The Chinese market is massive with a growing number of affluent consumers eager for Western products – but persuading them to buy at home rather than take a shopping trip to Paris may not always be easy. Penelope Ody investigates.
With almost 1.4 billion potential customers and year-on-year ecommerce sales growth expected to reach 27.9% this year, taking the total for online shopping alone to 2.36 trillion Yuan (£240bn), it is hardly surprising that many UK retailers are eyeing the Chinese market with interest.
By 2017, iResearch also suggests that total Chinese ecommerce sales – including B2B and online travel – will have hit 21.6 trillion Yuan (£2.23trillion). On Singles Day in 2014, Alibaba alone reported sales of more than 57 billion Yuan (£5.9bn) and shipped 278 million orders – rather more than 2 million an hour for 24 hours – with 43% of them placed on mobile devices. Such numbers are hard to visualise and an obvious carrot for Western retailers faced with slow growth at home.
The market is clearly attractive, but the practicalities of selling to China can be rather more daunting. While shoppers in the major population centres, such as Beijing or Shanghai, may be familiar with the better known Western brands, move to secondary cities and the leading names will be virtually unknown. Add multiple languages, a high level of counterfeit products and a consequent lack of trust that goods will really be authentic, significant customs problems, government controls on import quantities, the need for a business licence, very different demographics and a looming tax issue and successful Chinese operations clearly have their challenges.
Stuart Hill, CEO and Co-founder of wnDirect, was head of international operations at ASOS until 2012 and well remembers some of the issues the business faced: “The Chinese had no real concept of B2C customs clearance,” he says, “so quality control restrictions at the border could be very stringent, which meant that when the garments finally arrived customers often found they had had holes cut in them where the fabric had been taken for testing.”
Earlier this year wnDirect joined forces with Chinese digital marketing agency, Web2Asia, to establish a storefront on Tmall and a Chinese legal entity allowing UK retailers to quickly establish a Chinese web presence without worrying about a business licence, customer services, content management, customs issues or logistics. “This is the first development for our wnOnline go-to-market operation,” says Hall, “and it is the fastest growing part of our business. We already have live users and are talking to 25 retailers about setting up. There have been a few problems – especially with health foods delayed in customs – but generally using China Post goods can be delivered within five or six days.”
The health food issues – concerning sale of food supplements and multivitamins – reflects Chinese concerns over counterfeit products following “milk scandals” back in 2004 and 2008 when adulterated infant milk powder led to numerous deaths and more than 54,000 babies being hospitalised. Fake products are also a problem for many Western manufacturers producing in the country: designs are copied and sold as the genuine article on local marketplaces – much as ‘cabbage’ (extra garments made from economical use of fabric that were in addition to the contracted volume and were kept and sold illicitly by manufacturers) was an issue in the British cut and sew trade back in the 1970s.
“Intellectual property violation is a huge problem in China,” says David He, consultant with Kurt Salmon. “Western brands manufacturing in China have to employ their own quality control staff in the factories to ensure that designs are not being copied using poor quality materials for local distribution. Fakes often end up in secondary cities where local governments have no interest in controlling intellectual property rights and where consumers do not recognise the brand, so have no idea what standard the goods should be made to.”
As well as ending up in cities such as Chengdu, Jinan or Nanjing, counterfeit goods are also frequently sold on Taobao. “It is especially a problem for luxury brands,” says He. Last year Louis Vuitton signed an agreement with Alibaba to ensure that Taobao would “proactively take down” product listings of any suspected counterfeit LV products. The move followed a high profile police raid in Guiyang where the authorities confiscated more than 6,000 fake items – mostly branded as Louis Vuitton or Gucci – worth more than 81 million Yuan (£8.4m). The bags reputedly cost around 100 Yuan to produce but were being sold for more than 1,000 Yuan with customers accepting them as the genuine article.
There are also high tariffs on luxury goods entering China: “There is a 40% premium on goods,” says David He, “so the Chinese only buy a third of their luxury goods in the mainland. It is cheaper to go to Hong Kong or fly to Paris to buy them.” A high end handbag costing, say €6,000 would be €10,000 in a Chinese store and, as He also points out, “there will probably be a two year waiting list of the item”.
