When establishing their sale plans for the Chinese market many international brands and retailers think e-commerce should be their primary method of entry. Though this may not be the optimal strategy for the brand and they should always consider alternate sales channels, according to our Club China Blogger Robin Tabbers.
While China still maintains its title of the ‘sourcing capital’ of the world, foreign companies are increasingly focusing on selling to the Chinese market. For success, it is essential for brands to properly compare the different sales channels available in China. Companies need to choose the model that suits their products, potential market segment and budget. An in-depth assessment of the options will prevent failure, as we have seen in guiding more than 100 international retailers and brands. Let me give a brief overview of the most widely used entry models.
Import agent or distributor
The classic and most straightforward method is to work with a Chinese import agent or distributor. A distributor will usually buy and sell the product at their own expense and risk. This method is especially useful when a company wants to distribute its products quickly and cheaply in the market.
There are drawbacks. Choosing a distributor is not easy. There is a lot of competition to obtain the services of the best distributors who are usually in high demand. Most distributors may have their own priorities that do not align with the foreign company. They also usually make demands of exclusivity in exchange for their “fantastic” networks throughout China. They are also quick to promise enticing and incredible projected sales figures, which quite commonly fail to materialise. A foreign company should conduct a due diligence before granting their distributor exclusivity, and should include various conditions, such as geographical area limitations, industry, minimum market segment, minimum sales volumes, duration, etc. Proper structuring of sales agency, and distribution contracts is therefore essential for this method of distribution in China to be successful.
Cross-border or domestic e-commerce
E-Commerce is rapidly growing within China. Tmall, the B2C platform of Alibaba, had a market share of 54.6% in 2016, which was followed by JD with 27.7%. TMall Classic and JD both offer a platform for domestic e-commerce for companies based in China, while TMall Global and JD International offer cross-border e-commerce to companies based abroad. Setting up a cross-border store does seem like an attractive option for foreign companies as they do not then need a physical presence in China. There are downsides and challenges. Operating a store on such platform is quite expensive, with yearly operating fees of easily $10,000, a commission on every sale which varies between 3-6 % and a one-time registration fee of around $25,000. The company that establishes, designs and maintains the store will also charge fees and a commission; this will reduce projected profit margins.
By contrast, operating on a domestic e-commerce platform has many advantages, such as reaching much larger potential customers, being able to deliver the same day and higher margins. Establishing a Chinese subsidiary can be costly; it is a requirement to enlist with the platform in question, and to sell goods domestically in China. In general, apart from companies facing restrictions that prevent their products from being sold domestically in China, most companies now tend to use cross-border e-commerce as a stepping stone, or they skip it altogether and directly focus on domestic e-commerce channels through a newly-established Chinese subsidiary.
An increasingly popular option is for foreign companies to set up a China office to manage their sales channels more efficiently. A local office also enables the company to increase their involvement and control over marketing, customer data, branding, pricing, and distribution, while they can also hire local staff with a greater insight into the local market which will help to develop an optimal China strategy.
Physical retail stores
The traditional brick and mortar shop remains a profitable channel into the Chinese market, however it also comes with significant costs. Franchising is a popular approach, but comes with less control over marketing, branding, customer base, pricing and brand positioning. Likewise, an alternate option, a joint venture with a local company that co-invests and opens the market, results in giving up some of the autonomy and control over a brand. Many newcomers choose to go through the Wholly Foreign-Owned Enterprise (WFOE) route to open their own shops. This involves high investment and operating costs, but on the other hand: margins are higher, especially when the products are manufactured in China. This provides relief from the transportation and import costs and taxes faced by cross border commerce. A retailer also has full control over sales, marketing, branding, pricing, brand positioning and all sales channels. Having a physical presence will help companies to understand Chinese consumers, enabling the development of a successful long-term strategy. Some retailers invest heavily in brand recognition and nationwide coverage through many stores (G-Star, C&A), while others choose to open stores in strategic and affordable locations and take their time to grow their brand (Suitsupply).
Many roads to success
There are many roads to success in China. Ambitious companies usually want to combine physical retail stores, including one or more flagships, with at least one large e-commerce channel, as both channels often have a positive impact on each other. More conservative models include finding the right distributor, setting up domestic e-commerce channels or opening an office to slowly access multiple channels. For companies that are not yet fully prepared to enter the Chinese market, cross-border e-commerce can be a first step, but even then, they can best invest in a legal structure in China. This allows them to switch as soon as domestic sales channels become appropriate.
As Principal of R&P Lawyers, Robin Tabbers is fully committed to assisting European companies selling in China.