E-commerce vendors are paving the way for Western brands to enter China's booming e-commerce arena.
Don Davis , Editor in Chief
Just as in Marco Polo's day, China's riches are luring Western merchants. And e-commerce service and software providers are building a current version of the Silk Road to make it easier than ever for Western brands and retailers to sell directly to Chinese consumers via the web.
For example, Asos Plc, the U.K.-based online-only fashion retailer, needed only five months to launch a Chinese e-commerce site that went live in November. The retailer took advantage of e-commerce software localized for China from hybris, along with established ties between hybris and companies that provide help with regulations, fulfillment and customer service. While that project was underway, SAP AG, a major global provider of business software, acquired hybris.
It took Groupe Clarins, a France-based skin care brand, less than six months to launch its Chinese e-commerce site in September 2012. Clarins uses e-commerce technology from Demandware Inc. tailored for China and a Chinese company to handle logistics, customer support and payments.
While entering online retailing in China is still not simple, it is getting easier, says Zia Daniell Wigder, a Forrester Research Inc. analyst who specializes in global e-commerce. "You no longer have to solve the question entirely on your own."
And that's important, because most global brands are considering selling online in China, Wigder says. "Most brands that truly have a global footprint offline are looking at the e-commerce opportunity in China, because it is so massive," she says.
Manufacturers of high-end goods are especially keen on China, hoping to satisfy the demand among China's rapidly growing middle class for such prestigious brands as Coach, Clinique and Nike. And Western e-commerce technology vendors that serve those brands are responding by building a base in China. These vendors are not only translating their software into Chinese and mastering Chinese Internet regulations, they are identifying local partners that can handle fulfillment, customer service and payments. That in turn is spawning the growth of Chinese companies geared to work with Western clients, companies likely to play a bigger role in the years ahead as more North American and European retailers and brands begin selling online in China.
Those Western companies are drawn to what may well be the world's largest market for e-retail sales. China likely eclipsed the United States last year in e-commerce, as online retail sales in China totaled $305.74 billion in 2013, representing 42% growth, estimates Beijing Internet research firm iResearch Consulting Group. U.S. online retail sales reached $262.51 billion, up 16.9% from the previous year, according to the U.S. Commerce Department.
What's more, affluent Chinese consumers seek out foreign brands, both for their cachet and quality and because they're deemed less likely to be dangerous or contaminated, an important consideration in a country where there have been many scandals involving tainted goods. Those sentiments show up in a Forrester Research survey of Chinese online consumers who prefer at least one foreign type of product: 73% say they prefer foreign brands because their quality is higher than Chinese brands, and 65% say because foreign brands tend to be safer than domestic products. Plus, Chinese consumers buy more luxury goods than any other nationality, and 73% of Chinese luxury shoppers look to the Internet for product information, according to a 2013 survey by consulting firm Bain & Co.
China was top of mind for Benefit Cosmetics LLC when it embarked on a global e-commerce expansion five years ago using technology from hybris, says Valerie Hoecke, senior vice president of digital at the U.S.-based luxury brand. "We made it our top priority, due to the luxury consumers coming online in China," Hoecke says. "They know digital, and especially younger consumers are very comfortable online."
Benefit Cosmetics entered China before most Western brands, and when it surveyed software providers hybris was the only mid-tier e-commerce platform it could find at the time that handled Chinese characters, Hoecke says. But several U.S.-based e-commerce technology and service providers are joining hybris and Demandware in investing in China. For example:
- PFSweb Inc., a logistics and customer service provider to online retailers, has entered China in partnership with transcosmos Inc., a Japanese company that operates Chinese distribution centers and call centers. PFSweb CEO Mike Willoughby says he expects to sign his first client, a luxury goods manufacturer he declines to name, early this year, and for that company to be selling online in China by mid-year.
- Web marketing company ChannelAdvisor Corp. opened an office in Hong Kong early in 2013 and in December hired James Huang as its managing director for Greater China, which includes mainland China, Taiwan and Hong Kong. Huang, a U.S.-educated native Chinese speaker, founded MerchantRun Holdings Ltd., a Shanghai company that developed software to help retailers in China and other countries sell on eBay sites. The company was acquired by 4PX Worldwide Express Co., Ltd., a global logistics service provider, in 2012. And ChannelAdvisor announced in March that its platform will start supporting sellers on Tmall Global, Alibaba Group Holding Ltd.'s web site that lets international merchants sell directly to Chinese online shoppers.
