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China E-tail Growth Exposes Distribution Issues

The industry may be growing so fast that third-party logistics providers and delivery services in China are struggling to keep up with demand.

SHANGHAI — Several months ago, the manager of an American women’s wear brand launching e-commerce in China decided to visit the distribution center of a local third-party service logistics provider his company had hired.

What this manager discovered when he arrived was, he said, appalling. A video that he took of the warehouse shows piles of boxes strewn about on the floor with workers flinging orders that had been returned or were to be shipped out to customers onto the back of a truck. It was dirty. There was no security. Packages were bent, if not almost ripped open.

“I was completely disgusted,” said the manager, who requested anonymity out of concern speaking publicly about the experience might jeopardize business relationships in China. “They didn’t give a damn. They just tossed all of the boxes on the back of a truck. We have adjusted our packaging to suit the situation. That is the only thing we can do.”

 

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E-commerce is exploding in China. With $190 billion in online sales last year and a compound annual growth rate of 120 percent since 2003, the country has become the world’s second-largest e-tailing market, according to McKinsey. But there are concerns within the industry that e-tailing may be growing so fast that third-party logistics providers and delivery services in China are struggling to keep up with demand, which is resulting in substandard service that may ultimately damage consumers’ perceptions of the brands they have bought online.

By and large, Chinese logistics providers are considered efficient, particularly in big cities, and also incredibly cheap (sending packages across the country costs only a few dollars at most). That infrastructure works well for the mass-market world, where shoppers may not expect stellar service. But that could change as shoppers buy full-price luxury items on the Internet.

A lot of Chinese consumers “are starting to buy more premium and luxury brands online,” Lac Tran, head of marketing and advertising for Web2Asia, a Shanghai-based digital marketing company, said, adding that new markets are opening up in third- and fourth-tier cities for premium e-tailing. In fourth-tier cities, the online shoppers spend 27 percent of their disposable income online on average, according to a March McKinsey study on China’s e-commerce landscape.

Online retailers offering full-price luxury items will need to make sure their items are delivered with more care to meet the changing demands of customers who will expect their e-tailing experience to be on par with an experience they would have in bricks-and-mortar retail.

Concerns surround the quality of third-party logistics providers, which sometimes manage everything from a brand’s online operations to distribution of products, as well as delivery companies that transport orders to the end consumer. According to observers, certain turnkey solution providers in China are taking on too many clients, experience high employee turnover and take little time to understand the products they are helping to sell.

“I think what happens in China is that logistics companies that maybe once worked only with toys will start working with garments, and they do not know how to handle them,” said Andre Suguiura, general manager of LifeStyle Logistics, which specializes in providing services specifically for fashion retailers, including the China operations of Yoox Group. “When you buy something from a high-fashion brand, you want to have the same experience as when you are buying in the store, but a lot of times it is not like that.”

Part of the problem might be the fact that there are so many logistics providers in China. When helping fashion brands set up shop on its Tmall e-commerce platform, Alibaba provides its clients with a list of at least 3,000 third-party solutions providers. In 2011, there were 600 companies on the list.

“In China, we say there are a million logistics providers,” said Suguiura. “Even if a guy has a small truck, he calls himself a logistics company.”

Stephen Sher, cofounder and executive vice president for marketing and strategy at Moonbasa, an e-commerce fashion apparel company, voiced a similar view.

“The price wars in the logistics industry are very fierce. This is a poorly regulated area with too many suppliers and too little investment. There is no single player that can provide quality service across China,” Sher said.

According to research from the Shanghai-based consultancy Smith Street Solutions, shoppers on Tmall.com “generally recognize that a logistics company is a third party working with the brand” and do not associate problems directly with the brand. Still, common complaints include slow delivery, bad service, broken packages and lost goods.

Problems seem to be most severe during promotional events offered by e-commerce companies. In November, on Single’s Day, for example, many e-tailing sites offer deep discounts. In 2012, Single’s Day generated $4 billion in online sales, according to McKinsey. “That can stress systems and make things challenging to manage,” said Frank Lavin, chairman and chief executive officer of Export Now, which offers e-commerce solutions to brands in China.

The market is also flooded with companies in the delivery sector. Competition is fierce as rivals continually try to beat each other on volume and low price. “The express delivery market in China is not as old or well-established as in the United States, so you certainly will be more likely to find areas where there might be a performance gap or quality gap,” Lavin said.

Return rates are currently low in China as customers are still relatively new to online shopping, analysts said. Customers might not be able to navigate return processes. But returns are likely to increase as consumers become more adept at ordering from the Internet, which could cause further logistical problems.

Lai Jianchang, the director of international business for delivery company ZTO Express, said his company would rather not work with high-end fashion brands because the volume is simply not worth it and also the company does not want to have to pay sometimes steep deposits as a guarantee in case products are damaged when they are delivered. “If a product gets lost, we have to pay too much,” he said.

In the past few years, a number of foreign e-commerce companies, including Yoox, Neiman Marcus and Net-a-porter have entered the market in a bid to sell luxury products to Chinese consumers online. Neiman’s and Net-a-porter declined requests to discuss logistics, but the U.S. retailer last week tweaked its online strategy in China and how it delivers products. Rather than holding inventory in China, Neiman’s now will ship from its U.S.-based inventories, cutting its staff in China by about half. It will maintain its Mandarin-language site, however.

Yoox Group chief operating officer Giuseppe Guillot said that China “has been one of the biggest challenges” for the company. It has responded by setting up its own logistics center and office in Shanghai. Yoox works with Federal Express and its local partners, including LifeStyle Logistics, to deliver products to more than 400 Chinese cities.

The e-commerce player has put a special emphasis on service. Couriers will wait while customers try on products to see if they fit. The e-tailer also has created an antifraud microchip seal to ensure the authenticity of products.

More third-party logistics providers are beginning to offer services aimed at the fashion industry, Suguiura of LifeStyle Logistics said. For example, DHL Global Forwarding recently revealed plans to build a tailor-made fashion center of excellence outside of Shanghai. But still it is hard to ultimately control quality for delivery in third- and fourth-tier cities where larger delivery companies often hand off packages to small local partners. “First- and second-tier cities are pretty stable, but in third- and fourth-tier cities, things are getting a bit more complicated. It is not the same service level,” Suguiura said. “Sometimes they don’t wait [for customers to try on goods]. They don’t care. But where business is starting to increase is in these types of cities.”

McKinsey noted in its March study on e-tailing in China that next-day delivery is not available in many third-tier cities where e-commerce is unlocking pent-up demand for merchandise not yet available in physical retail stores. “Warehouse space, trucking routes and other logistics infrastructure would have to be priorities for smaller cities to fully participate in the Internet economy,” McKinsey said.

The sheer size of China is just one of the factors differentiating it from other markets. Lavin of Export Now warned that many brands make the mistake of approaching China the same way they would their home countries.

“It is frustrating for them because they are doing what they did in their home market,” he said. “But they are not getting the same results. The more sophisticated companies adopt a very different approach. I see brands that have jumped in very quickly and said, ‘Let’s get everything going next month,’ and they end up cutting corners.”