Cross-border e-commerce experiential stores in Guangzhou

China E-commerce Market Cross-border e-commerce experiential stores in Guangzhou Field Trip Takeaways July 2015 1

INTRODUCTION The Fung Business Intelligence Centre has recently visited several cross-border e-commerce experiential stores in Guangzhou to observe the current operation of such stores. The three major types of experiential stores we visited include (1) stores inside Free Trade Zones (FTZs), (2) stores launched by department store operators, and (3) stores run by e-commerce platforms. KEY TAKEAWAYS Here are the key takeaways from our visit: (1) Both duty-paid and bonded imported products are sold in the experiential stores. The ratio of duty-paid goods to bonded imported goods is around 7:3; (2) Prices of imported products vary a great deal at different experiential stores; (3) Limited variety of bonded imported products are available, mostly grocery products such as milk powders, baby diapers, cosmetics products and health supplements; (4) Increasing competition in cross-border e-commerce sector may lead to price disruption, high-priced international brands are more likely to be affected; (5) The new business model cross-border e-commerce plus experiential stores changes the ways people buying imported products. It may affect the business of daigou agencies and reduce the number of overseas shopping trips made by Chinese consumers; and (6) We expect the new business model, now prominent in Guangdong, to be duplicated soon in other FTZs and pilot cities approved for cross-border e-commerce import services. 2

CROSS-BORDER EXPERIENTIAL STORES IN GUANGZHOU Guangzhou has taken the lead in developing cross-border e-commerce business. As of July 2015, there were a total of 16 bonded direct sales experiential stores in Guangzhou (including those in operation and the announced ones), offering bonded imported goods whereby personal postal articles tax is applied. These include six stores in Mopark Department Store, three stores in Grandbuy Department Store, four stores run by Aoyuan Property, Funsens, Meijoy Best, and SD 020 respectively 1. 3

PRODUCTS AVAILABLE IN CROSS-BORDER EXPERIENTIAL STORES Broadly speaking, there are two types of products available in the experiential stores (1) dutypaid goods and (2) bonded imported goods. Duty-paid goods are goods imported to China under general trade procedures with value-added tax, consumption tax and import duties being paid. Bonded imported goods, on the other hand, are goods that stocked in bonded warehouses in FTZs. Bonded imported goods are regarded as personal postal articles for own consumption and are subject to postal articles tax. Duty-paid goods Bonded imported goods Value-added tax Consumption tax Import duties Postal articles tax Bonded warehouses in FTZ Product category Postal articles tax Food and beverage 10% Leather clothes and accessories 10% Bags and shoes 10% Apparel and textile 20% General watches 20% Luxury watches (10,000 yuan or above) 30% Cosmetics 50% Skin care 50%, China Customs 4

PURCHASING METHODS The purchasing methods for these two kinds of products are different. Customers can buy dutypaid goods directly from the experiential stores and take them back home right away. As for bonded imported goods, customers can only place orders online. The experiential stores display samples or photos of the imported products on shelves or walls, and customers can take the product card (usually with assigned barcode number) to the cashier to settle payment or they can scan the QR code to access the respective online platforms of the experiential stores to place order. Physical stores Duty-paid goods For duty-paid goods, customers can simply take the products and pay at cashier. Bank cards and authorized online banking or thirdparty payment platforms are accepted for authentication purpose. Bonded imported goods If customers want to purchase bonded imported goods, they need to register an account on respective websites with their real name before placing orders. In the store, only selected product samples are displayed on shelves, customers who want to make purchases can take the product card to the cashier and place orders. Alternatively, customers can the product QR code (usually under the photo of the product) to access the respective online platforms of the experiential stores. Selecting the goods Payment Receiving goods Registration Placing orders Payment Receiving goods Pick the products and pay at cashier Pay by bank card or online payment, cash is not accepted Pay and go Real name registration is required. Identity card number, mobile phone number and address are needed for authentication Products are for display only. Customers need to pick the product cards (with assigned barcodes) and pay at cashier or scan product QR code to access online store Pay by bank card or online payment in RMB, with personal identification Products will be delivered to the registered address from bonded warehouse 5

