China Paradigm transcript #97: Managing a supply chain in the Chinese food industry during the virus outbreak
Find here the China paradigm episode 97. Learn more about the Chinese food industry during the virus outbreak and listen to David Beutin’s, sales manager at Lactalis International experience in China’s dairy industry.
Full transcript below:
Hello everyone, this is China paradigm where we, Daxue consulting, interview season entrepreneurs in China.
Matthieu David: Hello everyone I’m Matthieu David the founder of Daxue Consulting and its podcast China Paradigm and today I am with someone who knows the food businesses very well in China. It’s David Beutin. You are now working at Lactalis as a sales manager and you have a very long experience of over nine years in China, in the food industry with a company called Daregal for more than 7 years, Qwehli, and then Lactalis to manage a food service company in China. Especially something I’m very interested in is the Horeca. So, Horeca is hotels, restaurants, catering, and B2B sales. At Daxue we have about 20-30% of our clients who are in the food business (discover one of our case studies in the food service industry) – food and drinks business and questions occur to be very often the same. Should I have a master distributor? Should I manage my distribution? How do you get in touch with the right person, the ones who make decisions? How do you build a sales team? Because of the context, today is the 21st of March 2020 – because of the occurring crisis, the virus crisis, the Covid-19 we will certainly begin, which is unique here, with a bit of an update of what the situation now is for an industry which has been highly impacted, which is the food industry – especially restaurants, hotels, cafés, and catering. Before that, I’d like to add one thing, we interview entrepreneurs and intrapreneurs and so far I found the word intrapreneur as being overused as a way to actually glorify some people within the company which may start a product, but here I think – with you, David we are looking at an intrapreneur, being that you built a sales team, you built a sales system in B2B for a company for more than 7 years. You have set up a WFOE (learn more about the WFOE structure in China), you have set up a business – the entire business for Qwehli – and you are developing again sales – and it’s that in China for everything which is related to the market is in front of us. Thanks for being with us David and first of all if you could update us about the situation of the Chinese food industry during the virus outbreak and your perspective of the current situation.
David Beutin: Hello Matthieu, thank you for inviting me to this podcast. With pleasure, I would like to discuss a little bit the Chinese food industry during the virus outbreak. So, when the Covid-19 started a little bit more than two months and a half – actually three months – ago, but we were affected in Shanghai around 2.5 months ago. You know it was Chinese New Year. So, I would say, businesses at this period in Shanghai are a bit low anyway but since the Chinese New Year has stopped, the economy and I would say restaurants and hotels have been down around 5%, 5% off of last year’s turnover which is divided by 20. Hotels could not accept most of the guests for less than 14 days, they could not in the meantime close down because if they were closing their operations, which could have saved some money but it would have been very hard to restart, which is the moment now where people can start to travel a little bit more in China. They would be able to restart in a much slower path, so hotel businesses are down to 5% of last year turnover and the restaurant industry is down to 20%, so divide by 5 for February I would say. So, now restaurants are picking up, the sales for March are picking up I would say gradually. We expect maybe the restaurant industry to go back to 25 -30% depending on whether you’re located in a shopping mall or an individual restaurant, but I would say that the figures are very positive. The hotel industry which is mostly relying on travel businessmen and exhibitions will take more time to recover, but let’s say they will open by June or July, which is by the way low season in China, but we expect the hotel industry to be back to more or less number figure. It also depends on the virus situation in Europe, but basically, figures are bad but it’s a very good direction for the past few days, especially in Shanghai. Originally in China is also – each region has a different path and speed to recover, Shanghai, from my point of view, is a bit ahead of the other regions. Beijing will come very soon but, as a capital, they don’t want to take any risks with the Chinese food industry during the virus outbreak. So, they also take more time to reopen businesses and restaurants and close down the accounting, but it’s very positive for China right now, I think we should be back to normal in a very quick time.
Matthieu David: For people listening to us and are not in China, are not linked to China but may try to understand what could happen in their own country because China was a bit ahead in time on the crisis. How long did it take for hotels and restaurants to recover? Are we talking about 1-2 months for that – I mean recover, it’s not fully recovered yet, but to increase again?
David Beutin: It really depends, because there is no case, no more case. Schools have not reopened so all the people food catering because that’s what we are talking today – hotel, restaurant catering, so the first one to recover depending on I would say – the information was at the beginning, in Shanghai if you get no new case twice for 15 days, for a period of 15 days no new case, and then there is the second period of 15 days with no new case, then that’s a moment where the pandemic will be officially stopped. So, we are on that path. It’s almost been a month or maybe a bit less where we have no new cases in Shanghai. So, it will depend on the end of the pandemic, but the first one to recover will be definitely restaurants because people after staying home, they want to get out, they want to enjoy themselves, eat outside, especially the weather is getting great in Shanghai so restaurants will be the first one to recover right after the pandemic, I think it could be quite fast. Then all the catering industry supplying schools and companies take time, especially all the cruise and airlines (learn more about the virus’s impact on Chinese airlines) are much more deeply affected now, so the catering industry is expected to be much longer to recover. For the hospitality industry – hotel it should be in-between. I am not very sure about this but it will also take some time, maybe another 6 months, but restaurants will be faster, individuals’ restaurants, shopping malls should start to pick up in the coming weeks very fast. Hotels probably in a matter of months, and catering might take a little bit more time, especially since the pandemic is in Europe now, so there are fewer flights, it’s also, in fact, affecting cargo and transportation costs for good, to import from Europe, I mean I would say these three crises – there is the sanitary crisis, then there was a big supply chain crisis, even before an economic crisis really happened. Logistically it was a mess and it still today is a mess. So the catering industry, airline, and cruise are mostly affected by that.
