Anniversary Publication Series | Part 3/3: Driving Sales Channels in China’s ‘New Normal’
Although consumer spending has slowed since the onset of the pandemic, many of our Clients continue to project healthy sales growth.
As the consumer market continues to transform, affected by many factors including population change, increasing internet usage, and changing consumer behaviour, new opportunities emerge.
But companies face numerous challenges such as intense competition, brand positioning and distribution methods.
In our final publication of our 40th anniversary series, we take a broad look at which factors will affect international brands on their path to success and how you can sell more in China’s post-pandemic ‘New Normal’.
1. The World’s Most Dynamic Retail Market
Growth under Zero-COVID
Strict pandemic measures have accelerated the development of ‘offline to online’ retail channels. The increasingly demanding E-commerce userbase is creating huge competition amongst retail giants on a broader range of product segments, such as online grocery sales. Facilitated by E-commerce titans such as Meituan and Pinduoduo, this trend shows no signs of slowing down as it contributes to the growth of the world’s largest digital marketplace within China’s already immense retail market, which totalled USD 2 trillion in 2021.
Recognising this growth, the Chinese government is promoting unified compliance regulations across E-commerce channels. These include implementing a legal framework for live-broadcast marketing, increasing the positive list for cross-border E-commerce commodities, and stricter control over the taxation of Key Opinion Leaders (KOLs) with greater regulation of marketing messages and promotions.
The establishment of a more controlled E-commerce environment presents more opportunities for brands. However, significant social and cultural differences between cities and provinces require a nuanced understanding of the targeted market.
Unique E-commerce Environment
China’s online marketplaces are highly dynamic and vastly different from the US and Europe. Companies looking to enter the market via E-commerce channels should be wary of not underestimating the cost and overestimating the return.
The cost items to consider in your E-commerce budget are:
- Content creation and advertising.
- KOLs and influencers.
- Logistics and fulfilment.
- Customer service.
- Platform fees.
As the budget allocation is highly dependent on brand recognition and maturity, a worldwide known brand will allocate less capital on KOLs as opposed to a midsize brand that requires more public exposure/awareness.
China’s E-commerce Environment
2. Understanding the Best Way to Sell
Where to start when looking to enter a vast, fast-paced, and unique market? Its complex regulations and distinct market conditions can be overwhelming. Below, we outline a typical path to help you approach your market entry.
Market Analysis & Strategy Definition
The retail landscape has become so saturated, mature, and complex, that it is more vital than ever for market entrants to go beyond a superficial understanding of the local market. In relation to your brand, it is crucial to assess:
Market Sizing, Segmentation and Trends
- Identify and validate market development trends of related brands/products.
- Compare online and offline sales proportion and identify key sales channels.
- Analyse existing markets in relation to current and upcoming rules and regulations.
- Assess the suitability of a broad distributor network or exclusive contracts.
Brand Benchmarking & Voice of Customer
- Identify the market landscape and top competitors in related categories including key information relating to revenue, market share, price positioning and growth prospect.
- Conduct reality check interviews with market insiders including competitors, distributors, and retail channel operators.
- Investigate high potential customer groups and identify commercial preferences and functional customer requirements.
To be successful, companies may need to combine various market entry strategies to fully penetrate the market and achieve sustained market growth.
Market Entry Options
A key question for brands looking to sell in China is whether or not they need to set up a local entity. Traditionally, foreign companies would establish an entity such as a WFOE or a joint venture with a local partner. However, given the rise of E-commerce selling, entity-free entry is an increasingly attractive option. Below we outline the benefits of three potential entry models.
Selling into China Without and Entity
Located in special customs areas, bonded warehouses have made it significantly easier for companies to enter the market, removing the need to set up an entity.
- A cost-effective way to test the market potential.
- Goods are physically in China and duties are paid only upon importation, thereby reducing cost and time to market.
- Combined with a Hong Kong company, it is possible to invoice customers in RMB given Hong Kong’s full RMB convertibility.
Companies may also utilise the bonded warehouse model to cater to both offline demand and cross border E-commerce.
Cross border E-commerce
Cross-border E-commerce via platforms such as JD Worldwide or Tmall Global is a less complex, lower-risk market entry strategy, providing companies with direct access to Chinese buyers.
