BEHIND THE SCENES OF THE CHINESE MARKET: An Insider lifts the curtain
2020 . 10 . 23 |
In a moment that seemed straight out of a film noir, I was asked if I wanted to know what is really going on behind the scenes on the market in China. Channeling a 1940’s detective, I put on my trench coat and made a Zoom call to Singapore to my informant, Chi Wai Tang, consultant and expert on the luxury goods market in China and Asia. He shared many eye-opening revelations that brands need to be aware of to navigate the complicated landscape and avoid potentially disastrous pitfalls.
Over the past ten years the mix of brands available in China has changed significantly. Back then few people knew about artisan fragrance brands, and in fact, Jo Malone London was one of the first to enter the China market in 2014. Though acquired by Estee Lauder in 1999, the brand was respected in Asia as the epitome of British luxury. Diptyque, Byredo, By Killian and even smaller players like Juliette Has a Gun and Parfums de Nicolai all have a presence now.
In addition, China has developed a multitude of options as to where product can be sold ranging from retail, wholesale, e-commerce, and App shopping. Online shopping is growing fast and is facilitated by the fact that it can happen on mobile and social platforms. Some distributors don’t even look to supply offline retail – they only sell to ecommerce sites, and this is a phenomenon in China. Chinese consumers are in the habit of searching online for information about brands, products and certainly pricing before they buy, so it is essential to have visibility and credibility online. If a brand isn’t present online, then no one will be talking about it, thinking about or looking for it, meaning brand awareness must be developed before entering the market.
Now let’s look at the various channels in the market.
PRACTICALITIES OF SELLING IN CHINA
According to Chi Wai Tang, “When you talk about the market, you have to realize there are multiple channels from which people can buy product: the official market, the grey market, and cross border. There is a lot of grey market happening in China – and it’s probably bigger than the official market for artisan fragrances. He indicated that a lot of trade companies who used to be parallel importers have now started to become distributors. Some of them also claim to be located in Hong Kong but they are actually based in China. Apparently they approach brands directly, and they are only focused on selling in volume, not on building the market. Chi observes that by operating in this fashion, “They actually spoil the market and can destroy a brand.”
Given this context, how do you find a partner you can trust?
FINDING A REPUTABLE DISTRIBUTOR
For companies who want to have control of their distribution in China, it is recommended to work with an established entity in China who can invoice Chinese customers. It is possible to go through distributors and resellers who will buy the product from the country of origin, but then it is tricky to know where and how the products are being sold. Sometimes a boutique is created to gain a brand’s trust and confidence in order to obtain distribution rights, but the shop could be a front for selling to the secondary market.
Chi told me, “Getting references is very important. Ask what brands they have handled and what channels they work with. Don’t jump in quickly: take time to understand each other, have a face to face conversation and then rely on your gut feeling. Even with retail partners it has to be this way. I’m sorry to say it’s not easy to do business in China.”
But this is not the only complication in the market.
BRAND TRADEMARK & PRODUCT REGISTRATION PROCESS
China only recognizes trademarks registered within its own jurisdiction, so it is an essential legal process to follow to avoid counterfeiters, knockoffs and fakes. It is equally vital to register the trademark in Chinese characters as well as the Roman alphabet as the two are treated individually.
All products to be sold in China are subject to a rigorous testing and analysis process. China is one of the few countries in the world where animal testing is still required on beauty products. The current laws require tests on animals for all imported cosmetics excluding those sold via cross-border eCommerce (CBEC) channels. The government is very conservative on the issue, and it is unlikely animal testing will be banned any time soon, although some revisions are under review to go into effect in 2021. Based on personal experience with the process and time delay, brand marketing launch plans in China tend to run one year behind the rest of the world.
Given this context, most artisan and niche brands present in China use the CBEC trading model.
