China: E-commerce trumps retail

High-tech meets low-tech (bike messengers!) as new Chinese consumers embrace online shopping.

By Scott Cendrowski, writer

Not so much.

FORTUNE -- Just as cash-strapped consumers in the developing world bypassed so-called landline phones in favor of mobile devices, so China's lower-income consumers are skipping physical stores in favor of e-commerce sites.

A recent report by McKinsey & Co. shows that e-commerce sales in China reached an estimated $190 billion last year, almost equaling the U.S. market as largest in the world. China's online retail industry is expected to grow to at least $420 billion by 2020 -- which would total more than the U.S., Japanese, U.K., German, and French markets combined. China will overtake the U.S. for the top spot next year, if it hasn't already.

In an economy known for astonishing growth, e-commerce stands out. China's market has grown at a 120% annualized clip since 2003 compared to the U.S.'s 17% growth rate. It shows no signs of stopping.

What interests McKinsey isn't just the massive growth -- it's the potential for e-commerce to drive the government's goal of increasing domestic consumption and diversifying the world's No. 2 economy from a reliance on infrastructure projects. The authors of the report, titled "China's E-tail Revolution," conclude that consumers are more than replacing what they might buy at the mall. E-commerce is driving consumers to buy new stuff, especially in the so-called lower-tier, lower-income cities where physical retail stores, if they exist at all, don't have anywhere near the same selection as online marketplaces.

MORE: The IPO market is back—for enterprise tech

"China remains an under-retailed country, and customers' needs are very strong overall," says Peggy Yu Yu, co-founder of Dangdang, a Beijing-based e-commerce site that competes with Amazon China. "I live [in] downtown Beijing, and I drive any direction, and one hour later, still within Beijing, I don't see good stores anymore, be it supermarket or clothing store."

More than 70% of China's e-commerce business is consumer to consumer. eBay-like  (EBAY) auction sites called Taobao, Tmall, and Paipai host hundreds of millions of listings. But Amazon (AMZN) wannabes such as 360Buy are setting up operations in second-tier cities, and analysts believe they'll eventually start moving into third- and fourth-tier cities.

While the ordering process on many e-commerce sites is done via mobile phones and apps, distribution is often a combination of high-tech and old-fashioned customers service -- which suits Chinese consumers just fine. 360buy, for example, offers same-day delivery (depending on when the order is placed) often via bike messenger.

Consumers in smaller cities like to pay via cash on delivery; one upside is that the customer can try on their wares before making payment, employing what's been called the "mobile fitting room" option.

MORE: The only Fortune 500 company that's grown faster than Apple

What's surprising in the McKinsey report is that consumers in China's lower-tier cities actually spend as much online as higher-tier cities even though their consumers have far less disposable income. In the small and mid-size cities dotting the countryside, e-commerce sites are proving a revelation. Many consumers can now buy books, movies, clothes, and other goods for the first time.

That means lower-income consumers who shop for newly available goods online are increasingly propelling the economy forward, even as some are skeptical that China can transition into a consumption economy. For China, as it becomes the e-commerce capital of the world, that might be the best news of all.

Posted in: 360buy.com, Amazon, China, Dangdang, E-Commerce, eBay

• Briefings of the day: U.S.A. vs. Apple Inc.

  In the DOJ's great e-book conspiracy, Apple is the sole defendant still standing.

  FORTUNE -- The conspiracy case that the U.S. Department of Justice filed against Apple and five book publishers in April 2011 is finally coming to a head.

  In the year that has passed, all five publishers have settled. Only Apple had the stomach -- or the wherewithal -- to take the case to trial.

  It's scheduled to begin in a MORE

  Philip Elmer-DeWitt - May 15, 2013 3:51 PM ET
  Posted in: Amazon, Antitrust, Apple, DOJ, e-books, Publishing

• Look at what the radicals at Groupon are working on

  Yes, Groupon's whimsy-prone founder is gone. That doesn't mean the e-commerce company has changed its ambitions much.

  FORTUNE -- Eric Lefkofsky does not know what became of Montgomery Ward & Co., the iconic Chicago catalog merchandiser and retailer that was built to last more than 100 years.

