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Tips for working with distribution agents (9): Evolving sales channels for home appliances in China

An interview with Joan Li, general manager, Guangzhou Homeease Trading Co Ltd

Joan Li, general manager of Guangzhou Homeease Trading Co Ltd, has more than 10 years' experience in the distribution of small appliances and has successfully led several foreign brands into China's distribution channels, both offline and online. In this interview, she shared with us her views on the characteristics and changes of consumer demand for small appliances as well as the trends of the development of distribution channels in China for the benefit of businesses interested in opening up the small appliances market on the mainland.

Faster upgrade cycle for small appliances

As people's living standards improve, there is a growing demand for small appliances that bring a better quality of life and greater convenience. Joan Li noted the following changes in consumer demand for small appliances in recent years:

First, there is a faster cycle for product upgrade and replacement. The proliferation of new and innovative products stimulates people's demand for specialised and upgraded products. People are replacing their appliances more frequently as products become more diversified. "Modern city life spurs demand for new appliances like egg cookers, yogurt makers and bread makers that make life easier. People of the older generation may care about the durability of the appliances they bought, but with faster product upgrades, consumers are more likely to get new replacements in three to four years, even a shorter time. These are factors driving further growth of the small appliances market," said Joan Li.

Photo: Tips for working with distribution agents (9)
 

Second, small appliances that are compact and have unique and innovative designs have gradually found their way to the gift and premium market and become a good choice for festive gifts. Enterprises like to buy small appliances through group purchase as welfare benefits for staff members or as gifts to customers. The credit card e-shops of banks also love offering small appliances for rewards redemption. Welhome, one of the clients of Homeease, has launched the Hello Kitty series of small appliances that are compact in size and cute in appearance targeting the gift and premium market, thus extending its market from end-user consumption to gift and premium.

Stay abreast of changing consumer preference

Joan Li pointed out that China's small appliances market has its unique characteristics. On the one hand, fast-changing market demand is testing the ability of industry players to grasp market demand. On the other hand, consumer demand in China is not the same as in overseas markets. One cannot simply transplant the successful experience of overseas markets to China.

It is based on our understanding of the mainland market that we can tell if the design of an appliance will meet the needs of Chinese consumers, says Li, adding that this makes it a necessity to conduct market research in advance and communicate with local dealers constantly. For companies switching from export to domestic sales and from the role of an original equipment manufacturer (OEM) to brand operation, it is risky to think that products that are successful overseas will invariably do well in China. "We used to be the dealer of a European brand before. Consumer feedback suggested that the market was getting tired of the ubiquitous grey or white colour hair dryers and suggested that the manufacturer start developing more colourful products. However, the manufacturer insisted on sticking to the original colours because they stood for quality and class in Europe. Not long after that, a Japanese brand launched pastel series products on the mainland market and they were well-received," said Joan Li. 

Furthermore, as consumers become better informed, factors other than price, such as energy consumption, product features, easy storage and convenience, are also taken into consideration when people buy small appliances. Some features which were only found in mid- and high-end products in the past, such as keep warm and timer functions, have now become "standard features". 

Adjust distribution strategies in step with the times 

Homeease mainly deals in small appliances of two major categories, namely, conventional and seasonal. Conventional appliances refer to products sold all year round, such as induction stoves, electric kettles, juicers, rice cookers, pressure cookers, electric stewpots, electric ceramic heaters and microwave ovens. Seasonal appliances refer to products sold in particular seasons, such as fans, heaters, dehumidifiers and humidifiers. The distribution channels include physical channels like supermarkets. ParknShop, Wal-Mart and Yonghui are examples of these. Homeease also sells goods online and is working with www.vipshop.com besides operating its own stores on www.taobao.com and www.tmall.com

Photo: Tips for working with distribution agents (9)
 

Homeease upholds the concept of "advancing with the times and following the trends" in the opening of distribution channels and keeps making timely adjustments of its distribution strategies. Small appliances were mainly distributed through traditional department stores on the mainland in the late 1990s. The subsequent emergence of supermarkets and hypermarkets with their friendly and budget-shopping image eventually captured a big share of the market for consumer merchandise. Homeease began to realise the prowess of supermarkets and hypermarkets and made all-out efforts to venture into this business in 2005. With the advent of the Internet era and the perfection of logistics, payment and other supporting services in the 21st century, Homeease came to realise the might of online marketing and began venturing into online sales in 2010 by opening its own online store on www.taobao.com and cooperating with e-commerce portals. Today, Homeease implements a distribution strategy that combines physical with online marketing, with offline sales contributing to 60% of its sales volume and online sales accounting for the remaining 40%.

Different channels, different positioning

Joan Li shared her views with us on the three existing distribution channels. In her opinion, traditional department stores still control the "cards and coupons consumption market" and the majority of their shoppers tend to spend quite lavishly, which means it is all right to slightly mark up the prices. Supermarkets and hypermarkets have value for money as their selling points and concentrate on selling mid- and low-end products with basic features. Online sales offer a wider selection and consumers can easily make comparison as prices are more transparent. For retailers, online sales promise faster payback and save them additional costs like slotting fee that they must pay in offline marketing.

