Flexibility is key to retail success in China

By Einar Tangen , for BizTimes

Published March 19, 2010

If you have a product or service and you want to get into the China market, one of your
biggest challenges will be distribution. Even though the media plays up the
problems with intellectual property, fakes and copycats, the truth is China’s
markets are immature.

Brand recognition, quality and value norms have not been established. But because
the canvas is unfinished, it also offers the ability to fill existing needs and create
new categories.

Great ideas for products and services often fall flat because businesses underestimate
delivery. Do not assume your distribution options are the same in China as in the
United States.

China is only in the beginning stages of its development, so thinking you can sell your
idea to a big box chain and be done with it are probably not in the cards. China
has 118 cities with 1 million or more people in them, but disposable income and
access to chain department stores in these cities is not a given.

Tier One cities have almost anything you could ask for but once you get beyond them
to the Tier Two and Three cities, the distribution systems are dominated by local
players. In time it is probable that these will be rolled up into more efficient
systems, but that will take years.

A good rule of thumb is to prove your product/service in the Tier One cities and then
make money in the Tier Two and Three cities. Moderate your expectations. If you
can break even in the Tier One cities, you are doing well. The real opportunities
will come as you expand into the smaller cities. To do so, you should plan on
creating your own retail channel. Unfortunately this means you have to have
something that will support the time and cost of creating your distribution system.

Take nothing for granted, which means you need a total ground-up retail concept,
including everything from layouts, materials, colors, lighting, bathroom fixtures,
plumbing, electrical, heating and air-conditioning, point of sale displays, employee
training, uniforms, stock systems, merchandise displays, return procedures,
marketing plans and a method of checking up on the stores to assure quality
control.
It also means that your retail concept may need to encompass other complimentary
merchandise or services to fill out the store and make it profitable.
Careful attention needs to be paid to selecting and integrating other products to create
the right atmosphere and synergy. But, do not be afraid to experiment and see what
works. There is no conventional wisdom in China yet when it comes to the retail market,
because the market is still evolving.

As always, you need to know your market, and since it’s your money, you should think
carefully about using experts to think for you. They often know only slightly more than
you do.

I constantly run into young people who are working for some big-name
law/accounting/consulting/banking firm, and when I turn the conversation to how they
advise their clients, it always comes down to some “old China hand” checking their gut
and limited knowledge and then giving their best guess.

You should always be very wary of advice you get – regardless of where it comes from –
when dealing in China. If you do go this route, drill down on the information your experts
used to develop their answers.

Remember, there is a lack of reliable information about China, so the more certain they
are, the less certain you should be. In the end, if you are coming to China, you have to
make the commitment to understand the market and the opportunities yourself, or be
prepared to learn some painful and expensive lessons.

In China, 99 percent of retail locations are run by third-party operators. Even in

department stores, each brand has its own location and pays rent and a percentage of
sales to the department store owners who are more like landlords than retailers.

Outside the malls and department chains, most stores are operated like franchises, but
instead of receiving a franchise fee, you have to get your profits from your sales to the
operators.

One twist, which is in your favor, is that while there are many variations, most Chinese
retailers buy the merchandise outright from you without an expectation of a return policy,
so once sold, unless it is defective, the inventory is gone and the sales risk is transferred
to the retailer. Vigilance is important, as it can be tempting for the retailer to buy knock-
off or similar looking merchandise and then sell it through your nicely designed retail
concept.

Proving your concept in the Tier One cities will provide you with a sales model to attract
Tier Two and Three cities. The advantage of the system is that you can get local
investor operators to foot the bill for creating the stores, but you have to agree on
location and
supervise every element of the conversion. Another element in your favor is that Chinese
storefronts are smaller and can be scaled down to meet your retail needs. They can also
be grouped with other complementary retail shops to create miniature lifestyle shopping
experiences.

So far, there has been little effort in this area outside the malls and department stores, but
it would be a welcome and less expensive alternative to either the chaos or sameness
which you generally encounter at street level. I have been on streets where a cement store
is next to a dry cleaners, next to a restaurant, next to a women’s clothing shop; and on
streets where there are 50 shops selling seemingly the same tea.

Keep in mind also that Chinese retailers have shorter investment horizons, so they need to
see fast returns. Retailers in China know how to sell and how to keep costs low. Their
focus is on “making money today.” They have the local knowledge and know what will sell,
and at what price. They (usually) know where to locate, whether a store will make money
and what the return on their investment will be. They will not hesitate to discount your
goods/services if it is the difference between making money or not, and they are not going
to be overly concerned about the impact on your brand.

So make sure the communication is two-way and when they push you on issues, make
sure you understand and are flexible to a point. You must resist the tendency to discount
their advice and attribute their comments (or demands) to not understanding your brand.

Nine times out of 10, they are right because they know their markets in ways you can not.
Their ideas and actions may run counter to your ideas about building your brand, but you
have to listen to them and adapt as necessary. The one thing you can be sure of is that
when you start distributing your product/service in China, it will be a challenge that will
require you to rethink your approach to your product/service on a regular basis, so be
prepared.

About Einar Tangen

Einar Tangen is a former Milwaukee business executive who now lives in Beijing,
China, where he advises the Heilongjiang Province on its technology valuations and
acquisitions. Tangen previously served as the chairman of Wisconsin’s International
Trade Council and is a former advisor to KOTRA (the Korean Government’s Direct
Foreign Investment Recruitment Agency). Readers who would like to submit questions
to Tangen about doing business in China can send an e-mail to
steve.jagler@biztimes.com.

Enjoy more content like this with a subscription to BizTimes Milwaukee.

Visit, https://www.biztimes.com/site/subscribe, for more information.