Behind China’s runaway online-to-offline commerce

By Wings Zhang

A flood of liquidity has produced huge subsidies and deep discounts in an app-driven marketplace.

As many executives around the world have discovered, China’s e-commerce markets are perhaps the most dynamic—even frenetic—on the planet. Nowhere is this dynamism more evident than in the burgeoning online-to-offline sector, where start-ups use apps, email, and other digital tools to entice shoppers to buy from physical stores or to purchase real-world services. Propelled by high levels of smartphone use, rampant liquidity from China’s often speculative A-share stock market, and deep-pocketed primary investors, online-to-offline sales are a fast-rising component of Chinese e-commerce, with offerings that range from taxi services to food delivery. But the online-to-offline mania has also produced what looks like a classic new-economy disequilibrium: many offerings are discounted by up to 60 percent (exhibit) as players compete on price with the hope that they will be the last company standing. In the late 1990s, the US dotcom market inflated on a similar drenching of liquidity, and start-ups spent wildly to attract eyeballs and traffic to their sites.

In China, the bet is that weaker players will drop out as cash runs dry and the winners will finally profit from their businesses by slashing discounts and eventually charging merchants fees for sales on the surviving platforms. With few signs of the market calming just yet, even after China’s stock-market correction, some bigger players are trying to impose order. In recent months, China’s two largest car-hailing start-ups, Didi and Kuaidi, have joined forces. Meanwhile, Dianping and Meituan are consolidating a sprawling range of services, from food delivery and online restaurant reservations to hotel booking and movie reservations. This move could be the start of a broader consolidation—or merely of a new round of competition in a winnowed field.

This article is the third in our series, China Pulse, which delivers insight into how digitization is reshaping China.

About the author(s)

Wings Zhang is a consultant in McKinsey’s Shanghai office.

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