Matthieu David: What did you do with Lactalis and the Chinese food industry during the virus outbreak? Because I believe the business was slowed down. Down in volume, slowed in terms of speed, but still, you had to serve some clients, some people, some distribution so what kind of things you did to protect people, what things you were asked by the government to do as a business to deliver food?
David Beutin: We actually worked mostly on the distribution business model. We import some products by ourselves but mostly go via a distributor. We sell in C&F – Cost, and freight, in Shanghai. So, we just end all production and exportation in Shanghai. So, I would say our distributor was mostly affected by the figures I mentioned to you at the beginning of the podcast, they were the first ones hit in the Chinese food industry during the virus outbreak. I would say – our orders which were on the sea were already planned and scheduled so we had to maybe reduce our production but we had, especially had a supply chain issue which was all those containers coming to Shanghai. Even the business was low, we had to deal – we had a lot of trouble with rerouted containers to Korea or Singapore because all the China ports were full of containers that could not be cleared. So, imagine that a lot of people didn’t want to send any goods in China during the Chinese New Year due to China’s supply chain issues during the coronavirus outbreak. They expect a lot of containers arriving just after Chinese New Year, and what happened is, all those containers arriving at that time, could not be cleared out because there was pandemic, everyone was at home, there were no trucks, so a lot of containers sent to Korea and then just finally got rerouted to Shanghai and was at the port of China this week as a consequence of China’s supply chain issues during the coronavirus outbreak. So, we had to deal – we had a lot of issues of logistics, supply chain. You can see that this crisis was global, it really put a mess with an increase of containers price with a possession fee of a $1000 and also a blank selling fee because it’s a yearly thing, it’s a logistics aspect that they re-route a lot of boats and there was not the same flow from China and Europe, so there was a lot of blank selling. So, we almost doubled the logistic cost because the freight forwarder and the maritime company increased their fee a lot and all the flights were canceled, because no passenger flight, so then most of the cargo flew all those passenger flights, so we could not get goods in by plane, or the price was crazy expensive. So we had a lot of work to deal with all those China’s supply chain issues during the coronavirus outbreak and I would say, since a lot of people were not even in the office or in the warehouses also we had difficulties to really add any action on the end last part of the deliveries, there was no order, just all the stock coming up, so we had to make a promotional plan trying to come up with the idea to clear the goods, but actually, we already anticipate that some overstock we have today, might come up with a shortage in the coming months. So, at the end of the day the business is picking up so it’s okay, we can still clear the product out and I would say this was in the supply chain point of view for the importation and we also had a factory locally acquired two years ago, so this one was closed down, but opened quite quickly anyway. We opened three weeks ago, so basically the office was also opened very quickly, so we could go back to the office just after the one week after the Chinese New Year holidays stopped, so I was able to go back to the office one month ago. I mean in Shanghai it was very well organized. So you know, at the end of the day we tried to make a lot of plan, but you had no choice but to follow the actual pandemic, every day you follow the pandemic development, expecting the slowdown of the new cases and hoping, cause there is nothing much you can do, just hoping that things get better and that your container finally arrives despite China’s supply chain issues during the coronavirus outbreak.
Matthieu David: Actually, I had two questions but now I’m adding one, so three questions related to what you just said. So the first question is – and it’s linked to the second one, what would you advise to businesses which are in the food business and strongly affected – restaurants, hotels, food service, which are now in Europe and the US, what would you give as advice or as warnings, if there is no advice and we just have to suffer it a bit, but warnings on what to be aware of and what to do to reduce the pain from your experience in the Chinese food industry during the virus outbreak. What would you advise?
David Beutin: Waimai, so Waimai in China this is the home delivery which you had Uber Eats (learn more on how Uber Eats may learn from Meituan) or any other, Panda Food, any other delivery system. So a lot of restaurants could reopen, because also sometimes your country open, but if you have a central kitchen office you can reopen, but not accept customer in because you don’t want people to sit less than 1 meter from each other or for whatever reason, so then you have this delivery solution which I think in all major cities already, are in place through Uber Eat or –
Matthieu David: If I may, because exactly – Uber Eat, because people may not know what waimai is, because waimai in Chinese means to take from outside, to buy from outside, so basically like Uber Eats. So, what you are saying is that restaurants need to rely on home delivery. I may add one thing on this, people may not be aware outside of China but for home delivery, for some time, on the package, it was written the temperature of the staff, of the cook who cooked the food. What the temperature was – 36.5 or 36.7 and so on and there was a very strong communication, of course, it’s just communication, you cannot check if it was true but a lot of transparency, communication transparency when delivering.
