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The Taobao Phenomenon

When 26-year-old Bai Yunwen decided to buy an iPod last year, she turned to popular online Chinese retail site Taobao.com to hire an agent who could...

When 26-year-old Bai Yunwen decided to buy an iPod last year, she turned to popular online Chinese retail site Taobao.com to hire an agent who could purchase the iPod abroad — where it wasn’t subject to China’s luxury taxes — and ship it to her directly. The price: about $100, where it would have cost her more than $115 if she’d gone to a local retailer in Beijing. “It was easy and it saved money,” she said. “Why wouldn’t I do it?”

For savvy young buyers like Bai, online shopping has emerged as a major outlet for their spending. A recent report by the China Internet Network Information Center revealed that last year, Chinese Internet users have increased 73 million from 2006 to more than 210 million, nearly 50 percent of which were between the ages of 18 and 30. And, about 22 percent of online users — or around 46 million — reported having made an online purchase in the last six months, according to the report.

“People are still clinging to the notion that online shopping is not taking off in China, due to things like low credit card penetration and lack of security for shoppers,” said Kaiser Kuo, director of digital strategy for Ogilvy China. “In reality, it’s booming.”

China’s large pool of low-cost labor has meant that the cash-on-delivery system is still very much utilized for online shopping in China. This gives customers increased comfort knowing they can have their purchases hand-delivered and check them out in person before handing over payment, according to Kuo. In addition, Internet shopping has surged in second- and third-tier cities where brand selection is still very limited.

“Online retail channels for items like cosmetics and fashion are huge in these markets because they just don’t have the selection to choose from in local stores,” Kuo notes. “In addition, many shoppers are using online shopping to buy brands not yet available in China or to save money on items that are available for much less in foreign markets.”

The undisputed leader in Chinese online shopping sites is Taobao.com — often referred to as “the eBay of China.” It reported a whopping 156 percent growth in the amount of its retail transactions in 2007 to $5.9 billion and an increase to 53 million users. The site offers traditional auction options, like eBay, but also has flourished with virtual storefronts that offer set prices as well as shopping services such as agents, who can take requests for specific items, purchase them overseas and have them delivered to shoppers.

So far, many foreign brands have largely ignored China’s online retail options, but that might need to change, especially in order to connect with youth consumers. “This generation is really wired,” noted Allison Luong of Pearl Research. “Online activity is a significant portion of their lives.”