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Premium retail brands in China

Podcast Transcript #77: Promote the effective development of premium retail brands in China

Find here the China Paradigm 77. In today’s interview, we have a comprehensive perception of how to promote the premium retail brands in China, to what extent should foreign luxury watches in China balance the online and offline marketplace, and why customer service in the Chinese retail market is the most important to increase sales.

Full transcript below:

Matthieu David: Hello everyone. I am Matthieu David, the founder of Daxue Consulting & its podcast China Paradigm. Today I am with Mike Hofmann. You are the managing director of Melchers, which has been in China for one hundred and fifty years. There is one thing for sure is that now I am interviewing the oldest company I have ever interviewed in the podcast, maybe the oldest company I will have interviewed in my life in the podcast. Melchers entered like in 1860 something – I read in your presentation and don’t you think actually for tourists it could be interesting to know how you survived all this history in China & where – maybe in Hong Kong at some time, then Thurmond & China.

We will go back. so, Melchers – what do you do? You are supporting the exports & operations of companies & with a strong focus on Asia, and specifically in China as far I understand. What gives me this feeling is that the name of Melchers is three characters next to it, which are Chinese characters. So, it seems that China is very important for the company. You are making six hundred million net & this is something maybe it would be interesting to understand what net means – 600 million Euros net of revenue, hiring 1700 people worldwide if my numbers are correct & updated and now you are also – you are doing manufacturing, you are helping to manufacture but also to implement brands overseas especially some premium retail brands in China; foreign luxury watches in China; luxury goods that we are going to talk more in details. Thanks very much for being with us. Anything you like to add to the presentation.

Mike Hofmann:  No. it’s very comprehensive. So yeah, the company is in China for a long-time history. Obviously, I am not as old. The company is over two hundred years old, it was a German company & entered China 150 years ago; we were in Hong Kong at that time. Then we came to Mainland China and Basically, with some interruptions during and after the war times, basically for a hundred fifty years always coming back to China, always building up again. and always constantly doing business here in the offices here running on the ground. As you said, it’s very comprehensive; it’s still family business which is ownership or proprietary partnership. So, it’s not driven by the stock market. Which means we have a very long-term view. This allows us to stay in businesses that maybe not as good in two-three years. But look more, in the long run, it’s a long, successful partnership and this also has helped us over the years to adjust our portfolio & nowadays it’s every entrepreneur, the company still is going always after where they can offer valued services. We don’t see us too much. We used to be a trading company; with trading routes. we used to be trading goods in both countries. But nowadays it’s more going towards the service provider & value-added customer services in the Chinese retail market. We can use our competencies in different fields to help brands to succeed in china.

Matthieu David:  So, we mentioned before the group net sales are six hundred million Euros. Would you like to explain what you talk about, when you talk about net Sales?

Mike Hofmann:  Yeah. It’s an official group number. Globally, China is the biggest market. The group is not telling numbers by each market. It’s basically the revenue, different word for them.       

Matthieu David:  Okay, my understanding of Net Sales was because you may have actually marketing expenses for your clients or advertisement budget, or maybe you take into account only the commission part or the part which is brought to you. Is it a good understanding? When do we talk about Net?

Mike Hofmann:  No, it’s paying after tax. So, it’s not –

Matthieu David:  Okay. Sorry to be so detailed but I like to have a good understanding of what you do & I think those details help us to understand also what you do? When you talk to the advertising agency very often, they say your revenues with marketing budget with ads spending & without ads spending because ads spending is taking the money of clients to actually spend it on ads. so, I understand it’s not that it’s more after tax. okay. So, would you like to help us to understand better what you do in detail with maybe one or two case studies you feel most illustrative for China & more specifically in the premium retail brand in China, as we mentioned earlier as the main topic for today?

Mike Hofmann:  Yeah. Like I mentioned, the group is business-wise very diverse, the one strong pillar is a retail business in China. Another one is sales of commissioning of machinery business. So, focusing on our business in the premium retail brand in China.  Melchers is in the sector in China, actually in Asia – we’re kind of now talking about China. In China, I would say it’s over fifteen-twenty years’ experience in this industry. We started it by being the partner for Swiss luxury watch brands. What we did is that we were running the entire retail operation for foreign luxury watches in China. When I say running, it is we used to buy the products; we opened the stores, we managed the store always in close corporation because the stores obviously have to be same corporate identity as the Swiss watch manufacturer wants to have it, and if it’s for branding; for marketing, you often also talk in Switzerland in these firms, how to position your brand? How you do it?

