7 April 2017
Hong Kong’s E-commerce Ecology: The Local Market
Hong Kong’s e-commerce activities, based on market rules, practice and regulations, can be categorised into exports (i.e., Hong Kong sellers or service-providers handling online orders from overseas markets), imports or cross-border trade  (i.e., Hong Kong sellers or service-providers handling online orders from the Chinese mainland market) and the local market.
Compared with the first two categories, the local e-commerce market – referring to online purchases made by Hong Kong consumers – only accounts for a fraction of the overall e-commerce activity in the city. Nevertheless, many merchants are interested in the local e-commerce market as Hong Kong is a metropolitan city with a sophisticated telecommunications infrastructure that can serve as a gateway to Asia as well as a testing ground for novel products and concepts. Local merchants, both brick-and-mortars and pure-plays, are also increasingly keen to develop their online channels to increase sales.
According to Euromonitor International, the sales value of internet retailing in Hong Kong amounted to HK$13.7 billion in 2016, and expanded at an annual rate of 15% for the past five years. While the low double-digit growth does not appear to be impressive compared with the pace of development in some other economies in the region, it represents a silver lining to many local merchants. Put in perspective, Hong Kong’s retail sales increased only 1.5% annually during the same period.
In Hong Kong, the top five categories of internet retailing are consumer electronics (31.4%), media products (18.4%), personal accessories and eyewear (15.5%), apparel and footwear (12.7%), and food and drink (6.7%). In the next five years, food and drink is expected to see the strongest growth among the major categories, at an annual rate of 11%.
Barriers to Local E-commerce Development
There are a few myths as to why local e-commerce is not more vibrant in Hong Kong:
Myth 1: Shopping in Hong Kong is too convenient. There are plenty of shopping malls around every corner.
Fact: Hong Kong people are known to work long hours. When they leave work, many shops have already closed.
Myth 2: Shops in Hong Kong provide a wide variety of goods.
Fact: Many niche goods cannot be found in Hong Kong shops. The flourishing procurement services (代購) have demonstrated that many niche foreign goods unavailable in Hong Kong are in high demand.
Myth 3: Hong Kong shoppers are concerned about online security.
Fact: There is no evidence that Hong Kong consumers are more concerned about online security than consumers anywhere else in the world. In fact, credit cards and PayPal accounts are widely used in Hong Kong to buy goods from foreign sites.
The real reasons for the tepid development of local e-commerce are the following:
- Hong Kong is a relatively small market with a high cost of customer acquisition. Merchants normally find it more cost effective to target larger markets.
- Hong Kong is a free port with good air connectivity but inexpensive cross-border logistics. This enables local consumers to look for deals that are not available from domestic e-commerce platforms and buy niche, good-quality products directly from foreign sites. This has in effect depressed the development of domestic e-commerce platforms.
- Many sectors in Hong Kong are dominated by incumbent, large conglomerates. They have little incentive to sell online or facilitate the development of e-commerce in Hong Kong, as the prospects of further market-share gain are limited while the fear of cannibalisation is imminent.
- Last-mile delivery is a bottleneck. Hong Kong people are busy, leading to a high first-time home-delivery failure rate that adds to the operation costs of couriers. In many economies such as Taiwan, chain stores and convenience stores are used as pick-up points but in Hong Kong this solution is less effective as shop space is scarce and expensive. Other solutions for solving the last-mile delivery problem, such as placing electronic lockers in public areas, are developing slowly, largely due to the low acceptance of such ideas by private-property owners.
- The risk-averse business culture in Hong Kong has hindered the development of electronic payment solutions and mobile wallets. These new payment systems are more convenient for consumers because they only need to carry a single all-purpose device rather than paper money and numerous credit/debit cards. In this area, Hong Kong has apparently fallen behind the Chinese mainland.
Future Development of Local E-commerce
Hong Kong retailers may be relative latecomers to e-commerce due to the above-mentioned reasons, but people in the trade are generally upbeat about the future development of this local sector.
Due to skyrocketing rents, the majority of retailers in Hong Kong have been forced to stick to high margins, branded luxury items or high-volume fast-moving consumer goods. Small independent retailers with something different to offer have been unable to survive. However, smaller online stores that sell unique concepts and niche products have emerged in the past couple of years to take advantage of the virtual space, where no high rents are demanded. Low entry barriers and reduced overheads have unleashed the power of creativity and an entrepreneurial spirit, the likes of which have not been seen in the city for a long time.
Pop-up shops and short-term leases are commonly used by these small online businesses to gain brand awareness, generate traffic to websites and forge personal contacts with the customer. They also use versatile methods for the delivery of goods, such as pick-ups at MTR stations, hiring local couriers or direct mailing. Most of these online stores do not intend to sign long-term leases, which would squeeze their profit margins and tie up their cash flow.
The sluggish performance of the retail sector in Hong Kong in recent years has urged many traditional retailers to re-think their e-commerce strategy. And many signs are pointing to an upward momentum of e-commerce activity in the city.
 Cross-border e-commerce commonly refers to China’s e-commerce imports, as it is from the perspective of Chinese residents.