Want to see the future of the O2O economy? Look East

Despite its exceptional growth and the role it has played in transforming the retail landscape, ecommerce only accounts for about 5 percent of all retail sales. The main reason the majority of shopping is still done offline is that some offline experiences can’t be moved fully online — specifically services that require a human interaction.

O2O, online to offline, is an ecommerce model that combines offline business opportunities with the Internet. O2O ecommerce platforms attract customers online, but the real consumption of services is experienced by the customers offline. A good O2O company looks at the entire digital journey, not just the transaction, beginning when a customer goes online to discover and research products. This process continues when the customer makes the purchase, completes the transaction, and then goes back online to share their experience.

In recent years, there has been a shift in online retail as it has moved from being focused on the channel to delivering an experience that combines ease of use and value. As connected mobile devices become a norm, their potential to transform the shopping experience (both in the store and online) is an enormous opportunity. About half of all smartphone owners now use their devices for research prior to purchasing – and soon, when two billion generation Z kids who were born into the mobile era become participating members of the ecommerce economy (as independent income holders), the range of opportunities will grow.

Look East

When it comes to B2C ecommerce sales, China is currently the world leader in digital retail, with sales growing at an annual rate of 25 percent. This growth now comes from traditional categories like electronics, but newer territories are making ground thanks to mobile apps and improved logistics, which have helped ecommerce companies reach new customers in smaller cities.

One of the fastest growing categories is groceries, with a penetration rate of 3 percent. While price remains the primary consideration in categories like books and consumer electronics, in categories such as apparel and cosmetics, offering quality assurance and authenticity can go a long way.

I was recently in China and had the opportunity to meet with a number of startups currently focused on building O2O businesses. Below I have highlighted a few that I believe are going to become household names over the next year or two.

Meicai.cn provides fresh food and vegetable delivery to the small and medium restaurants market. Restaurant owners can order fresh ingredients using their mobile before 10pm, and Meicei.cn will deliver their order by 6am the following day. In addition to reducing costs, the company offers a better supply chain management and improved food safety control from the field to the table. Meicail.cn already has more than 30,000 customers and has made 900,000 deliveries in the past three months, offering an average saving of 36 percent on purchase costs.

From vegetables to pets, Goudafu is another interesting O2O company. Founded in Feb 2014, the startup offers dog owners a comprehensive channel that allows them to access health-related information and services for dogs. The 700,000 users who have registered for the service can connect to 6,000 pet hospitals using their Wechat service account, Weibo, or a dedicated application.

It was only a matter of time before O2O took over one of the fastest growing ecommerce market in China — the fashion industry. Yeeda wants to offer brand stores and shopping malls a new way of interacting with their customers by offering on-demand styling advice through mobile.

The Big Boys

While the online-to-offline model had been around for quite some time and has been popularized by companies such as Groupon, Airbnb and Uber, the O2O economy is speedily gaining momentum in China. Last year, three of China’s biggest companies – Tencent, Baidu, and Wanda – united to create an O2O ecommerce joint venture estimated at close to $1 billion. Earlier this year, China had its first O2O IPO, when WOWO went public.

As the O2O model gains momentum in China, we can expect to see O2O companies focusing on providing high-quality services – including improved logistic and after-sale services – as well as trying to optimize in store user experience, to their user bases. This will in turn lead to the creation of numerous startups focused on leveraging the consumer interest in this economy.

Similar to other tech trends that have come to China and then experienced hyper-growth once introduced to that market, get ready for the O2O boom to hit. It’s going to be a fun ride.

Zack Weisfeld is the GM of Microsoft Ventures Global Accelerators.