So, we did the entire local market; entire marketing, distribution; importing warehouse & so on. But always in close corporations. As the company’s always doing, always was the brand partner they worked with very closely because we want to ensure that we are not trading house who buys a product & sells it. But rather to offer our advice; out marketing and also to ensure that the whole brand image is secured in China, and especially as today as you know a lot of – especially in the premium retail brand in China; a lot of Chinese consumers buy watches overseas because of tax reasons they are cheaper. So, it mostly comes to seeing China holistic as a Chinese consumer. Whereas China as a consumer is my biggest customer, but in the end how much did we really sell in the country? & how much do they sell otherwise? So, That’s often two different stories. So, that’s why you have to be very specific about how you are marketing in China and also because they might buy overseas. So, you have to be very careful about it.

Matthieu David:  Interesting. Yeah, I didn’t think about when preparing the interview that the speed between overseas sales by Chinese travelers basically and the statute generated in China could be a topic for you. Because you may drive trade traffic to them overseas & may not be rewarded for it actually. Also, that could be a topic. Is it fair to say that you compete with the Li & Fung; and the companies like Blue Bell? Is it the same kind of business?

Mike Hofmann:  It’s a little bit, yeah – what’s just one difference of it you don’t have off the self-products. So, we are not saying that this is our service. We always try to be as individualistic & customized as possible. I would say – one secret accountant that has been around so long because they are constantly able to adjust our business. Overall, we are working in China in all of our businesses. Its more than eighty companies in different segments. and, this is sometimes because sometimes what we see nowadays, that you still get a lot of contacts from companies & premium retail brands in China, handbags & other industries. which then okay – I want to do my retail business in China & maybe I have already one or two stores, or I have already a distribution partner.

But I need somebody who helps me maybe only in this negotiation vendor; I need somebody who’s only doing the accounting, doing my back-office function for me. Because they can’t sell, but I still need to see more a little bit on the corporate function support; I need somebody who helps in marketing in China – my brand image. So sometimes we see, that direction more and more that we tell clients looking for a partner in different fields. So, we are also developing there. But of course, where we come from this is maybe our strength in that area. That we are coming from the whole area where we tie up business & tie up retail operation. So, we can use actually these competencies & help these brands.

Matthieu David:  I see. Why do you feel companies would go through a service provider like yours instead of going directly & setting up a company directly? What would be the key element that would make them choose to go through your customer services in the Chinese retail market? What do you think about what circumstances they should better go through your services?

Mike Hofmann:  So, what we see is always about the risk & investment to make a decision If you invest in China. How do you set up? The Additional licensing; franchising of company and so on – not every company or who was a global company with smaller companies – who might not have the budget to do it themselves. China is still a very complicated market. Now you get a lot more map information. But it starts from maintaining the relationship, for instance, the vendor found the right business location in China’s malls, which is your right location we don’t know if you are not here active. You have to negotiate with the different vendors for retail landlords, for instance, which is not always as easy.

It’s a lot of hassle; a lot of local knowledge needed. So, it’s a very demanding market, demands-resources a lot, so not every company is willing or capable to do that & that’s why they also benefit sometimes from the partners. So, I would say smaller the company is, yes they are higher, but even big companies often work as part in certain areas, for instance, China is a huge country, maybe in the big cities like Beijing, Shanghai you still can handle it and you want to open in Chongqing & it’s totally like a different country; different province in China. Sometimes it’s really some companies back in Europe they underestimated or have no capability to handle China as a whole & that’s why they are often looking for partners.

Matthieu David:  I was checking some references you put in your presentations & some of them are pretty big companies indeed & well-known like Nexans, French company, so we know it,  but also as we talked today would be the main topic about the brand Breitling which is I know it actually, I don’t know if it’s famous but I know it. It’s interesting to see that some companies which are actually already well-known; were serving worldwide would go through some service provider. My feeling is that there is a cost of management which is actually pretty high to internalize China & there is a risk of seeing your general manager leaving suddenly. There is a risk of suddenly not having a person who would understand the contracts inside & doesn’t knows how to manage a lawyer. But you are able to offer continuity. I believe that’s something I think it brings a lot of value as well.