Buying online as an alternative also presents challenges. Apart from the perceived very high risk of buying a fake, shoppers also need to provide a copy of their ID card before their order can be delivered. This needs to be scanned, uploaded and sent to the customs agent or logistics company; failure to do so means that the goods will not be delivered and it can be difficult for retailers to arrange their return. “There are also issues with genuine goods being swapped in customs for fakes,” says Asif Khetani, Director of E-commerce at BT Expedite. “It means that many Chinese customers are very sceptical about ordering online so the Alipay system used by Tmall and Taobao is preferred.”
This is an escrow system with customers able to verify that they are satisfied with their purchases before the money is released to the seller. Alipay is said to account for at least half of China’s non-bank online payment market.
For UK retailers hoping to sell to China a shopfront on Tmall is the usual starting point, but many will face major challenges in creating brand awareness and trust. Cath Kidston, a BT Expedite customer, for example, has opened half a dozen shops in China all in either Hong Kong or Shanghai. These are obvious places to start and prime city locations, but will have had little impact on raising the brand profile elsewhere. “Affluent Chinese like branded goods and want to purchase them direct from the retailer,” says Khetani, “and not from a marketplace where counterfeits could be common. Our customers want to establish bricks and mortar sites to help establish their brands.”
The usual route is joint ventures with Chinese companies or franchise operations to simplify the legalities and business licensing issues. While opening in key cities seems to have been highly successful for brands such as Kidston, David He believes that bricks and mortar operations will be far more difficult if companies want to expand into the secondary areas: “Staff can be a major problem,” he says. “Luxury brands want to deliver good customer service and there is often little understanding of what that means. Wages are also rising – last year, for example, more than 60% of foreign companies reported increases in their wage bills of 5-10%.” Equally challenging can be managing in-country stock levels: demographics and tastes are very different from Europe and with no outlet malls to offload last season’s rejects getting rid of surplus stock can be expensive.
Alipay is said to account for at least half of China’s non-bank online payment market
For those preferring to focus purely on online sales, language used on the website can also be a challenge. In theory, despite the dozens of official and indigenous languages, most Chinese should be able to read Mandarin characters. However, while “Simplified Chinese” is standard in the mainland, Hong Kong, Taiwan and Macau retain the use of the more complex “Traditional Chinese” characters. Since Cantonese is spoken in Hong Kong, there is also a tradition of written Cantonese and a number of additional Mandarin characters not used on the mainland. Those UK e-tailers which do attempt to translate their websites into Chinese generally seem to use a mixture of English and “Simplified Chinese” and obviously hope that most customers will cope.
Compounding some of these difficulties is the Chinese government’s attitude to foreign imports and its preoccupation with protecting local brands and businesses. Concerns over the resale of imported goods, for example, mean that wnOnline’s Tmall storefront will decline any order for more than four items of the same SKU as Chinese customs will regard the order as wholesale and it may be unlikely ever to emerge from the customs shed. State media also emphasises any criticisms of Western products – as with recent iPhone problems – to encourage customers to buy Chinese goods instead: Xiaomi is now the largest smartphone supplier in China and the third largest worldwide. The authorities also regularly delay granting permission for Western products to be released in China, so giving local companies plenty of time to copy the item and beat the original to market.
Alibaba, which dominates the Chinese market, focuses on local companies for its marketplace and, like other Chinese websites, has the added benefit of not charging sales tax. “That makes it low cost,” says David He, “and so it is cheaper to buy online. However, this is going to change as the government is not happy that the $9bn worth of goods sold by Alibaba on Singles Day was untaxed.” A new ecommerce tax would increase prices online and could encourage a return to real world shops in some areas. Another current advantage for Alibaba is that they will accept returns whereas bricks and mortar Chinese stores will not. “When you buy in a shop nothing can be refunded,” says He, “but online you can return goods and that can be another problem for Western websites.”
Sending goods back to the UK can be expensive and difficult so Chinese customers are more likely to try to resell the goods on Taobao.
For high end retailers, given concern over counterfeit goods, establishing a bricks and mortar presence in major Chinese cities may be the only way to build consumer trust, while shipping online orders direct from the UK helps to emphasise that the items are genuine. For others, a Tmall presence may be adequate in both the short- and long-term – although making sure that orders comply with local regulations is essential if they are ever to reach their destination. As for expansion beyond major cities – that would seem to demand a rather hefty investment in brand promotion for a rather questionable return.
Caveat emptor? Perhaps would-be sellers to China need be equally cautious.