David Beutin: Yes, no it’s true. I mean in China they were very quick at finding solutions, reassuring the public, at the same time warning them not to go out, but they still had to eat right. I mean the food industry I would say – not all the turnover loss in foodservice Horeca hotel, restaurant, catering, went back to retail, but that’s the other thing. A restaurant, if they can deliver ready goods, it’s a good thing, but for a food manufacturer and for food importer of raw material or finished or unfinished goods, they should redirect more to online retail. I would say from what happened, Hema, even Hyper Market which is a more local platform for foreigners, these are a lot of platforms for retail and the one actually who took the most opportunity of this crisis were the ones relying mostly or only on online deliveries. So, we had Hema which actually maybe even closed their stores or didn’t have many people in their stores, were able to deliver to you in your home and they were overwhelmed with the number of the order they could receive (learn how Hema and other online grocers dealt with the outbreak). Hypermarkets are more expat-oriented platforms also informed their customers through email that they had so many orders that they would have maybe some delays or some product out of stock or they would not be able to respond as quickly as before. But I would say some retailers multiplied by 7 their turnovers. So once again, this business transferred to retailers, online retail especially – didn’t cover their loss in global foodservice, but some people still profit from this business and I think a lot of restaurants maybe tomorrow we think, oaky maybe I get the smaller restaurant, something I can – with the rent which I can have a better return on investment quicker and rely more also on deliveries or this kind of online platforms, rather than just 100% classic model which in terms of rent – I think rent today is the biggest issue for the Chinese food industry during the virus outbreak because even if you don’t have a business, your cost is so high, and you have to pay the tenant which don’t really care.
Matthieu David: What we may expect is that China will be back to business – it is on track to be back to business much earlier than Europe and the West. An official from Hong Kong said, “We may die of economic loss, earlier than of the disease” so ideally in the coming days and weeks what will be the priority is to try to find markets, maybe emphasize some markets. My question is – and I think we’ll dive into detail on some tips and understanding on how to do that, but what would you suggest for companies which are in the food business ingredients or whatever they do, in order to take advantage of the fact that China is back to business. From France, from Europe, from the US, from the West, from the rest of the world – would you have suggestions, warnings at the same time? On how to create a new channel?
David Beutin: Unfortunately, I would say the crisis is there, it’s already too late. In terms of the supply chain, now even you think China could consume more goods than Europe would do, it’s impossible or very hard to ship them out or even to manufacture them. Now, you see that the world is totally globalized because when we manufacture whatever dairy product for instance, maybe we can open the factories because we’re doing food and you need food and they will never close those factories during the quarantine, but you also rely on your packaging supplier, and you need to export to China administration to edit documents for you, phytosanitary certificate of origin and then you need the logistic company to be able to ship your goods to the port and to have someone taking your goods, put in a container and transfer this container to the boat. So, everything today I would say is a challenged model as the global model is really challenged. What we see today the opportunity for Lactalis group, which might not be reproduced by any other company but we at this local factory that we opened two years ago, and didn’t really pick up for various reasons until now that localism I would say and people with local manufacturing and local team, the sales team will be much easier and much faster to get back to business. Then you would have 11,000 kilometers away. So, at some point, and it’s just a matter of time because that’s the way I would say in terms of enduement and the way the customer wants to buy products. They want to buy products with less carbon (read our latest article discussing green products in China) trace than before, they want to buy products which are made locally. They want to know more about those products, where they are made and you need to adjust those goods to match regulation, but also the taste of the people and that’s what you can do when you have a local plant or local activity, could be a manufacturing or transformation or at least development with a local team, adjusting all those marketing, communication products and so on. It’s important to be locally implemented.
Matthieu David: Talking about reopening the factory, can you tell us more – is it 100% reopened now? What kind of things you had to do? What kind of constraints you had from the government to reopen? Would you mind just telling us how you reopened and what are the changes compared to the past to manage a food service company in China?
David Beutin: Okay, I would say food manufacturing, it’s the standard in China, it’s in term of the standard of production. Food safety (learn more about the challenge of food safety in China), cleanliness of the facilities. When you talk about Shanghai, I would say – its super high. So, I would say producing today in China is not what it used to be. It’s more expensive at some point because you have a lot of standards you need to follow, which are even sometimes, especially in the Shanghai area you can say that in the kitchen and restaurant business is the same, standard will be even higher than Europe. In terms of cleanliness, food safety, we have a lot of control, a lot of constraints so I would say food manufacturing was in such a high level anyway, everybody wears masks in the factory, you need to clean all the clothes, we have boots, we have the equipment, blouses and so on, so the standard was already high, we just had to clean and sanitize the whole plant, which also we are doing in order to improve and the cleanliness of the product. The whole plant was clean, even cleaner than a hospital and we just had to sanitize one more – train the staff on the cleaning habit, which they were already trained as a food manufacturer, so it was quite fast. Developed with the regional district to help us in the opening as fast as we could and actually, we were already back on track even before restaurants and foodservice businesses reopened and start reordering, so it was pretty fast.