CROSS BORDER E-COMMERCE (CBEC)
Whether as a way of bypassing the lengthy and costly registration process or to avoid the ethical issue of animal testing, many beauty companies opt for CBEC. Under this system, China allows international companies to sell specific categories of goods to Chinese consumers without a license to operate a business in the country through online platforms such as Alibaba’s Tmall, JD Mall, Taobao, and Little red book. Many artisan brands including L’Artisan Parfumeur and Penhaligon’s are using this channel to sell in China. These platforms represent huge opportunities when you consider that Alibaba alone expects to import $200 billion worth of goods to China by 2023. However, China does require that brands have a Chinese legal entity as their representative when present on these platforms. Consequently, the choice of a partner must be made wisely after significant research.
Chinese consumers visit these sites to look for high fashion and luxury goods because they trust the source. Fragrance and Beauty are among the fastest growing cross-border eCommerce categories.
Some brands who are present on the CBEC system also have a shop that acts as a non-selling showroom in what is called an online/offline model. Customers can go to the shop, see and test product but then order it online.
Even so, there are still more issues to be wary of.
Brands need to be cautious if distributors try to order huge quantities. Chi explained to me, “Never agree to a large quantity because they will probably sell your product at large discounts. A brand told me a distributor had promised they could sell 3000 pieces of one SKU in three months. The market can’t digest that – even if it is an exclusive fragrance.”
So what happens is the distributor places a one-time order and tries to sell the goods at a discounted price. Chi continued, “If someone makes a huge order, you need to question it. It’s why you can find a lot of amazing deals in China. A large order could end up being a one-time purchase, and the distributor never reorders, but rather looks for the next brand to exploit for a quick turnover . They don’t know how to build brands; they just rely on selling high volume in a short timeframe at a discount.”
Which leads us to the next concern.
As Chi mentioned, there are a lot of amazing deals in China, and sometimes this happens because the price written on the price list is not the price respected. He told me, “A brand can communicate what is the lowest price accepted and that price is what is found on the internet. But then, when the consumer goes to purchase, he gets a special discount or promotion and the price is much less. Say the official price is 86€ but he ends up paying only 56€.“ Consequently, the Chinese consumer is very accustomed to doing online searches to compare prices. There really shouldn’t be a difference between online and offline pricing, especially for true artisan and luxury brands. Chi stated, “If your brand is online at 40% off you can’t expect the customer to pay full price in a proper store – even if he enjoys a luxurious shopping experience. If the discount is over 20%, it will be really hard to take the price back up.” Certainly, grey market operators are functioning on high volume and low prices, but some distributors take it a step further. As Chi explains, “They have an e-store and offer wholesale prices to the end consumer. For example, if a retailer’s price is 100€, and the wholesaler price is 50€, they offer the product to the end consumer at 50€ or even 45€. They will place huge opening orders, sell high volume and get a smaller margin but it’s offset by the quantities sold. This harms the image of the brand.”
Controlling what the distributor does depends on how the brand feels. Chi observes, “When the brand really cares, they can warn their distributor and even stop selling to them if it has to go to that extent.” Unfortunately, some brands turn a blind eye, sacrificing brand integrity to make a lot of money quickly, but of course this is not a long-term strategy.
There is another factor that needs to be added to the mix.
PHENOMENON OF THE KEY OPINION LEADER (KOL)
It is essential to work with KOL’s in China to establish a brand, and in fact, they are so important now, no brand can survive without them. KOL’s in China are a combination of micro-influencers, celebrities, socialites and key opinion clients. Social media allows them to seem like a friend who is trustworthy. In most cases, they won’t recommend a product they don’t believe in because it could jeopardize their reputation. Chi explained to me, “In China, there must be over 300 people in this sector just for fragrance. There is even a company that helps groom people to become a KOL. Some are authentic and give the right information, but some are really running a business where they receive money from brands. Some KOLs are not really genuine; they have bought followers and then the comments on their sites can be fake.”
