physical retailers, these only support products with a long shelf line. Manufacturers distributing short life products will still require a partner that boasts cold chain distribution.
Added to this can be the growing competition among food manufacturers vying for a slice of the online pie.
As the growth potential offered by e-commerce attracts more CPG companies, it will become increasingly difficult to get your brand noticed among all the other firms clamouring for attention.
Standing out and growing consumer awareness will require a good amount of investment in some good old fashioned marketing and brand building.
