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 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. 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.
A direct-sales model leverages 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 concerned about bringing good quality products to market, 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 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:
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.
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:
Everyone is realizing that these modern chains, while good looking on the outside, are often difficult to work with because they are so big and wield so much power. The cost of doing business with them 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 happy with 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 they end up paying a lot in terms of marketing fees and not getting all that much for it.Direct sales may be the best way to get certain products into consumer hands and 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 with this method.