Online Web interface of these e-commerce platforms is in Chinese. Most online platforms offer only bonded imported goods, while some offer both bonded imported goods and duty-paid goods. Similar to buying bonded imported goods on site, customers can place orders and pay online. The payment is settled in RMB. Postal articles tax will be levied if the tax exceeds 50 yuan. Goods will be delivered to the registered address from bonded warehouse within 1 to 15 business days by authorised courier companies. Registration Placing orders Payment Receiving goods Real name registration is required. Identity card number, mobile phone number and address are needed for authentication Add products to cart, fill in delivery details and submit orders Pay online and payment settled in RMB Products will be delivered by domestic couriers to the registered address PRODUCT RETURN POLICY In general, "returns in seven days without a reason" is not applicable for bonded imported goods. Goods return is available only when there is quality problem or when goods are damaged during delivery. Consumers can contact the cross-border experiential store if there is quality problem, or contact the courier company when there is damage during delivery. For bonded imported goods, only exchange for the same item is allowed. 6

THREE TYPES OF CROSS-BORDER EXPERIENTIAL STORES 1. CROSS-BORDER EXPERIENTIAL STORES INSIDE FTZs Location: China (Guangdong) Pilot Free Trade Zone Nansha Area of Guangzhou: Yuexiu Binhai Juncheng Shopping Mall Opening date: 1-5-2015 Operating area: 10,000 sqm (2/F and 3/F) Funsens is the largest bonded direct sales experiential store in China. It adopts the "offline showroom + online platform" operation model. Located in the Guangdong Pilot Free Trade Zone (Nansha), the offline showroom is set over two floors, with around 30 retailers engaging in cross-border e-commerce business. Funsens has an online platform (http://www.funsens.com), but currently only around onethird of these retailers have launched their websites on Funsens online platform. WEBSITE http://www.funsens.com Telephone number: 400-881-0101 Operating hours: 10am-10pm Number of retailers: 30 Product categories: More than 10,000 types of imported products including food and beverages, fresh food, baby and maternity products, cosmetics and personal care products, digital products, bags, supplements, etc. Product origins: More than 20 countries/ regions including: Website interface is in Chinese. Only bonded imported goods are offered on the website. 7

OBSERVATIONS Funsens is located near residential area. The shopping mall where Funsens is situated is quite spacious, and there is a large indoor play area for kids on the 2nd floor. We were at the Funsens at around noon on a weekday. The car park outside Funsens was full. As Funsens is located a bit far from the Guangzhou city centre, many consumers drove here to shop. Foot traffic was high by the time we visited Funsens. Many customers were shopping together with friends or family members. The customers were from different age groups, although we observed that there were slightly more middle-aged women wandering around. Funsens is located near residential area Carpark outside Funsens was full Many customers shopping at Funsens Play area on the 2nd floor of the shopping mall 8

Stores in Funsens There are approximately 30 retailers engaging in cross-border e-commerce business Some retailers have opened certain themedstores, such as fresh food store, Australia store, South Korea store, while others offer a wide range of goods in different categories and from various countries. In general, the ratio of duty-paid goods to bonded imported goods is around 7:3. However, a few stores sell mostly duty-paid goods. The same products can be found in different stores, but prices may be different. The most common bonded imported products are milk powders, baby products, luxury cosmetics, and health supplements. Cash is not accepted, only bank cards or online payment are accepted; the check out time in cashier is relatively slower than normal supermarkets. Funsens offers preferential rent for some stores in the first year of operation, so that they can offer deeper discounts to consumers 2. Themed-store Australia store Themed-store South Korean store A wide range of duty-paid products available Bonded imported goods displayed on shelves 9