Mike Hofmann:  Yeah, and we also evolve in terms of market maturity. If we’re looking back in our terms, China was after joining WTO; after China opening-up policy. Everybody’s gotten a bit interested but it was a little too complex, so they worked in the department, it gives you the whole market. Nowadays everybody says China is so important, I want to be there myself; I want to have a footprint there; I still have to be engaged. So, what we have seen – what that means for us is – all this might also change. In the past we were the exclusive agent for China, we did everything.

Nowadays it’s becoming the different areas more specialized. We value working with a partner & the nice thing is we were still working with companies. We worked 20 – 30 years ago but just in different capacities not exclusive anymore but maybe only doing the aftersales in Techno. So, for the foreign luxury watch in China, for instance, we are having those in Beijing, Shanghai to watch service repair centers where we also do occasionally have our own watchmakers where we repair – Because the watch needs repair once they are bought. So, it’s always changing all these other areas & all the company you need to develop & stay relevant in the market. Through this evolution, our business model has also changed.

Matthieu David: I see. Not segmented then, but actually, companies could buy one piece or another & not the full package. How do you price your services? Is it on day man unit as we do it on daxue consulting? Is its total budget for one year & you commit to some goals? Is it depending on the volume of sales they have? Is it commission-based? What is the main model you are using?

Mike Hofmann:  We are using a different model. Like I said we try to be as much customized as possible to be attractive. But this is of course on the downside & in a trade-off don’t have fixed prices in terms of this model cost is so much – but what we do we work in terms for the accounting if we do back office services then yes, we work with some depending on the workload – having some fixed fees. Sometimes it’s depending on the revenues, like say two percent revenue or higher on a fixed fee, whichever is higher. It also depends – because sometimes companies have asked us to be involved in terms of let’s make a joint venture.

Let’s take some shares; get some skin in the game they call it. But then you have a different kind of negotiation & only being a service provider because then you have all the business angles. So, as a company, we are always open to these different models. We don’t say no to the capital investment & that’s fine, always there negotiate. But basically, it’s either revenue-based or it’s a fixed fee. That I would say is most common it seems.

Matthieu David:  I see – Let’s talk about more specifically in terms of operation. How to introduce a premium retail brand in China? The first question I would have is about building the team to manage this introduction. We know that a lot of information; a lot of cultures can be lost when you build a new team in another country. What are the challenges you have seen & how you have tackled them for introducing a premium retail brand in China? Where actually the brand image; the culture is so important?

Mike Hofmann:  Yeah. I think the HR topic in China is everywhere. No matter if it’s premium or the other company. It’s always – you grow, there’s a lot of change, you’re very demanding. Turnovers in general speaking. We have been quite successful & keep our retention rate quite low. So, it really comes down when you do recruitment in the selection of what kind of people you would like to have. There you have to look a little bit what the brand represents and how it is.

So, for instance, what we often see, what we don’t do sometimes with the foreign luxury watch in China, for example, we don’t hire people from other watch companies. We don’t do that because often they are already like – how do we say, not toxic, that’s the wrong word, but they already have a brand and then they maybe bring that to your brand, but your brand is different. So, we instead look for salespeople they have to be very customer-oriented. They are in a very customer mind. So, we’re rather looking for salespeople from the hospitality industry, for instance, or from some airline industry or something like that.

So, their customer service in the Chinese retail market is very important. Especially in the premium retail brand in China, it is easier than that of consumer business. But this doesn’t require the same to provide a successful strategy we are doing here. We are very hesitate to hire people from other watch companies, definitely not. From other premium retail brands in China, yes, we do but we from Omega watches, not so much.

And then, once you have them on board, of course, you need to keep them – you need the right training & keep them motivated; you have to keep them up to date. We don’t try for the sales commission, push them too much in terms of what you often see in the market. Their base salary is very low & they’re learning to live from commission, which is standard for sales, but if you make it through, especially in China the high living cost, if you make the base salary too low, they are too aggressive salespeople & then especially they can be off-putting in an industry where we are in for the premium retail brand in China, as your customers are also premium. They want to be – they want good service; they don’t want to be too much pushed into the sales. Now if we have too many sales-driven people sometimes it doesn’t work out. So, we go rather for people more on customer service in the Chinese retail market. Which people do & pay a little bit more base salary in order to facilitate them, that they consult & make the customer experience in the center of the sales.

Matthieu David:  How do you train & how much time do you think you need to make a salesperson good enough salesperson, & good enough to sell foreign luxury watches in China? I am asking you this question because my first business in China was actually in Beijing. You’re based in Beijing, right?

