Getting Ready to Deliver: It’s All about Distribution!

Distribution is the hardest part of selling products in China. It’s regional and highly fragmented, and you have to deal with a wide range of channels and multiple layers. The products that win in China aren’t necessarily the best ones; they’re the products that get to where they need to be.

Where your products get sold

The retail market in China has been a little bipolar — the formats that have been doing well are either large hypermarkets or tiny neighborhood stores. Although all segments are growing, specialty retail is really taking off now.

Hypermarkets in hyperdrive

Hypermarkets, such as Carrefour, Wal-Mart, Century Mart, and WuMart, are the largest force in retail in China. Because of their large size, they aren’t that convenient to get to; thus, they’re destinations. These stores offer better assortment and lower prices because they eliminate a number of distribution layers by functioning as warehouses that take deliveries directly from the port or factories. Hypermarkets often provide a mixture of well-known international and Chinese-branded products.

Spreading the word on distribution costs Distribution expenses in China are among the highest in the world. China’s logistics spending accounts for 17.6 percent of the GDP, as compared to 11.2 percent and 8.5 percent in Europe and the U.S., respectively. The following chart illustrates the complexity and expense of distribution in China. The markup at each level refers to the markup over the price at which the distributor buys the product. By the time the product gets to the consumer, distribution markups have added about 36 percent to the cost of premium detergent: 100% × 102% × 106% × 105% × 120% ≈ 136%

Hypermarkets’ Chinese suppliers are usually much smaller than their multinational suppliers. The Chinese brands in hypermarkets are ones that Chinese in the local markets are familiar with. Often, these products have special features (such as a particular taste) that make them popular in a particular locale. The Chinese-branded goods are usually commodities, such as sugar and tea, but they’re differentiated in some way from their competition. The Chinese goods in these stores come from the relatively small number of Chinese manufacturers that are able to meet the hypermarkets’ quality and distribution standards.

Tough-to-beat convenience

After hypermarkets, the second-largest number of retail sales occurs in convenience or neighborhood grocery stores. These stores are often individually owned and independent, but you do see some large chains, such as Lian Hua, Lawsons, Ke Di, All Days, and 7-11, which are usually franchises. The mom-and-pop stores are quite cramped, but they generate business because they’re located close to their customers.

Specialty stores

Specialty retail, or focusing on a particular offering or type of offering to the consumer, is a great opportunity for smaller foreign companies — both as a distribution channel and as a business model. Specialty retail is growing particularly quickly because of the increasing incomes of Chinese and because Chinese consumers are looking for alternatives to hypermarkets and department stores.

Three distribution choices

You can distribute products in China in three ways:

✓	Using third-party distributors
✓	Partnering with or acquiring a Chinese firm
✓	Growing your own sales force

You have to be pretty sure you’ll be able to sell enough volume to cover the fixed costs of your distribution network, so some companies use the first two techniques until they can establish their own sales force. The following sections go over some of your options.

Hiring third-party distributors

Third-party distribution in China is more expensive than in the West. Unfortunately, this extra expense doesn’t usually buy you good service. Most distributors do little more than transport goods. They’re often lackluster at selling your product because they don’t understand it and don’t care that much. They usually don’t manage inventory, track shipments, stock products, or merchandise.

Unfortunately, when you ask distributors whether they can do more than just bring products from A to B, they’ll yes you to death. Although you can find a few good distributors in China, don’t believe most third-party distributors.

Even though the third-party distribution picture isn’t pretty, using third parties during your first few years selling in China may be a good idea if you want to get off the ground quickly. This strategy is usually best when you’re not selling a potentially big mass-market product (for mass-market products, try to have your own sales force from the beginning — see the upcoming “Developing a homegrown sales force” section).

