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6 Sept 2012

Economists' Pick > HKTDC Research Reports > Research Articles

Can wholesale marts bring brand success in China?


Development of Chinas consumer market Chinese consumers have become more sophisticated, demanding and mature as the economy of their country took off. They are attaching greater importance to the quality, design and brand image of products. In particular, the middle-class and high-end consumer groups not only generate a growing demand for high-grade commodities, but also have rising expectations in respect of the shopping environment, services and experience offered. Following the rapid development of various retail formats such as supermarket, hypermarket and convenience store in the commercial districts and residential areas on the mainland, consumers are now used to shop for daily necessities and food from the nearby supermarkets or convenience stores. Apart from department stores, branded specialty stores and specialist stores have also become the major shopping channels for middle-class consumers to purchase general merchandise in recent years. Meanwhile, online shopping for general merchandise is becoming popular among consumers of the young generation. Of late, modern shopping complexes have developed rapidly on the mainland. Providing consumers with comfortable shopping environment and a rich product mix for selection, together with a full range of leisure, entertainment and dining facilities, these shopping complexes have already become the popular weekend and holiday destinations of mainland families and young people. Today, new development plans, particularly those for the new urban districts in first- and second-tier cities, generally include large-scale shopping complexes as the major commercial and living support facilities. These shopping complexes usually draw in department stores, hypermarkets and large home appliance specialist chains as anchor stores, with open recruitments to solicit other store and brand operators. In face of more and more intense market competition, retail enterprises on the mainland including retailers of fast-moving consumer goods (FMCG) and general merchandise have started to step up the management of their brands and supply chains with a view to developing new product types and sources that are competitive. For large retail enterprise chains with massive sales volume, they even consider developing their own brands. To win over middle-class consumers and those with high spending power, department stores and shopping malls on the mainland are becoming increasingly brand-oriented focusing on quality products. They strive to upgrade and maintain their market

Can wholesale marts bring brand success in China?

positioning and product grades by drawing in well-known brands. For the urban consumers of the working class as well as those third- or fourth-tier cities, towns and villages with slower economic development, they have less demand for brands and their daily consumption and shopping activities still focus on ordinary shopping malls and stores that are basically selling low- to mid-range products. To tap into the middle-class market on the mainland, not only should there be quality products and successful brand development, but a sales network should also be set up by carefully selecting the wholesale and retail channels with appropriate positioning and image. Wholesale and distribution channels As Chinas urbanisation gathers pace, more and more supermarket and hypermarket chains are setting up shops in the new commercial and business districts of cities and towns. With an increasing number of stores coupled with larger purchasing quantities, chain groups tend to adopt centralised purchasing process as a way to raise efficiency and minimise costs. Supermarket, hypermarket and convenience store chains on the mainland generally seek out suppliers in three ways. First, authorised regional distributors / agents of manufacturers take the initiative to contact the purchasing departments of supermarket and convenience store chains for business discussions. Second, suitable products or suitable distributors / agents are identified in recruitment activities organised by supermarket and hypermarket chains. Third, suitable products are identified by supermarket and hypermarket chains at third-party exhibitions / trade fairs for subsequent cooperation with distributors / agents of the products concerned. Once an FMCG brand has established some reputation on the mainland, consideration can be given to selling directly to supermarkets / hypermarkets / convenience stores of good standing as a way to cut out the costs of intermediary distributors / agents, thereby improving profit margins. Yet in third-, fourth- or lower-tier cities where the retail channels for FMCG mainly consist of independent shops or small market chains and where the purchasing quantities are still insufficient for direct ordering from manufacturers, reliance on regional distributors / agents or wholesalers is still necessary. More and more general merchandise retail enterprises adopt the centralised purchasing mode to minimise the intermediaries. For example, nearly all mainland department stores are making centralised purchasing. Some major general merchandise retail enterprises have even started to upgrade from centralised purchasing by individual stores to centralised purchasing by the group. In other words, the purchasing authority is withdrawn from the stores to the head office of the group for purchasing directly from the manufacturers or their national sole agents. Mainland department stores generally adopt two modes of operation: direct sales (selfoperated and consignment sales) and specialty counter sales. Similarly, there are three basic purchasing modes for department stores: (1) a product supplier appoints / authorises regional distributors / agents on the mainland to negotiate with the purchasing department of a department store / shopping mall; (2) a brand owner negotiates directly with the purchasing department of a department store / shopping mall; and (3) the purchasing department of a department store / shopping mall identifies suitable brands and products in exhibitions / trade fairs.

