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Tips for working with distribution agents (10): Opening up marketing channels in China for small appliances

An interview with Mandy Chen, general manager, Guangzhou Haoshun Trading Co Ltd

Guangzhou Haoshun Trading Co Ltd has 16 years of experience in the distribution of small appliances. Its business, both offline and online, covers department stores, supermarkets and e-commerce platforms. In this interview, its general manager Mandy Chen tells of the changes in consumer demand and business opportunities in China's small appliance market as well as the development trends of retail channels. Her views should provide useful reference to people intending to open up the mainland small appliance market.

Health-care and creative small appliances: selling hot

Photo: Tips for working with distribution agents (10): Opening up marketing channels in China
 

Consumer demand for small appliances is shifting from basic appliances to products that offer better quality of life and convenience as people's living standards improve. Many new and interesting products have been developed to meet this change. Among these, health-care and creative products have stood out in the competitive market.

The increasing attention people attach to health issues has generated considerable business opportunities for small health-care appliances. "The incident of melamine-tainted milk has triggered great demand for soy milk makers," said Mandy Chen. "As more and more food safety incidents come to light and air pollution worsens, people are becoming more and more concerned about health and food safety. Yogurt makers, bread makers, noodle machines, air fryers and air purifiers have become best-selling items in the market," she pointed out.

Also selling hot are new and interesting appliances that let consumers better enjoy the little pleasures of life. Heated computer mouse that keeps one’s hand warm in winter and small table-top air purifier and humidifier are some examples. These creative appliances not only make life easier but have novel and interesting designs that greatly add to our pleasures of life. They are great both for own consumption and as gifts. "As far as current market supplies are concerned, creative small appliances always fall short of demand and many of the creative appliances that I saw in overseas markets are not available in the domestic market. Hong Kong firms should be able to find plenty of opportunities in this area. Hong Kong has always been renowned for its creative designs and global vision, which are advantages unmatched in the mainland," said Mandy Chen.

Skyrocketing online sales spur channel reshuffle 

Offline retail channels for small appliances mainly include department stores and chain-operated supermarkets. There is a difference between their positioning. Out of gross profit per unit area consideration, department stores tend to give access to products with a higher profit margin to create a "small but refined" ambience. Thus, they have higher requirements for brand portfolio and favour big European and American names over little known or mid- or low-end brands. Supermarket chains, on the other hand, have value for money as their selling point. Mid- or low-end products with basic and conventional features are selling better and are easier to increase sales volumes.

Although offline sales still occupy a dominant position in distribution, the trend of slowing growth rate for offline sales is evident in recent years. To the contrary, online sales have been growing at an amazing speed. "On the whole, offline sales could only achieve double-digit growth at best and growth was only between 10% and 20% in most ideal situations. Online sales, on the other hand, have doubled every year in recent years and the market share of online sales will continue to grow in the years ahead," said Chen. 

Photo: Tips for working with distribution agents (10): Opening up marketing channels in China
 

In the past when there were only physical retail channels, there was not much difference in the operating cost of different channels. Each had its own market positioning and all it needed to run these channels was to appoint regional distributors. The emergence of online channels greatly lowered the operating cost and reduced the tying down of capital for replenishing goods on the shelf. They also have no need for on-site sales promoters. Since the goods have a much wider circulation, the conventional method of appointing regional distributors can no longer serve the purpose. Thus, growth in online sales is affecting the performance of conventional physical channels and has led to the reshuffling of distribution channels.

The reshuffling of distribution channels will affect both distributors and suppliers. On the one hand, in order to better control operating costs, they are beginning to control the number of offline distributors. Some suppliers have decided not to increase the number of distributors and have moved from regional to countrywide management by appointing only one distributor for products of the same brand. Accordingly, distributors are shifting from regional management to cooperation with retail outlets. On the other hand, if suppliers cannot keep abreast of the situation, "online sales may hit offline sales" for the same product due to differences in operating costs. Thus, some suppliers are beginning to adopt the strategy of tying specific distributors to specific retail outlets to prevent commodity fleeing. The suppliers will take punitive measures if a retail outlet operator tries to get its supplies from other distributors. These measures include reserving the right to sue the retail outlet operator in question, disqualify the distributor that secretly engaged in commodity fleeing, and refusing to provide maintenance service to products sold through improper channels. Another strategy is to separate the models of products sold offline and online. Under this strategy, different models are distributed through different channels, with special series for offline and online sales. This will prevent online sales from hitting the performance of physical channels.