Matthieu David: I feel indeed the hygiene standards are high in China and greater to China compared to France. I think we all had the experience in France to go to a bakery, to go somewhere and someone is serving you without gloves and with his own hands, cutting the bread or whatever. That would not happen in China, you would even have a kind of mask to protect the mouth.
David Beutin: Sure, Shanghai is not China I would say because to educate the whole population takes a lot of time but I would say in Shanghai what happened, one bakery which I won’t name, a big chain from Korea, one guy was doing bread behind glass, in the baking lab in the stores and the mask was just put on his chin, not covering his mouth. One customer took a picture, put on social media. And it actually affected greatly the image and even the staff himself, the employee himself. So, this happened in Shanghai, in other regions it takes time, but standard in Shanghai are very high and the social media, I would say is exactly on Taobao, people will take a picture, you have to be careful. You have no choice. So yeah – standard in Shanghai for the rest of China it’ll take a little bit more time but in Shanghai especially its very, very high.
Matthieu David: We’re talking about the situation and I think it was good to get an update, It’s not related to the podcast, more looking at the long term – to go back to the more usual podcast and talking about your current position managing a food service company in China, we may actually go further than your current position and go back in time later on, but could you tell us what Lactalis is doing in China currently and how different Lactalis is in China compared to the West. Specifically. I see from your website that China – let’s say, Asia because there is no number about China specifically but what we call Asia and Australia, is 13% of the revenue so compared to the population it’s much lower and in terms of revenue as well worldwide, 34% is cheese and we know that cheese is not a daily consumption in China, it’s not even a common consumption in China, not even in Shanghai or Beijing which are international. Even Milk, Yogurt, Butter are not products that are daily consumed in China the same way than it is in the West. So, would you mind telling us what do you do in China, with Lactalis what do you sell and how different is it from the West to promote dairy products in China?
David Beutin: So, Lactalis group is very strong in cheese manufacturing, this is the number one dairy company in the world. I think second food manufacturing in Europe and 10th food manufacturing world-wide. So, they’re strongest is processing dairy, but in cheese and in retail.
In France everybody knows about the President or you know Le Petit, we have a lot of brands of cheese, we acquire gourmet cheese brands but also more I would say commodities and volume items, but we are very strong in cheese. In China, as you pointed out very well, we do mostly cream. Cream for cooking or for pastries because of a bakery in China, so bread or I would say pastries is developing much faster as you mentioned than the cheese consumption. But, actually, things are moving very fast with cheese and my idea is really to try to push this consumption of cheese to promote dairy products in China and following a trend which is happening where actually dairy, one of my friends told me okay – you’re moving to Lactalis, good luck to going into a company who is selling dairy where I would say half or more than half of the population is lactose intolerant. They can’t drink raw milk, but they can actually eat our cheese with no problem. You can even if you’re lactose intolerant eat cheese, and there is – so other products that you would go through education, through the yogurt, so dairy consumption doesn’t come right away, which we are very strong in France and in Europe and globally, they would go through snacks, through yogurt, milk at some point maybe, but the education and I would say the consumption of cheese is already happening. More in processed cheese, which is like you would say a small triangle of cheese that you spread on your bread, you know it’s like cheese with herbs, that we all put on some bread, fresh cheese, so spread cheese and then people will get educated to our cheese like Emmental or Comté (learn more about the cheese market in China), this kind of cheese, and then they will start to try new soft cheese, such as Brie and many others. So, it’ll take time. The volume obviously compared to the population of China is not that big, but the growth is very, very important.
Matthieu David: May I ask you a further question. We looked into the case, I believe it’s a conflict of group Bel, with famous cheese called ‘La Vache Qui Rit’ – Crazy Cow – we have translated it in English – and they entered the market I think pretty early, I don’t know how early compared to Lactalis. Their market entry was not very successful and then they redirected their cheese towards children because children need milk, need cheese to grow, and also, they added a flavor in their cheese, which was like strawberry, like a banana in the crazy cow cheese. What do you see as the use of cheese which is different in China? I would add one more thing, we always think about cheese that’s personal consumption, added to the desert in France, but cheese is present in fast food a lot. McDonald’s is putting cheese in hamburgers. You may find cheese in other places and in restaurants as you said. So, I feel the market is driven by B2B, by those fast-food chains and also may be driven by new segments that have to be invented, compared to Europe. How do you react to this?
