China’s ecommerce marketplace is the world’s biggest and represents enormous potential for Australian business. But it's certainly not for the faint of heart, reports Jessica Mudditt.
In the space of a decade, China’s ecommerce market has gone from being a small niche offering to the world’s largest. By 2021, its value is forecast to exceed US$840 billion ($1067b), with predicted sales doubling those in the United States. While Alibaba and Amazon are currently neck-and-neck in the race to reach the US$500b ($635b) mark, Alibaba is outperforming Amazon and is pegged to overtake it — most say it’s simply a question of time.
Meanwhile, the social network and gaming firm Tencent (which owns China’s biggest social networking site WeChat and its associated payment platform WeChat Pay) in November surpassed Facebook’s market value and became the first Asian firm to be worth more than US$500b — although tech turmoil later in the month temporarily pushed it back under the magic US$500b mark.
Opportunities for Australian companies are vast, as those already engaging with China can attest. Cross-border online trade is expected to account for US$150b ($191b) of total ecommerce sales in China by 2020, fuelled by a rapidly growing middle class with a hunger for foreign goods. While there are no official trade statistics available, the Department of Foreign Affairs and Trade (DFAT) estimates Australia is currently the fourth most popular source of products behind the US, Japan and Korea.
Alibaba is outperforming Amazon and is pegged to overtake it — most say it’s simply a question of time.
“Australian products are hugely popular in China due to their clean and green reputation,” says Maggie Zhou, Alibaba Group managing director Australia and New Zealand. The best-performing Australian categories include health and nutrition supplements, milk powder, dietary supplements, snacks, coffee and instant beverages.
Last February, Alibaba Group opened its ANZ headquarters in Melbourne to help Australian businesses capitalise on opportunities and get their heads around the many challenges.
Ecommerce in China is made up of a highly complex ecosystem that includes ecommerce platforms, social media, payment systems and logistics. There’s nothing else like it in the world and even dipping in a toe to test the waters can be intimidating. There is much for boards to weigh up, which may be why not everyone is jumping on the bandwagon. “Ecommerce platforms present a lower-cost and more accessible option for Australian companies to access the Chinese market, but are not a shortcut to quick success or making it big in China,” says Nick Henderson, China practice director for Asialink Business. “You need to really understand what the consumer wants, what their needs are, how they like to purchase — and have a compelling product.”
Ben McHarg MAICD, managing director of the Australian probiotics manufacturer and supplier Life-Space Group, which operates Evolution Health and owns the Chinese market-leading probiotic brand Life-Space, agrees. “Entering China with a ‘me-too’ product is doomed to fail,” he says.
It is also necessary to stay abreast of regulations imposed by a Chinese government scrambling to keep up with the pace of growth. Major Australian players such as Blackmores and Swisse breathed a sigh of relief earlier in 2017 when China did a U-turn on introducing tough new cross-border ecommerce laws that would have imposed complex requirements for the local registration and labelling of foreign goods.
“We recognise that regulation in China evolves, as it does in any market, and we’re focused on building a business that can adapt to market changes,” says Blackmores CEO Richard Henfrey.
“Ecommerce regulation in China is evolving and this is in response to the massive growth of online sales. We see this as a short-term hurdle, however businesses need to be prepared to adjust their strategy accordingly,” says Zhou.
The Life-Space brand has garnered huge sales over the past three years after it acted quickly to capitalise on offshore opportunities. The family-owned firm was ranked fourth on this year’s BRW Fast 100 list, with 129 per cent year-on-year growth and sales of $71.85m, mostly in China — it recorded 350 per cent sales growth in China FY15-FY16.
“It’s an incredibly complex market and it’s taken us three years to feel like we’ve got a reasonable handle on it,” says McHarg.
On 31 January, Life-Space Group announced the sale of 100 per cent of its shares to China’s BY-HEALTH Group for approximately $690m.
“Life-Space Group has grown exponentially over the past five years and we reached a point where to continue our expansion domestically and internationally we needed to review the privately-owned structure of our business,” said McHarg.
Trading in trust: dealing with daigous
Life-Space has a flagship store on Alibaba’s online marketplace Tmall, which is by no means the only ecommerce payment platform available in China, but is certainly its largest.
“Through our flagship store we control the pricing, messaging and imagery of our products. But it’s a constant and ongoing process — you don’t just do it once and then forget about it, because China changes very quickly,” says McHarg.
He adds that it’s fairly common for Chinese marketers, even those who are actually working on behalf of Life-Space, to “take a claim about a product and go a step further. So you have to be constantly reviewing and reminding them about regulations, restrictions and the messages you want to have about your products.”
Adding further complication is the fact that the thousands of daigous or “personal shoppers” selling Life-Space products in China have no affiliation with the company. “You couldn’t stop it even if you wanted to, because daigous purchase our products from retail outlets in Australia or other distributors. It’s the nature of the business,” says McHarg. And as daigous often “borrow” the flagship store’s digital assets, a single error or exaggeration could be replicated thousands of times over in a country which has strict marketing regulations, both online and offline.