Open up diverse channels and optimise strategies

Haoshun has 16 years of experience in trading and mainly deals in small appliances, including lifestyle appliances, kitchen appliances, personal care appliances and environmental appliances. Its brand portfolio covers Panasonic and Sanyo from Japan, Sunpentown (SPT) and Tsann Kuen from Taiwan, and local brands like Singfun, Flyco, Yongxing, Wahson and Topcreating.

During the early stage, besides opening up the primary retail channel for small appliances, namely  department stores, Haoshun also forged cooperative ties with China's first hypermarket chain Makro (predecessor of Lotus) because it was also the time when this retail format first made inroads into China. Eventually Haoshun expanded its distribution channels and gained access to more and more department stores and supermarket chains. It ventured into online marketing and worked with e-commerce platforms in 2011. Today, Haoshun's distribution network covers both offline and online channels, including department stores like Grandbuy, Friendship and Wangfujing, supermarkets like Aeon, Lotus, Wal-Mart, Carrefour and ParknShop, and online e-commerce portals like Amazon, Yixun, VIPShop, Gome and iGrandbuy.

Today, offline sales account for about 70% of Haoshun's turnover while online sales account for the remaining 30%. Among offline channels, supermarkets account for 80% of the turnover and department stores 20%.

Since there are more suppliers and brands wishing to gain access to offline retail terminals than the actual offline shelf space available, operators of retail terminals have a much bigger say in the selection of partners. Suppliers often have to put up with harsh conditions in trying to gain shelf space. For example, in addition to slotting fee, they have to offer higher revenue-sharing ratios to retailers, pay other fees and get short-changed when goods are returned. It is thus necessary to have a sense of awareness for the need to optimise the offline retailing channels and the channel mix, as well as make adjustments and choices in the light of the actual state of cooperation. "We worked with some famous appliance chains before but eventually found that they deliberately delayed payments. There was also serious imbalance between actual sales and inventory replenishment. Although they had many outlets, some of them were 'non-performing stores', that is, stores that keep replenishing stocks but do not produce actual turnovers. That was why we decided to pull out," she said. "The optimisation and readjustment of retailing channels is very important. We cannot afford to be dragged behind by non-performing channels that affect our cash flow," she added. 

Photo: Tips for working with distribution agents (10): Opening up marketing channels in China
 

For both offline and online retail channels, the revenue-sharing ratio is about 20% on small appliances, but the percentage may differ slightly between different types of products. Generally speaking, the ratio is higher for high-end products and is payable based on the actual turnover. Although payment should be settled monthly as agreed upon in the contracts, in reality the payment due day is about 60 days for offline sales. For online sales, prompt payment within 30 days can be expected.

New brands: long-term investment needed

On the choice of suppliers and products, Mandy Chen spoke of the following major considerations: First, the products themselves. Since Haoshun is currently distributing products of many different brands, it would only "fill gaps left vacant" based on its existing network and source of products by choosing products that are different from the rest of the products it already distributes and have market potential to avoid coming into conflict with existing products. "In the case of razors, we mainly distribute mid- and high-end Japanese products and target first- and second-tier cities. Local brands are predominantly mid- to low-end and mainly target the surrounding cities and counties," said Mandy Chen. Second, brand qualifications. Haoshun will choose those brands that are of considerable repute and have quality assurance. Even for brands that are new to the mainland, it hopes that they are quite famous in their place of origin. The reason is that the supplier is responsible for providing repair service for small appliances in China and people tend to lack confidence in the maintenance and repair service of new brands. Third, the credibility of suppliers. Haoshun would make its judgment by seeking advice from its peers and by getting in touch and discussing with the representatives of suppliers.

"The mentality of suppliers is also very important. We have to see whether they are truly committed to long-term development in the China market. They are not suitable for doing business in the China market if they just want to make a fast buck and have no patience for long-term investment," she added. New brands, in particular, will invariably involve a start-up period and suppliers must be prepared to personally visit the markets, meet the local distributors, discuss with them suitable promotion strategies and come to a consensus on future development before the two sides can work together in better ways.

Special correspondent, Vantage Marketing & Research in Guangzhou

Content provided by Picture: HKTDC Research
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