David Beutin: As we talked before, yes you need to start promoting dairy products in China with kids, education towards cheese will be mostly on the youngster, on the teenager, on the kids. They need protein and milk is one of the best ingredients with the highest ratio of protein intake you could get. So definitely all those sweet or non-sweet, I mean like we discussed at the beginning, you have to have a local operation and customize your product. Give it fancy, nice packaging or even a different way of eating it. Not on bread but on a stick. So, there’s a different approach to adapting our vision and the way we think cheese to a teenager and young people and definitely, this is something that needs to be done in order to educate them to later eat cheeses. But, as you mentioned still if you give those kinds of – I would say through retail – those kinds of protein intake, with good flavor, adapted to kids, then the second stage of experiencing cheeses would be via QSR and that’s something that I’ve seen previously with Darégal when I worked in that company, you cannot come with some new products like Emmental, or with some herbs like basil and develop a recipe towards retail right away. People don’t experience and don’t want to try something new in retail, they would try something new usually in food service when they go to a pizza chain or a burger chain or a bakery chain. It’s the best way for us and for all brand to promote dairy products in China, whether it’s Lactalis or another brand, to promote dairy products in China this brand to our bakery or to a QSR, then people will be easier to try something new there and then buy your product, in maybe a different format or buy your brand in supermarkets. Yeah, so the approach of QSR is I would say very – is necessary for a lot of ingredients and even for some end consumer brands to get the visibility, the brand awareness, and to educate the consumers. It’s very important.
Matthieu David: I believe the question next would be – maybe it’s not something we can elaborate right now but the challenge will be in the future – how to create B2B2C brands when you’re used by restaurants, you’re used by bakeries and the final consumers don’t know about you, but still you could be useful for the restaurants, you could be useful for the bakery because Lactalis is well known, Lactalis is by the way 18.5 billion euros worldwide. So, it could be actually an asset for those businesses using such good ingredients in their food, in the same way as in the restaurant, in good restaurants you may have better water, for instance, you may have an Evian and other water.
To go back on sales, because I feel you expect you are developing sales in China beyond the fact that you have started a business, created a business, and so on. One of the focuses is on sales, and especially B2B sales. Would you mind sharing about currently Lactalis? Are you handling everything yourself? Are you going through distribution? Do you have a master distributor? Do we need to have a distribution pair province? There are a lot of questions about it and I believe there’s no simple answer but what could be at least the parameters to consider?
David Beutin: With Daregal, I would say, with Lactalis when I joined the company obviously you know the system and the channels and the distribution system was already in place for quite some time and they always – I would say every company, big or small starts with the distributor. You need to understand the market and at some point, whenever you’re ready to do your own importation or your own distribution or even open a local factory and manufacture yourself, most of the time you will fail. The first time.
Or, you are in the market and work closely with the distributor and you really learn the market, learn what the customer needs, learn how sales operate or logistics operate and then maybe you will have more chance to succeed to manage a food service company in China but even so I would say you most likely will fail the first time when you try to do everything on your own. Yourself.
So, the first approach of Lactalis at the time, they definitely went through a distributor, they were acquired by another company and then they find a new distributor and now what they are doing is they started to import some product themselves of different brands, to distribute to other channels, not to compete with the actual distributor and at the same time have local manufacturing. So, I would say, even in Daregal, first we had a lot of struggle to import but we were trying to import. One of the first mistakes you do is trying to rush to find the first distributor. In China, you really need to take time, evaluate all those potential distributors that you have, build up your network, go for exhibitions, through networking, through your pair and I would say in the French community, maybe not always on your field of expertise in the market in China that you’re looking for, but I would say, most likely yes. You really can find peers and friends and people will help you to find this channel. And China goes very fast, people are very open, very entrepreneur-minded. So take time, make a good study and once you did this study then you can really sit down – a lot of companies make the mistake to take an intern or someone for the short term, they really have to study, even though a consulting company, maybe first but do a deep study and – one big CEO says, it’s not a matter of early you start, but whenever you’re ready and you have a clear path, that’s when in China, you arrive late or not late – it’s okay. But – if you have a clear direction, then that’s when you’re going to be efficient. And the study of the distributor is very important, the first stage. The first ability of importation, it’s the key. A lot of products are going to be imported for various reasons. Is your factory accredited? Is your ingredient list allowed? There’s a lot of research needed to be done first.
In China, one of the approaches we have is not what the market needs, okay – what market needs are important but what China imports. That’s the first question and from that, you already narrow down a lot and it also helps you to have more focus somehow, and you kind of walk backward. What can I import? . Where do I have the opportunity? And then you narrow down to distributors, channels and all these things. So, basically, that’s what I’m doing now. Motivating the distributor and finding opportunities, always developing your network, trying to build brand awareness. Chinese people in the industry are very much looking into your technical advice, education about the products – where are they coming from? How to consume it? How to use it in a dish? For example, when you mentioned about cheese previously, nobody eats cheese at the end of the dinner, I mean that’s pretty French. No one after every meal would say okay, I will have cheese and then dessert. No. most of the consumption of cheese now comes with a glass of wine, some cold cuts, at the beginning of dinner I would say. Or incorporated into a dish. So, you need to rethink the way to consume cheese, you need to rethink the way how to sell it through distribution channels, online, offline and I would say you have companies in China who can help you promote dairy products in China. You have other people who did this work before and Chinese business people are very open to have these kinds of discussions and find the right direction for you, so it’s a very interesting market I would say.
