Sold in China
What’s happening in the world’s hottest retail market
With China, it’s always been about the numbers. The world’s most populous nation became the world’s largest economy last month, according to the International Monetary Fund. But size alone is not what’s drawing companies like Abercrombie & Fitch, Gap, Burberry and Louis Vuitton.
China’s retail sales have grown at around 15 percent annually for the past five years, according to “Ten Highlights of China’s Commercial Sector,” compiled by the Fung Business Intelligence Center and released last January. With increasing urbanization and household income, it shows no signs of waning. By 2022, the retail market will top $8 trillion, according to the Economist Intelligence Unit; the U.S. retail market in 2022 will be just over $4 trillion.
China became the world’s largest grocery, luxury and e-commerce markets last year, and there are plans to build nearly 550 malls in the country over the next few years. “Many of them are by no means small,” says K.K. Fung, managing director for greater China and chair of retail for Asia Pacific with commercial real estate firm JLL. “The total space available in the next three years is astronomical.”
Ready to send a team to Beijing or Shanghai to build your first bricks-and-mortar store? It’s certainly tempting, but it requires an understanding of a vastly different culture. Take the luxury segment, which has been — and continues to be — strong in China due to the rise of the middle class and a growing brand consciousness. But the government’s anti-corruption campaign has taken a bite.
“In the Chinese culture it is common to buy gifts to give out to business partners,” says Yujun Qiu, a Beijing-based retail analyst with Planet Retail. “Many companies buy such gifts for government officials as a way of fostering relationships, and that can be an important market for luxury brands. But those officials are now extremely careful about accepting such gifts.”
“Chinese consumers are starving for global and luxury brands,” says Rob Garf, vice president of industry strategy and insights with Demandware. He cites three Demandware clients — Puma, Clarins and Lacoste — who have successfully made inroads into the country.
“The consumer knows these brands, and they are reacting to consumer demand,” Garf says. “That’s the case for many fashion and luxury brands. There’s been a ton of counterfeiting of these brands and others when there is the demand and not the supply.”
A desire for Western brand prestige means Chinese consumers are willing to part with more of their income to acquire these status symbols.
“A cup of coffee in Starbucks is not any less than what you pay in San Francisco, but the monthly income of those consumers is probably 10 times lower than people in San Francisco,” says Fung, who is based in Hong Kong. “But [they] still want to go to Starbucks or be seen holding a paper cup with a green logo on it.”
As the Chinese are becoming some of the world’s most avid international travelers, they are being introduced to Western brands that they want to find at home. Abercrombie & Fitch opened its first store earlier this year and says it could bring as many as 100 A&F and Hollister stores there. Gap opened its first stores in 2012 and plans to open as many as 35 this year.
“China has a huge demand for quality and stylish products [that] U.S. retailers have great opportunities to fill in,” Qiu says.
After a few shaky years, Walmart is once again growing in China. Last year the company announced it would open up to 110 more stores in the country by 2016.
Exporting products may work, but what may not is the formula that companies like Walmart follow successfully in the United States. Chinese consumers in the largest cities expect e-commerce deliveries within several hours; China Post — the official postal service — might make multiple deliveries to a residence daily. But that’s not the only complication.
A Chinese consumer can receive a package, “open it up, check it and can return it right there,” says John Zhang, professor of marketing and director of the Penn China Center at the University of Pennsylvania’s Wharton School of Business.
Then there’s the Chinese competitive spirit. “If your company creates something very successful in China, then Chinese companies will replicate you rapidly and relentlessly,” says Steven Veldhoen, partner and consumer and retail practice lead for strategy&, a division of PricewaterhouseCoopers. “The key is building competitive advantage which is sustainable over time, rather than just against where Chinese competition may be today.”
Understanding the Market
What’s worked — and what hasn’t — for retailers in China
Successful trailblazers often find themselves passing the remains of those who came before. Such is the case with retailers seeking to enter China: They must go where some have gone — and failed — before. Some Western retailers have endured losses for years before establishing a business plan that worked. Others have left the country altogether.
“One needs to understand the China market is not one market,” says K.K. Fung, managing director for Greater China and chair of retail for Asia Pacific with JLL. “There are many submarkets. You will have to get your market information right if you’re thinking of coming into China.”
Taiwanese grocer RT-Mart has operated in China for two decades without closing a store. “It has done its market research about the Chinese consumers,” says Yujun Qiu, a retail analyst with Planet Retail. “Of course, Chinese consumers share a lot with the Taiwanese consumer. But it is the best performing hypermarket operator in China. Its success really depends on knowledge of the Chinese consumer.”
‘Eyes wide open’
It’s apparent — at least in China — when a Western company simply tries to import what has worked elsewhere. Best Buy took its nameplate to China in 2006 and also purchased Five Star, a retailer with a longer track record there. By 2013, Best Buy closed its named stores, and media reports have the company looking to sell off all of its operations there.
Qiu says it never was the right fit: Best Buy devoted too much space to things like high-end stereos. “That wouldn’t make sense for normal retail operations here,” he says. “They have fancy, expensive products which could draw traffic, but won’t sell [Chinese] cookware.”
Best Buy is far from the only foreign retailer to struggle. The Home Depot entered and then left the Chinese market, another move that Qiu termed a bad fit. “In the U.S. ... consumers like to do it themselves. In China, most like to see the projects completed and have others install it for them.”
British do-it-yourself retailer B&Q was headed down the same path until it shifted gears. “The big proposition at B&Q is from home decorating services,” Qiu says. “All the consumer has to do is come to a store, pick the materials and pay for it. That is working quite well.”