- Export Now, a 3-year-old company, helps Western brands sell on Tmall.com, the more brand-friendly of the two big online marketplaces operated by Alibaba Group. Export Now was founded by Frank Lavin, who as an undersecretary of the U.S. Commerce Department negotiated trade deals with China and India. The company claims to have launched more than 100 clients on Tmall, including rainwear brand Totes, Italian coffee company Lavazza Premium Coffees Corp. and backpack maker Osprey Packs Inc.
But hybris and Demandware stand out as two companies creating a base in China and developing relationships with both Chinese and Western partners that can help foreign companies get started selling online in China.
A physical presence was especially important for Demandware, because the U.S. company hosts its software on its own servers, and its retailer clients access it via the web, a model known as software-as-a-service. Since a retailer can't host Demandware's software in its own data center, it's crucial that Demandware have its own servers inside what's commonly called the Great China Firewall, the virtual barrier China's government erected for monitoring—and sometimes blocking—Internet traffic coming from abroad.
For Groupe Clarins, which operates eight e-commerce sites around the world using Demandware technology, it was essential that the software provider have servers inside China, says Laurent Malaveille, executive vice president of global digital, CRM and e-commerce. The software for Clarins' seven other e-commerce sites is hosted in a Demandware data center in Germany, and the distance to Europe somewhat slows performance of Clarins' sites in Japan and South Korea, Malaveille says.
For China, Clarins insisted that the software be hosted locally. "Because of the China firewall, a necessary condition was that Demandware find a solution to host in China," Malaveille says. In 2012, Demandware opened a data center in Hong Kong to host its software. After that, Malaveille says, "we decided it was fine to use Demandware."
The Hong Kong location also enables Demandware to provide client brands with a Chinese Internet address, which helps sites show up higher on Chinese search engines, says Rob Garf, vice president of product and solutions marketing at Demandware. The company also helps foreign brands acquire the Internet Content Provider license necessary to operate online in China, and has forged partnerships with 35 companies to provide e-commerce services for Demandware clients, including translation, implementation and marketing.
Many of those partners are Chinese companies, such as Hangzhou Uco Cosmetics Co. Ltd., which specializes in helping brands sell on Tmall and other web marketplaces. Others are Western firms like Accenture, the international accounting and consulting firm that helped French apparel brand Lacoste launch an e-commerce site in China last summer on Demandware software.
Demandware opened an office in Shanghai two years ago and has disclosed three clients in China: Clarins, Lacoste and athletic shoe maker Puma.
For its part, hybris established its initial China base in Hong Kong in 2009 and had been planning to open an office in mainland China when SAP acquired it in 2013, says Stefan Schmidt, vice president of product strategy. With SAP having offices throughout China there is less need for hybris to have its own mainland headquarters, but Schmidt says hybris has been adding personnel in China, particularly in Shanghai.
Hybris has about 20 clients operating in China, Schmidt says, about three-fourths of them Western companies and the rest Chinese manufacturers or retailers. He would not name them, beyond Asos and Benefit Cosmetics.
Underscoring its commitment, the software company in December bundled its services for China into what it calls the hybris B2C Commerce Accelerator for China. The German company developed a similar package of services in 2011 when it entered the U.S. e-commerce market, Schmidt says.
The package includes user and training manuals in Chinese along with the software itself, links to popular Chinese social networks like Weibo and QQ so customer comments can be displayed on a brand's site, integration with the big Chinese payment service Alipay and with the Tmall marketplace. It also includes web page templates customized for China that leave space for big product images and promotional banners, for long pages suited for Chinese shoppers accustomed to scrolling from big marketplaces like Tmall and Taobao, and integration with the maps from leading Chinese search engine Baidu so that Chinese consumers can easily find a bricks-and-mortar store selling a desired brand.
