China Direct Sales

Excellent podcast/article on Technomic Asia’s Business Blog and Podcast, entitled, China calling: Direct Sales in China, [link no longer exists] on how direct sales just seem to correspond naturally to the concept of guanxi in China:

Historically, sales in China have been based on this guanxi … I get the sale, not necessarily because I have the best price or the best quality product, but because I have good guanxi with you. However, this is rapidly changing in China: while good guanxi is a necessary condition to successful sales, it is by no means a sufficient one — I now have to bring good products to the market at good prices. And for most industrial and consumer products companies, this is a good thing because it means that they can develop more “professional” distribution channels and get a broader sales footprint in China.

So let’s go back to the direct-sales model … this is a model that leverages (and even celebrates) guanxi-based sales. Sales most often are made to friends and family (or the friends and family of other friends) and, while these product suppliers are certainly concerned to bring good quality products to market, I would argue that they are relying even more on the strength of their sales teams’ guanxi in their local area. The strength of the direct-selling model is that it goes with the flow of traditional Chinese culture, not against it, by making each sale personal. And all you have to do is multiply the large number of people in China by helping them grow their disposable income and you understand why executives at companies such as Mary Kay, Amway and Avon are having a hard time controlling their excessive drooling.

One of the toughest things about selling a consumer product in China is getting it into distribution. The post nicely sets out how the choice is often between the traditional and more modern models:

This is a topic too large for one blog post but suffice it to say that China is in the midst of a sea-change in its retail channels, moving from a “traditional” model — dominated by mom-and-pop stores and small specialty stores — to a “modern” model dominated by the larger hypermarkets, “Big Box” and grocery chains. If you look at China as a whole, a slight majority of consumer products are sold through traditional channels; however, the growth is in the modern channels and particularly in the so-called “hypermarkets”, chains such as Wal-Mart, Carrefour, Rt-Mart, etc.

Both methods have their “issues.” Distribution through mom and pops can be, as one would imagine, difficult to institute, and sometimes even chaotic. But distribution through the hypermarkets is also definitely not without its own set of problems:

However, what everyone is realizing is that these modern chains, while good looking on the outside, are often very difficult to work with simply because they are so big and wield so much power. The cost of doing business with them — what consumer products companies call “trading terms” — are often quite high in China compared to the rest of the world so while consumer products companies are often happy with the volume that moves through modern channels, they are not as happy with the margins (and multinational consumer products companies are ALL about the margins!). These companies are often finding that the hypermarkets are not all that good at merchandising and marketing themselves so consumer products companies often feel that they end up paying a lot in terms of marketing fees and not getting all that much for it.

The thought is that direct sales may be the best way to get certain products into consumer hands and that direct sales may make better sense in China than elsewhere. Because my law firm just started working on a very sensitive direct sales matter, I am going to bite my tongue on the legal issues surrounding direct sales in China and merely state that many in China’s government are not terribly comfortable yet with this method.

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China Business