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China market
Evolving distribution models in China

The business landscape in the Middle Kingdom is forever changing so it comes as no surprise that we hear new buzz words coming out of China such as ‘modern retail’, ‘O2O’ and ‘omni-channel’.  How does this impact on a typical Kiwi exporter model of shipping and selling free-on-board to a China master distributor? To learn more, ExporterToday talked to Damon Paling, NZTE Trade Commissioner, based in Shanghai.

ET: What impact is the changing China retail landscape having on exporters?

Damon: For those exporters that have ambition in the market, the impact is significant.   For some exporters, market access can be quickly and directly attained through various e-commerce platforms, such as Alibaba, JD.com, VIP.com.  However, before securing sales revenues through these platforms, it may be that the product has, unbeknown to the exporter, already entered the market through ‘daigou’ trade with a price point and brand story already established.  Retrofitting a sustainable strategy with ‘daigou’ may be a required first-step.  Compounding matters is that traditional offline distributors are asking, irrespective proficiency, for a piece of the online sales action.  Moreover, the rise of the Chinese consumer in Tier 2 cities and the consumption of product through offline/online channels and food service channels also changes the formulation of distribution strategies.

ET: What are the key distribution considerations for exporters when thinking China?

Damon: Firstly, we would highlight that there is no “right” or “wrong” distribution strategy.  Business factors dictate which model(s) is suited over others.  The models we see in play today are not mutually exclusive and there are hybrids.  Moreover, the partnership will more often than not only be as good as the investment that is placed by the New Zealand exporter.  If there was a ‘check-list’ of considerations for exporters to evaluate them we would typically include the following:

  • Desired degree of control of physical product in the value chain?
  • Desired degree of control of (end-user) pricing in the value chain?
  • Desired market coverage (geography)?
  • Can the business support (or necessitates) multiple distribution layers?
  • Any need to keep different business channels separate?
  • What regulatory or other constraints can limit distributor appointment?
  • What capability is needed to manage multiple distribution channels/distributors?
  • What marketing support, expertise, and investment is needed and by whom?

ET:  What distribution models are in play across which sectors?

Damon: The various distribution models that we see in play today are as follows:

  • Master Importer/Distributor: Typically applied for shelf-stable and long-shelf-life product with specific region and channel focus (e.g. wine, artesian water, manuka honey, niche FMCG, retail ready pet food).  The appointed partner may cover both online and offline.
  • Master Importer/Distributor & sub-distributor: Similar to above, simply with more reach into region and channels and ultimately key accounts.  Bifurcation of online and offline may arise.
  • Regional Distributor: Typically seen for a maturing product with deeper regional focus and categories such as fruit/seafood/dairy where the product has a shorter shelf life, wholesale markets may be used, and cold-chain logistics are required. Geographic split may be across the four core regions of Beijing (and surrounds), Chengdu/Chongqing, Shanghai (and surrounds), and Guangdong.
  • Consulting/Services Wholly Foreign Owned Enterprise (WFOE) and Key Accounts/Distributors:  Typically for a maturing product with high aspirations for market growth.  A good example would be Primary Collaboration New Zealand (PCNZ) based in Shanghai, which is home to the likes of Villa Maria, Silver Fern Farms, Synlait, Sealord, Mr Apple, New Zealand King Salmon, ANZCO and K9 Pet Food.  Companies such as Les Mills, Mainfreight, Vista Entertainment, and Uniservices, have successfully established their own independent services WFOE.
  • Trading WFOE and Key Accounts/Distributors: Typically for exporters where China is financially material as an export market and a higher degree of business control is sought as a result.  Typical examples would include all of the large dairy exporters (Fonterra, Tatua, Westland, A2), the large fruit exporters (Zespri, Turners & Growers, Foodview) and the likes of Oravida, Sanitarium, Kono, Delegat, Integria Healthcare, F&P Appliances, and ADI Instruments.

The trading WFOE is typically engaged in import and storage, inventory management, marketing and promotion, sales and receivables.  Most New Zealand companies that have a trading WFOE employ a team of around 6-8 people and focus primarily on sales and marketing.

ET: What about distribution joint ventures? These have delivered mixed outcomes over the years.

Damon: Within the F&B sector, third-party distributor relationships remain the norm as these enable ready access to key channels and support agility so that one can adapt to landscape changes. This is particularly so for the fast-changing e-commerce ecosystem as is dominated by the likes of Alibaba and JD.com.   However, for non-F&B, particularly where the end-consumer may be medical or education institutes, or software as a service is being delivered where localization and regulatory approval is required, then a co-operation or equity join-venture distribution partner is worthy of consideration.  The joint-venture partner may open-up market segments that would otherwise not be accessible through a ‘go it alone’ approach.  Of course, partial control or involvement in market development drives up risk for the exporter, but hopefully in return for greater economic gains.

ET: Is an old-school exclusive master importer/distributor still feasible?

Damon: Yes, but it may not yield the desired growth outcomes for the exporter.  Given the geographic size of the market, fragmentation of distribution channels, and cultural differences within China, it is highly probable that a multi-distributor plan is rolled out across the different regions and channels.  Of course, it remains the norm for potential partners to seek ‘exclusively’.  However, those potential partners that are being honest would acknowledge that they probably have competency and networks in selected regions and channels only.  A multi-distributor strategy means more work for the exporter, so resourcing with suitable Chinese talent in the business, either based at home in New Zealand or in the market alongside the distributor, is a key ingredient for success.  PCNZ based in Shanghai is a great example of how to operate in-market business development managers.

ET: Any final thoughts on distribution strategies and managing distribution partners?

Damon: In respect of distribution strategy, we always aim to establish just how financially material China is likely to be as an export market to the overall business.  This sets the scene to discuss business risk and the desired levels of control to manage that risk.  For the actual day-to-day management of distribution partners, the call to action may be clichéd, but generally consist of:

  • Spending time together to study the market and understand the distributors proficiencies and capabilities.
  • Understanding the reasons behind margin requirements and where cost is expensed and where value is created.
  • Transparently managing retail pricing levels across different channels.
  • Jointly developing a qualified target channel matrix.
  • Jointly setting listing and sales targets and reviewing these periodically.
  • Jointly developing an advertising and promotion budget.

Finally, your work is only just beginning when you load the container.  An exporter-distributor partnership is a two-way street and needs joint-cooperation in areas such as localized brand story and marketing collateral, investment in product activation and the like.  Those exporters that are winning are actively involved in China business and market development.  They visit market frequently in order to be aware of trends, changes, competition, and so on.  They have patience and are taking a longer-term view.

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