Can wholesale marts bring brand success in China?

Many brands in the department stores are directly introduced through their purchasing departments. Some well-known brands will initiate cooperation discussions with department stores / shopping malls through their headquarters. Brands which are more global and more famous with a larger clientele will have greater bargaining power when negotiating with department stores. If a new, branded product is unique or has not been launched in the mainland market, department stores are also willing to discuss cooperation terms. For specialist stores, product varieties and brands are relatively limited and they mostly adopt centralised purchasing and management. In general, specialist stores either independently operate the purchase and sale of products, or they operate in the form of buy-out, consignment sales or sales of house brand products (that is, the store places customised orders with manufacturers to produce its own branded products). Franchise operation has been growing rapidly on the mainland in recent years. With the increase in modern shopping complexes, in particular, many brand enterprises engaged in clothing, footwear, jewellery and other consumer goods have accelerated the development of their mainland distribution network through franchise operation. By way of sub-franchising, some capable franchisees with better management ability are even entrusted with the market development of the region and assist in the management of other franchise stores within the region. For individual retail stores and small- to medium-sized operators that still take up a substantial share in the overall retail market of China, their main purchasing channels include regional distributors, wholesalers and wholesale markets. This is because their markets are scattered, their purchasing quantities are small, and their products basically belong to the low- to mid-range. Wholesale markets Commodity retail and wholesale markets first emerged in the 1980s as marketplaces where people traded in all kinds of products. As such, they are a product of Chinas opening-up and reform. Subsequently, as the development of retail channels on the mainland became more mature while the income and tastes of consumers improved, the operation of these markets has gradually changed. Today, these wholesale markets serve as a support to the rural markets. They target the low- to medium-end markets in some mainland cities as well as in overseas markets. They have become specialised wholesale centres (or wholesale markets for short). Guangzhou, for instance, has been striving to develop wholesale markets since the 1990s by virtue of its regional location and industrial advantages in the PRD. At present, there are more than 100 wholesale markets of industrial consumer goods that are relatively large, and many of them have an annual sales of more than Rmb100 million. Among them, the clothing wholesale market at Liuhua district of Guangzhou (comprising Baima, Tianma, Hongmian Bubugao and Xindadi clothing markets), the footwear wholesale market near the junction of Huanshi West Road and Zhanxi Road (consisting of Bu Yun Shoes World, New Continent Footwear Plaza, Euro Commercial Plaza Shoes City and International Shoes City) as well as the toys and gifts wholesale market around Yide Road and Haizhu Road in Yuexiu District (including International Toy and Stationery Collectibles Plaza, Yijinyuan Toys and Stationery Market, Jinjin Toys and Stationery Market, Haizhu Toys and Premiums City, and Zhonggang Toys Market) are all famous national trading centres of consumer goods.

Can wholesale marts bring brand success in China?

On the basis of their simple functions of booth leasing and commodity trading in the past, the operating mode of some large and successful specialised wholesale centres on the mainland is transforming into a multi-functional specialised marketing centre integrating the functions of trade fairs, major commodity order-placing meetings and general services. These large wholesale markets always host specialised trade fairs and major commodity order-placing meetings. They also organise site visits for companies and even invite foreign companies or manufacturers to conduct trade discussions in a bid to assist them in product sourcing or marketing. All these aim at making use of effective means to change the operating mode of traditional wholesale centres which is more passive. In the past, the products available at wholesale markets are entirely those manufactured by small- to medium-sized enterprises and township enterprises. Yet to satisfy the growing demands of consumers in quality of life and consumption level, the product sources and product mix of some wholesale market have begun to move towards higher quality and higher grades, thereby attracting some major enterprises or some brands with nationwide reputation to set up product showrooms and marketing offices at the wholesale markets. As large numbers of suppliers and products are concentrated in the wholesale markets, the cluster effect can attract individually-run business operators and wholesale agents from across the country, including those from third- and fourth-tier cities and township districts to come for sourcing. In recent years, mainland manufacturing enterprises have been actively developing brand business. A majority of them set their positioning at mass market brands and target at second- and third-tier cities. These enterprises also choose to develop brand franchising business through wholesale markets. Kaiser and Girdear, for instance, are both mainland brands hatched at Guangzhous Baima garment wholesale market earlier on. Some wholesale markets have been transformed into display and trading platforms of factory direct sales for receiving agents from across the country. For example, Highsun Bin Bin Plaza is engaged in the franchising wholesale cum retail business, mainly involving upmarket womens wear and the wholesale of imported Taiwan and Hong Kong fashion. Their customers come from all parts of the country, particularly from the northeast. Haizhu Toys and Premiums City also pursues the branding strategy where all the tenants of the mall are agents of toy brands such as Goodbaby, Blue Box and Smart Toys. The decoration and layout of the mall is highly modernised where each tenant has a separate unit to serve as show room and office. Meanwhile, the International Toy and Stationery Collectibles Plaza has followed the operating mode of Haizhu Toys and Premiums City in decorating the top floor as a display parlour which is let under a separate lease with a view to attracting some large enterprise or major brand to set up showroom and office for specialised wholesale business. In respect of footwear industry, more than a dozen footwear wholesale markets are centralised in Zhanxi area of Guangzhou for the distribution of a wide range of footwear products from low- to high-end. This location has become the largest footwear distribution centre of China offering a full range of product mix that are sold across the country and overseas including Southeast Asia, Middle East, South America, Europe, the United States and Russia. Among these wholesale markets, Bu Yun Shoes World, New Continent Footwear Plaza, International Shoes City and Euro Commercial Plaza Shoes City are offering top-grade products with a relatively large number of brands that are well-known in the domestic and overseas markets, serving mainly footwear companies

