Understanding The Basics On China Retail

The following is a re-post of an article by Renee Hartmann that appears on China Law Blog a year ago. Everything still holds true, and in the wake of Mattel’s recent Barbie retail flameout, it’s worth revisiting the customer acquisition philosophy that they overlooked.

Despite all the attention given to intellectual property copycats and price points, the single biggest challenge for any brand selling into the China market is distribution.

Though distribution is a challenge for any brand in any market, selling products in China not only requires a brand to meet the expectations of customers, in many cases, it actually requires you to create your own customers. In many industries, a retail channel literally does not exist — you will need to create your own retail concept and either run it yourself, or find others to do it for you — adding risk and uncertainty to the picture.

In eno’s business — the branded apparel sector — the vast majority of shops in China selling apparel, footwear and accessories are single-branded stores. This means that stores only sell one brand, such as Nike, Adidas, Columbia, Vans or North Face. Though consumers may assume that the brand owners run these stores, in China, 99% of retail locations are run by third-party operators.
Single-branded Nike, Adidas and Li-Ning stores number over 6,000 each in China.  The retail operator model is similar to the typical Western franchise model, except that in China most operators do not pay franchise fees due to the lack of established franchise laws and conventions.

This structure is similar to the retail landscape in Korea, but quite different from Western markets, where multi-brand retailers (i.e., Foot Locker, Urban Outfitters, REI, Target, Walmart) and department stores (i.e., Nordstrom, Macy’s) make up the bulk of most brands’ sales.

The proliferation of single-branded stores in China has several implications for brands:
–         your brand must be strong enough to drive people into stores
–         you must have a broad enough product line to fill out a store
–         you need to create your own unique retail concept

As a result, there are three maxims that I believe every brand selling to the China market should take to heart:

1.) Act like a retailer – whether you want to or not

Operating a brand in China means being good at retailing — whether it is your core competency or not. In practice, this means designing store layouts for your retailers, creating customized fixture units, designing Point of Sale signage, creating merchandising standards, providing retail training materials and building a line that fills out and optimizes an entire store. For brands that are primarily wholesalers in other markets, this can be a painful undertaking, requiring excruciating attention to detail and policing that is not required in other markets. For brands that retail in their home market, this can be an easier transition (although operating your own retail in China is not without its pain points).

As we roll out the eno store concept with retail operators in Tier 2 and 3 cities, our single biggest issue is providing retail marketing support to our retailers. Not only does our store concept need to work for them, in terms of ease of build-out, cost, material availability, and look and feel that differentiates our brand in the marketplace, but we also need to help them maintain the store look once it is open. This ongoing support requires creating product merchandising guidelines, seasonal imagery and signage support, promotional gifts and ongoing training for the retailer and their staff. We also need to work with the retailer to optimize the product mix for their customer base and sales patterns, and support them on the promotions the department stores practically force them to run during holiday and discount periods. This support is all on top of the typical support wholesalers provide to their retailers, such as marketing their brand to the end consumer through advertising, social media, grassroots, sports marketing, PR and other marketing support.

2.) Retailers are not long term investors – make money for them now

I wouldn’t say it is true that retailers in China don’t care about your brand. They do. They know that your brand is key to them making money. They are even willing to invest in your brand — up to a point. But, one thing is certain — they are not long-term investors. China retailers are extremely astute at two things: 1.) how to sell and 2.) how to keep costs low. In short, China retailers know how to make money — today. They know what will sell, and at what price. They (usually) know where to locate your brand, and whether a store will make money. They will not hesitate to discount your goods if it is the difference between them making money or not — no matter the impact on your brand. They will push you to do what they need in order to make money — today.
You may have a tendency to not want to believe them and to attribute their comments (or demands) to them not understanding your brand. You may disagree with them that your unique and innovative product won’t sell. The tough part is that 9 times out of 10 they are usually right. Their knowledge may not help you build your brand in the long-term or differentiate your product or concept, but listening to the retailers will help you determine what will sell and how you will make money for your retailers.

At eno, we are increasingly seeking out feedback and input from our retailers. If a retailer believes in your brand, they will be more than happy to provide input on your product, retail concept, marketing and brand image. Though this feedback is often blunt and to the point, it is immensely useful in both finding ways to make money for your retailer (and hence you) as well as in gaining buy in and support from your key customers. In fact, our retailers are beginning to ask for our help in creating their own brands and products, as they recognize that it is in branding and design where Chinese brands need the most help. By recognizing synergies between our brand, design and marketing skills and our retailers’ sales and distribution skills, we are engaging our retailers early in our brand’s development to ensure long term success for both parties.

Don’t stop creating innovative and brand building product, and don’t stop building your brand for the long term. Just know that this is your burden, not your retailers. This is your long-term investment in your brand. Retailers invest in your brand, but for the short term. As long as you can find ways to provide short and long term payoffs, both you and your retailers will be happy.

3.) Look pretty in Tier 1 cities, make money in Tier 2 and 3

Retail rents in Shanghai and Beijing are expensive on a global scale, and climbing every day. Even staff and other costs, while lower than in most other global cities, are still on the rise. However, efficiency of stores in China is mostly lower on a per square meter basis than stores in other countries, thus making the economics very difficult in Tier 1 cities in China. Given the immaturity of the market and so many new malls coming on line (80 new malls were built in Beijing in 2008), competition for the best retail spots in Tier 1 cities is steep. Since most retail operators come to shop in Tier 1 cities for brands to open in their home-towns, many brands use Tier 1 cities to create flagship or “image” stores in high-street areas, which are a great brand showcase, but typically lose money. These brands treat these image stores as a type of “marketing” expense, and don’t mind losing money on them, as it helps them to open retail stores elsewhere in China where they do make money. Additionally, consumers in Tier 1 cities are spoiled for choice, and therefore not as hungry for new brands as customers in Tier 2 and 3 cities.

At eno, our business development team is spending most of its time in cities like Chengdu, Chongqing, Tianjin, Wuxi, Wenzhou, Hangzhou, Ningbo and other second tier cities, as we work with retail operators to open our concept in their city.
Despite the hassles and costs that come with operating in Tier 1 markets, doing so is necessary for your brand to expand. All retailers train their eyes on Beijing and Shanghai, so looking good in these markets is essential to your ability to sign up retail operators in Tier 2 and 3 cities. If you can break-even or make a small profit running your own retail in Tier 1 cities, you are doing well. For most brands in China, expansion in Tier 2 and Tier 3 cities is where brands really profit.

These maxims hold true for single brand led retail in China. For those whose products have established retailers in the market, such as food, electronics, health and beauty products and others, these rules will not apply 100%. For these companies, issues such as making their products stand out in cluttered aisles, securing shelf space and executing successful promotions are probably bigger issues.

However, regardless of whether you are selling to existing customers or creating your own customers, you can be sure that distributing your product in China will be a challenge that will require you to rethink your brand and your product completely.

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