FUNSENS IN THE NEWS Funsens drew more than 10,000 visitors on its first day of trial operation on 1 May 2015. According to Funsens, the most popular products sold in Funsens are milk powder, baby products and snacks 3. On the Dragon Boat Festival and the Father s Day, number of visitors exceeded 20,000. Some of them were coming from cities outside Guangzhou include Dongguan, Zhongshan and Foshan 4. To control the flow of visitors on 1-3 May 2015, visitors need to make bookings online, on WeChat or by phone 5. Visitors have to queue to enter the shops. Funsens said that the second phase is currently under planning. Operating area of the second phase will be extended to 30,000 sqm, and it will be in the format of shopping street. More catering and entertainment facilities will be incorporated, and new categories of products, including digital products and luxury goods will be added 6. 10

2. CROSS-BORDER EXPERIENTIAL STORES RUN BY DEPARTMENT STORES OPERATORS Cases: Mopark Department Store, Grandbuy Department Store Mopark Department Store and Grandbuy Department Store are the forerunners in launching crossborder e-commerce business. Apart from establishing online websites selling imported products, both department store operators have set up cross-border experiential store in selected branch stores to showcase the products and let customers place their orders on site. Location: 7th Floor, Mopark Department Store, 611 Tianhe Road, Tianhe District, Guangzhou. Business District: Tianhe District Guangzhou-based Mopark Department Store is the first department store operator in Guangzhou as well as in Guangdong Province to run the cross-border e-commerce business. The retailer has set up a cross-border shopping channel on its website (http://www.imopark.com/). It has also opened a number of cross-border direct sales experiential stores in some of its department stores. Mopark Department Store partners with Top Ideal Logistics, a Guangzhou-based logistics company, to operate the business. The former provides the sales channels (both online and offline), while the latter handles logistics, customs clearance and inspection for the imported products sold in Mopark s experiential store 7. WEBSITE http://www.imopark.com/ Opening date: 28-4-2015 Operating area: ~ 300 sqm Telephone number: 020-61212111 Operating Hours: 10am-10pm Product categories: Maternal and child-related products, health care products, cosmetics and personal care products, food and beverages, snacks, accessories, handbags, belts, suitcases Product origins: Website interface is in Chinese. Only bonded imported goods are offered on the website. 11

OBSERVATIONS We visited the experiential store in Mopark Department Store (Gangding branch) on a weekday afternoon. It is situated in Tianhe District, a central business area in Guangzhou with lots of shopping malls and restaurants. The experiential store is located on the 7th floor of Mopark Department Store, with an area of around 400 sqm. The store was undergoing store revamp to expand the floor area and product offerings. Some new shelves were added to the store and staff were busy putting the products on the shelves. There were only a few aisles in the store displaying mostly duty-paid products. Pictures of bonded imported products were displayed on shelves and walls. But only a few types of bonded imported goods such as baby diapers, baby formulas and vitamin tablets were shown in the store. Foot traffic was not high during our visit. A few middle-aged customers (both male and female) were wandering around and familiarising themselves with the store. Cartons of unpacked baby diapers Baby diapers displayed on shelves New shelves were added to stock more products Photos of bonded products shown on the wall 12

MOPARK IN THE NEWS Recently, Mopark Department Store has announced that it will open a few more experiential stores selling imported products an experiential store in Huangpu was opened on 7 July 2015. It is reported that two other stores will be opened in Beijing Road branch and Haigou Shopping Centre in July 2015, and another two stores in Shengdi Plaza and Huadu district will be opened in August 2015, bringing the number of experiential stores to six 8. 13

2. CROSS-BORDER EXPERIENTIAL STORES RUN BY DEPARTMENT STORES OPERATORS Location: Grandbuy Gold Building, 395 Zhongshan Four Road, Yuexiu District, Guangzhou. Business District: Beijing Road District Opening date: 15-05-2015 Operating area: ~ 300 sqm Guangzhou-based Grandbuy Department Store has also rolled out a cross-border e-commerce shopping channel on its online platform (http://www.gbhui.com) and opened experiential stores in three of its department stores in Guangzhou, namely Grandbuy Department Store (Grandbuy Gold Building store) ( 广 百 黄 金 珠 宝 大 厦 ), Grandbuy Sunny Mall ( 广 百 新 一 城 店 ) and Grandbuy Xindaxin Department Store (Panyu Store) ( 新 大 新 番 禺 店 ). We visited the store in Grandbuy Gold Building on a weekday morning. Grandbuy s cross border e-commerce platform is completely self-owned and is different from the one operated by Mopark Department Store, which is jointly run by Mopark and Top Ideal Logistics 9. Telephone number: 020-83027168 Operating Hours: 10am-9pm Product categories: Maternal and child-related products, health care products, cosmetics and personal care products, frozen food, food and beverage, small household electrical appliances, handbags Product origins: WEBSITE http://www.gbhui.com/ Website interface is in Chinese. Both bonded imported goods and duty-paid goods are offered on the website. 14