While it may seem obvious, Western retailers entering China must remember that they are in China, serving Chinese customers. “If there is no significant DIY culture in China — for a lot of reasons — then why try to set up a DIY chain?” asks Steven Veldhoen, partner and consumer and retail practice lead for strategy&.
“If you make that kind of a high-risk/high-return investment, then at least make sure that you do it with eyes wide open. The same held true for Best Buy. Chinese consumers were not interested in guaranteed low prices — they want to bargain for their electronic wares.”
“If you look at failures, there seems to be a pattern,” says John Zhang, professor of marketing and director of the Penn China Center at the University of Pennsylvania’s Wharton School of Business. “If you talk about a company where you sell these sorts of goods sourced locally, in most cases, Western companies are not doing too well. If you talk about where you go in with your own brand and that brand is not available anywhere in China, they seem to be doing better.”
Walmart, France’s Carrefour and the United Kingdom’s Tesco are making inroads, though it has taken some time. “They originally went into the market thinking they could [use] their operating model and principals that have served them so well elsewhere,” says Rob Garf, Demandware’s vice president of industry strategy and insights.
“The Chinese consumer is so much different. It comes down to things like store layout, assortment and payment methods. It’s taken them some time to get boots on the ground and local resources to manage the local consumer there and operate as a local entity with the benefits of the global backing of their enterprise.”
Navigating China’s sensitive — and lucrative — online retail environment
The disposable income of Chinese consumers, coupled with increasing urbanization, makes e-commerce an appealing way for retailers to enter China. But it brings its own set of complexities.
“There are a couple of things that are in favor of the expansion of e-commerce,” says John Zhang, professor of marketing and director of the Penn China Center at the University of Pennsylvania’s Wharton School of Business. “In China, everywhere is really congested. … any store you go into is just jammed up with people. The best way to shop is to stay in your living room and order online.”
On the other hand, “The context is specifically Chinese,” says Steven Veldhoen, partner and consumer and retail practice lead for strategy&. “E-commerce in China has its own eco-system and infrastructure. Chinese e-commerce shoppers have very specific habits and desires.”
Perhaps that is why retailers continue to look to Canada and the U.K. for global e-commerce expansion — markets without China’s vast potential growth but with easier barriers to entry. eBay Enterprise’s Holiday 2014 Retail Audit found that 45 percent of large online retailers in the United States planned to expand globally in 2014; Canada (23 percent) and the U.K. (16 percent) topped China (15 percent) as target markets.
Reaching the consumer
Retailers interested in China’s e-commerce possibilities can look to Clarins as an example. Clarins launched its online presence in China using Demandware’s enterprise cloud commerce platform. “Not only have they increased sales significantly … they also have increased their loyalty and customer database significantly,” says Rob Garf, Demandware’s vice president of industry strategy and insights.
A majority of Clarins’ orders in China are generated from “areas where they don’t have a physical store. They’re able to attract and garner new customers without the cost, complexity and capital of standing up their own store,” he says.
Like many U.S.-based e-commerce sites, Clarins operates through Tmall, a division of mega e-commerce company Alibaba. Given that just over half of all retailers sell through Tmall, though, standing out can be a challenge. “Having your own digital destination as a complement to Tmall can allow you to create a direct relationship with customers and start to better understand their behavior,” Garf says.
Tmall can be a cluttered maze of multiple retailers and not as experiential as U.S. online shoppers are accustomed to, but it does have a distinct advantage: It can reach Chinese consumers.
Foreign companies that choose to make a dot-com available in China can find their URLs blocked or traffic slowed. “Basically the website needs to be recognized by a government that is pervasively monitoring the digital flow of traffic in and out,” Garf says. “It needs to be recognized as a ‘local site’ and you need to partner with a content delivery network located in China so that performance is at a level that consumers expect.”
Chinese consumers are more willing and able to shop international sites. And they are taking advantage of paying lower fees by importing the products themselves rather than paying high tax and tariffs.
That’s created a lot of small packages coming into Chinese ports — and the government is responding, says Yujun Qiu, a retail analyst with Planet Retail. “Customs can’t inspect every parcel and they are losing control of the import and flow of products. Now with the new trial cross-border e-commerce platform, the government ensures no import tariffs on small parcels and paves the way for inspections.” That has reduced typical delivery times from two to four weeks to seven to 10 days, he says.
The Chinese government was testing the plan last month in some 20 cities. If adopted more widely, it could ease the way for Chinese consumers to make more overseas purchases — presenting great opportunities for foreign retailers.
Amazon has set up a store on Kuajingtong, the official cross-border e-commerce platform, and plans to establish logistics centers in the Shanghai Free Trade Zone, Qiu says. The retailer hopes to bring a greater number of American and foreign products to China, more quickly and cost effectively, through its global sourcing system.
China already has a robust e-commerce economy, led by Alibaba, which made waves in the United States earlier this year with its $20 billion initial public offering. Alibaba includes consumer-to-consumer site Taobao, the aforementioned Tmall and its own online payment system. The mother site, Alibaba.com, connects Chinese manufacturers with global buyers.
“I would like to stress how quickly the Chinese are prepared to take the overseas retailers into their markets,” says K.K. Fung, managing director for Greater China and chair of retail for Asia Pacific with JLL. “I think that’s all very positive. They are prepared to take on competition and accept more competition into their markets and the consumer has the aspiration for overseas brands. Those are all positives.
“But as I keep telling people,” he continues, “China is like a big sponge. You need to be very patient. Do not expect to come in and make a big profit the next year.”