As with other trades, manufacturers must pay slotting fees, barcode fees and other fees when they work with supermarket chains. In general, a 20-30% share of the sales revenue is required for small appliances. Chain-operated supermarkets have many stores and can easily increase sales volume. Take the sales of electric fans, for instance. Some stores are able to sell between 6,000 and 7,000 fans in 15 days. However, supermarkets have a longer payback period and it usually takes 45-60 days to get the money back. In practice, it may take up to 90 days, even longer than six months. Some renowned e-commerce portals also require a revenue sharing ratio of around 20%, but the payback period is shorter than physical channels, usually 45 days. Payment is also speedier.

Advantages of online sales

Online sales have registered rapid growth in recent years. Joan Li found it meaningful that online shopping has become people's first choice because consumers have come to associate online shopping with "low price" and "convenience" over recent years and are getting too lazy to shop around. "A customer bought an appliance priced at Rmb218 at our online shop and I found out when he gave his address that he is living right next to a supermarket that also sells our goods. We were doing offline promotion at that time and the same product was sold at Rmb199 in the supermarket. I asked him out of curiosity why he did not buy it from the supermarket next door. He said online shopping is convenient and prices at online shops are usually cheaper, which was what made him too lazy to go and find out," said Joan Li.

Online sales also have other advantages. First, it is easier to obtain first-hand information and gauge consumer response through online marketing. Second, sales in physical stores are usually affected by retailers. If their buyers do not like certain products with new and unique designs, these products may not have the chance to go on the shelf. By comparison, the cost of getting products on the shelf is lower in the online shop and it is possible to get the products on the shelf first and find out whether they will sell well later. Moreover, online spending tends to be more individualistic and new products with character may be more readily accepted by consumers.

Through its expansion from offline to online marketing, Homeease has discovered that there are similarities between these two modes of operation. For example, both need to guide customer flow. Online keyword bidding and flow guide are equivalent to location selection and POP (point of purchase) advertising offline. Also requiring attention is the timing of sales promotion and real-time sales guide. Online customer service plays the role of offline promoters and also requires good training on products and service. Both call for attention to the aesthetics and attractiveness of product display, and product description and artwork on the website is the same as product display offline. The parallel development of physical and online channels proves a viable and complementary strategy of distribution.

Manufacturer and agent: working together in good faith 

Regional concentration is obvious in the small appliances market on the mainland. Basically all offline supermarkets are in the hands of distribution agents, and suppliers wishing to enter these supermarkets, especially new brands wishing to enter the local markets, will normally try to cooperate with the agents who control these channels. On the whole, offline distribution agents are divided by region while online agents may serve the whole country although they may still be classified into different tiers according to the size of their orders. 

Photo: Tips for working with distribution agents (9)
 

On the choice of supplier and product, Joan Li said there are the following major considerations: First, whether the products show originality and uniqueness and have market potential on the mainland. Second, the profit margin. Since the price of small appliances is quite transparent, suppliers will normally fix the ex-factory price and retail price of their products for the distribution agents. Based on these and the revenue-sharing ratio agreed with distribution agent, one can get a rough idea of the profit margin. Third, the corporate culture of the supplier and whether it has plans for long-term development on the mainland. Lastly, the actual terms and conditions of cooperation between the two sides, as well as details such as on-going shelf coverage and other services.

Since retail price is set by the supplier, there is very little room for adjustment. The usual scope of adjustment is less than 10%. Joan Li pointed out that different brands may have different pricing strategies for physical and online channels. Some manufacturers (mainly those brands that have risen to fame through offline channels) insist on having the same price for online and offline sales. Others (mainly those brands that have made it big through online channels) tend to allow online prices to be lower than offline prices within a range of 10%.

There are two major forms of cooperation in the small appliances business. First, strong-brand suppliers usually have control over actual market operation. The distribution agents have to pay for their purchases in cash and their relationship with suppliers is mainly a buyer-seller relationship. Second, suppliers of the smaller brands usually set a payment period on the basis of the distribution capability of the distribution agents. They will set an annual sales volume and require settlement of accounts at fixed intervals. The actual settlement period will be fixed by mutual agreement. The relationship between the supplier and the agent is mainly a cooperative relationship requiring the involvement of both parties. Usually the agent is responsible for the actual market operation while the supplier will pay for the necessary market expenses. The cost of the stock held in storage or on the shelves of supermarkets, slotting fees and barcode fees are borne by suppliers while expenses on hiring sales promoters are shared by both sides. Maintenance and repair fees are also borne by suppliers. Maintenance and repair may take one of the following two forms: 1) The agent is responsible for maintenance and repair if it has such capability, and the expenses will be borne by the supplier. 2) The defective equipment will be directly sent back to the supplier for maintenance and repair if the agent does not have this capability and the equipment will be returned to the consumer after maintenance and repair.

Homeease mainly adopts the second form of cooperation. As a distribution agent, it hopes that the suppliers it works with will understand that their relationship is one of partnership and not just a buyer-seller relationship. It hopes to see more communication and understanding between the two sides. The suppliers should listen more to the views of frontline agents during the stage of product development and in the stage of marketing, communicate with them constantly and explain to them in detail about the characteristics of their products. Only when the agents have a better understanding of the products will they be able to do a good job selling the products.

Special correspondent, Vantage Marketing & Research in Guangzhou

Content provided by Picture: HKTDC Research
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