OBSERVATIONS The experiential store is co-located with Grandbuy supermarket in the basement of Grandbuy Department Store. A wide range of duty-paid products, including frozen food, drinks, snacks, cosmetics and health care products, etc. were shelved in aisles in the supermarket. Selected pictures of bonded imported products were displayed on the shelves, each comes along with a QR code to link customers to the online platform. Only a few bonded goods such as diapers were displayed in the store. There was also a self-service area with a few computer stations for customers to shop online. Since the experiential store is located inside the supermarket, quite a number of customers were shopping in the store during our visit. Most of them were buying duty-paid grocery products. Some customers were looking at the displaying shelves for the bonded imported goods and taking down the product prices. A few customers were using the self-service stations to browse the bonded imported goods. Grandbuy experiential store is co-located with the supermarket A wide range of duty-paid products were sold in the store Bonded imported goods displayed on walls Self-service area with computer stations 15

3. CROSS-BORDER EXPERIENTIAL STORES RUN BY E- COMMERCE PLATFORMS Cases: SD 020 Experiential Store, Meijoy Best An increasing number of e-commerce platforms have started tapping cross-border import business. They have their own e-commerce platforms selling imported products, and at the same time, they have also set up physical stores to provide seamless online to in-store experiences for customers. We visited two of these cross-border experiential stores SD 020 experiential store (020 跨 境 直 购 体 验 馆 ) and Meijoy Best experiential store ( 悦 优 选 保 税 店 ). Location: 1421 North of Guangzhou Avenue, Baiyun District, Guangzhou. Shengdi Square. Business District: Baiyun District Opening date: 29-1-2015 SD 020 experiential store is owned and operated by Guangzhou SD 020 E-commerce Co. ( 广 州 林 贰 林 跨 境 电 子 商 务 公 司 ). It adopts the cross-border e-commerce +experiential store operation model. Customers can buy imported goods in its cross-border e-commerce platform (http://www.sd020.com/shop/index.php) or purchase in the O2O experiential store. The company handles custom clearance and shipping arrangement for customers. The ordered products will be delivered to customers directly from the bonded warehouse. The experiential store is located in the north of Guangzhou Avenue, an arterial road in Shengdi district. It is also a high traffic area. Operating area: about 300 sqm Telephone number: 020-86816828 Operating Hours: 10am-9pm Product categories: Maternal and child-related products, cosmetics and personal care products, health care products, food and beverages, imported fruits, kitchenware, handbags, wallets, belts Product origins: WEBSITE http://www.sd020.com/shop/index.php Website interface is in Chinese. Both bonded imported goods and duty-paid goods are offered on the website. 16

OBSERVATIONS With an area of around 300 sqm, the SD 020 experiential store was clean and well-organised. Various types of duty-paid products including skincare products for kids, snacks, beverages, and wine were stacked on the shelves in the main area of the store. There was also a separate area displaying bonded imported products. That said, the range of bonded imported goods that the store displays was limited. A few baby diapers brands, baby formulas, health supplements, cereals and wine were displayed in the area. Customers need to take down the product numbers of the bonded imported products they want to buy and complete the purchasing procedure at the cashier. Otherwise, they can place orders on the website. Unlike the other experiential stores we visited, there were no virtual walls or shelves displaying photos of bonded imported products. We visited the store on a weekday morning and we were the only customers in the stores. Duty-paid products neatly placed on shelves Duty-paid products neatly placed on shelves A separate area showing bonded-imported products A separate area showing bonded-imported products 17