Mike Hofmann:  Yeah, Beijing.

Matthieu David:  It was in Beijing. I was selling gift boxes of experience – so you have this gift where you have coupons inside; you have a leaflet. You can use one activity inside when you receive it. We were distributing – we were selling in twenty points of sale. We had our own people selling. But I realized as a salesperson I had never been to a French restaurant or German restaurant. So, when in the leaflet, she had to talk about the French restaurant, the only comment she would have is to say ‘oh it’s nice; it’s French and that’ s it. No more. So, if it was to sell about an activity like we had this kind of thing – driving a Ferrari for 10 minutes, it’s got things. She could emphasize the brand but not much more. It’s the brand she was not very familiar with. How did you create this culture; this knowledge & this training to ramp up quickly? How much time do you think it’s needed?

Mike Hofmann:  It’s a good question, how much time is needed. Maybe, personally, I would say that’s different – what we do is that we are making tests regularly for the salespeople in terms of knowledge of the product. For instance, for watches it’s a very technical product, even doesn’t seem so. So, this you can make very nice test every three – six months, for instance, to see at least on that level, to see if the people are really progressing & make it at the end of the period to see if the people have at least the basic knowledge to sell the customer asking any technical specialty, and they do especially for foreign luxury watch in China, every detail sometimes have to even think – wow! what question they would have thought of, the Chinese customers are very interested in very small details.

So, how much we train them, actually you have to oversee the experienced people. How they are doing; behaving towards a customer, how they are training? I wouldn’t say we don’t have a –  except for technical parts, for the real – to get the feeling, don’t have sign – You have so many hours training because it’s a constant, constant training and even I think a life-long learning we believe, So, we have regular training in regular every couple of months and things like that, but it’s mandatory for the people.

Matthieu David:  Does it means that actually, introducing a brand in your company with you is going to rely maybe on one person, who is going to be the main product manager & then who is actually going to make sure that the training is good; make sure that the locations are good. How do you organize an introduction? Is it the one person who would see the role of general manager, or is it a split like one person is in charge of sales, recruiting people & training them but for different companies; different brands? Or is it one main person kind of general manager?

Mike Hofmann:  Yeah. So, it depends on how big a company is. At the beginning I would say it’s more like, we always try to share services or for the back-office function. We have to have a recruitment person who is always the recruitment for luxury; for premium retail brands in China or there is a knowledge that we use this. At the beginning when we set up & maybe showing the service to the brand owner, we hire some people who will be – yes you can call it as a general manager or sometimes director. It is relevant, based upon the one person who adjusts the most to slowly build it up, and often the brand is always also getting strongly involved.

It’s more as of course the big ends & companies want it right from the beginning & either they set up their own legal entity managed by us as I said, or they ask us to invest some capital. But then its really own company set up I’d say, used the shared services, back office, they used the financial accounting. They use the HR service for instance from the group level & they are focusing on the non-sales and then depending on how much the company wants to be involved themselves. They also have that – sometimes they send the people over to China as an expatriate. Sometimes it happens, especially in the beginning – if they want to have firmer control of the operation, in other instances it works – The person goes over to Europe to be trained for a certain amount of time.

So, it really depends on the plan but it’s both ways, sometimes send over, sometimes going there. At the beginning, in the starting yes then it’s one or two people, but bigger the operation then it becomes more shoulders. But it’s also our role to ensure that once a person might leave, he doesn’t stumble across. So, our service to install processes to make sure there is a possible successor in place as the business matures & not somebody where the business crumbles, that would be a nightmare.

Matthieu David:  So, we talked about the salespeople but we haven’t talked about the business locations in China’s malls. Where do they work? Which shops? How do you negotiate the location? I feel finding good business locations in China’s malls has been more challenging because now it’s costly. On arriving in China, I remember a brand called 6IXTY8IGHT. It was underwear brand & they were from actual China but they had – from Hong Kong more specifically. But they had a brand actually which is western & they were in all the good malls, that’s how they got famous. Now it’s much more difficult for them to be in the good malls because it is much more expensive. But 10 years ago, they could try to go to the mall fail & go somewhere else. It was not that expensive. So how do you identify the right business locations in China’s malls? And how do you negotiate a good deal with this location? And finally, what kind of deals are negotiable fixed commissions, commissions, fix plus commissions with a minimum of sales to reach out otherwise you are kicked out. What kind of parameters?

