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China market
NZ companies lack strategy for 'grey channel' cross border exports

Looking to enter the China market? Dr Mathew McDougall looks at the evolution of the cross border e-commerce market, and the recent launch of private e-stores by offline daigou traders.

There is no doubt that the increasingly sophisticated and demanding Chinese consumer has turned to Western products and brands, in part due to a belief that these are safer, higher quality and reflect a lifestyle many aspirational Chinese are looking for.  
Further, with the advent of a rapidly growing e-commerce industry in China, the Chinese consumer is not short of options. China has already seen the rise of online-to-offline commerce (O2O), social commerce, and mobile commerce. Now cross-border e-commerce has become a key area for the world’s leading brands and retailers. 

Cross-border e-commerce has grown over the past few years through Chinese students and new immigrants living overseas and being asked by their family, friends and ex-colleagues to send products back to them in China. This Chinese overseas buyer is better known as  a “daigou”, which means “buying agent” in Chinese. 
Over recent times this daigou business has matured and become more organised, with some daigou even establishing physical stores, becoming major traders or key distributors. New Zealand has an estimated 350 daigou stores that generally stock around 20 to 30 key brands in predominately the vitamin, infant formula and skin care categories. The stores offer competitive pricing with many even shipping purchases directly to China.  

Back in 2008 there was an infant milk formula crisis in China that goes a long way to explaining the perception by Chinese consumers that overseas products are safer. Since that incident, there have been further well publicised food scandals that reinforce this perception of unsafe Chinese food products. 

With the rapid expansion of cross-border e-commerce through the “Daigou” model, the Chinese government established experimental zones of cross-border e-commerce in 2013 for better regulation. Shanghai was the first city selected for such an experiment, followed by a further 11 cities by June 2016. 

A series of other regulations have helped the government to gain control over the quality, safety and manufacturing standards of imported products, and helped to ensure that taxes on these imports are properly traced and collected.  
International brand owners and retailers are taking advantage of this new channel, and an increasing number have started an official cross-border business. They either open their own official stores on major platforms such as Tmall Global, or sell directly to major B2C players such as JD Worldwide or VIP.com. 

Since the official launch in 2013, cross-border retail e-commerce has grown to more than three percent of total e-commerce transactions in China (B2C and C2C), reaching RMB120 billion in 2015. It is expected to grow at a compound annual growth rate (CAGR) of more than 60 percent, reaching seven percent of total Chinese e-commerce value by 2018. 
Last year, one out of every five online Chinese shoppers purchased on cross-border e-commerce platforms, double the proportion in 2014. 

According to iResearch, a Shanghai-based company, the top five purchased categories on cross-border are health and beauty, mum and baby, health supplements, apparel and accessories, and consumer electronics. The United States, Japan and Korea are the most popular countries of origin for Chinese online cross-border purchases.

By offering more choices at better prices to consumers, cross-border e-commerce has succeeded in completely disrupting the market dynamics in some categories. Infant milk formula from brands like A2 and XXX has created a reshuffle within the leading brands, and an adjustment of the Chinese domestic price structures. Cross-border e-commerce has become an important phenomenon, both for brands that decide to play in China and also for those that decide not to.

What's the strategy?

For many of the major brands, the path to cross border e-commerce arose after seeing their products being purchased in the home market by daigou then believing that they could cut these buyers out and go direct - meaning setting up a flagship store on Tmall or JD.com so that Chinese consumers could buy direct. Not only was this considerably more expensive, for many brands this strategy put the daigou offside and this group went from brand advocates to outright hostile. The brands underestimated the power of the daigou and the influence word of mouth has on buying decisions back in China.

The result has seen several major brands scrambling to ‘embrace’ the daigou and look at winning their loyalty back. A tough objective because in many cases these daigou are a fragmented buying group, one day a daigou, the next a university student. This was the problem Reach China, a Hong Kong tech business resolved by developing a daigou specific WeChat eMarketplace and online community. 

The platform called, “DaigouSales” was launched in New Zealand this month and allows New Zealand companies to create wholesale e-Stores for daigou to purchase from and then have their products shipped directly into China. Like all e-commerce offerings it offers an alternative from physically having to visit retailers to buy, then ship, products. 
Additionally, given it is a marketplace, offline daigou stores in Auckland and around New Zealand are launching their own private e-Stores to give their daigou buyers an alternative to visiting their store - even stocking a wider ‘virtual’ product range as there is no contention on their limited in-store shelf space.

For brands looking to establish an e-commerce position, note that Chinese consumers are willing to pay a small premium for (quick) access to quality imported products, but they have significant information on prices in different countries and have access to a wide range of channels to obtain similar products. 
Charging Chinese consumers a large premium is long gone and therefore your Chinese pricing strategy needs to be within a certain price differential vis-à-vis pricing in New Zealand.

So, for New Zealand businesses that have yet to enter the Chinese market and for those brands that already have, the light bulb moment is that daigou are your potentially untapped brand asset.  
Treat your Chinese consumers with respect and don’t just assume brand “NZ” will get you across the line. 

Dr Mathew McDougall is founder and CEO of Reach China - connecting brands with Chinese consumers. Visit: www.digitaljungle.agency/

 

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