Matthieu David: Okay, so go through a distributor, don’t do it yourself when you start in China. What kind of deals to expect from distributors, could you give some landmarks? In terms of percentage, do you give a free will on how much they price a product, what kind of elements do we need to have an agreement on and what kind of deal is expected by a distributor?
David Beutin: I think it’s – the first time you start something in China, most of the time you get it wrong because there are no such rules. Even if you are a huge company, the leverage you have with your local distributor maybe – you have to see how big your distributor is, and how strong he is on the market, but the leverage is not that easy to get. You need to entrust. You need to really study what the competitor does. If you can bring a value chain and say okay, what is a distributor – I would like to ask you first? It’s an importer. Someone who can also help you to clear the goods, because you need good knowledge about clearing products from the customs. Someone who stores and delivers your goods, or someone who sells and promote dairy products in China. This is three different businesses, three different works which actually companies are focusing on each of them and also hardly sometimes manage to do it perfectly. So, how can someone be able to import, stock, deliver, sell, and promote your products? Hardly they can do everything. So, try to find a distributor who matches your requirement, see where he’s strong. And from that you can start to build the value chain and say okay – maybe importation you’re not so strong, so I’m going to import it myself, open a WOFE, store the products here and then sell it to you, so you avoid also all those issues and create them, and then you can say okay then – from the margin, I give you before, I can reduce by that much percentage because I am taking the risk on the importation, storage and stock here. And I just sell you afterward, in China. But to arrive at this you really need to have a team, long term team here and learn these things, but it really depends on how much work they’re going to put on the distribution of your products and to get a number maybe goes from 10 for very big commodities to over 30% margin for a distributor. Another thing I would not suggest to do is sign an agreement, because whenever you do such a thing, then you tend to lose totally any leverage because the distributors have all power over you, but at the end of the day leverage, you acquire it by helping your distributor, being close to him, trusting him, but following him as well. So, it’s a very hard balance to find, but it’s something that when you’re in China for a long time you tend to acquire. Get lose and let some benefit to him whenever he really needs it, but be able to strike it and ask reporting and really following hard whenever you feel that he’s not pushing hard enough. Because at the end of the day every distributor is the same, you need to make him think of you more than other brands. So, it’s a game which is an endless game but you need the right person and the team to push forward.
Matthieu David: What do you do? What do you do to make them aware of you? What do you do so they push more your products than other products? Some tactics, can you share some very precise tactics or things you have in mind when you want to push your distributor to go further.
David Beutin: So, you know when I was in Daregal I had to handle 15 countries, so this you don’t – really can’t spend a lot of time, with all those distributors. So, I would say exhibition, to go to their country exhibition or to invite them to your own country exhibition, invite them there, treat them to dinner and take care of them it’s important to build this kind of relationship. Because what you want is, whenever you need to call them and ask them to push forward some projects for you, they will remember that and help you out. China of course drinking and going out with some customers and distributors, it’s important. It’s part of the business I think like in every country, but in particular in China. So, you need to do that, you need to be involved – you can’t be reactive, reply to an email quickly. Whenever they – never say no, it’s hard to say no but you have to sometimes, but in China, the culture says you have to do your best. You have to try to understand. Sometimes regulation in China is difficult, so if they ask you something, in particular, a special document for importation, you need to understand them that China it’s not like any country. It could be sometimes in terms of an administration very complicated as well, as French I think and like sometimes bringing in some competition is good. So, if you have one distributor and doing most of the business and start to be a bit slow, then you have to show him that maybe for the other part you’re also looking for new China, new distributors, or doing it yourself. So, it’s some tips but yeah – I mean you can look at many stories of Danone when they come to China and maybe overcontrol their first joint venture partner they had, and it was a failure because then you lose the advantage of having a local partner doing it, his local way, which is more flexible, with better guanxi and you know, who has some flexibility. So, if you control too much, it doesn’t work. If you don’t control enough, then they might have the temptation to push you away from this business and take another brand or do it directly or manufacture locally, so it’s once again the balance. I would say, Chinese businessmen and Chinese business world, it’s not that different. You just need to get to understand it and see from their perspective rather than yours. Really looking at the business through their eyes will help you to take the appropriate action.
Matthieu David: Is it correct to say that your experience with sales is a lot through distribution or have you built also a sales team to sell directly? Was it a mix or was it focusing only on distribution?
