When I first moved to Shanghai four years ago, I lugged along suitcases full of American products I thought I couldn’t live without. Tubes of Crest
(NYSE:PG) toothpaste, bottles of L’Oreal
(OTCMKTS:LRLCY) shampoos, and even jars of Jif
(NYSE:SJM) peanut butter likely gave the TSA a hearty laugh upon inspection of my luggage.
While the official foreign retail market is rapidly expanding in China, it remains dominated by mass luxury companies such as Gucci
(OTCMKTS:GUCG), fast-fashion giants like H&M, and hypermarkets such as Wal-Mart
(NYSE:WMT). Consumer products officially sold across the country may bear foreign names, but they are locally produced and contain formulas different from those of their home countries. Official apparel and accessories are often available, but only in a limited way.
The word official
appears above for good reason. As I soon came to learn, the 50 pounds of products I hauled halfway around the world are available online with the click of a button. Yes, even my US-produced Coffee-mate
Taobao, owned by Alibaba Group, is essentially China’s national e-commerce platform, capturing roughly 95% of C2C (customer to customer) business. Just as Americans often say “I’ll Google
(NASDAQ:GOOG) it,” in China we say "I’ll Taobao it." Just about any product imaginable is available on the site, even if it’s not actually sold in China by the manufacturer. If you sell something, I would bet your product is on there, too.
Taobao should be a familiar name to foreign retailers and avid readers of China news, but most cannot understand the way the site works, mainly because Western business considers the site’s operations to be illegal. In China, we prefer to label it as a "gray area".
Often, foreign news simply reports that Taobao and its Alipay payment platform are dominating players in the Chinese e-commerce space. What the news fails to reveal is that even if retailers or consumer product companies have not stepped foot in Mainland China, their products are already here. Unofficially.
Even though Taobao is limited to selling in China, it is, in a sense, a global entity. Chinese people from around the world set up Taobao shops and ship goods to China from Western countries, most often the US, Australia, and the UK. The goods are shipped in such a way that they pass through customs without being slapped with a hefty VAT or duty assigned from the Chinese government. Some ship higher volumes of inventory via Hong Kong and hire people to walk the goods across the border into Guangzhou, a city in southern China.
Although many products on Taobao are fake, stolen, sourced directly from factories in China, or obtained in other unorthodox manners, a growing number of products on the site are being imported from overseas and providing Chinese consumers the opportunity to purchase authentic, international products from the comfort of home.
This phenomenon should not go unnoticed by retailers and consumer product companies. An individual Taobao seller sitting in the US and shipping American products can earn a six-figure salary. Several Chinese friends have verified this statistic, some participating as sellers themselves.
This means two things:
There is already demand for brands or products that do not yet have an official presence in China.
Someone else is reaping the benefits of the China story rather than the brand itself.
A general search for L Brands
(NYSE:LTD) Bath & Body Works or Victoria’s Secret on Taobao yields thousands of results. Yet neither brand has entered China. Not only are their products available online now, but I came across knock-off Pink collection items in a random middle-class mall in Chengdu, a city known as the west’s shopping hub.
Pink collection found in Chengdu
Taobao has helped many foreign brands gain recognition in China. This means the foreign retailers have, in a way, already made headway in China without any investment at all. If interested, lucky retailers can piggyback off of the name Taobao has made for them among Chinese consumers. However, an official entrance to China, sooner rather than later, is vital.
Retailers must ensure that they solidify their brand value and control quality by entering China themselves. Not to mention, also reap the benefits of selling in the Chinese market. For example, the fake Victoria’s Secret Pink collection I found in Chengdu was of far lesser quality than the real deal.
Retailers can officially compete in China’s e-commerce space via opening a store on Taobao’s secondary site, Tmall. Tmall is a B2C (business to consumer) platform that allows businesses to officially market and sell their product through the Taobao brand. According to Enfodesk, Tmall accounted for 44.1% of the B2C market in 2012, demonstrating its strength even in the B2C category. Buying through the site guarantees consumers an authentic product sourced directly from the retailer or brand itself. It also allows retailers and brands to take advantage of the strength of the Taobao business.
Retailers can gain tremendous exposure by selling their products on Tmall. The site already has 150,000 merchants and 200,000 brands selling to 180 million customers. Unlike in the US, Chinese consumers do not generally shop directly on a retailer’s website. While there are relatively smaller players rapidly emerging in the e-commerce space in China, Tmall remains the “go-to” site for authentic, online shopping. Additionally, Tmall shares consumer data with its sellers, providing retailers with valuable information about their Chinese target customer.
Foreign retailers are inadvertently capitalizing on the Chinese consumer growth story by selling products to Chinese Taobao sellers, who in turn get the product to China. Retailers should be doing research to see how much of their product is ending up in China, as there is often already high demand in the country. If ignored, retailers will continue to allow individuals to capitalize off of their brand in selling to the ever-important Chinese consumer.
Kristin Graham, CFA, is currently a consultant partnered with CRG, a multi-channel retail services company that assists retailers entering and expanding in China. She lives in Shanghai.
No positions in stocks mentioned.
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