Chinese Consumer Trust Powering Hidden Champions in B2C Sector

BEIJING--(Business Wire)--
Growing trust among Chinese consumers is powering a new generation of online
retailers in the country, with trusted e-commerce websites unlocking consumers'
growing spending power and dominating their niches, according to a recent report
by Z. H. STUDIO.

While it is no secret that China's overall population of internet users is
growing fast - it currently stands at about 420 million - their main online
activities had long been confined to entertainment and gaming.

But in the recent two years, the number of Chinese shoppers willing to buy
products online reached a critical mass, fueling the success of a handful of B2C
websites that have quickly become "hidden champions" in vertical marketplaces.

"E-commerce has lagged behind total internet development in China because of the
make-up of internet users, who are mostly aged under 30," said Peter Lu,
managing partner of China Intelli Consulting. "Now it is the main focus."

Although the total value of goods bought over the internet in China was just 1%
of the total value of goods bought and sold in China in 2009, it is doubling
every year and this rapid growth is predicted to continue for up to five years.

And that's good news for CEOs such as Zhao Cheng of Boheshop.com, which has
carved out a successful niche selling women's cosmetics and healthcare products
over the internet.

Rapid urbanization is creating wealth, but it is also leading Chinese to have
sedentary lives and eat more unhealthy processed food. Some 10 million
city-dwelling Chinese are becoming obese each year, according to surveys cited
by China Economic Review magazine.

As both wallets and waistlines expand, demand for slimming pills and nutritional
supplements as well as anti-aging products is on the rise, buoying Boheshop's
sales.

Founded in 2007 with just 50,000 yuan ($7,300), Boheshop made 600,000 yuan
($90,000) in its first year. It now attracts 100,000 users a month and makes
between 8 and 10 million yuan per month ($1,175,000 - 1,470,000). And with fewer
women than men among Chinese netizens, there is huge scope for further growth.

But while rising internet usage and growing prosperity naturally mean big
opportunities across many sectors, Zhao says gaining netizens' trust is key to
success in what is a highly competitive environment. Typically, Chinese
consumers may be less trusting than their counterparts in western countries due
to the widespread incidence of fake or substandard products.

"You can't exaggerate the importance of trust," said Zhao. "On the internet
trust is important. When dealing with healthcare products trust is even more
important. Trust will decide how far your business can go."

"China is a really low-trust environment," said Ben Cavender, associate
principal with China Market Research Group in Shanghai. "And with e-commerce you
don't really know what you are getting until you have it in your hands."

Zhao has responded by collaborating with big-name product brands - like TRT and
Harbin Pharm - that already have a good reputation, by setting up a call centre
and, in September this year, by launching a network of physical stores where
customers can find out more about the products Boheshop sells.

"These stores are not sales-oriented," said Zhao. "Face-to-face interaction is
very valuable for customer acquisition and it is especially necessary in
healthcare, where people might have a lot of questions. It will be useful in
secondary Chinese cities, where netizens don't yet feel comfortable with buying
online."

Developing offline "touchpoints", like Zhao`s move, is regarded by analysts as
an innovative tool unique to China that serves to build trust with consumers.

The property website Taofang.com has gone a step further. Launched in April
2010, Taofang.com aims to create a trusted network of buyers and property agents
in a country currently undergoing its first major modern property boom.

Mature property markets such as the US already have well-established mechanisms
to protect the rights of buyers, sellers and tenants. But in China, the
secondary property market is relatively new, the rules and regulations
surrounding it may not yet be widely-known and, according to Taofang.com's CEO
Wang Huiwen, there is a lack of publicly-available information about property
deals. All this leaves consumers more at risk of being ripped off.

"This is exactly where internet can fill the void and play a constructive role,"
said Wang. "Before the Internet age it was hard to make rating information about
property agents available. E-commerce has brought about unprecedented added
value in the property brokerage sector."

