Distribution in China

Common dangers in China distribution networks

Logistics and distribution in China is a lucrative but complicated sector. Setting up effective distribution channels is essential, and it requires much more effort and oversight than it might in Europe or the United States. Haphazardly established channels can cause a loss in both sales and profitability. Despite the value of a unified and strategic approach, it’s common for companies to set up their distribution structure in a reactive way. Below there are some of the common problems facing a company looking at distribution in China.

Distribution network in China are fragmented

Networks of distribution in China habitually involve at 6 to 7 tiers. Wholesalers sell to an unstructured network of distributors, retailers and other wholesalers. China’s contract laws sometimes allow for exclusivity and non-compete clauses, but an often time, that’s not the case. If the brand is a major player in the market, for example, China’s anti-monopoly laws actually forbid non-compete clauses with a distributor without a reasonable justification.

Often, wholesalers rely on distributors for the actual work of delivery and selling of the product. These ad hoc distribution channels results in little oversight, little accountability, few quotas, and ultimately, poor profit margins and poor sales along the line. For example, the beverage distribution structure in Shanghai resulted in a fragmented distribution model that allowed distributors to sell exclusively for high-end venues, hoping to turn a greater profit with the higher price. In the process, they cut out domestic retailers which made up the majority of demand, leading to a loss of sales and shortages of some beverages.

It’s important to enter China with a robust distribution structure already planned out. The clients, distributors and providers should all be agreed on the implementation and execution beforehand, rather than improvising as complications arise. This is the stake of distribution in China.

distribution in China

Logistics Service Providers (LSP) can be unreliable.

Though there has been an increase in the quality of service like warehousing, packaging and processing over the last two years, LSPs still deal primarily with transportation. Many local companies lack understanding and experience with modern management practice, or the know-how to meet the increasingly sophisticated demands and needs of clients. While foreign companies often seek out Chinese providers for their local experience, they find that their partners can’t communicate with foreign customers. On the other hand, while they may be educated, they typically lack soft skills or management experience. There’s a high turn-over of experts in the field, too, which can lead to loss of talents and experienced leadership. Consequently, most companies are hesitant to outsource a significant portion of the distribution processes, as the quality and the cost of the LSPs services cannot be guaranteed.

Furthermore, most LSPs are unfit to deal with the development of online commerce. They don’t have the economy of scale and can’t deliver reliably and cheaply to more remote areas. As ecommerce becomes more and more dominant in the Chinese market, the inability of local distributors to meet customer demand would harm sales.

Selecting a competent LSP leads to excellent returns. By building a relationship and encouraging the LSP to develop its expertise and retain logistics talent, the local partner could become a boon to any company in overcoming Chinese logistics hurdles.

Transportation is complex and expensive

As mentioned, transportation makes up the bulk of local distribution services, but there are serious costs and complications involved. There were 790,000 road transport companies in 2012, and the top 20 companies make up less than 2% of the market share. In 2012, around 78% of cargo was dispatched by road, and tolls accounted for 1/3rd of transport expenditures. This leads to unsafe practices among couriers such as overloading vehicles. In addition, cities levy heavy taxes on trucks in metropolitan areas, to avoid traffic congestion. To counteract this, distributors often operate fleets of smaller vehicles, often without much managerial oversight or accountability on the part of the drivers.

Although foreign companies such as DHL dominate 80% of China’s express delivery system, they still lack the support and structure necessary to cope with demand in the more remote regions of China, where ecommerce demand is higher than in the big cities. In this case, local logistics agents still provide good local transportation and at a much lower cost than state-owned or foreign-owned companies, but producers must often sacrifice regulation, and the lack of an established point-of-sale may confound the smaller LSPs. Increasingly, rail has become a cheaper and more convenient channel for distributing to areas further inland. The rapid development of China’s rail system, the standardisation of cargo fares, and the reduction of a significant amount of paperwork has greatly increased the viability of using rail as a logistical alternative.

Daxue Consulting

Sources:

https://startvaekst.dk/file/372965/mckinskey_rapport_440_byer.pdf

https://www.funggroup.com/eng/knowledge/research/china_dis_issue113.pdf

https://www.ipsosconsulting.com/pdf/Research-Note-Achieving-Successful-Distribution-in-Emerging-Markets.pdf

https://www.mwechinalaw.com/uploads/doc/DistributioninChina-LegalIssues.pdf

https://thestorecheckers.com/

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Growth continues in 2011

Current value growth in retailing remained robust in 2011. The continuous recovery of the economy and increasing household incomes laid solid foundations for the buoyant development of retailing. Meanwhile, the upgrading consumption structure on the part of consumers also fuelled the growth of retailing. However, the climbing consumer price index, due to rocketing inflation rates in 2011, also contributed to the double-digit growth in retailing in current value terms in 2011.