David Beutin: You have some direct, you need at some point to have some direct account, international account or even big local account which at the end, the price ratio sometimes can be so hard that you have to supply directly in order to be competitive but I would say, French people – maybe European people, other people maybe are not that business oriented sometimes, but whenever you arrive in China you see that people are friendly but also talking about their business. You do constant networking (learn more about how companies enter China and build their network). WeChat, I would say – if I look for something, rather than going through Google now I go through WeChat because I have all those history of groups and you can get very quickly information, so I would say, of course after 9 years, after many years in China, you have a good network, you build your contacts, whenever now you have a direction to supply a certain channel then you call your friend, you call some business partner, you try to get information about a specific channel. So, I would say- but you can’t do all the little ordering process. Foodservice is all about food and service. How can you yourself respond to all the customers’ requirements? Urgent deliveries? You need people to do this. So, if your distributor has the capability to deliver and to supply and to answer your customer question and user question then it’s the best. So, I would say you go back to the same first reason. Are you distributor good at distributing and selling, then let him do it. If he can’t, then okay – distribute but then you will assist him with your own personal team to contact and directly. So, from our point of view now, from Lactalis’ point of view, we have two-person in Beijing, one in Shenzhen, one in Guangzhou, and then we’re going to open in Chengdu soon. So, we have these people managing basically the distributor and also contacting and talking to some chefs and customers directly, but it’s a mix of everything. You just have to identify whenever you have a distributor, whether they are strong or weak and then you can develop particularly – for us we are working on the technical team. Maybe the sales we still sell and promote dairy products in China but for technical advice, we will send our team to support consumers and customers to help them how to apply the products in their recipes, how to use it, what’s the advantages of the products. So, China is such a big market, manage a food service company in China, and do it yourself it’s impossible. Even Taobao at some point doesn’t do the distribution themselves. It’s just a platform, it’s a matchmaking platform so people want to sell goods, people want to buy goods and then that’s it. This JingDong then, they will have fewer goods, have their own platform and distribution, but also it makes them slower. So, a distributor could be to some extent – whenever you sell those kinds of very mass-market products, have to be through those channels, who have all operation and strength. Otherwise, it’s too big.
Matthieu David: I listed a question but I feel I may have to change it a little bit which is – what is still missing in the market in the food business? Where do opportunities still lie in the market? The reason why I’m thinking that the question should be changed because based on what you just said I think that products, most products are already in China. Are findable. But what’s missing is education and how to know how to use it and when to use it, for what and how. Is it your perspective too? What do you feel? Do you feel that there are still products to import which are not present or the efforts are more about marketing? Getting to be known as a product?
David Beutin: If you go towards food service, I would say distributor as you mentioned, they already have quite a bit catalog. Not as big as other countries in the foodservice like Hong Kong and so on, because you can import basically anything and I would say the market is a bit more mature, but the distributor first thing he will ask you is what’s your marketing budget? Can you help us to promote dairy products in China? Do you have a brand ambassador? Because at the end of the day, they can’t finance your stock here and push your products, rather than all this, you need to show them you have – marketing power, brand ambassadors (learn more about brand ambassadors in China), someone who can help us to promote this. So, now I know in the French community there is a lot of culinary consultants, helping you to adapt your recipe or incorporate our products into some local dishes and there is a lot of company like yours helping maybe online or to help people to understand the market to promote dairy products in China. China has a lot of opportunities, but as you say – you need to be able to come up with a plan and with product adaptation and a direction. So, all those culinary consultants, I think it’s something pretty new. Some people with both cultures who are able to tell you from a local point of view, okay I think this product has potential there. And there is definitely a lot of opportunities, even on the dairy, on the beverage, in many aspects. So, I mean – it’s just a matter of the approach really. Consumers for example for cheese I would say, people are willing to buy expensive cheeses, but you need to be there and explain to them what’s this cheese, how it’s made, where it comes from. How to eat it? How to pair it, with which wine. And this as you mentioned, it’s actually costly but it’s effective and there is a lot of small distributors, or now big distributors who are doing this work in a very niche perspective but I think it’s the right investment to start with small distributors now, even with a niche product, do it step by step to promote dairy products in China. Finding the right guy locally and develop it bit by bit and you know, like oysters a few years back was a niche product, now it’s a huge volume item. So, yeah – China needs to react fast but there is a lot of things to do.
Matthieu David: Yeah, I confirm, the oyster market, we have a client in the oyster business and they consider China as really a very, very important market. I’d like to talk about what a producer of food, processed food, and the food inspecting has to consider when exporting to China. I can give you a bit of explanation of why I’m asking this question. I understand that regulation asked you to change the packaging so that you can write in Chinese and so it’s understandable by the local market. That’s one thing. The other thing is you have to get a certification that you can export the product, food is not something that is under looked by the government. The government is very, very careful about it because they had some issues in the past with infant formula for instance. In 2008, not as big as this one, but still – so it’s in some ways a bit of a risky business to sell food in China. So, what would you at least as a top priority to consider to change on your product when you are considering exporting to China?