3. CROSS-BORDER EXPERIENTIAL STORES RUN BY E-COMMERCE PLATFORMS Location: 4th Floor, Spring Mall, GT Land Plaza, Zhujiang New Town, Tianhe District, Guangzhou. Business District: Central Business District Opening date: 23-01-2015 Meijoy Best experiential store is owned and run by Guangzhou Meijoy Best E-Commerce Co., Ltd, (Meijoy Best) ( 广 东 美 悦 优 选 电 子 商 务 有 限 公 司 ). Meijoy Best has also established a crossborder e-commerce shopping website (http://www.meijoybest.com/). The company hopes to provide seamless cross-border shopping experience for customers via both its online and offline platforms. WEBSITE http://www.meijoybest.com/ Operating area: ~200 sqm Telephone number: 400-840-8700 Operating Hours: 10am-9pm Product categories: Maternal and child-related products, health care products, cosmetics and personal care products, wine, food and beverages, designer handbags, wallets, watches, electronic products Product origins: Website interface is in Chinese. Only bonded imported goods are offered on the website. 18

OBSERVATIONS We visited the store on a weekday afternoon and we were quite impressed by its visitor flow and nice store design. Meijoy Best is located in GT Land Plaza in Zhujiang New Town, the Central Business District of Guangzhou; its central and convenient location allows the store to attract customers and drive foot traffic. There was a large virtual wall right next to the store entrance displaying photos of the bonded imported products. This certainly can give customers a clear idea of what the store offers. Compared with the other stores that we visited, Meijoy Best experiential store stocked the widest range of both bonded and duty-paid imported goods, from designer bags and premium cosmetics products to wine and imported snack to personal care products. Meijoy Best experiential store also sold more high-ticket products, such as designer handbags, high-end watches and cosmetics products. The duty-paid products were displaced neatly on the shelves, while photos of bonded imported products were displayed on the walls. To place orders, customers need to take down the barcode number of the products and proceed to the service counter. Alternatively, they can buy the products on the online platform. Virtual walls displaying photos of bonded imported products High-ticket products Duty-paid products shown on shelves A customer placing order at the service counter 19

MEIJOY BEST IN THE NEWS Meijoy Best opened a second store in Vanke Mall in Nanhai district of Foshan, Guangdong on 25 July. The store sells both duty-paid goods and bonded imported goods. Meijoy Best said that it will open about 800 offline stores in 2015, 30% of which will be self-operated stores and 70% will be franchised stores. The stores will be classified into two types. 300 stores will offer both duty-paid goods and bonded imported goods. The remaining 500 stores will only display products through posters, ipads, etc., and customers can order online 10. 20

KEY TAKEAWAYS All of the cross-border experiential stores we visited sell both duty-paid goods and bonded imported goods. In general, the ratio of duty-paid goods to bonded imported goods is around 7:3. We noted that a few stores in Funsens sell mostly duty-paid goods. Prices of imported products vary a great deal at different experiential stores. The Fung Business Intelligence Centre compared the prices of selected popular bonded products offered in different experiential stores (see Exhibit 1). Overall speaking, products offered at Funsens stores are cheaper than in other experiential stores and their respective online platforms. This is partly attributable to the deeper discounts offered by retailers in Funsens. Price and product variety are key differentiators. Store footfall in Funsens exceeded other experiential stores we visited although Funsens is located further away from the city centre. This may due in part to the larger variety of imported goods offered at cheaper prices in Funsens. Exhibit 1: Prices of selected bonded imported products at various stores Source: Funsens, imopark, gbhui, SD 020, Meijoy Best, Tmall, compiled by Fung Business Intelligence Centre * Note: Prices as of 14 July, 2015 21