Mike Hofmann:  Yeah, that’s a good question. As you just said the rents in China are getting very expensive. IF there are some rents coming from the west first time, and they visit and then they first time see the figures per square meter or whatever they get shocked. Saying wow! That’s more expensive than New York First Avenue in Beijing sometimes, but this is, unfortunately, one of the premium luxury shopping malls for your premium retail brand in China and that’s the price you have to be on the market & this is very expensive. So, that’s also the locations that are crowded; they are sought after. Everybody wants to be in China, that’s a point. So, you have a lot of competitors & on the other hand, a lot of shopping malls open at all times in China. So, which one is the right one? That’s, indeed, a question every brand struggle with and sometimes the wrong locations get chosen?

So, depending on the reputation of the Shopping mall for instance where normally your point of sales is in China. Sometimes you are not able to negotiate at all with the vendors, because they have so many on their own list. Sometimes they approach you because they open a new shop. So, they want you as a brand, if you have something to pull in people from the street, so they give you – the most sought-after space is the ground floor, ground floor level, which is the highest one.

So, if they sought you, they want you as a brand representative once they open their new shopping mall, then you have to be a little bit more leverage to negotiate. Each shopping mall has a little different business model. But sometimes you have liked fixed fees or revenue, whichever is higher. Now, this is very common. That you are having at Beijing SKP, is one of the most expensive in Beijing. They have like four different categories for fashion, it’s different, then for foreign luxury watches in China & so on and they ask you sometimes in some categories, 24% of your sales.

Matthieu David:  How much? What twenty-five percent?

Mike Hofmann:  Twenty percent.

Matthieu David:  Twenty percent! Wow.

Mike Hofmann:  Depending on the categories, it’s different for ground level and actually based on what they want to have. So basically, then at the end, you see that they get a margin for the dealer, if you work with the distributor, he wants 20 to 30 percent, the same you pay to the shopping mall. So, they have ½ of whatever is higher and they want to have a fixed fee of 100,000 – 200,000 RMB sometimes. So, it’s really expensive. That’s why you have to be careful with selecting how many – we want to select & then some brands saying okay if China is so expensive, I might be making only – I know to attract four, five or six-point of sales & more focus on the online sales to make it more work online – offline together, and If you negotiate with the vendors, it really depends – some are very – like I said, welcoming and they want your brand and you can negotiate and have them a bit downwards, Looking at you and saying we have all the brands here, we have all your competitors, If you want it here, that’s the cost & go out at then at the end you have to check the legal contracts. Devil is in the detail I would say sometimes. In that there is a surcharge on this, there is a surcharge on that. This you can sometimes negotiate. But you have to be very careful to look at that and then you need a good law firm here in China who knows that, to avoid you from getting the pay that too much?

Matthieu David: You just mentioned SKP – Shin Kong Place, this is the most luxury mall or departmental store. I don’t know actually, in Beijing & in China and indeed they basically – I don’t think you negotiate with them; you try to wait actually and you beg them to enter. What I heard is it’s pretty common that you have a fixed amount the standard agreement as far as I understood is fixed amount; commission. But if you don’t reach a certain level of commissions you will have to pay an extra fixed amount or to be kicked out after sometime. So, even some people I remember in Shin Kong like six years ago, they were doing fake fapiao (invoice) and fake sales in order to stay in business in the mall because they did not want to lose this location, which was a good location. To pretend they were doing as much to show that people – is it a standard way of working?

Mike Hofmann:  Well I would say, yes in terms of like you said, that is the fixed figure on your base, so sometimes it is also mixed –  you have the fixed fee plus the revenue and like I said you have a minimum or percentage of revenue, whichever is higher during the months and of course, they look into the period of terms that you have to bring in so much revenue, especially if it’s a shopping mall which has a long waiting list of other brands who was to enter, they can be there more ending the partnership after a certain amount of time. Well, the fake fapiao luckily, we did not have to do that. But yeah that is possible sometimes in China you will not be surprised as some brands go there, if they really want the business location in China’s malls. But then if they make their calculation, it either works for them – but it’s really like you say. That’s why it’s getting very expensive in malls in China.

Matthieu David: Which format do you think or have you seen most successful? Is it more ten square meters a booth? Is it more to have a shop for yourself? Is it more to have a corner? What would you suggest for market entry in terms of format? To have your own space or to work with a wholesaler to be different among brands? What format would you suggest?

