Entering China’s E-commerce Market: What International Brands Need to Know
August 3, 2020

China is the world’s largest and fastest-growing consumer market. This certainly makes China an attractive destination for foreign retailers and consumer brands alike, yet it is often pointed out that China is a fast-paced, complex and challenging market.

Indeed, we often hear from industry experts and business leaders: “What’s works at home does not work in China,” but do we fully understand what is required to succeed in the Chinese market?

Today, we interview Johan Aledal, COO and Partner of Aventura. Johan, who brings over 10 years on-the-ground experience in China’s e-commerce industry, shares his views on issues that international firms should consider before taking the leap and starting to sell online in China.

Johan, you have been working with bringing international brands to China for over 10 years. Talking to brand owners every day, you are keenly aware of both the opportunities and the challenges international entrants face in navigating the local market. So, I guess my first question is: how may international brands know if their products are suitable for the Chinese market?

I often say: your product or service must add something to the Chinese market.

By this I do not mean that your brand or product must be revolutionary. But to have a decent shot of success, you better have some angle – whether be branding, product features, quality, or design – which makes you stand out from the crowd.

Secondly, it helps if you address certain opportunities which play on the perceived shortcomings of Chinese brands/products.

For instance, products supporting a family’s lifestyle, health, and wellbeing – such as sports, healthcare, beauty, or maternity products – have been popular categories for a long time, even more so during Covid.

For these and related categories, consumers tend to trust the quality of international brands over domestic products.

We do not expect these sentiments to fundamentally change in the foreseeable future, so by addressing these product categories you gain a head start in positioning yourself favorably in the eyes of Chinese consumers.

That said, the days of easy shortcuts for international brands are coming to an end. The Chinese market is a fierce, competitive battle ground, and Chinese consumers are well-informed and quite sophisticated. Having travelled the world and gained both product and price level information, they know what they want.

The fact that your product sells well “back home” means little in a Chinese market context. Similarly, while a “made in the EU” label can certainly be helpful for your China launch, this alone is not the key for local market acceptance.

Clear! What prepatory steps then can international brands take to calibrate their strategies ahead of entering the market?

I would stress that localization is a key – in terms of branding strategy, product positioning, and marketing approach.

That is not to say that we recommend you to fundamentally overhaul your brand identity or throw best practices gained elsewhere out of the window. Rather, to use a local adage, it is all about giving your brand, marketing, and sales strategy some “Chinese characteristics.”

In some cases, it can be as simple as adopting alterative marketing methods and new visuals which may – at least not at first glance – square well with your global standards and processes.

To avoid disappointments, it is also vital to prepare a reasonable business case. Marketing is not even close to as cheap as most outsiders often assume. Operational costs have also risen rapidly across the board in recent years. Almost everything in China takes longer than expected.

With this in mind, I cannot stress enough that it is absolutely essential to develop a detailed understanding of your competitive positioning in the local market and reasonable business case before venturing into China.

This can be done in various ways. At Aventura, we usually recommend a market feasibility study, whereby we help our clients map the market landscape and tweak branding and marketing strategies to meet local requirements – of course, while staying true to the DNA of the brand.

In terms of budgets, we focus as much on the downside as on the upside. Be suspicious of standard pitches based on rosy sales forecasts which do not account for potential risks and delays!

Interesting points. So, once you know there is potential for your product category and you have refined your branding and marketing strategy, what business models do you recommend for entering the Chinese market?

Every case is different, but we usually recommend an online first approach. Such a strategy can be implemented via cross-border channels (i.e. the brand-owner sells directly to consumers via special trade channels).

Often, a cross-border approach serves well as a market entry point. It allows the brand owner to validate its market thesis while managing both fixed and variable costs.

The cross-border model is also the preferred entry strategy for products which belong to certain “sensitive categories” such as cosmetic, food & beverage, supplements etc. By selling via cross-border channels, one faces significantly less onerous compliance and testing requirements, which reduce both costs and time-to- market for such products.