 

International distributions eye convenience stores

In addition to accelerating their expansion in chained supermarkets and hypermarkets in China in 2010, international grocery retailers were setting their sights on opening convenience stores in urban areas in 2011. Apart from Lawson, which plans to expand its outlets to 10,000 by 2020, Wal-Mart has also announced its plan to open 1,000 more Smart Choice outlets in the coming five years, whilst Tesco will also introduce its Tesco Express brand in China, and is likely to open around 500 outlets in the next five years.

 

Non-grocery retailing prevails in value sales and overall growth

Non-grocery retailing outperformed grocery retailing in 2011, in terms of both value sales and overall growth. The further penetration of non-grocery retailing into the rural market and urban communities underpinned its outstanding performance in 2011. Meanwhile, the rapid development of non-grocery retailing via the internet, in the format of online shops, also stimulated robust growth. In addition, government stimulus packages such as the Appliance Subsidy Programme for Rural Households, even though it was coming to an end by the end of 2011, also played an important role in boosting non-grocery retailing.

 

Chained players further extend their leading positions in a fragmented market

Thanks to the vast geography of the country and the complexity of the market, retailing in China was quite fragmented in the review period, with the top three leading players jointly accounting for a value share of only 3% in 2011. However, the three leading players, all chained operators, managed to further consolidate the market and extended their leading positions by optimising their operations and reducing costs.

Vigorous growth momentum is expected to continue in the forecast period

Retailing in China is expected to continue see dynamic growth momentum in the forecast period, thanks to the stable development of the macro-economy and rising disposable incomes. On the other hand, chained operators in retailing, represented by chained electronics and appliance specialist retailers, as well as chained supermarkets and hypermarkets, are also expected to spice up the market with further robust expansion, particularly into lower-tier cities and the rural market.

 

Increasingly fierce competition in the distribution in China and the impact

In view of the increasingly intense competition, many operators have adopted a multiple retailing strategy, venturing into more channels or formats in addition to their existing one. Suning Appliance and GOME Electrical Appliances Holding’s involvement in internet retailing complemented their original store-based retailing, whereas major grocery retailer China Resources penetrated more retail channels, such as health and beauty specialist retailers, over the review period.

Within store-based retailing, operators also further divided market segments to address the specific needs of certain consumer groups. Suning Appliance’s stores, for example, can be categorised into three groups: flagship stores in prime shopping areas, central outlets in sub-prime commercial areas and community outlets in neighbourhoods. With this multiple approach, Suning achieved the leading position in retailing in China in value terms.

Amidst the fierce competition, many retailers looked for growth by penetrating lower-tier cities in China over the review period, in view of the saturated market in major cities. Many multinational grocery retailers have announced expansion plans in lower-tier cities, including Sun Art, Wal-Mart and Carrefour, to name a few. Growing personal wealth and the less competitive market in these lower-tier cities offer good growth potential for many chained retailers which have already set a strong foothold in first-tier cities.

Creative marketing is another way to stand out amidst the furious competition. The most sought-after tweeter in China, Sina micro-blog, with 227 million registered users by September 2011, is the latest marketing platform for retailers, with such leading players as Shanghai Bailian Group already starting to release news of promotions and shopping advice to consumers via its micro-blog.

 

DEFINITIONS

This report analyzes the market for retailing in China. For the purposes of the study, the market has been defined as follows:

Store-based retailing

Grocery retailers

Modern grocery retailers

Hypermarkets

Supermarkets

Discounters

Convenience stores

Forecourt retailers

Chained forecourt retailers

Independent forecourt retailers

Traditional grocery retailers

Independent small grocers

Food/drink/tobacco specialists

Other grocery retailers

Non-grocery retailers

Mixed retailers

Department stores

Variety stores

Mass merchandisers

Warehouse clubs

Health and beauty specialist retailers

Chemists/pharmacies

Parapharmacies/drugstores

Beauty specialist retailers

Other healthcare specialist retailers

Apparel specialist retailers

Home and garden specialist retailers

Furniture and furnishings stores

DIY, home improvement and garden centres

Electronics and appliance specialist retailers

Leisure and personal goods specialist retailers

Media products stores

Stationers/office supply stores

Traditional toys and games stores

Sports goods stores

Pet shops and superstores

Jewellers

Other leisure and personal goods specialist retailers

Other non-grocery retailers

Non-store retailing

Vending

Homeshopping

Internet retailing

Direct selling

Other terminology:

GBO refers to global brand owner, which is the ultimate owner of a brand.

NBO refers to national brand owner, which is the company licensed to distribute a brand on behalf of a GBO. The NBO may be a subsidiary of a GBO or it may be a completely separate company. Share tables at both GBO and at NBO level are provided in the report. Reference to shares in the report analysis is at NBO level.

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