McHarg knows better than anyone how catastrophic it would be to resist the power of the daigou industry, which accounts for 60 per cent of his company’s sales in China. The daigou system was born in response to the milk and infant formula scandal of 2008 and has transformed from a cottage industry to a vast trading network that utilises China’s 11 free trade zones (which the government established, in part, to generate tax from daigou sales). Free trade zones (FTZ) allow foreign products to be sold without requiring the lengthy and often costly process of being registered locally. Products entering via this channel may only be sold online.
Last year, Life-Space was almost dropped by its daigous when it affixed QR labels (which can be scanned by smartphones) to its packaging. The labels directed customers to its flagship store on WeChat. But the daigous were furious about what they saw as an attempt to cut them out. McHarg directed his China-based marketing company to rectify the mistake, destroying 200,000 labels overnight.
“It’s an example of how flexible you must be and how quickly you need to act. It’s so important to keep daigous motivated and interested in your product because they act as sales and marketing agents. There are massive brands that aren’t successful in China because they are probably looking for too much control. We don’t have a relationship with all our daigous and that’s something not all brands are comfortable with. But to be successful in China, you do need to be comfortable with that.”
Daigous use their social networks on WeChat to garner orders.
Blackmores’ Henfrey also recognises the crucial importance of the daigous. “The daigou sellers have played a key role in building our brand in China. We’ve invested in the daigou community, ensuring they’re supported with access to quality education about our formulations, which is important because they have become ambassadors for our products.”
The power of WeChat lies in its ability to market and educate consumers.
Daigous use their social networks on WeChat to share marketing information and garner orders, with payments processed via the likes of WeChat Pay. Customers will pay their daigou up to 20–40 per cent more because they trust them to supply authentic products. “Daigous trade in trust as much as anything else,” says McHarg.
WeChat Pay and Alibaba’s Alipay enjoy a duopoly in China similar to MasterCard and Visa in the West. In 2015, China’s mobile transactions market surpassed those in the US, with a value of more than US$235b ($298b). For most Australian companies, though, the power of WeChat lies in its ability to market and educate consumers. “We only use WeChat for marketing purposes,” says McHarg. “We don’t drive people to any particular way of purchasing our products — if you elevate one channel over another, you risk losing the support of the rest.”
Staying on-message and fighting fakes
Getting its Chinese marketing agency to establish an official WeChat channel cost Life-Space around $20,000. The bigger investment, however, is in ensuring that the marketing content is accurate and culturally appropriate.
Tasmania’s Bridestowe Lavender Estate made its debut on WeChat with a “local” (overseas account) page available only in English. This year it applied for an official account so it could be seen in China. “We worked to ensure our message is consistent with who we are while being culturally appropriate,” says Bridestowe’s owner Robert Ravens. “It’s a really complex exercise, not just a quick Google translate.”
Celebrities can also be used to generate buzz. Known as KOLs (key opinion leaders), such campaigns are typically run on platforms such as Weibo, because unlike WeChat, it allows “open” connections from fans. Such campaigns do not come cheap: a single post can start from $10,000 (for a celebrity with an established follower base), according to the managing director of Lion Media Group in Melbourne, Leo Lian.
However, with success comes the risk of copycats, as Ravens learned first-hand in 2013. His marketing team in Shanghai executed such an effective tie-in between the company’s Bobbie the Bear and high-profile celebrities that demand outstripped supply, prompting the explosion of a “fake bear” industry. Not only were its lavender-and-wheat-stuffed bears faked with staggering sophistication, so, too, were its authenticity certificates, packaging and website.
“We’d always been aware of the risks of IP theft, but the speed of responses from the counterfeiting industry and breadth of the theft was astonishing,” recalls Ravens. The company has spent “the upside of a half a million dollars” repositioning its IP.
“For a small company, it’s an extraordinary burden. Protecting our trademarks is an ongoing, time-consuming and expensive process, but we’ve won enough battles to prove no-one should attempt it [counterfeiting] lightly.”
China Online: The ecommerce market explained
Alipay Mobile Ecommerce payment platform (like PayPal) owned by Alibaba. It accounts for 54 per cent of all Chinese online sales.
Tmall and Tmall Global Business-to-consumer (b2c) platforms owned by Alibaba. Australian products are ranked fifth on Tmall Global, which now stocks more than 1300 Australian brands and was launched in 2014. Other major ecommerce marketplaces include JD.com, VIP.com, Kaola.com and Suning.com. These are similar to Amazon or eBay.
Weibo Social media platform utilised for celebrity-led marketing campaigns. Owned by Sina Corp, it is similar to Twitter or Instagram.
WeChat Social media platform owned by Tencent, with 938 million active monthly users and a growth rate of 23 per cent. “Tied into the fabric of Chinese society in a way Facebook could only hope to achieve,” says Life-Space Group’s Ben McHarg MAICD.
WeChat Pay Payment platform owned by Tencent and a rival to AliPay.
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