KEY TAKEAWAYS (Cont d) Some customers reflected to us that they like this new business model. They said the bonded imported products offered in the stores are authentic products and they have greater faith in shopping in the experiential stores. The ability to see and touch the products before purchasing is definitely an added advantage. That said, the variety of bonded imported goods is still very limited. The experiential stores sell mainly grocery products with major focus on milk powders, baby diapers, cosmetics products, health supplements, etc. Only a few offers high-end handbags and accessories, home electronics, digital products. There is ample room to expand product offerings and improve the quality of customer experience. With more and more experiential stores opening in the city, competition in crossborder e-commerce sector is set to become fiercer. It may also drive down the retail price of some imported products and lead to price disruption. High-priced international brands, in particular, are more likely to be affected. The proliferation of this new business model - cross-border e-commerce plus offline experiential stores - in Guangzhou is changing the ways people buying imported products. It may negatively impact the business of daigou agencies, another popular channel for buying overseas products. Daigou agencies buy the overseas products on behalf of the customers and charge them commissions. The crossborder experiential stores and their associated e-commerce platforms allow customers to buy overseas products directly at ease and no commissions are paid. Meanwhile, mainland consumers shopping trips to overseas countries, Hong Kong and Macau may be reduced with greater inflow of imported goods into China. With the government s eagerness to further promote cross-border e-commerce development, we expect this new business model to be duplicated soon in other FTZs and bonded areas in pilot cities approved for cross-border e-commerce import services. 22

ENDNOTES 1 "Physical retailers invest in experiential stores for greater market share." 16 July, 2015. Sina. http://news.sina.com.tw/article/20150716/14789045.html 2 "Cross-border e-commerce enterprises target Nansha market." 24 June, 2015. Sina. http://tech.sina.com.cn/i/2015-06-24/doc-ifxefurr1804635.shtml 3 "Development of FTZ in Nansha." 16 July, 2015. Sohu. http://business.sohu.com/20150716/n416925063.shtml 4 "Cross-border e-commerce experiential stores in Guangzhou is getting popular." 3 July, 2015. Wenweipo. http://paper.wenweipo.com/2015/07/03/cn1507030001.htm 5 "Funsens to open in 1 May, 2015." 21 April, 2015. Xinhua. http://news.dayoo.com/finance/201504/21/54391_111561626.htm 6 "Cross-border e-commerce experiential stores in Guangzhou is getting popular." 3 July, 2015. Wenweipo. http://paper.wenweipo.com/2015/07/03/cn1507030001.htm 7 "Mopark to launch O2O experiential stores." 28 April, 2015. Ebrun. http://www.ebrun.com/20150428/132525.shtml 8 "Cross-border e-commerce experiential stores become the key for the transformation of department stores in China." 8 July, 2015. Sina. http://news.sina.com.tw/article/20150708/14734072.html 9 "Grandbuy to open three cross-border e-commerce experiential stores." 15 May, 2015. Ebrun. http://www.ebrun.com/20150515/134077.shtml 10 "Meijoy Best to open cross-border e-commerce experiential store in Foshan." 24 July, 2015. Ebrun. http://www.ebrun.com/20150724/142143.shtml For more details about cross-border import trade, please refer to the section on Cross-Border E-Commerce: Import Trade in our earlier publication Spotlight on China Retail. April 2015. Fung Business Intelligence Centre. https://www.fbicgroup.com/?q=publication/spotlight-china-retail 23

CONTACTS Asia Distribution and Retail Teresa Lam Vice President teresalam@fung1937.com (852) 2300 2466 Christy Li Research Manager christyli@fung1937.com (852) 2300 2476 Fung Business Intelligence Centre 10/F, LiFung Tower, 888 Cheung Sha Wan Road, Kowloon, Hong Kong Tel: (852) 2300 2470 Fax: (852) 2635 1598 Email: fbicgroup@fung1937.com http://www.fbicgroup.com/ Find us on WeChat FBIC WEBSITE www.fbicgroup.com Photo source: Fung Business Intelligence Centre Picture source: http://www.freepik.com Copyright 2015 Fung Business Intelligence Centre. All rights reserved. Though the Fung Business Intelligence Centre endeavours to have information presented in this document as accurate and updated as possible, it accepts no responsibility for any error, omission or misrepresentation. Fung Business Intelligence Centre and/or its associates accept no responsibility for any direct, indirect or consequential loss that may arise from the use of information contained in this document. 24