While Western companies like Demandware and hybris are gearing up to serve foreign companies entering e-commerce in China, so are Chinese companies. Clarins, for example, chose Hangzhou Uco to handle such services as warehousing, shipping, customer service and payments. One reason was that Uco's top executives spoke English well, Malaveille says. That includes an MIT-educated top technical executive who previously worked at Amazon.com Inc. in both China and the United States. (For more on Uco, see story on page 36.)
While these partners make it easier than in the past to enter China, they all take a cut of a brand's revenue. That makes it important for a brand entering China to achieve scale quickly, says PFSweb CEO Willoughby. He says brands selling $5 million to $25 million in China can expect service fees to cost them 15% to 25% of revenue, while those selling $25 million to $100 million can reduce that percentage to 10% to 15%.
But Clarins' China online operation is already profitable, Malaveille says. That's in part because Clarins could leverage the customization of promotions and other features it had built for its Demandware sites in other countries, and because the Tmall store Clarins launched in September uses the same back-end services as the brand's own site, which opened in 2012, he says. Compared to the roughly 100 bricks-and-mortar stores Clarins operates in China, sales on the Clarins.cn site are about equal to the tenth-best store, and the Tmall storefront "should soon become No. 1," Malaveille says.
Not bad for a storefront open just a few months, and an example of why Western brands are setting their sights on selling online in China. Increasingly, those Western brands and retailers will find vendors waiting for them with open arms.
A new Marco Polo helps Western brands sell in China
In late 2009, Alibaba Group Holdings Ltd. set up a new business unit to help foreign manufacturers sell on Alibaba's two big online marketplaces, Taobao and Tmall. Alibaba, China's leading e-commerce company, put in charge Arthur Chang, vice president of global sales and service.
Three months later Alibaba chairman Jack Ma canceled the project, fearing the competition would hurt the many entrepreneurs making their living on Taobao and Tmall. But Chang convinced Alibaba's management to spin off the business unit, and Alibaba wound up as a minority investor in the holding company created to own the business, Hong Kong-based Marco Polo E-Commerce (Holding) Ltd. The operating company is named Hangzhou Uco Cosmetics Co. Ltd. and based in Hangzhou, a city of more than 8 million southwest of Shanghai where Alibaba has its headquarters.
Uco decided to focus on working with brands that sell skin care products, in part because Chinese consumers are thinking about more than price when they buy these items, Chang says. That's because Chinese women have relatively little experience buying these products, and their mothers even less, so they want to be sure they're getting the products best for them, he says. Plus, he says, "after you use a skin care product you come back to buy more. It's a very sustainable long-term business."
In 2010 Uco's first clients were South Korean cosmetics brands, including Missha and Skinfood, and several cosmetic lines owned by LG Corp. Western clients followed, including Clarins, Clinique, Yves Rocher and such L'Oreal dermatological brands as Vichy and La Roche-Posay. Uco now has some 20 foreign brands as clients.
Those brands ship their products to Uco's warehouse in Hangzhou, and Uco sells them through storefronts carrying the brands' names that Uco operates on such web marketplaces as Tmall and Taobao, but also Alibaba competitors like JD.com, VIPshop and Jumei.com. It also supports the official brand e-commerce sites for some clients.
Uco typically handles customer service and fulfillment. It also offers some specialized services, such as trained consultants who can help consumers decide which skin care products to buy. Chang says 95% of those interactions take place via live chat, and 5% by phone.
Uco also monitors Chinese marketplaces for counterfeit versions of the products of client brands, and for so-called "grey market" products, often merchandise a Chinese company has bought abroad and is selling in China without a license from the manufacturer.
When operating marketplace storefronts for branded clients Uco either buys the merchandise or holds it on consignment, taking a commission of 27% to 65% on sales. When engaged to help run a brand's own web site, Uco charges based on the services provided, such as the number of customer service agents dedicated to the brand, warehouse space used and packages delivered.
The company now has some 300 employees and sold 400 million yuan ($66 million) of product in 2013.
Chang says Uco will explore other product categories once it's firmly established in skin care, although there are no immediate plans for expansion. "We want to make sure we can add value in a category," he says, "and that it makes sense in terms of profitability."