China's retail market: Distribution the
key By Jayanthi Iyengar
US
sales companies have been celebrating and the US-China
Joint Commission on Commerce and Trade has been pointing
to eight recent business-friendly agreements, one of
which provides for the opening of China's retail sales
distribution system to foreign competition, leveling the
playing field. Under this agreement US companies will be
able to distribute their products directly to Chinese
stores without having to go through a state-owned
distribution company. It goes into effect on January 1,
2005.
The agreements are the result of China's
accession to the World Trade Organization (WTO), and
Beijing is required to drop preferential treatment for
any company and remove barriers to foreign companies so
that they can compete equally. Despite the rapid growth
of the economy after economic reform, the Chinese market
is still not mature, yet its very immaturity opens
possibilities and leaves wide room for maneuvering and
self-definition.
"This is a landmark day and a
very fruitful day in terms of the developing
relationship between the United States and China," said
US Commerce Secretary Don Evans, who signed the
agreements and led the team that included Trade
Representative Robert Zoellick and Agriculture Secretary
Ann Veneman.
Bill Primosch, director of
international policy for the National Association of
Manufacturers, however, sounded a more cautious note.
"We'll need careful monitoring to ensure the Chinese
deliver on what they've promised," he said soon after
the agreements were signed last Friday.
As many
companies have found to their peril, doing business in
the Middle Kingdom is as much about what they do and how
they do it as it is about what the Chinese government
does. After having sunk in millions of yuan, many
companies have discovered the great truth about the
Chinese market, says Piset Wattanavitukul, China-based
business management expert, former academician and
columnist with the Asia Pacific Management Forum. That
is: "There are many distinctive worlds in one China."
And the astute and successful seller gets to understand
them, how they work or don't work together, and works
the system that covers an enormous land mass. China also
defies some of the conventional marketing wisdom: the
new market bonanza may not be in the cities, but in the
developing rural areas.
An often-cited example
is that of the Thai energy-drink manufacturer Red Bull.
When the company entered the Chinese market in early
1996, with advertising budgets exceeding 100 million
yuan (US$12 million), it assumed the market would be its
for the taking. Yet things didn't quite pan out that
way. Instead of reaping the benefits of its
blitzkrieg, it found to its dismay that its
competitors and "me too" brands were the beneficiaries.
Distributors must cover huge
distances According to Wattanavitukul, Red Bull's
failure lay in not understanding the challenges of
covering a 9.6-million-square-kilometer market in a
short time. The company located its manufacturing base
in the Chinese city of Shenzhen and the island province
of Hainan - both special economic zones that give
incentives to foreign investors, and both in the south.
Its markets, however, were in the north and northeast.
Consumers were drawn to the retail outlets by the
company's advertising, but when the product was not
available, they ended up buying the competitors' and
imitation products.
Latter-day entrants such as
Pepsi understood the value of setting up their own
marketing teams in order to directly work with their
retailers, but experts say there is no such thing as a
set formula when it comes to cracking the Chinese
market. One reason is the very nature of the market -
huge and fragmented. Another reason is the legislative,
social and political framework, which is constantly in
flux. For instance, foreign suppliers were initially
allowed to sell directly in China. This led to the
growth of multi-layered marketing. But that approach was
abandoned after questionable behavior by foreign firms,
and regulations in 1999 made it necessary for foreigner
suppliers to use the state-owned distribution system.
Even today, the mail-order business is unknown
in China, but the Internet, particularly after the
outbreak of severe acute respiratory syndrome (SARS), is
being seen as a viable alternative channel for direct
sales. As marketing expert Alice Chung notes in an
article on about.com, "it is not the product, but
getting the product to reach their customers" that is
critical to success in China. Chung has said that recent
liberalization of the distribution system, to comply
with WTO requirements, intensifies both opportunities
and competition. Firms that establish effective
distribution networks will get a head-start in this
fast-growing market.
Any company doing business
in China today must understand the nature of the Chinese
market, consumerism, distribution network and habits. At
a very general level, the Chinese market could prove to
be a bonanza. This base is constantly growing, but
cracking this market is another matter.