Mike Hofmann:  Well I mean, you want your own point of sales, and sometimes companies do their work with retail companies’ partners. Because China is so big, you barely can cover the whole country. In some cities, they work like a partner for Beijing who does their business deal who has sometimes their own point of sales & wants to have your product, or sometimes like you just said with the department kind of shopping system.

What we see is that brands – all the premium retail brands in China want to be having their own stores. Either with a partner. They don’t like to be together as a brand too much. This is obviously seen in China; they want to be standing out; standing out of the crowd. This is which we also recommend on a normal if it’s an own store; if it’s a partner or if you make a small one & then online. This really depends on the category of the business & also how the brand is willing to invest in China? How do they want to do? You would then try to talk with them about the premium retail brand in China.

Some brands, the more luxury it is, the more luxury scarcity you can have to have fewer stores & special things about more Chinese often buy overseas. It’s more like a flagship store, you invest more money in China. But they provide also sometimes overseas, so you have to see it more on a business bigger scale model and as an instance, saying – no, this doesn’t make sense for our model, we really need to buy – sell in China for China and then you are maybe looking for – not for a shopping mall but maybe look for a lower category and make a store.

Matthieu David: In Shanghai in Xin Tian Di, I got the number that Starbucks was paying 35 – 40 RMB per day per square meter. What are we talking about, in Beijing in a premium place for a premium brand if it wants to have its own shop? Are we talking about more about 15, 20, 30 RMB per square meter per day & that’s the way we work in China? In China, we work per day per square meter.

Mike Hofmann:  If it’s a huge scale product, it depends on which shopping mall location and how we did in which business district, rents can easily go up like about 50, 60, 70 RMB per day. So, I would say Beijing, Shanghai there is no very big difference & average should calculate when you enter the market and you’re more in the premium segment – 50 – 60 you should calculate.

Matthieu David: So, okay 50 to 60.

Mike Hofmann: When you make your business case.

Matthieu David: I see. When you negotiate a space how much deposit do you have to put? How much do you have to expect to renovate? Let’s say you are having a 50 square meter or 100 square meters. How much budget do you need to allocate to open the first shop basically?

Mike Hofmann:  You should run for about three months’ rent, we recommend. Sometimes you can negotiate a little bit. But it’s three months’ rent maybe and when you said for the renovation & there’s also a difference, that’s in shopping malls is also not a problem, I said it often now – You see China’s city, every vendor here is little different but it makes it also complicated by the companies once they hear and then they talk with somebody and then they really understand. Sometimes we cannot give a clear answer to that. So, it’s also how much retail technology you want to go in thinking about new retails. Some companies go there to bring smart mirrors in, so things are connecting somehow with their POS system & with their online stores. Easily we should calculate around about average say for 100 square meters for the 50s & half round. But 150,000 Euros so round about 100 thousand Euros. So, 800000 RMB you might –

Matthieu David: OK, for the renovation

Mike Hofmann:  Sometimes, mostly for the point of sales system you have to make in the shopping malls because that’s how you track your sales.

Matthieu David: Yeah. But this is about which is cheaper in China than in the West to renovate & to reorganize a shop.

Mike Hofmann:  I would say it’s similar – considering the location.

Matthieu David: Okay. So, we talked about the salespeople; we talked about the locations & where they are. This is one piece you mentioned which is big in China, bigger in China than anywhere else. It is online marketing or online sales. Is it something you also manage the online presence & what’s your experience of managing the online presence for premium retail brands in China? We know that China has been built on marketplaces – Tmall, and nobody would imagine luxury brands to be on Amazon in Germany or in France or in Europe wherever. So, how do you manage your online presence of luxury retail brands in China & what to be careful of?

Mike Hofmann:  So yes, like you said it’s not uncommon to have a presence on the marketplaces and there are always different options that you can opt to make your own flagship store on T-Mall. Sometimes theirs own so called T-Mall Partners which means obviously – which means the company was specialized in the segment and does everything for you – warehousing, order fulfillment to customer returns payments. So, then you just deliver them the goods & they do it for you and they charge you a monthly fee & a revenue fee so basically, it’s like a normal distributor.

You can do the whole operation yourself as I said. And sometimes have multi-brands stores – so there is a big variety. Then sometimes which market place should go right for the T-mall & make it hard for you when they have discounts on each other. So, it’s time to spend on, basically also how much you want to get involved? Do you want to give it out of hand or you want to have control & it also scares you a little bit? Do I work with a partner? Do I build up my own infrastructure? So, this is all the things that you have to decide according to the China marketing strategy.