In some cases the KOL is also a Group Buy Leader* and offers an attractive price which is much better that what consumers can find online. They post an item on their social sites, take orders from their followers, tally the total quantity then get the exact number of pieces ordered from the supplier. Chi continued, “Stores need to have the margin to cover their expenses. KOLs have no overhead, and no risks. This is why the KOL can sell at such a reduced price.” It’s common to see multiple KOL’s pushing the same fragrance at the same time on multiple social media platforms, but then the question of who has the best price comes up. As Chi told me, “Recently there was an issue where a distributor sold to customers at the same price they were suppling to the KOL. A consumer complained to the KOL that the price was not sufficiently discounted since they could buy it at a lower price from the distributor’s online store.”
Brands need to be wary of the KOL they partner with, as Chi continued. ‘A big brand operated by a reputable company asked me how to bring the retail price back up to the suggested retail. It’s difficult to do when the consumer has already seen the product offered at a lower price by a KOL who the brand has partnered with – sometimes offering as much as 50% off. Consumers know they can get a good deal and won’t pay full price.”
Consumers also need to be wary of the KOL from whom they shop. “The KOL/Group Buy Leaders sometimes even sell fake products because they also get the goods from a grey market source. Since many customers are unfamiliar with niche fragrances, they may not be able to realize that the fragrance is not authentic. There is a lot of fake Frederic Malle on the market. The fragrance doesn’t smell right and it doesn’t last,” Chi continued.
Fake product is another pitfall to watch out for, especially with decanting.
Decanting is a big business in China. Companies set up an online store and have a few hundred - and up to 1000 - fragrances available. But they are not selling the full bottle – they sell by milliliter. The smallest quantity available to order is 0.2ml for people to try. Unfortunately, this is not always a trustworthy method of testing product. Sometimes sellers mislabel the bottle or the decanted scent that is purchased, and the customer is not satisfied. Chi told me, “Customers ask why the scents are not the same as what they remember or different from what they expected. So first you have to ask yourself, where did you buy your decant, when was it decanted, and under what conditions. This system has jeopardized product integrity and causes trust issues, even for the legitimate sellers.” Nevertheless, having a legitimate and efficient sampling system is very important in China.
The question of what is it in a brand that attracts a consumer then comes to mind.
The Chinese consumer is stereotyped as being in search of the latest and the greatest products available, with a preference for luxury and exclusive brands, but this is not the whole story.
“Chinese consumers think that natural ingredients are safe and better than synthetics. They almost have an obsession with natural things and will pay a higher price for them. Brands have even increased prices on some products (that claim to be natural or have natural ingredients) and sometimes what they tell the consumer is not the truth,” according to Chi. He also sees a dichotomy in the market where “there is a group looking for the most luxurious and exclusive product – regardless of quality, and then another consumer is really looking for value for money.”
In line with the global trend however, Chinese consumers are also attracted by authenticity and purpose. Artisan fragrances have a big opportunity because they have been pioneers in eco-friendly packaging, sustainable sourcing, ethical practices and strong values.
Which brings us to the future.
I asked Chi to predict how the market and the consumer could change in the next few years. One evolution he foresees is the eventual shrinking role of KOLs. “At first people lacked confidence, so they liked to see what the KOL was suggesting. I think down the road, in 2-3 years, the KOLs will be less important as people get the real information and decide for themselves, “ he stated.
In terms of the market, he foresees a rise in the online/offline showroom model as well as an escalation of Direct-to-Consumer shopping. He recognizes that “Some brands already have small platforms on WeChat. This could be a way to protect your brand integrity and pricing.”
And one other development is that a lot of local brands are coming onto the market, and with very good product, especially in skincare. There are a few fragrance brands which had targeted a lower retail market, but now a moderately priced brand sells references at just under 100€.
Clearly, every country has complexities, and being aware of what they are can only prepare a brand before making a leap. Forewarned is forearmed, after all. Undoubtedly, there is a slippery slope to navigate to find ethical and honorable partners and to avoid pricing pitfalls in order to seize opportunity and succeed in running a legitimate business. Hopefully, Chi’s insight will be helpful to brands who wish to enter this market.
*Group Buy: Traditionally occurs when a group of people collectively orders a product or service at a significantly reduced price contingent that a minimum number of consumers will indeed make the purchase.