The Alibaba effect can be a negative for Western brands in China.
As the giant Chinese e-tailer gets set to launch its initial public offering on Thursday that could raise more than $25 billion, a series of studies has warned brands about the dangers of one of Alibaba’s core business streams: daigou agents. Similar to Amazon’s platform, Alibaba touts itself as the world’s largest marketplace, connecting sellers with buyers. But Western brands themselves tend not to be direct sellers at the site, apart from a few such as Burberry, which is on its Tmall site. Many sellers instead are resellers, or daigou agents, which represent a $15 billion to $20 billion business annually that is projected to grow 33 percent each year, according to China E-commerce Research Center.
Bain & Co. noted that 60 percent of consumers have made luxury purchases through these daigou channels rather than from brands or department stores. And according to Jing Daily, there are more than 285,000 active daigou agents on Taobao.
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Brian Buchwald, chief executive officer of media group The Bomoda Group, said brands in China face a “huge problem with these resellers.” He explained that these individuals often will head West to purchase items at a 40 percent discount, but ship the goods back home and resell them online. “They’ll sell maybe at a 10 percent discount from what a brand might be selling the same item for in a store,” Buchwald said, noting that “it’s a big challenge for these brands in terms of what to do about it.”
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Bomoda just completed a study called Bomoda 300, to help brands better focus their efforts and understand which resources to leverage in China. The study looked at the 300 top-performing luxury brands in the country, along with their performance across three major categories — brand awareness, brand engagement and consumer experience. The rankings were from an algorithm Bomoda built that incorporates more than 250 data points across social, search, e-commerce and mobile sources to score a brand’s total aggregate performance in China.
According to Buchwald, brands need to put themselves in the shoes of their Chinese consumers. “They have unique paths to discovery, engagement and purchase, which have resulting implications for product and marketing strategy,” he said.
The survey also showed that companies that are consistent in their localization have a better chance at success in the Chinese market. Localization refers to a brand’s ability to match China’s cultural characteristics, such as adapting language and leveraging existing platforms. Many brands may show up on the Baidu search engine, but then link to a Web site in English. “This doesn’t work for Chinese consumers, who mostly read and write in Chinese,” Buchwald said.
Buchwald said Western brands can’t afford to wait to enter China. “Brands need to take control of the dialogue and define their position in the marketplace,” he said. That’s because the brands are already there via the resellers, who in turn are controlling market perceptions and creating product dialogues with consumers.
Many brands choose to sell on multibrand platforms, such as Xiu.com or Shangpin.com, when they first enter China’s marketplace. But these sites don’t garner enough traction with consumers to be meaningful for brands. And the ones that do — such as the 80 percent market share that Alibaba captures through its three marketplaces: Alibaba, Tmall and Taobao — can be more of a detriment because of the power of reselling.
Buchwald believes many brands aren’t proactive enough in their China initiatives. According to Buchwald, companies can have “extraordinary success with the Chinese consumer, provided brand leaders know where to focus and which resources to leverage.”
For one thing, his firm’s data show Western brands need to have a competitive pricing strategy. “Brands need to compete with their own products’ prices overseas. A 30 percent to 100 percent premium is untenable for Chinese consumers. They will simply seek other paths to make their purchases,” Buchwald said.
Another finding of the survey is that mobile is huge in China and growing. “For the Chinese consumer, mobile is the first place they go….Chinese homes may not have WiFi, and many don’t have a computer. Most consumers have mobile through their smartphone. That means Western brands hoping to sell online must have the site in Chinese, as well as be optimized for selling via mobile. If a brand isn’t optimized for mobile, the consumer won’t buy and will fall off at some point,” Buchwald said.
In addition, brands entering China need key opinion leaders, or online celebrities on Chinese social media, to let Chinese consumers know that the brand exists. According to data points in the Bomoda survey, advocacy overwhelmingly drives consumer behavior in China. “Today, most brands seek to buy their way into the hearts of consumers through sponsorship, often to little effect. Savvier brands realize advocacy is best developed through sustained and customized participation across an array of channels,” Buchwald said.
While Weibo and WeChat are the main social apps, there are now secondary social channels that brands need to invest and participate in to reach the Chinese consumer. These include Dianping, China’s version of Yelp; Meilishuo, which is similar to Polyvore; Nice, modeled after Instagram, and Huaban, the Chinese version of Pinterest.