So, coming back to question what we do? Yes, we do work on the online marketplaces with our partners together. Either Tmall partner, for instance, is normally the way we do it because so far, the partner is so complex, we normally agree – okay we focusing more on the offline sales and here you will be working with this partner which will be controlling. Yeah, it’s very common for luxury brands on the market presence selling online in China.

Matthieu David: So, you recommend to go with a TP – T-mall partner to work; to go online in China & to be present in market places?

Mike Hofmann:  Mostly it makes the most sense & when I say mostly, I say every company when you do the business case with China, you have to see what is the alternative cost of doing it myself, you have to build up the infrastructure, you have to deal with the customer returns, you have to deal with the payments, reimbursement, broken warranty cases and so on. So, if you invest enough and build up your own team, of course, you can do that. But for smaller brands normally they prefer as the first step to work with the partners.

Matthieu David: And about working with a TP then what kind of contract do you have, & let’s have a bit of similar analysis with retail. Is that you need to put a deposit? Is it based on fixed commissions? What is the typical deal you can get with them?

Mike Hofmann:  Yeah, here also the partners have different services they provide. So, what is normally coming first is you make a payment or set up a store which is the sign; which is in making pictures of inventory, positioning, deal with search engine optimizing things like that. So, they are paying normally a fixed sum and it is also depending on how many pictures you have. But that is easily two, four or five hundred thousand RMB. And then for being able – And then one has to say it’s a commission, like a normal offline partner.

Matthieu David: So, they would take 20%.

Mike Hofmann:  Which is then depending because then it is a team of partners, so some want to have a higher commission and a less fixed monthly, an annual fee. & some rather want to have a higher annual fee and a less commission, but you can calculate that the commission is between 15 to 20 – 25 percent.

Matthieu David: I See. So, very similar actually with the offline, kind of copied the model. Interesting.

Mike Hofmann:  Exactly so on the cost side, the online is not cheaper, but people often see it cheaper. It may be cheaper if you do it yourself, but if you work with a partner it is not really cheaper. It’s a long distribution model, but in China, it’s not necessarily cheap.

Matthieu David: Because the fixed amount is supporting to actually pay the people working on at the TP. But it does not include all the advertisement spend which would be more including the commission part. Is it correct?

Mike Hofmann:  Yes, & it’s also you can’t talk to them about sometimes how much marketing you want to allocate because they can arrange for you the marketing. If they have a festival, where people can expect discounts & they can make some noise to get the people attracted & they can do that for you but they will, of course, get a payment, but that is something you will want to talk with the partner about,  what you want to allocate to them.

Matthieu David: I believe a lot of premium retail brands in China would be skeptical or cautious to give their brand image to the TMall partner. Because I believe for a shop, they can go and see how the shop is, but for online it can go everywhere. If suddenly there is someone who is working on your brand, writing a comment on WeChat, or opening a channel on Youku or so on, so is it a concern among clients you have? Is it a concern among people around you that if they choose a T-Mall partner may not totally understand the brand identity and may not be able to actually convey it online as well as the brand itself & then if you have the case, how do you manage it?

Mike Hofmann:  What we have seen normally they’re very experienced working with marketing and PI, and so they do have some experience. What is always the key is that you work closely with this partner and don’t give too long leash. You tell them clearly what the brand stands about & you need to keep control of it with KPI’s. They are not very afraid of working because they see it’s just kind of another agent you have to control and it does not ruin your brand or something like that.

Matthieu David: Okay. So, it has not been a major issue. I was thinking that it could have been. It’s already 45 minutes. So now we are moving to the last questions, it’s a typical question that we ask at the end of the interview. Some of them are about books. What books have inspired you the most in your China journey – 12 years?

Mike Hofmann:  That’s a good question. I thought about – because I don’t have the specific book on China, but what I would say would have inspired me for sure is from Anil Gupta – The Quest for Global Dominance. Anil Gupta used to be my professor in my MBA school and I liked the book especially from his perspective looking on how you play the global chess game, it’s also emphasized on China and India, how you should make a global strategy which is very important for brands and how you position yourself and you can take out quite a lot of it. I would say personally also what I like is, it’s not anything to do with China, I could say it’s total recall from Arnold Schwarzenegger, I like very much, which really shows – it’s a really inspiring book, how many different careers he had and the mindset to stay hungry, always push to grow yourself in life and your learning and always set high achieving goals, it’s kind of inspirational.

