Distribution in China.

Transcription

1 Distribution in China

2 The possibility of selling to China s rapidly expanding market is becoming increasingly difficult to ignore for international companies of all sizes. While your company may be excited by the opportunity to establish distribution channels in the Chinese market, it may also be daunted by determining how to actually achieve this goal. From our experience helping a variety of international small and medium sized enterprises develop and manage their distribution networks in China, we have gained valuable insights into the process of entering the Chinese market. 2 Chinese consumer report Chinese consumer report 3

3 Determine Demand Conducting initial market research to understand the demand for your product in the market is essential for evaluating if it is feasible for company to enter China. While the appeal of the Chinese market may be strong, assessing the needs of the market, understanding competing brands strategies, and possessing a unique product are important considerations for initial market research. Learn Legal and Regulatory Requirements Since some industries are not fully open to foreign companies in China; during initial research, you should also determine if foreign companies are permitted to operate in your industry in China. In addition your company should next learn what, if any, certifications are required before your products can be sold in China. These applications should be started immediately since they can often be time consuming procedures. Identify End Users When deciding your company s target customer, you will need to determine if you will be engaging on a business to consumer, business to business, or business to government basis. One thing to keep in mind is many of China s largest industrial companies are State-Owned Enterprises (SOEs) and thus under the control of the Chinese government. If your company s potential end-users are SOEs you should keep in mind that they often operate according the characteristics of a government agency rather than those of a private company. Identify Key Players and Distributors Once you have identified the market for your product in China you will need to identify who the key players and potential distributors are in your industry. There are variety of tools you can use to identify these players, including internetresearch, services of U.S. and Chinese consulting companies, trade organizations and government agencies, and referrals from other companies in related industries. Develop Marketing Materials and Strategy At the same time that you begin to identify key players and distributors in your field, you will need to develop marketing materials and a strategy of how to engage with the industry players you have identified. When developing marketing materials such Getting started as brochures and websites, make sure to have them written in simplified Chinese characters. Another thing to take into consideration is that Chinese company brochures and websites often have a different format than those in the West. It is important to consult with people familiar with Chinese business culture to make sure your marketing materials will match with Chinese preferences. During this time, your company should also develop a pricing structure, sales terms, and an agency contract. Having these ready to present to potential distributors when you meet with them will accelerate the sales process. Establish a Local Sales Team In order to achieve sales it will be important to have a local sales team which can guide you through China s unique business culture in the negotiation process. Local staff will have a better understanding of how Chinese businesses and government agencies operate and how to access key decision makers in order to make a sale. A local sales team can provide your company the local kow-how needed to complete business deals. Meet with Qualify Distributors Once you have identified key distributors in your industry, developed a marketing strategy, and built a sales team it will be necessary to visit potential distributors in-person. By meeting them you will have the opportunity to both market your company and confirm that the distributor is qualified. By visiting you will also be given the opportunity to see their operations first-hand, learn their business model, and understand their strengths and weaknesses. Based on this information, your company can make necessary adjustments in its business plan so that it matches with the needs of the potential customer. At this time, it would also be helpful to check with local government agencies to verify the quality and reliability of the company. Achieve Sales Now that your company has identified qualified distributors you can enter the next stage of the sales negotiation process. Your company should expect extensive negotiations with distributors before a deal can be struck. You should be willing to devote time to develop a close relationship with your potential customer during this time in both formal business settings and more informal occasions such as tea sessions and meals. In general, this time commitment means business deals can take three to five times longer to complete in China than they do in the West. Even if a company is ready to buy your products, finalizing a distribution or sales contract can also be a lengthy and complicated process. When drafting distribution contracts it is important to work with a lawyer who is familiar with local legal practices. A good lawyer will help you draft a contract that protects your company s interests in the complicated international arena. Manage the Relationship Even after you have completed sales with a distributor in China it will be necessary to manage the distributor to ensure long-term sales. Having a local presence is also essential for this process. You will need staff on the ground that will be able to communicate regularly with the distributor, provide technical and marketing support, and continue to develop both a formal and informal business relationship between your two companies. 4 Chinese consumer report Chinese consumer report 5