  I am of two minds on his knowledge gap. On the one hand, you'd think that the man whose several companies, including the much-criticized deal-promotion site MORE

  Adam Lashinsky, Sr. Editor at Large - May 9, 2013 7:22 AM ET
  Posted in: Amazon, Andrew Mason, daily deals, E-Commerce, eBay, Eric Levkofsky, Google, Groupon, Ted Leonsis

• Amazon: The ultimate good-faith stock

  Few stocks involve more guessing than Amazon. The company is tightfisted when it comes to disclosing data or metrics.

  By Kevin Kelleher, contributor

  FORTUNE -- No matter how much research is done before an investment, there always remains a little bit of faith when it comes time to place a trade. People may mock analysts when their forecasts are off, but the analysts who aren't pressured by their firms to dress up MORE

  Kevin Kelleher - May 9, 2013 5:00 AM ET
  Posted in: Amazon, amzn, E-Commerce, Earnings, Financials, Free cash flow, Gross margins, Jeff Bezos, Revenue

• Cracks in objections to Internet sales taxes

  Some say collecting and remitting sales taxes would be too complicated and expensive for smaller businesses. But that doesn't seem to be the case.

  FORTUNE -- Taxes on Internet sales have been talked about since the birth of e-commerce. In those early web days, one major objection was that taxes would be impossible to collect, given all the various local and state sales-tax regimes. Forcing merchants to adhere to the laws of MORE

  Dan Mitchell, contributor - May 7, 2013 10:45 AM ET
  Posted in: Amazon, Best Buy, eBay, internet sales tax, John Donahoe, Marketplace Fairness Act, Target, Wal-Mart

• Grand St. is conquering the Web, one bespoke gadget at a time

  The new e-retailer wants to do for tech inventors what crowd-funding site Kickstarter has done for thousands of aspiring entrepreneurs -- without the risk.

  FORTUNE -- For the modern inventor, getting her creation in the hands of consumers can be just as trying as conjuring up the product in the first place. "So many people who build hardware love building products but spend all their time doing manufacturing and distribution," explains 29-year-old MORE

  JP Mangalindan, Writer - May 2, 2013 10:55 AM ET
  Posted in: Amanda Peyton, Amazon, Best Buy, First Round Capital, Gary Vaynerchuk, Grand St., Kickstarter, Massachusetts Institute of Technology, Phineas Barnes, Wal-Mart

• Amazon Studios' first big show is no 'House of Cards'

  The first crop of fresh, original content from Amazon's Hollywood arm is now ready-to-stream. But are the shows any good?

  JP Mangalindan, Writer - Apr 19, 2013 2:43 PM ET
  Posted in: Amazon, Amazon Instant Video, Amazon Studios, Amazon.com, House of Cards, Jeff Bezos, Lovefilm, Zombieland

• Chart of the day: iPad Web presence is up, Kindle down

  The iPad's usage share in North America rose in March for the first time since December.

  FORTUNE -- Despite increased competition from tablets running Google (GOOG) Android, the presence of Apple's (AAPL) iPad in the Chitika online ad network rose in March to 81.9%, up from 80.5% in February.

  According to the report Chitika issued Thursday, the rest of the tablets are all distant also-rans.

  In the same one-month time period, it saw the presence of MORE

  Philip Elmer-DeWitt - Apr 18, 2013 2:57 PM ET
  Posted in: Amazon, Apple, Chitika, iPad, Kindle, Samsung Tab

• What's next for Aereo?

  Adding Internet streams of broadcast TV to the mix of options for viewers is yet another assault on cable's walled garden.

  FORTUNE -- Now that Aereo has a new lease on life for its bizarre business model thanks to a court ruling Monday, the question arises: What is the company's end game?

  Aereo streams broadcast television programs -- including news and sports -- over the Internet. The company argues that by creating MORE

  Dan Mitchell, contributor - Apr 3, 2013 9:03 AM ET
  Posted in: Aereo, Amazon, Amazon Cloud Player, Cable TV, cablevision, cloud media, Google, Google Music, streaming video, TV

• My apps don't know me - and that's a problem

  So-called recommendation engines still have a long way to go.

  By Daniel Roberts, writer-reporter

  FORTUNE -- As you grow older and busier, it becomes more difficult to make spontaneous discoveries. Or at least that's the theory behind a bevy of so-called predictive apps purporting to know each user well enough to hand them their next favorite song, restaurant, or magazine article.

  I gave these tools a test run on a recent trip MORE

  Apr 2, 2013 6:54 AM ET
  Posted in: Amazon, Apple, Bing, Facebook, Flipboard, Google, Ness, Netflix, recommendation engines, Spotify, Zite