Selling to Consumers
You can sell to consumers in China in a number of ways. Consumers are getting more sophisticated, and they’re looking for more than just hypermarkets and convenience stores.
Retail stores
If you’re going to set up retail stores in China, you should expect that Chinese shoppers are as sophisticated as customers anywhere else in the world. Therefore, you should bring your latest store concept to China.
Don’t fall into the trap of making assumptions based on cheap labor. If you think margins will be higher in China, think again. High rent eats up a lot of cost savings. Also, don’t rely on cheap labor instead of using sophisticated inventory tracking systems. This tracking is particularly important in China, where you may encounter supply bottlenecks.
The following sections discuss a bit about your retail options.
Making concessions: Renting space from department stores
One retail option in China is the department store concession. Unlike in the West, Chinese department stores usually don’t buy inventory themselves. Instead, they rent out parts of their store to individual retailers. In most cases, concessionaires rent out a concession to sell just one brand. The result is confusing to many Western consumers because in Chinese department stores, products are usually grouped by brand rather than by type. This setup makes complete sense to the Chinese, though.
One drawback to renting a department store concession is that you have to float the department store 30 to 45 days on your sales. The department stores you rent from (rather than the concessions) provide the points of sale. Therefore, sorting out your sales and paying you takes the store some time.
Selling items in your own store
As we mention earlier in this chapter, specialty retailing is a particularly attractive opportunity for smaller foreign companies. You can choose from lots of possibilities, but some of the areas that seem particularly promising are stores related to cars (for example, car washes and lube shops), budget hotels, and education-related businesses.
One of the tough parts of retailing in China is that landlords customarily reserve the right to move you out — even though you sign a lease for a certain number of years. What’s worse is that landlords sometimes move you out and then try to ride your coattails by opening a similar business in your place. This problem is just one of the realities of retailing in China.
Keeping the customer’s experience consistentOne of the problems of managing employees in any industry in China is that they sometimes think they’ve found a better way to do something than what you’ve taught then. Without telling you, they may start doing it their way instead. When you’re in retail, this can be particularly problematic. Rick Wang is CEO of RetailCo, Inc. (www.retailcoinc.com), which is a company that specializes in apparel and food and beverage retailing. He says that in China, “Training is easy; training for consistency is hard.” His favorite example of this is a story one of his associates told him about training Chinese restaurant staff in a five-star hotel. The trainer spent several weeks each in Shanghai, showing the restaurant staff (among other things) how to set a Western-style table — forks, knives, spoons, and all. The staff learned quickly. After a few weeks of reinforcement, they were setting the tables perfectly each time. The trainer then left China for a couple of months. When he returned to the hotel, he saw that the tables were set perfectly — except for one thing. The spoons were all placed above the plates. He called the wait staff over and asked why they were doing this. They said, “Your system is good, but don’t you think ours is better?” The moral of this story is that to keep things consistent and maintain your brand and quality, train your employees. Don’t assume that they absorbed it the first time. Train them again. And again. |
Even though consumers show little brand loyalty in China, the concession system (see the preceding section) has made Chinese consumers used to shopping in stores by brand rather than by type of product. As some Western retailers have found out, getting consumers to break this habit — even in small stores — is difficult. Therefore, you probably want to set your store up the same way, grouping items by brand, not by product type.
Franchising
Franchising is a very hot area for foreign businesses in China. It’s a new concept to Chinese. Many foreign retailers that don’t normally franchise are choosing to do so in China. By having a Chinese person operating a store, you may be able to avoid making mistakes due to your lack of knowledge or understanding of the market. Franchising may be the best way for your company to enter second- and third-tier markets if your company isn’t committing enormous resources to China.
On the other hand, you want to ensure that your franchisees stick to your system. Franchisees may attempt to change important aspects of the store because they feel they have better ways of doing things. However, when franchisees make those changes, they can hurt your company a lot more by damaging the brand.
Franchising’s three barriersRick Wang of RetailCo, Inc., developed the three barriers to Chinese-foreign cooperation that we discuss in Chapter 7. He sees that the three barriers are a particularly large issue in franchising:
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Finding applicants
If you’re thinking of franchising your brand in China, you can find plenty of people in China who have the money and desire to become franchisees. However, because China doesn’t have any credit bureaus, finding quality franchisees takes a lot of work. For example, when RetailCo recently sought out franchisees for a new footwear store concept, it received about 500 business cards at a single franchise fair. Some people even approached the company with bundles of cash. Through a gradual process of screening and interviewing, RetailCo narrowed the field from that event to just one franchisee — that’s right, just one.
