Despite huge opportunities, the Chinese market is highly competitive and very different from any other market in the world. E-commerce is booming in China, and it is the best way to reach the emerging middle-class.
Brands are leaving Tmall
However, numerous retail and luxury brand giants are closing their online stores, indicating the fierce online competition. Here are several reasons for that:
1. Too high costs
Different costs are involved when you open your Tmall store. They depend on the type of store you choose: Flagship Store for brands with a trademark, Speciality Store for businesses with brand authorization documents or Monopolized Store for sellers with two or more brands within one of Tmall’s product categories.
It also depends on the platform: Tmall.com, the largest business-to-consumer (B2C) retail platform in Asia, or Tmall Global which enables overseas brands to sell directly to Chinese consumers.
In general, those costs fall into five categories: Deposit, Technology and Service Fees, Sales commission, Customer Loyalty Program fee and Alipay service fee.
- The deposit is taken in the case the shop has breached the “Taobao Mall Service Agreement” and sold counterfeit products. These fees are used to cover damages to both Tmall and consumers.
Flagship Store, Flagship Store (Marketplace), Authorized Store and Specialty Store must submit a security deposit (from 10,000RMB to 300,000RMB depending on the category).
- Technology and Service Fees are separated into two types of fees:
This fee is payable to yearly for services rendered and dependent upon the merchant’s registered primary categories (generally 30,000 RMB or 60,000 RMB for Tmall.com). This annual fee can sometimes be refunded if the store reaches Tmall.com a certain amount of sales.
Real Time Transaction Fee (for Tmall Global)
Tmall Global charges a commission fee based on the category of the product sold. It is calculated using the product price and the logistics cost.
- Tmall.com generally keeps 5% of the sales value as commission. It is based on annual revenue (excluding shipping costs) and are taken on an annual basis.
- There is an additional 0.5% deduction (or higher at the merchant’s discretion) per transaction which accumulates for Tmall.com to reward consumers in future promotions.
- Alipay is almost mandatory in China. For Tmall Global charges a 1% service fee for it, applied to each transaction via Tmall.hk. The applicable transaction is the total of the product price and logistics fee.
This accumulation of fees and commissions can be unsustainable for some brands, this is thus a first reason for them to leave Tmall.
2. A low Return on Investment (ROI)
In addition to all the fees previously mentioned, brands are not certain to have a good ROI on Tmall.
Indeed, to counterbalance the high fees, Official Tmall flagship stores must sell more. However, they receive no priority when an online shopper searches for their brand online. Only a few of the luxury brands that have opened Tmall stores (like Ports 1961, Burberry or Tommy Hilfiger) own more than 90% of search results for their brand name, and even those brands have trouble appearing in the first page of results.
This is partly because search results for brand names are sorted by bestsellers. Which means counterfeit sellers who are present for a long time on Tmall can be much more visible than the official store.
Thus, if brands must pay high fees and don’t appear on the first page on Tmall, they can barely make profit and have a bad ROI.
3. Bad E-commerce Agencies
As we stated before, the Chinese market is different from the Western markets.
Chinese consumers are massively connected. They buy a lot on their smartphones or on the Internet in general on platforms like Taobao, JD.com, Tmall… More than 90% people in China use mobile phones. It means more than one billion people in this country can use shopping apps and it makes China the biggest e-commerce market in the world.
They are also more and more educated and demanding customers. The Chinese spend a lot of time on forums to get information about specific products and look for the cheapest product.
E-reputation is then a key factor of a successful digital strategy in China. A brand must have good reviews on forums… Viral marketing campaigns on social media (WeChat, Weibo) can also attract new customers. Some agencies are not good at it and keep spending huge amounts of money on street commercials or other “classic” marketing campaigns they use in the West. Those are not as efficient as digital campaigns tailored to the Chinese market.
The result of such inadequate campaigns is a low reputation on Chinese social media and low sales and Tmall.
4. Heavy local competition: ASOS case
ASOS, the UK’s largest online fashion retailer is an example of a foreign brand that faced high competition in China. The company entered the Chinese market in 2013 with high expectations (100 million RMB of investments, British style, sales force training…). Its business model relied exclusively on e-commerce, with its own website, as well as a Tmall store. That was a good approach to China.
ASOS faced several problems in the Chinese market, from operations (for example: import taxes on clothes) to marketing. Indeed, the company failed to distinguish itself from local, more affordable brands. While it may be a major player in the US and Europe, ASOS was relatively unknown to Chinese millenials, its target consumer base.
5. WeChat as a new platform? Coach case
Coach was one of the first American luxury handbags brands to launch a Tmall store (first a pop-up store 2011, then an official one in 2015). However, just one year later in September 2016, the luxury brand left the Chinese platform.
China is the first market for luxury goods. Many brands see e-commerce as a way to directly access customers and receive greater visibility. That is why many have moved onto digital platforms. However, online platforms have always been a concern for luxury brands since they can appear “too mass market”. Moreover, Alibaba has been criticized by luxury brands for not doing enough to remove fake goods, despite an existing counterfeit removal program.
Coach opted for a different way to be present on the Chinese market: WeChat. Cartier, Longchamp, and Montblanc all have WeChat shops with WeChat Pay. Some companies believe that WeChat offers a more personalized shopping experience, as well as greater control over their brand.
To conclude, e-commerce is a booming sector in China, with a forecast of $470 billion online retail sales in 2017, and it is estimated to grow 20 percent annually by 2020. China is now the biggest online retail market in the world, and Chinese consumers make up almost half of all online sales globally.
Foreign companies must understand the market and the Chinese consumers. They also must adapt to the Chinese social media to counterbalance the issues they can face on Tmall.
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