Classic partnership models (in China) are dead!
Unless your company counts with a significant amount of free-cash sitting in the bank and a well studied long-term plan to directly invest in China (probably just 5% of the mid-size retail brands do), choosing a local partner is the most common way to start developing an international retail brand in a market like the Chinese.
If you did not attempt to develop your brand in China before you might first be aware that you are quite late. There is nothing wrong with not being an early entrant, China is a big market offering many good opportunities to new brands, but the current retail landscape is challenging and you need to take that into consideration before approaching any potential partner – especially the good ones. Bringing a deal into the negotiation table far away from the existing context and reality may mean losing good chances to work with the strongest partners in China. So the very first step is gaining basic market understanding to fine-tune, improve and adjust the strategy and adequate the partnership collaboration model to the Chinese specific context.
10 years ago selling in China was relatively easy for any brand (any fashion brand was selling relatively well!!). China has radically changed along this period and so it did its retail landscape. Today China is an ultra-competitive market, where most of the global brands are well established, rentals are super high in Tier-1 cities and there are long waiting lists to enter most of the A projects. China is a country where e-commerce channel is taking a 20% of the total retail sales and social media influence is much more relevant than in any other place in the world. Customers taste and size is also different, they look for highly differentiated offerings and use multiple ways to get brand information and check references, often requiring product adaptation to fit well their own specific needs.
All in all we could sum it up by saying that the China journey is long, requires significant investments and a deep knowledge of what consumers want. Moreover it is a fast changing market where being agile and flexible will help your company taking advantage over significant opportunities. With these circumstances access to the best distribution channels and consumer knowledge are critical expansion success factors.
In the same way any brand was able to achieve positive results 10 years ago, any retailer - no matter which was his profile or background - was able to successfully run a brand. In today’s new omnichannel context, classic distribution profiles are not necessary those better equipped to do so anymore.
The classic distribution operators' mindset is driven by bottom line results – neither branding nor long-term positioning are within their priority list, meaning that lower investment options will always be preferred. In China this is usually a bad idea to follow, the lower cost options today could downgrade the overall brand equity value and diminish the long-term development possibilities. Location selection criteria is a good example of that, a bad opening will not perform and consequently will not encourage new landlords to embrace the new concept, resulting into a slower expansion.Some of these operators were strong in channels and consumers that today are not potential anymore – especially those players specialized in department stores and mature ladies, a channel and audience in decline. The present and future are among a combination of shopping malls & e-commerce targeting millennial and wealthy families.Some of the old distribution profiles do not have a clue running digital campaigns or managing the e-commerce channel – both fundamental in today’s on-line context. Those companies without the set of skills to develop this channel should be immediately discarded.
Going back to the basics the following are some of the common partner selection criteria:
1) Choosing profiles that are in your same business: same product category and same price and positioning range. If your company is in the urban outfit business do not choose a partner offering products to the office ladies. If your company sells cosmetics for teens, do not choose a partner selling diapers. It seems logical but reality shows that still many companies make the mistake of choosing a partner because of the channels they have access to but do not take into considerations the synergies between the partner's existing brand portfolio and their own. Choose both access to best channels and product complementarity.
2) Private companies: typically government background companies bring resources that are not sufficient to develop a brand; State Owned Enterprises are important in China but in retail you need professionals to do this job. Make sure you marry with a company that can bring both relationship and professional management.
3) Direct control over distribution channels: there are still some brands out there cutting deals with operators that do not have direct control over their expansion and operations. The existing trend is cutting distribution layers not adding more. Do not partner with someone that will externalize or sub-franchise 100% of the business. In latter stages though this could be a good move to reach remote regions and increase the overall revenue.
Furthermore, and specifically in the case of China, your should be aware that:
Heavy investments are required: financial muscle is important in a market like the Chinese were results will always come in the long-term; if you just want to test China cross-border e-commerce (Global TMALL/JD) might be your starting point then.Scalable models: a combination of non-profitable (especially at the beginning to correctly position the brand) and profitable channels is needed. The first priority for any brand should be positioning, the second one scaling the business and finally making the overall business profitable.Margins: if the local partner doesn't make enough money he won't be interested to scale. It sounds obvious but it is a fundamental aspect of the Chinese expansion. Business without the necessary margins to support the local partner's growth won't be able to encourage him to invest in the business. In China size matters, a business not able to spread around the territory won't make the total numbers positive.Just 1 partner: when talking about the Chinese market potential for any mid-size brand we are talking about an interesting but limited growth. If you cut a relatively small cake into small pieces forget about attracting the best partners, they will not invest in your brand. China requires 1 master-mind behind all channels, a non-homogenous approach per channel will make things messy and very hard to control.
Distribution relationships based on the old scheme of IP and discount (brands) in exchange for local distribution expertise and branding efforts (partner) are not appealing anymore, at least to best distribution candidates. The “new China” requires new partnership models where profits and risks are shared. Joint Ventures are a good vehicle for that purpose. It does not only show commitment towards pursuing a shared vision but also engagement towards the market and the partner itself. The lesson from the past is well learned “if you are not going to invest why someone else should?”
No matter which the formula used at the end of the day China is not a market exempt of risks. At Oriental Retail Ventures we claim that “50% of your business success in China depends on the partner and business formula used, and the other 50% depends on the execution”. Retail is still detail and how flexible and rapid your organization adapts to new changes will significantly determine the future pathway of your brand. Starting this journey without a local team of your confidence it's an unnecessary risk to assume for a market of such a strategic importance.
We extremely encourage you to visit China and check it out by yourself, without filters, understanding from the ground which the new market dynamics are and looking at what your competition is doing. You won't be disappointed!