The scale of the Alibaba companies—with $150 billion-plus 2012 sales, up by more than 60 percent—is overwhelming.  This year will represent a tipping point for growth in the share of online sales of clothes and electronics.  Many Chinese physical retailers, as owners of their own real estate and part of broader conglomerates, may be able to hide their underperformance for a while. But further exits from China by multinationals (following the path of Home Depot, Mattel, and OBI) seem likely.

Online competition has yet to put major retailers in China out of business. Historically, economic growth has been sufficient to support all players, but that is about to change.  In third- and fourth-tier Chinese cities, where modern retailing still isn’t well established, online retailers have the biggest edge in product range and prices.  But thanks to low-cost distribution and very small markups on consumer-electronics products such as mobile phones, China’s e-retailers are increasingly penetrating “time poor” middle-income households in all cities.  The appeal of these players lies not just in low prices but also in convenient home delivery, a trusted payment system, and the ability to return goods quickly and without administrative barriers. Physical retailers are moving online as fast as they can, but for most of them this is a very different business model and one that requires execution skills and a sophisticated online presence they currently lack.

Source:  McKinsey Quarterly