4 Choosing the right retail format Hypermarkets and shopping malls Hypermarkets generate a steady cash flow for retailers and are popular with Chinese consumers, who like to spend time shopping with their families on weekends. Hypermarkets that include a shopping gallery with specialty stores and restaurants are particularly popular. As a result, many operators in this channel tend to build large shopping complexes with hypermarkets as their anchors and invite clothing retailers, restaurants, and entertainment operators to create a small shopping mall. Hypermarkets will continue to be successful in China. Though Chinese incomes may increase significantly, consumers will still opt to buy groceries at hypermarkets because of the low prices and one-stop shopping experience. As urbanization continues, hypermarkets will find new opportunities in smaller emerging cities, and an increasing number of big box chains may emerge. Supermarkets Ordinary supermarkets are fairly unprofitable in China because they face fierce competition from hypermarkets and wet markets. Wealthier Chinese cities are saturated with supermarkets, but consumers in smaller towns are often too poor to support a profitable supermarket chain. As the number of wealthy consumers rises in first- and second-tier cities, a demand for better quality lifestyles has emerged. These affluent consumers favor imported products, which are associated with high social status and a more leisurely lifestyle. Though most Chinese shoppers perceive hypermarkets as the place to find bargains, premium supermarkets, which offer more high-quality and imported products, are expanding rapidly in larger cities. Premium supermarkets are likely to open near high-end office buildings and in shopping centers in central locations and affluent residential areas. Many local retailers such as Beijing Hualian Department Store Co., Ltd. and China Resources Enterprise, Ltd. have already started testing this retail format. Convenience stores Some larger cities such as Beijing; Guangzhou, Guangdong; and Shanghai are saturated with convenience stores. Planet Retail expects that consumers in rapidly expanding second-tier cities will also accept convenience over low prices soon. Most local convenience store chains operate as small supermarkets with fewer stock-keeping units, higher prices, and no fresh produce. Modern convenience stores are likely to develop in second-tier cities, but they face high rent and competition from local mom and pop stores. It will take time before a convenience store chain can increase in scale, build an efficient supply chain, and become profitable. Foreign companies are looking to tap the expanding convenience store market. For example, Japan s FamilyMart Co., Ltd. has announced plans to move from Shanghai to other first- and second-tier cities such as Chengdu, Sichuan, and Hangzhou, Zhejiang this year. The retailer aims to operate 8,000 stores in China by February 2021, up from 600 stores currently. Shopping malls Hypermarket and department store operators have taken advantage of the popularity of their brand to develop freehold shopping malls, leasing the remaining space to complementary retailers. International and local retailers have announced plans to open more shopping malls in first-, second-, and third-tier cities. The retailer is also looking to open outlets in smaller cities where there is more space on centrally located streets. In general, more shopping malls are likely to open in suburbs of major cities. Neighborhood stores Neighborhood stores, located in populous areas, are similar to small supermarkets. They sell more groceries than convenience stores but charge more than hypermarkets. Typical neighborhood stores include Walmart Stores, Inc. s Smart Choice and Tesco plc stexco Express. These stores enjoy moderate sales but still operate at a loss because of their small scales of operation and inefficient supply chains. As incomes rise, however, more Chinese shoppers are expected to buy products from neighborhood stores for convenience than from hypermarkets. Discount stores This format should theoretically be popular among Chinese consumers, but private labels have yet to gain consumer acceptance a prerequisite for this retail channel s growth. Discount stores are unlikely to thrive in China in the short term. Online stores Check Ecommerce document for more infos 6 Chinese consumer report Chinese consumer report 7

5 Distribution players In China, goods have to pass through multitiers of distribution players before reaching the hands of consumers. There are different parties involved in the product supply chains, such as agents, distributors, wholesalers and sub- distributors, etc. Given the complexity of the Chinese market, companies in China often adopt a combination of distribution models Types of Distribution Channels There are different types of distribution channels for consumer goods in China. Distributors and agentsdistributors and agents are authorized by brand owners or manufacturers to distribute their products; typically, they do not involve in manufacturing and retailing of the products. Some of them are obliged to the buyout of these products, thereby carrying inventory risk; whereas some do not need to buy out but receive a certain amount of commissions. Currently, domestic distributors account for a large share of the wholesale trade in China. Many of these distributors come with stateowned background and have operated since the pre-economic reform era, giving them an edge in terms of established infrastructure, government guanxi and network reach (especially in towns and counties). Distribution sector was opened to foreign investors in Since then, foreign agents and distributors have been expanding quickly. They have brought into China the international perspective and sound management experience. Exhibit 2 shows the major characteristics of domestic and foreign players. Wholesale markets Allowing groups of merchants to display and sell their goods on site, wholesale markets are often regarded as a distinct feature of China s distribution landscape. Mushroomed in the 1980s-90s, wholesale markets have been playing a significant role in channeling products of the country s numerous small-andmedium-sized manufacturers into the hands of urban and rural consumers. According to the National Bureau of Statistics of China (NBS), the number of wholesale markets with transaction value over 100 million yuan amounted to 4,940 in 2010, up by 5.4% yoy. A lot of people view wholesale markets in China as disorganized markets selling low - end and unbranded products. In recent years, however, some large-scale whole sale markets have been upgradingthemselves with sound management, modernized facilities and better brand positioning. It is widely believed that wholesale markets would continue to be an important player in China s distribution landscape. Direct sale by manufacturers Facilitated by improving logistics infrastructure in China, some established brand owners or manufacturers have set up their own wholesale and retail arms to conduct wholesaling and retail activities. Indeed, these enterprises view distributing their of own products as an effective way to keep abreast with latest market developments. For instance, a growing number of manufacturers start selling directly to consumers in apparel sector. However, a lot of them use a combination of direct-operated as well as franchise stores. This is probably due to China s vast geographical span and the substantial investment involved. Warehouse-style supermarkets Warehouse-style supermarkets are another effective way to distribute products in China. Metro is a typical example.metro adopts a membership system and sells goods in bulk at wholesale prices to its members. Only cash payment is accepted. Targeted the intermediaries and commercial customers, Metro today has more than 3 million registered members in China. Metro s major customers include HoReCa (hotels, restaurants and catering businesses), small retail outlets and kiosks, and other business users (offices, service companies and government agencies). Online distribution channels Online distribution channels are gaining attention. For instance, some export-trading-oriented companies have opened online shops on B2C platforms such as Taobao.com to target the domestic market. However, most of the platform operators are in fact online transaction facilitators without engaging in real distribution businesses. They charge suppliers membership fees for listing on their websites and do not involve in the real businesses. Despite rapid growth in recent years, online distribution in China is not with out its challenges. Many are still reluctant to place huge orders online, worrying about fraudulent activities and credit defaults. 8 Chinese consumer report Chinese consumer report 9

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