In spite
of the high density of population and progressively
higher average annual incomes, per capita car ownership
is still low in China as compared with the developed
markets. Further, the Chinese prefer foods to processed,
packaged products, and they still continue to be
touch-and-feel shoppers. This makes them shop daily,
unlike their Western counterparts. For retailers, these
habits mean setting up their sales outlet in the city
centers. Rents there are high, pushing up the cost of
retailing.
The cash-and-carry-format retailers
such as Metro AG and Wal-Mart have been able to create a
following, despite outlets in the suburbs. The big
outlets are generally the hypermarkets. These
hypermarkets are all-in-one stores, which sell a
combination of foodstuffs and consumer durables. The
large retailers are able to draw customers to their
suburban units with this format because of their lower
unit prices, made possible by volume sales. The number
of customers tend to offset the price advantage against
the cost and effort of traveling to the suburbs, but it
is another matter when it comes to the smaller
retailers, who cannot extend similar benefits.
The market cream is in virgin rural
territory The buying segment is concentrated in
urban China. A supplier may be tempted to concentrate on
this market, but those who have been doing business for
long know that the cream is concentrated in virgin rural
territory. These markets are far apart, disparate and
difficult to penetrate, but they represent significant
market share and could make the difference between the
success and failure of an enterprise.
With
consumerism, the urban Chinese have become discerning.
They are no longer blindly swayed by foreign brands.
They ask specific questions. They also seek local
brands, driven by the nationalistic pride to buy local
products. The quality of the local products itself is
improving, and these also may carry a cost advantage
because of the lower labor costs and location. Further,
relationship between buyer and seller is another
important parameter that determines sales. A foreign
supplier would have to contend with this factor and
overcome local preference when doing business in China.
It is for these reasons that Jason Yang, manager
of consultancy and research for Colliers International
in Beijing, recommends retaining an experienced
consultant before venturing into China. This expert
would be able to help a new entrant run a market study
to assess consumer behavior and the past performance of
other failed and successful retailers. He or she would
provide guidance on major shopping areas, rental levels,
target groups, revenue stream, market positioning and
financial analysis. Further help could be provided in
site selection and location, taking into consideration
legal issues such as building height, zoning and
consumer profiles.
While these are important
issues at the retail level, distribution is yet another
ball game when it comes to China.
At present,
foreign firms are restricted from distributing imported
products and from managing distribution networks,
wholesaling outlets and warehouses. These restrictions
are in place to protect the domestic distribution
industry, which either has its origin in the state-owned
distribution centers or is part of the private
distribution companies set up after China permitted
private enterprise in this area.
The existing
distribution system has grown from the traditional
state-owned distribution system and suffers from all its
ills. The state-level distributors send a product to the
provincial units, which in turn sell to the retailers.
In the rural areas, where a larger geographical area has
to be covered, the layers increase. This makes
distribution easier and coverage of the retail territory
possible - distributors pool and distribute several
products to cover larger territories. However, from the
suppliers' point of view, every layer represents
additional cost in the form of a 5-7 percent dealer
commission. In the ultimate analysis, these have to be
passed on the consumer, which could lead to the
out-pricing of a product as compared to that of a
competitor who might be a domestic manufacturers
competing in local instead of national markets.
Foreign suppliers try to work around the
restrictions and attempt to reduce the number of
intermediaries by either directly contacting retailers
and working with them or by working through Hong Kong
agents. Another equally viable alternative is to set up
a joint venture with local wholesale and retail
partners, though the quality of Chinese salesmanship and
the nature of the market ultimately demand the direct
involvement of the supplier in promotion and sales at
the retail unit.
"So important has it become to
control the point of sales in China," says
Wattanavitukul, "that suppliers often send their own
sales personnel to promote their product in the
retailer's outlet."
Jayanthi Iyengar
is a senior business journalist from India who writes on
a range of subjects for publications in Asia, Britain
and the United States. She may be contacted atjayanthiiyengar1@hotmail.com.
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