If you do use third parties during these first few years, you can work on developing your own sales force at the same time. When evaluating a distributor, ask it to provide foreign-company customer references. Here’s a list of things to think about when dealing with a distributor:

Sims: Spotlight on exceptional distribution Effective distribution companies do exist in China. They offer quality market analyses, effective sales, IT support and management, and logistics services. Elizabeth Harrington, CEO of E. Harrington Global, has over 25 years of experience in China business. One of Harrington’s clients, Sims Hong Kong (www.simshk.com), is among the few Western-style distribution companies in China. When Harrington helped Sims develop its China strategy, the company was a division of an Asian retail giant. In 2001, Sims was acquired by CITIC Pacific, the Hong Kong–listed arm of CITIC (China Investment and Trust Investment Company), which is a powerful investment arm of the Chinese government. The sale strengthened Sims’ capabilities in China. Sims’ prior ownership gives it understanding of retail marketing, and the transaction with CITIC Pacific provides it with market access. Sims is one of the few firms that offers a full range of services for its national distribution network.

✓	Make sure it’s not selling your competitors’ products without telling you.
✓	Ensure that it knows your industry, has experience in your product area, and knows who your customers are.
✓	Speak with your customers (or potential customers) to determine whether they respect and trust the distributor.
✓	Payment and collection involve a whole new set of risks, so make sure any distributor who handles that area of your business is up to the job.
✓	Find out whether the distributor buys from you in advance or just takes orders from your customer and has you fulfill them.
✓	Find out whether it uses modern technology to provide its services.

Don’t agree to grant exclusive distributorships — it’s neither necessary nor usual in China.

Partnering with/acquiring a Chinese firm for its distribution

Acquiring a Chinese firm for its distribution can make sense depending on the numbers. Basically, partnering is for companies that want to make smaller financial commitments to China. The idea behind partnering with a Chinese firm is that it already has a good sales force and distribution. This method is very much a plunge into China, because you’re going to have to integrate and run your Chinese company. In a best-case scenario, the brands you acquire can maintain their Chinese identities (see “Considering Nationalism,” earlier in this chapter). At the same time, you can successfully piggyback your foreign brands on the acquired company’s distribution network and improve overall management practices at the company.

This model can work, but it’s seldom perfect. The problem is that the partner will almost always sell its own products before yours, regardless of whatever assurances the company reps give you, even in a joint venture. You’ll probably have to accept that you’re a second-class citizen. Also, your partner owns the customers, so if your deal goes south, you’re back at square one as far as finding customers goes.

Developing a homegrown sales force

If your company is willing to commit the resources, developing your own sales force is likely the best distribution solution. In doing so, you can take an aggressive approach and look to build a large force overnight. Or you can do it the Chinese way by building gradually and letting your existing sales force’s productivity pay for expansion; we talk about this method more in the upcoming “Deciding How You Want to Enter the Market” section.

The right people

Your initial sales hires ideally have sales experience and know your industry. Of course, you’re in even better shape if they have relationships with customers. If you’re going to grow the Chinese way, take the time to find this type of salesperson.

If your candidates lack experience, look for people who are eager to receive international standard training. They should also be motivated to advance, gaining responsibility and greater face, and to earn a lot of money.

Fact-based selling

The traditional Chinese mentality has been to drive sales based on making their product prices cheap. They look to profit based on high volume. However, most Western sellers aren’t coming to China to battle it out for razor-thin margins.

The Chinese also have a tradition of relationship-based selling in which salespeople look to develop friendships with customers. After they’ve done that, their friends buy whatever they’re selling, provided that it’s cheap enough. As a foreign company with a quality offering, you’re going to have to train your salespeople to sell based on a new set of criteria.

You must train your salespeople to make the case that your product or service sells at a premium because of the number and/or quality of its features. The salespeople also have to be able to make factual comparisons between your product and the competitions’. Try your best to ensure that they understand and believe in your brand. Perhaps loan them the product so they can try it out themselves.

If you’re selling very high-end goods, take fact-based selling a step further. Your salespeople have to be able to read customers and sell to them based on what the customers want. This skill is part natural ability, part training.

