By
Franklin Chu, Azoya USA
International
retailers have been quick to flock to large e-Commerce platforms in China,
enticed by impressive consumer traffic in the world’s biggest retail market.
Yet a
growing number of them – including Macy’s, Watsons and New
Look – have recently decided to
shutter their Tmall Global stores despite growing demand among Chinese
consumers for foreign goods.
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Here’s what’s going on, as
well as some alternative paths for U.S. and foreign retail companies to succeed
in China.
Cross-Border Retailers Increasingly Compete With
Tmall’s Direct Retailing Business
Retailers on marketplaces such as Tmall Global
face an increasingly precarious situation. While Tmall Global is an online
marketplace for third-party global sellers, it also runs its own direct
retailing business, Tmall Direct Import. This store procures inventory in bulk
from leading global brands and sells directly to consumers.
This business model puts it in direct competition
with multi-brand retailers such as Macy’s and Watsons. Tmall Direct Import
items are almost always displayed in top-ranking search results and sell for
competitive prices, making it difficult forthird-party retailers to
compete.
Below, a snapshot shows search results of The
Ordinary skincare products on Tmall, with Tmall Direct Import conspicuously highlighted
in bright purple.
Tmall Direct Import ranks at the top of the search
results for The Ordinary’s nicotinamide products.
Source: Tmall Global Official Web Site
Tmall Direct Import has an economies of scale
advantage — it can buy a larger selection of products at lower bulk prices, and
pass those savings on to the consumer. Tmall also can stock top-selling items
in bonded warehouses for faster shipping. A newcomer to the market cannot do
this without incurring large inventory risk.
On top of all this, there isn’t much room on a
large marketplace’s web site to differentiate oneself with banners and brand
logos. To compete, retailers such as Macy’s and Watsons have to decide whether
or not they want to invest in a stronger customer experience or pull out of the
market altogether.
Retailers
Fail To Provide A Unique Proposition For Chinese Consumers
Multi-brand retailers like Macy’s are often
selling the same brands that other retailers sell, prompting consumers to pick
the retailer with the lowest prices and fastest delivery.
The snapshot below shows a number of different
retailers all selling the same Swisse products. In this type of situation, it’s
very easy for the customer to compare prices.
Source: Tmall Global Web Site
It’s hard for new market entrants to compete on pricing
and logistics, so U.S. and foreign retailers should curate products that better
reflect Chinese tastes. This requires procuring new inventory from sources that
may not be part of the original inventory in the home market.
But it’s hard for apparel retailers like Macy’s or
New Look because there are so many different colors and sizes for each product.
Retailers do have to provide a wide selection to drive traffic, but localizing
that selection for a market as large and diverse as China can be a nightmare.
Retailers
Aren’t Making Much Money On Marketplaces
On marketplace platforms, retailers have to spend
money on platform ads to drive traffic and clicks. In 2017, the average
customer acquisition cost on Tmall grew to over 310 RMB ($46), outstripping
the average revenue per user at 225 RMB ($34), according to market intelligence
firm Analysys International.
They are also pressured to discount their goods
for large platform-wide sales holidays such as Tmall’s Singles Day and JD.com’s
618 Festival in June. Discounting eats heavily into one’s margins, as these
holidays often drive a large percentage of sales in a given year.
Lastly, for large e-Commerce platforms, upfront
setup fees and deposits can cost tens of thousands of dollars, not to mention
commissions that can erode profits.
To give an example, Tmall charges an annual
fee of $5,000-10,000 USD, a deposit of $25,000 USD and commissions
that range from 0.5% to 5% for the most popular categories. There also is a 1%
payments processing fee charged by Alipay
For many, the costs are prohibitively high and the
ROI can be much lower than in developed markets.
What Should Retailers Do?
The environment for global retail has been
difficult in recent years. Many retailers are just trying to stay afloat in
their home markets, and lack the resources to invest in a stronger customer
experience in China.
But the competition in China has intensified in
recent years, and it’s not possible for a U.S. or foreign retailer to rely
solely on their brand name to drive sales anymore.
Multi-brand retailers have to figure out how to
differentiate themselves, and it often comes down to product selection, price
or shipping.
Proven Tips:
1. Set up a multi-channel China strategy to reduce the
risks associated with relying on a single platform. Setting up an official
China e-Commerce web site and a store on WeChat, China’s most influential social
media platform, can differentiate you from competitor retailers selling the
same brands, and enable you to build up your own loyal customer base.
2. Procure and sell a compelling mix of top-selling
and emerging brands at competitive prices.
3. Enhance the user experience to win over customers.
This includes moving inventory to Hong Kong or Chinese-bonded warehouses as
soon as possible to speed up shipping times, and establishing your own Chinese
customer service system.
4. Try to differentiate yourself through branding
events. UK beauty retailer Feelunique invited Chinese influencers to tour their
facilities in London, recording the event on social media and driving a strong
uptick in sales.
Franklin Chu is Managing Director for Azoya USA, a provider of turnkey
cross-border e-Commerce solutions to assist retailers looking to expand into
China through a cost-effective and lower risk method. To date more than 35
retailers in 11 countries have partnered with Azoya to expand into China with
ease, including French fashion retailer La Redoute, Sigma, Australia’s largest
pharmacy group, Feelunique, Europe’s largest online beauty retailer, and
Babyhaven, the U.S.’s premier retailer of juvenile products.
