News of China's buoyant, digital-first retail landscape has been hitting the headlines for years now. But for many businesses, how to enter the Chinese market remains a complex and challenging mystery. The key to making the most out of the opportunity is to develop a real and thorough understanding of the local market in order to determine the most relevant way for your business to position itself within it.
In this piece, I explore steps to start the process, gleaned from our experience on multiple innovation projects in China and analysis of the successful and failed entry points of brands over the last 10 years. These four steps are: identifying trending categories; targeting unexpected consumer groups; bridging the gap between digital and physical retail; and discovering the opportunities of cross border e-commerce.
1. Identify trending categories.
These are many burgeoning categories in China that could indicate successful entry points. The sports industry in its widest sense is one of them -- winter sport specifically. The Winter Olympics will arrive in Beijing in 2022, which has caused a rapid growth in the outdoor and winter sports category in China. It's being fueled by the government, which launched an ambitious initiative to create 300 million new winter sports enthusiasts and build 800 ski resorts and 650 skating rinks by 2022.
So far, they seem to be on track. This is creating a growing demand not only for specialist winter sports apparel and equipment, but for a broader range of lifestyle brands that have winter sports connotations. Brands entering the market should think carefully about if their product can fit into the hospitality and service industries within the growing number of Chinese ski resorts or with the increasing demand for fashion, accessories, and gadgets for the ski slopes or ice rinks.
Similarly, the smart home market is growing rapidly in China. It's forecasted to grow from $7.1 billion to $26.2 billion over the next four years. Meanwhile, household penetration is currently at 4.9 percent and is expected to reach 21.2 percent over the same time period. The surge in the market has been attributed to the growing middle and upper-class population, increasing urbanization, high internet penetration, government-backed IoT policies, and a large number of local manufacturers offering competitive prices for devices.
While this is clearly a niche market, it's a lucrative one and brands should be asking if and how their offer can relate to this consumer trend, or the further opportunities that it could spark for their own business. Entering the market cold and directly competing with local firms is unlikely to bring in results. Instead, it's all about collaborating with people on the ground who already know the market.
These are just two examples of burgeoning categories in China. There are many more. Brands looking to succeed there need to develop a real understanding of these to work out how to best align their product and service to the real developments shaping the market today.
2. Target unexpected consumer groups.
Gaining insider knowledge of the market can help ambitious companies locate and tap unexpected consumer groups and find the influencers of tomorrow. For example, appealing to the increasing number of Chinese international tourists can be a powerful way to grow influence in the market from the outside.
China currently has the world's largest group of international tourists and Chinese nationals are reported to be the biggest spenders when traveling abroad. When returning to China, these tourists become influencers and building relationships with them when they're traveling in your region can create demand for your brand from within the market once they're home. The trick is finding relevant ways to connect with them when they're back in China and making your products available to the market on the most relevant platforms within the market.
This year is the Canada-China Year of Tourism, a government-led initiative that builds on demand from Chinese tourists and designed to improve links between the two countries, as well as bolster trade. The ongoing scheme seems to be paying off. On "Singles Day'' in 2017, China's record-breaking equivalent to Cyber Monday and Black Friday, six million Canadian lobsters were sold on Alibaba in one day, according to Global Affairs Canada.
Of course, this is a government backed scheme carefully designed to bring in commercial results. But companies in all markets can make their own individual moves to appeal to Chinese tourists, such as partnering and aligning themselves with hotels, travel companies, tour operators and other tourism services to grow exposure of their brand to Chinese tourists outside of China.
Targeting less expected consumer groups such as this one can be a good way to spot interesting, emerging behaviors in Chinese consumers and help gauge where the consumer mind-set is heading to next.
3. Bridge the gap between digital and physical retail.
Like many emerging markets, China is many different markets in one and a detailed understanding of cultural and demographic variances is crucial. When it comes to e-commerce, 98 percent of all searches are performed in Chinese. A lot of foreign-language content and Western platforms simply aren't visible. There's not only this language barrier to contend with; there are also specific cultural and consumption behaviors unique to the market, meaning that digital strategies cannot be copied and pasted but need to be created from scratch.
This is why the starting point for most overseas businesses is to partner with the well-known e-commerce giants like Tmall, Taobao and Alibaba, the latter of which generates more transactions than Amazon and eBay combined. Having local teams and using local knowledge and structures is the best way to increase your chance of success.
However, many companies get so fixated on the e-commerce opportunity that they miss out on a much bigger opportunity: physical retail. E-commerce still only counts for 15 percent of retail sales in China (and 11 percent of that currently belongs to Alibaba). This is why major e-commerce platforms have been launching physical equivalents -- to start tapping the other 85 percent.
Often these are no ordinary stores. Many are cutting-edge malls powered by data and AI support that provide flagship customer experiences and push the performance of physical retail as far as possible. It creates a seamless "online to offline" shopping experience, which is a major trend in the Chinese market. Companies looking to break into China should not only consider the e-commerce opportunities in isolation, but think carefully about developing a strategy that encompasses and links to physical retail to get the most out of the market.
4. Explore cross-border e-commerce.
While there are big opportunities to be had in brick-and-mortar retail from within China, outside of the country there is a growing trend of "cross-border e-commerce" powered by live video streaming.
Video streaming has been steadily gathering momentum around the world, but in China it's exploding. Goldman Sachs expects the market there to grow from $2 billion in 2015 to $15 billion by 2020. Around half of China's internet users have tried live-streaming apps, which is more than the population of the U.S., according to CNNIC (China Internet Network Information Center). And ambitious retailers have woken up to this.
ShopShops is a Chinese-based business that hosts live-streamed shopping events in US stores, connecting brick-and-mortar U.S. shopping experiences to millions of Chinese consumers. The draw is that consumers can interact with trusted reviewers and micro-influencers in real time who can describe the products and show them from every angle, while getting access to foreign brands, some of which can be difficult to purchase in China. On top of this, live-streamed content from overseas is in demand in China because it brings an aspect of novelty, adding to the potential appeal of outside brands getting access to consumers.
In the words of one research consultant, it's "QVC on steroids." But it's working. Last year, "cross-border" e-commerce sales were worth $100 billion and the entrepreneurial ShopShops is seen by many as one to watch. Adopting this technology could be a very efficient and economical route in to the market and we expect to see plenty more developments in this area over the coming years.
These are four starting points brands can use when planning their entry strategy into China. The key is developing this kind of detailed insight of the local market and working out how your business can best fit in to it. Looking further ahead into the future, it's crucial that we understand these cultural nuances of Chinese consumers in order to succeed in the West, as the shifting consumer behaviors of this increasingly dominant market could reshape the global business and retail community. I hope that these four starting points will prove a useful introduction to understanding the world's most sought-after market, and how to enter it.