Homebuyers in China are now also much more positive about involving the internet
in deals than even relatively recently in 2005, when research Wang commissioned
found an almost complete lack of enthusiasm. In the US, about 37% of property
deals were arranged via the internet in 1999, rising to 90% a decade later in
2009. In China, the percentage of property deals involving the internet is
predicted to jump to 90% by 2020. At that time, a total of about 300 billion
Yuan ($45 billion) in commission fees for agents will be up for grabs.

Amid such frenzied trading, the Taofang-card System allows Chinese property
buyers or tenants to rate the service they have received at the hands of
property agents, some of whom have a reputation for conning customers.

"Through this mechanism, it`s fair to say that those agents who have the
confidence to show the Taofang-card are ready to be subject to monitoring and
criticism," said Wang. "These agents offer a more transparent and trusted
service than those without the Taofang-card. We are in the trust-building
business."

Wang Huiwen himself is no naïve first-timer. A serial entrepreneur born in China
with an electronic engineering degree from Tsinghua University, he launched in
2005 Xiaonei.com, a top brand in China`s SNS sector. Xiaonei.com was acquired by
Oak Pacific Interactive Group and through that merge, it`s now known as
Renren.com.

Because it doesn't physically deliver goods to customers, Taofang.com has been
spared the headache of having to deal with delivery logistics, which have been
behind the failure of some e-commerce companies, according to Wang.

"China still suffers from unsophisticated logistics," echoed Wang Lipeng, vice
president of Zero2IPO, a venture capital research company and broker. "But
should they be spending resources on in-house logistics or use third-party
services and focus on their own area of expertise? It's a real dilemma," he
said.

One company that chose to develop its own logistics service is Redbaby.com.cn,
which was founded in 2004 as a retailer for mother and babycare products and now
says it has the biggest logistics service of any B2C player in China.

Redbaby CEO Xu Peixin says its 3 million members are fashion-conscious,
forward-looking and independent people who care about their lifestyle. "We found
that in an ordinary family, usually women are the decision makers for the
fast-moving consumer goods," said Xu. "Thus, those who purchase the baby powder
tend to be the key decision makers of the family`s purchase of cosmetic
products, bed/curtain products, healthcare goods for the elderly, cakes for
office staff and so on."

Building upon that kind of customer insight, Redbaby has been successful both in
acquiring new customers and selling more products to its existing customer base.
It has now branched out into cosmetics, organic food and other daily necessities
- a total of about 200,000 products.

In the meantime, however, many Chinese B2C companies are still struggling as
they don't know how to attract new customers. Spending huge dollars on marketing
is one thing, but converting the buzz into incremental revenue is another.
According to Wang Lipeng of Zero2IPO, every yuan the websites invest in
marketing their products translates into less than 2 yuan in sales on average at
current stage, a paltry return on investment that is not sustainable in the long
run.

And even for domestic entrepreneurs getting customer insight is no easy. The
task is made more difficult as the demographics of internet users are changing
fast. A few years ago, 30% of netizens had been through higher education - now
that figure has halved to 15%. And China's size and diversity means it is more
like several different countries than just one.

The sheer size of the Chinese market makes it a huge prize that many companies
are vying for - sometimes using shady methods.

"Our biggest challenge is malignant competition," said Boheshop's Zhao. "We
welcome healthy competition but it`s a phenomenon in China and includes some
unfair play. For every single new initiative the next day you can see the same
product news pasted somewhere else immediately, even though the product might
not be available there. Vicious competition creates a lot of pressure for us,
but it also keeps us focused."

Industry experts predict that consolidation may be inevitable. While the
e-commerce ecosystem - ease of payment and logistics and the regulatory
environment - is likely to keep improving fast, a "winners-take-all" phenomenon
will be seen in most of the vertical sectors, which means that a handful of B2C
websites will end up dominating China.

At the current stage, what looks assuring is that Chinese B2C players have no
worry about financing. "In China the capital available is much higher than the
global average. The most attractive thing for VC is the growth rate and
scalability," said Wang Lipeng of Zero2IPO. "If companies are having difficulty
finding VC now it probably means there are different opinions about the
valuation."

Z.H.STUDIO
Ms. Li CHEN, 86-10-58769825
li.chen@zhstudio.net

Copyright Business Wire 2010