Can wholesale marts bring brand success in China?

that come to place orders. In particular, Bu Yun Shoes World is the largest footwear wholesale market of the highest grade in Guangzhou operating with the best supporting facilities. It has more than 1,000 operators coming from across the country and overseas. Bu Yun Shoes World targets at the footwear export market and companies sourcing here mainly come from the United States, Canada, Europe and Africa. However, products available at most wholesale markets are of varying qualities but similar designs, with many produced at small workshops. There are highly imitative fake goods as well as low-end counterfeits. In consideration of their image and target markets, enterprises planning to develop medium- to high-end brands on the mainland seldom choose to set up operating points at these wholesale markets. As for some famous international clothing and leather brands that enter South China City at Shenzhen, they only aim at promoting the sale of their leftover stock at an outlet venue. Conclusion With rising income and growing consumption awareness, mainland consumers are becoming more demanding towards the brand, design and quality of products. Large department stores and shopping malls at first-tier or even second- and third-tier cities basically focus their operation on medium- to high-end products and well-known brands. Brand store chains that are taking up an increasing market share on the mainland and expanding their sales network through franchise operation also focus on the sale of international and local branded products. Coupled with the growing maturity and popularity of online sales platforms including B2B and B2C websites, the traditional commodity wholesale mode of operation on the mainland is beginning to change. In face of the increasingly intense competition of the mainland market, brand suppliers have to adopt more proactive and aggressive strategies in building up sales channels and brand image so as to earn a slot or a ticket for setting up stores or counters at desirable shopping malls, department stores or hypermarkets with appropriate market positioning. To tap the mainland market more effectively, many international brands have, in the past few years, withdrawn the operating rights of their mainland market agents and set up their own task force to liaise with department stores / shopping malls directly for market development. Changes in the market have also driven the wholesale markets on the mainland to transform their operation into brand and product display cum wholesale business. The successfully transformed wholesale markets find their clients in low- to medium-end markets at home and overseas, as well as individually-run businesses and regional distributors in second- and third-tier mainland cities. In dealing with large distribution and retail enterprises in first- and second-tier cities, brand suppliers have to take the initiative in soliciting business through door-to-door visits. To build up a medium- to high-end brand image on the mainland market, it is always necessary to set up flagship stores at some shopping malls of good standing and advertise. Today, mainland consumers seldom shop at wholesale markets for fear that product qualities are varied and fake products prevalent. For the more successful wholesale markets on the mainland, they usually have very sound history of development with advantageous geographic factors where a large group of wholesale markets with numerous commercial operators are centralised and produce an obvious cluster effect. For example, the area around Yide Road and Haizhu Road in Guangzhou is the earliest and largest toys and gifts wholesale cum retail centre of the city. Apart from hundreds of traditional roadside stalls and shops, there are also 12 large

Can wholesale marts bring brand success in China?

wholesale malls in this toys and gifts wholesale market which is well-known nationwide. Large wholesale market can attract purchasing clients not only because of their fame, convenient location or rich choice of suppliers and product mix, but the management ability of the operators is also an important factor. Yet to sum up, in face of the increasingly sophisticated demand of mainland consumers, the move towards direct purchasing by retail enterprises and the emerging popularity of online B2B and B2C sales platforms, the role of wholesale markets in the domestic wholesale channels of China will continue to be put to test in the days to come.
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