Training and management

Have two people train each new sales hire. In this model, one trainer is a solid senior salesperson and the other is a fairly new salesperson. The new hire learns from a seasoned employee while the less-experienced salesperson reinforces his or her own training by teaching and gains confidence and face. Sometimes, having someone who’s just a little ahead of them in training is valuable for new hires when they need to ask for advice — the old hands may have forgotten what starting out is like.

As for promotions, not all salespeople make good managers. Figuring out whether someone is management material usually takes a few years. Don’t promote salespeople to management if they’re not suited for it.

Failing to promote employees may cause them to lose face, so you may want to set up a two-tier track for senior salespeople — one into management and the other into a prestigious sales title. When promoting salespeople into the latter, take them aside and convince them that they don’t want to be managers — after all, they can make more money and have fewer headaches if they stay in sales! Maybe give them a bigger desk or some other perks that show they’re not just average salespeople.

At the end of the day, it’s about pay

The key to getting your sales force to sell is proper incentives. Your pay system must motivate people to sell. However, here are a few things to watch out for:

✓	Pay for profitability. Don’t provide incentives for your salespeople to discount products deeply in order to get volume.
✓	Pay salespeople only after delivery and customer payment. If you pay them just when they get the order, you’re likely to have a lot of fake orders.
✓	Watch out for your salespeople’s paying kickbacks. Don’t let them get your company into trouble by marking up prices to give money to someone on the other end. (For more on financial controls, see Chapter 17.)

Trench warfare in distribution

One Western sales executive calls distributing in China “trench warfare.” China has significantly more retail outlets than the U.S., even though the retail market is a fraction of the size. Part of the reason for the fragmentation is that the government encourages it. Retail in China is a large employer, which the government likes. Therefore, you’re likely going to need to have a lot of salespeople spending significant time face-to-face with the store owners. Competition for shelf space is ugly, and success requires persistence and systemization.

If you want to reach the mass market, you have to deal with a lot of mom-and-pop stores and the hypermarkets (see the earlier section titled “Where your products get sold”). If you’re selling to both ends of the spectrum, the varying approaches take a good deal of sophistication.

Dealing with mom-and-pop stores

Selling to mom-and-pop stores takes incredibly detailed process management. Your salespeople have to constantly be at the stores, keeping good relationships with the store-level people. And after your salespeople leave the store, another salesperson is likely to come along and replace your product on the shelf with his or her own. Therefore, your people have to keep returning and putting your product back on the shelf.

Here are ways to make your product more appealing and to build relationships when dealing with mom-and-pops:

✓	Make sure you give them smaller packaging. These stores are often cramped.
✓	In addition to having good relationships with the store operators, your salespeople have to use those fact-based selling skills to convince the stores that they can sell your product for more money and make a higher profit margin. (See the earlier section on fact-based selling.)
✓	Make sure your salespeople work closely with mom and pop to give them a good display and technical support.

At the small store level, you may see a good deal of corruption. Operators may want kickbacks to stock your merchandise. For a whole host of reasons, your salespeople shouldn’t play along. If they do, it’s a vicious cycle — the required payments will get larger and larger. Eventually, you’ll have no profit margin. Also, when dealing with small Chinese stores, don’t extend credit — you won’t get paid.

Running with the big dogs in hypermarkets

Smaller foreign companies’ product prices are usually sandwiched between those of local brands and well-known multinationals. Even though smaller companies’ products may cost less than other multinationals’, they don’t have the brand recognition. Unless your product is widely known or has no real Chinese competition, hypermarkets are a tough channel for a small company.

The hypermarkets look for suppliers that can provide consistent quality on time. If you’re a smaller company, you can get into the hypermarkets by explaining why they need to carry your product. Show that there’s an unfulfilled demand in their China stores for your product, and they’ll often be willing to buy from you on a test basis to fill that hole.

Chain convenience and grocery stores usually have centralized purchasing that has to approve your company as a vendor. Franchisees then have some discretion in what they stock, so they may choose to pick up your product.