China is already the world’s largest e-commerce market, thanks to the immense size of its economy and internet user base. According to eMarketer, China accounts for 52% of all e-commerce transactions worldwide, with total online sales of over $2 trillion (about three times the US market) in 2021. It also boasts the highest penetration rate (online sales as a proportion of total retail sales) globally, at nearly 30%. Despite recent setbacks due to COVID-19-related lockdowns, Chinese e-commerce is likely to grow for many years, driven not only by continuous consumption growth but also the invention of new technology and business models that make online shopping a better experience for consumers. Community group buying and live streaming e-commerce are models that have emerged in China.

Live streaming e-commerce is a digital and more advanced version of infomercials (television channels dedicated to selling products). The live streaming feature allows shoppers to interact in real time with the host (usually a celebrity or a key opinion leader), with the brand and with other shoppers, blending entertainment with instant purchasing. The host demonstrates and critiques the products, answers call-in questions, and urges viewers to take action with time-limited tactics such as one-off coupons.

Thousands of items can sell out in seconds. During the “Double 11” online shopping festival in 2021, the top two hosts recorded total sales of nearly $3 billion in a single day, a number that tops the annual sales of 90% of listed companies on the Chinese mainland.

Live streaming e-commerce creates value for shoppers and brands. Products are selected and bulk-purchased by the host, offering shoppers ease and assurance with deep discounts to the normal retail prices. It is also entertaining to watch and participate in the show. If done well, brands find it an effective way to generate awareness and sales. Some companies report conversion rates of up to 30%, which is about ten times higher than in conventional e-commerce.

This new way of online promotion and selling has reinvigorated the industry and experienced explosive growth since its debut about five years ago. Sales value grew a hundredfold between 2017 and 2021 to reach an estimated $315billion in 2021, representing roughly 16% of the online retail market in China. Traditional players like Alibaba and JD.com, as well as social platforms like Douyin (the Chinese TikTok), Kuaishou (another short-video platform), Little Red Book (a crowd-sourced review and social shopping site) and Tencent’s WeChat, are all taking advantage of this rapidly growing segment of the market. Even New Oriental, previously known as a leading private tutoring firm until last year’s regulatory crackdown, is thriving, having reinvented itself with former teachers selling agricultural products on the internet.

In pursuing live streaming e-commerce, China is far ahead of the West. Only a few retailers, such as M&S and Ted Baker, have recently launched livestream initiatives in the UK. Perhaps not surprising, considering how tech-savvy the Chinese population is, as seen in their fast adoption of digital payments, and the government heavily expanding the 5G network. The domestic popularity of live commerce has grown from lower-tier to higher-tier cities, from Gen-Z and Millennials to seniors, from small to large brands, and from apparel and beauty products to electronics and many other categories.

There has been minimal regulatory oversight of this sector until recently. Like any new sector, the government has allowed it to develop with few restrictions but now needs to catch up with regulations. This is not without good cause. According to the China Consumers Association, a surge of complaints was reported by online shoppers about misinformation, product quality and lack of after-sales service. It is also causing legal and tax problems given the complicated business arrangement between the involved parties (i.e. the host, brand, multi-channel network and platform). Regulation is, therefore, necessary. The latest guidance issued just recently states that the hosts must have the relevant professional qualifications for broadcasts related to healthcare, finance, law and education.

As we have seen in the past, regulation can bring headwinds and tailwinds. For example, it can help accelerate consolidation in the industry, benefitting the larger or more compliant players.

We expect live streaming e-commerce to continue its rapid growth in the years ahead via expansion into new niches, a broader demographic of users and a combination with new technology such as virtual reality. We are very excited to see that many growth opportunities like this still exist in the Chinese market today.

Lars Hagenbuch, Investment Consultant at RisCura.