What this year’s 618 shopping craze says about China’s cutthroat e-commerce sector

5 min read
(Image credit: TechNode/Nicole Jao)

This year’s mid-year shopping festival, commonly known as “618” in China, came to a close on Tuesday. Since the launch of the event in 2010, Chinese e-commerce companies have raked in billions of Chinese yuan during the buying frenzy.

For e-commerce players, 618, which ran from June 1 through June 18,  isn’t only about winning Chinese consumers’ hearts and money. Perhaps more importantly, platforms aim to spot the latest trends that could be valuable in molding their strategies in the second half of the year. The high-profile e-commerce event, and others like it, are showdown moments for Chinese companies and those at the helm.

But this year was different: It was the first time the next generation of young leaders shaping China’s largest e-commerce platforms went head-to head-during a major online shopping event. 

JD’s efforts were led by Xu Lei, the rumored creator of the 618 festival who became the new chief executive of JD Retail just months before CEO Richard Liu’s arrest in the US last year. At the same time, 34-year-old Jiang Fan—who, ahead of Jack Ma’s expected departure in September, has headed Alibaba’s Tmall and Taobao since March—led the e-commerce giant in the shopping festival. 

Meanwhile, Huang Zheng, founder and CEO of social e-commerce firm Pinduoduo, became the leader of a publicly listed company last July when Pinduoduo debuted in the US.

Statistics from this year’s 618 shopping festival highlight some changes that might shape future strategies for the industry, with China’s hinterlands driving consumption while e-commerce upstarts accused more establish players of “unfair competition.” 

Emerging growth in lower-tier cities

Consumption in China’s lower-tier regions, including third, fourth, and fifth-tier cities, is quickly catching up with that in Beijing and Shanghai. The trend points to a changing dynamic in the country’s gargantuan e-commerce sector, in which the country’s interior, and particularly the youth that live there, drive consumption.

While these mostly inland provinces are home to more than 600 million mobile internet users, e-commerce penetration is below the national average. E-commerce platforms see these areas as untapped markets as consumers have more access to disposable income and demand for high-quality goods is increasing.

The growing demand from lower-tier cities was evident across platforms during the 18-day event. Alibaba’s gross merchandise volume (GMV) from third- to fifth-tier cities grew by 100% year-on-year during the period. Beitun and Tumxuk, county-level and prefectural-level cities from China’s northwestern Xinjiang autonomous region, topped the of the 10 fastest growing areas during Alibaba’s 618 festival this year. Nonetheless, GMV in cities including Beijing, Shanghai, Guangzhou, and Shenzen was still unmatched by other areas.

Similarly, transaction volume growth was twice as high in lower-tier cities than the overall growth of transaction volumes on JD.com. Meanwhile, sales of 3C products, which include computers, communication devices, and consumer electronics, in lower-tier cities overtook those in their first- and second-tier counterparts. More than 70% of Pinduoduo’s physical goods during 618 were sold in lower-tier regions.

Behind the spike in sales is an expanding e-commerce userbase from lower-tier cities. Alibaba recorded a 100% year-on-year jump in the number of users from lower-tier regions on its platforms during the festival. Furthermore, the e-commerce giant recorded 654 million annual active consumers for the fiscal year ending March 2019, representing an annual increase of 102 million users. More than 70% of these were from lower-tier regions and below, the company has said.

These consumers are also “trading up,” showing greater interest in luxury brands and shopping experiences. According to Tmall, half of the newly launched products on the platform during the event were purchased by customers outside first- and second-tier cities.

“One of the interesting trends we’ve seen is premiumization–Chinese consumers’ preference for premium products, Carol Fung, president of JD’s fast-moving consumer goods unit, told TechNode. “This is particularly true in the lower-tier cities, where Chinese consumers are trading up for higher quality and valued goods.”

As a result, e-commerce platforms are adjusting their strategies. Pinduoduo has launched a joint “RMB 10 billion” subsidy plan with partners that include premium brands like Dyson, Boss, Apple, and Sony, shifting focus to where budget or even counterfeit commodities once prevailed.

Meanwhile, JD-Daojia, the on-demand delivery arm of JD, has brought its one-hour delivery system to more than 50 lower-tier since the second half of last year, bringing the total number of cities that offers this service to 91 during the 618 festival.

Interest in branded products is especially strong among younger generations from lower-tier cities, who have gained a newly coined moniker: “small-town youth.” The term refers to young residents living in China’s third-tier and lower cities, or prefectural and county-level urban centers, who benefit from China’s urbanization process. They are quickly adapting to premium urban lifestyles to fuel China’s next stage of consumption growth.

Sales of Tmall’s Luxury Pavilion, Alibaba Group’s dedicated site for high-end brands, more than doubled from last year, boosted by customers in emerging cities and shoppers born after 1995, according to Alibaba. Nearly 80% of Pinduoduo’s sales during the 618 campaign came from users born in the 1980s and 1990s.

“We believe this group of customers will continue to grow into a strong and sustainable force for brands who are looking at further developing the Chinese market,” said Jiang Fan, president of Taobao and Tmall, in an emailed statement.

“Forced exclusivity” practice persists

The fight for China’s upwardly mobile online population reached a fever pitch during 618. On June 17, home electronics manufacturer Galanz accused Tmall, Alibaba’s online marketplace, of hiding its products—200,000 home appliances—from search results, which Galanz claimed began on Monday afternoon.

Galanz said in a statement on Wednesday that Tmall requested the company to remove its listings from Pinduoduo in May, but it didn’t comply. During the same month, Galanz signed a long-term partnership with Alibaba rival Pinduoduo. Galanz said it was blocked from Tmall’s 520 shopping promotions in May soon after denying the company’s request.

The “forced exclusivity” tactic, also known as the “choose one of two” rule in China, is an unspoken edict that pressures merchants to choose a single platform on which to sell their products. 

In e-commerce, the practice dates back to 2012 when Alibaba registered trademarks for its “Double 11” shopping event. JD and other e-commerce companies also started launching sales promotions during the Alibaba shopping event. The resulting fallout left merchants in the middle of a battle between platforms, in which they were asked to “take sides,” and forced to sign exclusive partnerships during the shopping craze.

JD and Alibaba have quarreled over unfair competitive practices several times, but the competition in China’s e-commerce space worsened when Pinduoduo went public last year.

Pinduoduo’s Huang previously condemned the monopolistic practice, saying that the company’s strategy has never been to “disrupt a monopoly in order to create a new one.” Over the 618 shopping festival, Victor Tseng, vice president of International Corporate Affairs at Pinduoduo, said in a press release that the company had a successful 618 campaign, despite “unfair competition and circumstances.”

According to Tseng, these arrangements “ultimately hurt merchants, brands, and consumers and should be put to an end.” Many of those who participate in exclusive partnerships are young, fast-growing companies.

China passed a new e-commerce law last August, which officially came into effect this January, to prohibit e-commerce platforms from engaging in monopolistic practices to undermine competitors.

Forced exclusivity practices also plague other sectors. Food delivery platforms like Meituan and Ele.me would offer lower commission rates for restaurant owners that are willing to list exclusively on their platforms. Similarly, drivers on ride-hailing platforms would get a lower commission rate if they only work on through one app.

With contributions from Nicole Jao.