However, for most products, in order to build a sustainable China business over the long-term, one is hard pressed not to maintain a local operation, which is fully integrated with the leading Chinese social media platforms and online marketplaces.

On that note, what are the preferred marketplaces in China? In the west, we hear a lot about Alibaba. Is this the market leader?

When you talk about online retail in China, it is indeed difficult to avoid Alibaba with its major marketplaces for both B2C and B2B e-commerce.

What about Tmall, Alibaba’s B2C platform: Could you explain what it stands for and why you consider this to be the best platform for most international brands?

It starts with the basics: size and market reach. Tmall is by far the biggest B2C marketplace in China. Importantly, not only does Tmall have the largest amount of traffic of all Chinese e-commerce channels, but given the way the platform is run, it has also developed a great deal of market trust and goodwill with Chinese consumers.

As a general rule of thumb, without taking into account budget constraints, Tmall therefore tends to be the best option for most brands. Notable exceptions would be if you are marketing a home appliance product, in which case you are better off on JD.com. Conversely, if you for some reason feel that your product is best sold exclusively via influencers, then one of the bigger social media platforms may be preferable as your main sales channel.

Generally speaking, though, for most brands we tend to recommend an integrated channel strategy that covers all the main social media platforms and market places, with the mix of resources dedicated to each platform being tailored according to brand and budget specific considerations.

There are two different versions of Tmall: Tmall.com and Tmall Global. What would you say is the best choice and for what reasons?

Tmall Global (also known as Tmall.hk) is Alibaba’s cross-border marketplace. This platform alone represents around 20 to 25 percent of China’s cross-border e-commerce sales. Tmall.com, on the other hand, is a domestic marketplace with a 60 percent market share of domestic B2C sales.

As previously mentioned, a cross-border entry model is the way to go if you want to “test the waters” before making a major financial commitment to China. For such an approach, Tmall Global is the default entry point. Most importantly, from a cost and management perspective, there is no need to establish a local entity to start selling on Tmall Global.

By contrast, all Tmall stores must be owned by a China domiciled companies. For this, and other related reasons, there is a clear trend today among foreign brands to establish their own legal entities in China.

Increasingly, international brands tend to set up multiple stores, on both Tmall and Tmall Global, since respective marketplace have slightly different customer groups.

What is a Tmall Partner (TP)? What should intentional brands expect from their TPs?

The TP function is a defining element of the Chinese e-commerce ecosystem, which is quite different from e-commerce in the west.

In short, the TP acts as a middle man. It provides services such as daily communication and negotiations with Alibaba. This alone is an indispensable service for many international brands considering that all interactions are conducted in Chinese and on “China-time,” requiring quick decisions and implementation.

Typically, the TP will also design and maintain online stores and assortments, as well as executing marketing and promotions on behalf of the brand. Not to be forgotten, the TP ensures prompt customer support, 7 days a week.

A TP must be a Chinese company, authorized by Alibaba to run stores on Alibaba’s different marketplaces, such as Tmall and Tmall Global.

In principal, there is nothing preventing a brand from registering as a TP and running its own stores (provided its done through a local subsidiary), but since it requires specific expertise and is a rather labor intensive function, most brands outsource the TP function to specialized third parties.

Beyond demonstrating TP expertise, any other factors new entrants should consider when evaluating prospective partners?

The classical distributor model – whereby a local company represents the brand, invests in inventory and marketing, and handles all operative matters – is gradually fading away.

Brand owners need – and in many cases want – to form a direct relationship with end-customers. In particular in a fast-moving market such as China, keeping the “finger on the pulse” of consumer trends and adjust branding and marketing strategies accordingly is key.

Doing so, however, entails bigger investments by the brand owner as well as access to local expertise and execution capabilities. Without all of these three ingredients – capital, expertise and execution capabilities – your market entry strategy will likely fail, regardless of the potential of your brand.