- Multi-step roll-out to additional platforms with a step-by-step approach after initial market testing.
- Implementation via local outsourcing to manage trade operations, logistics and warehousing.
- Fewer taxes and compliance checks, no product certification required.
Leveraging Hong Kong
Setting up a distribution centre in Hong Kong is a relatively simple and cost-effective way to export goods to China and Asia Pacific. This model offers the possibility to:
- Streamline legal set-up and changes.
- Favourable legal and tax environment.
- Use the Hong Kong branch as a legal risk buffer.
- Minimise impact on partners, enabling VAT refund for suppliers.
- Shorten logistic routes via relocated warehouses.
- Leverage dual circulation policy.
Wholly Foreign Owned Enterprise (WFOE)
Although opening a local entity is a more complex and time-consuming process, requiring compliance with various regulations, it affords foreign companies the same rights to trade as their local counterparts and the freedom to sell across multiple channels. Additional benefits include:
- Independent control over operations, ensuring a higher degree of compliance.
- Capacity to hire both local and foreign employees.
- Ability to repatriate profits and export products.
- The power to issue VAT (Fapiao).
- Closer customer proximity.
Operation Excellence Through Digitisation
Companies face challenges in managing sales and distribution activities due to multiple factors, including omnichannel selling, shifting consumer demand, and fluctuating supplier and logistics costs.
A fully integrated ERP system can therefore improve efficiency by providing full visibility across all internal and external operational processes, as well as crucial customer insights.
Potential integrations include:
- HQ ERP system: Enable company HQs to monitor all operations across subsidiaries.
- Chinese E-commerce platforms: Real-time visibility into inventory, pricing and shipment information.
- Point of sale (POS) systems: Facilitate daily communication with stores.
- Warehousing and 3PLs: Shorten delivery lead times, enhance software platform-based communication with suppliers and third-party logistics providers.
- CRM systems: Gain an overview of all customer information and interactions in one place.
Bucherer looked for an integrated ERP solution to support the digital integration of our sales and distribution subsidiary in Hong Kong. Fiducia performed an in-depth analysis of our business operating model and implemented modules to support our order processing and finance management. The Fiducia team has provided continuous support before and after the implementation to facilitate this management and digital transition.
— Markus Amstutz, (former) CFO, Carl F. Bucherer
3. Client Success Stories
Case Study 1: Offline and E-Commerce Market Entry for an Electronics Retailer
As a company which was only sourcing from China, our Client utilised Fiducia to find distribution partners and E-Commerce solutions, resulting in a full transformation into a sales and service entity for the local market.
Step 1. Competitor Analysis
- We conducted a deep analysis of five key competitors.
- Carried out deep-dive study on organisational set-up and business structuring.
Step 2. Channel Analysis
- Identified key sales channels for the Client’s products.
- Defined a concise online and offline channel strategy.
Step 3. Partner Search
- Conducted a search for qualified online and offline partners.
- Connected our Client with major E-commerce platforms.
Step. 4 Voice of Customer
- Investigated high potential customer groups.
- Identified commercial preferences and functional requirements of customers.
After connecting our Client to Alibaba and JD partners, we also introduced him to qualified distributors and logistics partners. The Client has continuously expanded his sales in the market.
Case Study 2: Direct Distribution Strategy for a Fashion Brand
Our Client, a leading outdoors brand from the DACH region approached Fiducia for practical advice on how to roll out a direct distribution strategy. Challenges included:
- How to build up a regional distribution hub in Asia?
- What is the best trade and logistics set-up?
- How to find experienced staff at an executive level?
Fiducia helped the Client overcome these challenges, improving the company’s overall efficiency. After identifying optimal warehouse locations, we helped the Client to incorporate a WFOE, set up their retail stores, and implement a customised ERP solution. We continue to support the Client on an ongoing basis assisting with all HR, corporate, financial and trade needs.
Ever since Richard Wolf decided to strengthen its footprint in Hong Kong and China, Fiducia has stood by our side. We needed a clear picture of the strengths and weaknesses of our local and international competitors in the market. Fiducia supported us with a detailed market analysis mapping out all of our relevant competitors. Based on this information, we were able to further increase our market share.
— Carolin Frey van Maris, Head of International Sales, Richard Wolf GmbH