There are great opportunities in China for International fast-moving consumer goods brands (FMCGs), says KPMG China in a white paper. But to leverage e-commerce growth in China, they will need to compete with strong local brands and accelerate their product innovation (with fast-to-market timeline) to cater to Chinese tastes. They will also need to develop a clear and clever e-commerce strategy for China. Club China spoke to KPMG China’s Strategy Director Willi Sun about the required steps for success.
Large e-commerce platforms such as Alibaba and JD dominate China’s B2C sector, capturing over 90% of sales, you write in your paper. It seems that these players are difficult to avoid for any international brand that is looking for access to the market.
Willi Sun: “Alibaba and JD are attractive to merchants, as they offer a full-service solution, providing a user-friendly store management interface and support for logistics, marketing, payment and data analytics. However, the success also comes from the attractiveness to consumers, as they provide a quality guarantee by carefully selecting buyers and requesting deposits in case of fraud or fake product. Further, Alibaba and JD ensure price attractiveness via events, such as Double 11, where very low prices are requested from merchants. Also, Alibaba and JD solve all customer issues such as logistics tracking, payment security and product reviews. All of this does come at a cost: all struggle for profitability. JD claims to have turned profitable for the first time in 2017.”
In your report, you write that Chinese brands have an increasingly sophisticated product offering with improved brand recognition in China. International brands feel the pressure of the competition. It seems they need to stand out more than they needed to do 5 years ago?
“This is correct. Competition from Chinese brands is increasingly intense. Their product qualities have upgraded tremendously via gaining thorough understanding of Chinese consumers as well as upgrade of in-house production capabilities. Moreover, Chinese companies have been very aggressive in overseas acquisitions to gain know-how and brand fame in order to target wider consumer segments. Many foreign brands (e.g. in apparel) are losing market share and closing stores in China. As such, foreign brands need to localize their management team to better understand the Chinese consumers and providing products that would appeal to the consumers.”
What examples do you know of local brands that outperform international brands?
“In apparel, for example, Chinese brands such as HLA have outperformed foreign brands such as American Apparel or Tom Tailor, which have been forced to close stores and exit the market in some or all regions in China.”
Your report suggests that international brands should adopt rapid product launching is key – would you say that many international brands in China are having trouble following the pace of their Chinese competitors?
“Yes. For foreign companies which are not well localized, the process of obtaining market insights on Chinese consumer preferences, reporting to the headquarter, conducting R&D and adjusting manufacturing, and bringing the product back in China is very time-consuming. Local players are much faster at it.”
How hard is it for them to introduce simplified legal/regulatory procedures, as you advise?
“It has to do with localization and decentralization of decision power, and it is very difficult for large companies to alter their structure. However, some alternative ways are possible, such as engaging in cross-border e-commerce, which at least reduces time-to-market for products.”
The point you make in your paper is that multinationals in China currently rely too much on local e-commerce operation service providers. Why is that?
“The brand image on e-commerce is increasingly important, and many international companies only have limited control on these channels. Nurturing a team of e-commerce professionals and take over control is beneficial, and we have observed that increasingly more companies are gearing towards a self-controlled model for faster and more transparent insights into customers.”
It is interesting to see that you advise international brands that want a market entry to start via e-commerce, before opening brick and mortar retail stores. Why?
“Offline retail is complicated, considering China is relatively large and to gain significant coverage requires significant investments. On the other hand, e-commerce can be implemented fairly rapidly at a more justifiable cost. As a result, we believe it is a good way to test the market before deciding on a full offline entry.”
“China is a very fast-moving market. A year ago, brands were still talking about O2O and now brands are talking about omni-channels. Brands are actively exploring technology to strengthen supply chain (order online and pick-up or delivery via offline stores), AR/VR technologies in physical stores and even self-payments. China is not only looking at either online or offline – instead it’s moving towards ‘new retail’ where integration happens between online/offline, driven by technology.
What support does KPMG China offer to enterprises that aim to enter the e-commerce arena?
“KPMG can help enterprises with a comprehensive omni-channel market entry strategy for a growing but competitive market. Our work includes strategies around relevant product categories in China, with market trends, competitive landscape, channel structure and consumer preferences. Essentially, we help our clients develop their go-to-market value propositions when entering into the Chinese market. Additionally, we also support developing the required operating model on how to win in China including IT infrastructure design and implementation, HR structure, measures & incentives. Ultimately, we will assist our client with a business case to justify their go/no-go decision regarding entry into China and how to implement in China if the decision is a go.”