David Beutin: China regulations on the importation, even the GB standard, local GB production standard, which is basically every factory in China have to follow this standard. So, whenever you import goods you also have to follow GB standard. All of those are changing very fast. If you’re working on an ingredient of finished product business, a big volume item, a commodity but its somehow not sure whether you can import or not, the first thing you do is put someone in Beijing, start to do the lobbying and really trying to work with the local French embassy and all these constituent companies trying to understand whether how it’s going forward. Because there is a lot of company opportunities from the food ingredient point of view, it’s hard to import. China is protecting its frontier on the importation, we have a lot of regulation that sometimes it’s hard to make sense of it, but its opening. I’m very convinced and positive about it, it’s opening.
So, I think the first stage would be very understanding. The mean and the reason for all this regulation behind it and it takes a lot of time but it’s possible and a lot of products have been working hard on it to open any kind of buyer that could block you from importing your goods. So that’s for the commodities.
For more niche products, understanding the importation is the key. As once again it’s the same thing, distributor. What your distributor can do – can he import? Can he stock? Can he deliver? Can he import? So, does he do it himself? Does he really have knowledge about it? Because his knowledge is power. Every time you ask a distributor – how did you import this product? It’s supposed to be forbidden, not forbidden, in the end, everybody is confused. It’s a blurred area and actually, you usually work most of the time in the grey area. Just have to be careful not to be in the black area, but you know importation sometimes is always a bit grey area. So, if you have a distributor, get involved in this, understand how does he import? What’s the reason behind a problem with the document? Really trying to get involved and not saying oh I can’t do it or can’t do that. You need to ask him – why? And understand the reason behind this, because tomorrow, whenever you want to change the distributor, you will have to restart from zero, unless you really get involved in this importation business and that’s the first thing, I did with Daregal. It was really complicated. And then with Qwehli, and even Lactalis now I’m seeing – and we’re talking about opportunities, but I’m saying opportunities because when it’s difficult, no one – not everyone can do it. But when you have good knowledge, when you understand the market, the regulation, the importation issues, then you kind of tend to see opportunities and in Qwehli in particular when I did the WOFE importation, the type of fish you can import, the herbs was the same, the variety of herbs, the species of fish, all the formulation and the origin of milk of products you can import, all of those make it very complicated but when I have knowledge about it, then it’s much easier. It’s much easier. You see opportunities, the distributor will always stay in the grey area for this because that’s what Chinese say, it’s in troubled water, then you catch most fish. Because whenever you don’t see it – you can’t make any move. You don’t see someone’s coming on top of you. So, a distributor, if you don’t know how to import, you’re not going to change distributor. You know it’s going to be hard. So, if you understand all this first part, you understand how to import and you have products on hand, then a lot of doors will open, a lot of opportunities, you can react faster, and to me, importation is the crucial point. Whenever you think of a business in China, import food, if it’s important for you, you think this market has potential, you need to at least be involved. And this will change dramatically the attitude your distributor will have with you, the leverage you have, the understanding in the market, you’ll be more reactive, and able to find new opportunities much faster.
Matthieu David: We are soon leading to one hour and I’d like to add one more question. How do you stay up to date about China? What’s going on? Whatever it is about, if it’s about information about the market, about information about regulations, about information for yourself. What sources do you use?
David Beutin: So, as you know in China there’s a great firewall, so gfw right. So I would say all the – LinkedIn for me it’s a very important platform to keep connected with people rather than Facebook and so on, but to know where people are, keeping touch with them, posting any article related to their industry, somehow it’s a good way to keep informed. WeChat is a tremendous platform to share news about business opening, business closing for the restaurant industry, and hotel opening and closing. Networking and guanxi, that’s where you get the most accurate and close information about your markets – who is importing what, what are the new distributors in the new products, new brands coming in. so all those – these are a lot of networking and events. There’s one tonight in Shanghai, I think the first networking since the pandemic, so that’s a good sign, but those networking are very important.
Matthieu David: That’s very interesting because I think if we ask – there are so many I interview who have said that my source of information is WeChat, LinkedIn, social networks. I think if you asked the same questions to Europeans, Americans, they may say – they may name some well-known newspapers, some well-known magazines in their industry or website in their industry, but they may not say that I’m crowdsourcing information through WeChat groups and LinkedIn groups or Facebook groups or WhatsApp groups and I feel that in China, information is fragmented, because of this social networks. It goes fast but it’s sort of fragmented because you have groups, you may not be part of or you may be part of. So, it’s very, very interesting. Thank you, David, for being with us, already one hour. Thanks for the update on the crisis, I think it was very useful. Hopefully, we’ll be able to publish very soon so people can protect themselves from what may happen in their own country in the world. And thanks for the tips on distribution, I think it’s a question we very often have. I hope you stay safe; I hope everyone stays safe and thank you for listening.
David Beutin: You too, my pleasure. Bye Matthieu. Bye, everyone.
China paradigm is a China business podcast sponsored by Daxue Consulting where we interview successful entrepreneurs about their businesses in China. You can access all available episodes from the China paradigm Youtube page.
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