You can get the word out that you’re offering franchise opportunities in a number of ways, including Franchise China (www.english.franchisechina.com) and other shows, franchise brokers, and franchising consultants. The key to selling franchises isn’t having a big brand; it’s being able to show people that they’ll make money with you.
Screening franchisees
When looking to franchise into a second- or third-tier market (see Chapter 7 for info on tiers), make sure your franchisees have good relationships with the local government. A good business track record in a particular locale is often an indication that a potential franchisee is in good shape.
The most important part of screening franchisees is to see whether they really share your vision and buy into the brand. You can find this information only through multiple in-person interviews. You may also want to avoid franchisees who’ve already been operating in your field. Their ways and habits may transfer, which hurts consistency.
Protecting your company in the franchise agreement
The most costly problem you’re likely to face with a franchisee is that he or she does something to damage the brand. Fortunately, China’s franchise laws generally give as much (or more) protection to franchisors as Western countries’ laws do. Regardless, you should put some additional protections in your agreements.
Your franchise agreements should contain provisions that allow you to terminate the agreement for damaging the brand (or for other reasons), just as they would in the West. However, you should also require franchisees to furnish a security deposit against damaging the brand. (The deposit would be in addition to the franchise fee and ongoing royalties.) Your agreement should allow you to take the security deposit if you terminate the franchise agreement for certain problems. It must be an amount that hurts the franchisee to make him or her think twice about going off the reservation.
Most foreign franchisors use five-year contracts with their Chinese franchisees, even though they use ten-year contracts elsewhere. Although such a contract is standard practice in China, some people argue that you should use the same term in China that you do elsewhere. The argument goes that by signing shorter agreements, you’re not increasing your company’s protection; after all, a franchise agreement should allow you to terminate it in many instances, anyway. On the other hand, you’re sending the franchisees the message you don’t trust them, which may sow the seeds for future problems in the relationship.
Other franchisee challenges
The biggest day-to-day issue with franchisees is getting them to stick to your system. You need good controls to monitor and work with your franchisees, particularly if they’re in different parts of China. Just installing video cameras to monitor stores doesn’t work. You need to send a combination of secret shoppers and company representatives in to look at the stores and speak with the franchisees. It’s also vital that your company have a strong inventory management and tracking system.
Another issue that can arise later is that a franchisee thinks he or she understands your concept well enough to go independent. You may have a little more leverage to prevent that in China than you would in the West. If your company controls the supply chain to the franchisee, it’s probably not a big deal if the franchisee goes independent — he or she will have a hard time competing with you. If you don’t have that leverage (particularly because the concept is almost exclusive knowledge and system based), you face the same risk as you’d take outside of China.
Direct-to-consumer
Companies are selling directly to Chinese consumers through media such as catalogs, television shopping channels, and the Internet. Catalog selling has existed in China for over ten years, but market penetration is still relatively low. Catalog sales are concentrated in a small range of product types, such as baby products, books, magazines, and clothing, although you may find opportunities to sell other products through catalogs. One challenge is that getting good prospective customer lists in China can be a challenge. Internet sales are a mixture of stand-alone online stores and Web sites that have many small sellers.
Shipping was initially unreliable, but domestic shipping within China is now pretty good. Shipping collect on delivery (COD) to customers isn’t uncommon.
Online payment systems are pretty well established in China. Most customers in China have accounts with banks that have developed electronic payment systems in recent years. Therefore, individuals who have Internet access are usually able to pay for products through online debits to their bank accounts.
Selling services
Service areas that are growing particularly quickly in China include financial services, healthcare, travel, and education. In a number of service areas, Western brands have an edge over Chinese ones — particularly if they’re providing services that Chinese perceive to be more complex or more developed in the West.
Selling services to Chinese consumers has a lot in common with selling products. Brands can be quite effective in marketing services in China; however, the service industry hasn’t developed as many well-known brands yet. Brand-building strategies are similar for services, except that giving the consumer face with something intangible is harder.
Provide gifts or attractive membership cards — something tangible that can confer face, especially if it identifies the customer with a high-end service brand.
Treating customers in a way that gives them face is particularly important with high-end consumers. This type of customer service makes cultural sense. For example, place a customer in the seat of honor when dining with him or her. (For more on cultural understanding, see Chapter 11.)
Chinese consumers aren’t as sophisticated in evaluating services as Western customers are. Therefore, you have to educate the consumer on your offering. Your salespeople need to be good at fact-based selling (which we discuss earlier in this chapter).