Recognizing these challenges, we work with many of our clients under a build-operate-transfer model, whereby Aventura assumes full operational responsibility for building a China business, including all aspects of their e-commerce operations. When the China business reaches predetermined operational and financial milestones, it is then transferred to the customer.

This model allows brand owners to “hit the ground running,” minimize execution risks and financial exposure, while ensuring that they remain masters of their own destiny, able to capture the full value of their brand equity over the long-haul.

Interesting! Could you share some more details on successful cases you managed so far?

Most certainly!

BabyBjörn, a Swedish brand with international appeal best known for its baby carriers, is one representative case.

In close collaboration with the brand’s HQ brand and marketing teams, we built and re-launched the BabyBjörn Tmall flagship store in it 2014. In the ensuing years, while gradually building BabyBjörn’s brand in China, we increased the online store and traffic and sales from zero to 50 plus percent of total sales in China. Having reached critical mass, the business was transferred to Babybjorn last year.

Another success case has been the Swedish wooden floor cleaning brand Bona. In only one year, we surpassed all financial targets set for the business. Chinese consumers simply love the environmentally friendly brand Bona!

E-commerce is a fast developing sector – particularly in China. What emerging market trends have you identified and what should we expect in the near future?

The COVID epidemic has accelerated the digitalization of retailing across the world. China is certainly no exception. Arguably, China has taken the pole position in developing new formats in response to the constraints imposed by the epidemic.

One obvious example is live-streaming. During February to April this year, when China was effectively locked down, live-streaming emerged as the closest substitute for an offline retail experience.

Going forward, we see live-streaming becoming a “must have” for brands and retailers, not only to compensate for lagging sales from bricks-and-mortar stores, but as a new medium for connecting with target audiences, thereby creating deeper forms of engagement and brand awareness.

We also noticed, both during and post Covid, a big increase in the number of offline retailers which transformed their physical retail space to more influencer and social media friendly environments.

Both these developments are examples of a mega trend in China, generally referred to as New Retail, which blurs traditional distinctions between offline and online retails and different formats for e-commerce.

New retail is indeed a hot topic, but logistics and fulfillment are equally critical elements of a successful e-commerce operation. Could you give us an overview options in this regard?

For cross-border stores on Tmall Global, brands and retailers must work with Alibaba’s subsidiary Cainiao.

Such a setup has distinct advantages. Not only can Cainiao pickup your goods in Europe, but their China based warehouses are connected with Chinese Customs, which ensures speedy and efficient custom clearance

For a domestic e-commerce operation, you have more options and factors to take into account. While some opt to run their China logistic in-house, most brands outsource this function to their TP or a specialized 3PL with B2C experience.

Note that none of these service providers will purchase your goods. Rather, they charge a variable fee of 7 to 14 percent of GMV or net sales, depending on product category and volumes.

Aventura’s Logistics & Fulfillment business unit is fully capable to take overall responsibility for your China logistic operations, although I must stress that this is in no way a requirement.

Indeed, even in cases where our brand customers decide to take care of the logistic function in-house or work with third parties, we often play an active role in facilitating coordination and communication between the brand owner and domestic service providers.

Finally, any concluding thoughts on what brands should keep in mind when stepping into China’s e-commerce arena?

I think the theme of our conversation is quite clear, but it is worth making it explicit: China is different in many ways and you must handle this market accordingly.

To sum things up, I would say: be ready to localize your product, branding, and marketing strategy. Ensure you allocate a reasonable budget. Play the long-game: there are few quick wins in China. Choose a partner that “knows your language” and is willing to engage in a business model that enables quick and efficient execution while ensuring you remain in control. Finally, make frequent trips to China to stay on top of local market trends.

If you make these tenants the basis for your China strategy, you have a good shot in making it big in the world’s largest and most exciting e-commerce market!

Thank you Johan for your time. Indeed, an interview full of insights.