Matthieu David: Interesting. So, talking about what you’re reading to stay up to date about China, do you have a specific newsletter or newspaper?

Mike Hofmann:  Yeah what I often read is – it’s a German chamber of commerce has a good weekly summary, this news, it’s basically different newspapers that helps, a lot of German media. Then I have HSBC bank, they have a good China weekly the newsletter. Always interested if it’s China-related, sometimes a really good article.

Matthieu David: Okay. If you had extra time working on something new, what would you do in China?

Mike Hofmann:  I think if I would have the time for my own business or something like that, I would probably look more into how – we are working as a company, it’s what we tell premium retail brands in China but what we could maybe do in the future or something which I would look at, is something – cause China’s outborn tourism is growing and you know that overseas, but how you attract them better to come to your store, and I think there’s still market opportunity in Europe for the retailers supporting how you would check them, because – Europe is already too late, you have to have more here, so I would like how to help them better to position themselves.

Matthieu David: I see, very interesting.

Mike Hofmann:  So, in marketing or –

Matthieu David: Yeah, actually your focus is Chinese consumers wherever they are. If they go to Germany, you can still handle them and you need specific customer service in the Chinese retail market for them, whether it was WeChat, or it was Alipay and so on – interesting. What unexpected success have you witnessed in China? When I’m using the word unexpected success, we get this word from Peter Drucker, the strategist, he said that innovation – in innovation it’s very important to look at – it’s a good way to look at innovation through unexpected success. So, something you wouldn’t have expected to be successful and which has been successful.

Mike Hofmann:  I think China is such an amazing country with so much going on and I see these China people still hungry and it’s just fascinating me – and since I’m here, my 12 years here, I’ve always seen. So it’s unexpected, I mean at the end you can say China has a plan for everything but what I would not have seen, unexpected I have witnessed is that China caught up so fast in the digital space as an ecosystem which is something you know, China has a state company, everything is planned, five-year plans and stuff like that and then comes the private companies in the digital space which people are using and people are very open to adapt for their life and also starting to raise their opinions and share about – on WeChat,  Alibaba and whatever and that they have come as a copycat in the past to what they are today and this is kind of fascinating. I would not have guessed in the time I’m here, especially in the short time frame how huge it’s gone.

Matthieu David: Yeah, how digitalized –

Mike Hofmann:  Yeah, on the other hand, I’m still fascinated and surprised sometimes by the big contrast because on the one hand they have this fund and the other hand is a company, you still have to go in person for the bank, for salaries and thing like that, sometimes. I mean you can do online payment and you still need to get a job, you still have a lot of old administration things coming from the old times, so you just kind of live next to each other. So interesting.

Matthieu David: That’s very true. On the opposite, what unexpected failure, what have you seen that failed in China, could be foreign businesses, could be a business, could be an organization, could be a way of leading whatever, what unexpected failure have you witnessed? Which was surprising.

Mike Hofmann:  Yeah. I would say yeah, the overseas sometimes fails, things happen, how you learn and get out of that. I think as China is moving so fast, they’re always trying things out and sometimes they fail very fast. Just to name one – what I’ve seen now, I mean now we are in the trade war with the US, we’re seeing a little bit that maybe China realized that’s also I was a little bit surprised that we are not so independent yet as it might have thought, in terms of what happened three years ago, that was the one that was a little bit of a surprise to me and China suddenly realized we don’t have so much of microchips, where they nearly went bankrupt. This was a surprise for the whole of China, they were surprised that oh! It’s of crucial important, we are still dependent and this is something China – me myself is that we see sometimes what’s happening in the China economy or some parts of it, they’re not even – they always present, as strong, innovative, everyone wants to be here, but still vulnerable in some parts. It’s not a failure per se but it’s something I would say is unexpected.

Matthieu David: Yeah, it’s very funny I had exactly the same remark to a friend yesterday telling him that Qualcomm and Chips and so on, which are Americans actually are so vital for China that it can wage a trade war. Yeah, it’s very interesting. Thank you very much Mike for your time. I hope you enjoyed your talk; I hope everyone who was listening to us has enjoyed the talk and if you like it you can like it digitally as well. You can write five stars, you can comment on our China Paradigm on iTunes channel, Spotify whatever, you listen to our podcast or vlog, thank you, everyone, for listening, thanks mike again for being with us.

Mike Hofmann:  Thanks for having me. Thank you.

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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