December 19, 2018 – This post was written by Eric Johnson, Engagement Manager, and Sunny Xu, Senior Analyst.
The e-commerce landscape in China is at a crossroads. New regulation has resulted in a climate of volatility for the fastest-growing online channel in China, daigou, as it undergoes its first major transition. Beyond attention-grabbing headlines, the new regulation will have a much deeper impact on the industry, including consolidation, increased levels of sophistication, newly available customers, and a value-add that shifts from price to access.
In this final part of our three-part series on the new Chinese e-commerce law, we will focus on the five tactics MNCs should implement given the likely regulatory impact on the industry. If you have not yet read Part 1 and Part 2, we encourage you to do so by clicking on the hyperlinks.
1. NEW CUSTOMER IDENTIFICATION
Impact: As the daigou landscape consolidates and many daigous are forced out of business, customers who relied on the daigou channel will need to find new ways to purchase products. MNCs have an opportunity to incentivize customers who used daigous for product access and authenticity to shop at their online and offline flagship stores instead of transitioning to different daigou operators.
Response: FSG recommends identifying cities across China with the largest group of newly available customers. To do this, conduct a quantitative analysis locating geographies with demand yet without access to either your products or your competitors’. This analysis often complements a competitor footprint mapping with multivariable regression models that have independent variables such as market potential and dependent variables such as market size and revenue.
In the example graph below, the China executive should target customers in cities such as Shenzhen and Chongqing with the largest gap between the predicted Y-value and the actual Y-value given the strong positive relationship between the independent variable, retail sales, and the dependent variable, revenue.
2. NEW CUSTOMER MARKETING
Impact: As mentioned above, market consolidation and daigous going out of business will result in newly available customers. Many of these customers will decide between shopping at official brand stores and other daigous. MNCs who understand the value daigous deliver and the reason customers use this online channel will be able to focus their marketing campaigns to drive shoppers to their online and offline stores.
Response: In Part 2 of this series we discussed that daigous deliver value by guaranteeing product authenticity and quality to geographies that would not otherwise have access. Newly available customers will search for similar value from a new product source, so design marketing campaigns accordingly. For example, provide and emphasize an authenticity guarantee and highlight how your products are shipped safely and reliably. In addition, marketing teams should showcase the geographical reach of products across China so potential customers know they can purchase products directly from online and/or offline flagship stores.
Impact: The Chinese government has signaled its intent to crack down on online activities it deems illegal and formalize the landscape. The government will now require platforms such as Taobao to ensure daigous and other online stores abide by regulations as outlined in the new e-commerce law.
Response: Given the new era of scrutiny and the current trade tensions between the US and China, it’s more important than ever to ensure your company and your daigou partners follow the proper procedures. FSG recommends seeking advice from internal legal teams and working with them to ensure the right contracts are in place to avoid liability should a daigou partner face legal issues.
4. PARTNER SELECTION
Impact: The daigous at the greatest risk of going out of business are those that are medium sized, relatively less sophisticated, and/or reliant on price arbitrage. These daigous will also face legal risks as they come under increasing scrutiny from the Chinese government and online platforms.
Response: MNCs that plan to leverage the daigou e-commerce channel need to mitigate counter-party and compliance risk, particularly important for US companies given the current political climate and potential of a US-China economic cold war in 2019. To do so, prioritize potential daigou partners by their size, business sophistication, and value-add to mitigate the risk that they will go out of business. Additionally, inquire how potential partners plan to manage the new regulation, even going as far to add a clause in the contract that states the daigou will abide by all necessary legal requirements as outlined in the new law.
5. PARTNER MANAGEMENT
Impact: The new regulation will place new requirements on daigous that will expand the capabilities needed to legally stay in business and compete in the marketplace. The challenge for daigous to broaden and deepen capabilities will create an opportunity for MNCs to establish and maintain mutually beneficial partnerships based on industry best practices.
Response: Based on an FSG analysis of 160 multinationals around the world, MNCs with capability-based training for channel partners achieve revenue growth 11 percentage points higher than average. FSG recommends using the current situation to establish capability development with daigou partners that focuses on critical areas where daigous are likely to have newly required skillsets, such as product importing through official channels and accounting in accordance with government taxation requirements.
The right strategy for the new landscape
Those daigous able to evolve and develop the necessary capabilities to meet the new regulations and changing landscape have an opportunity to increase their position in the marketplace. Similarly, MNCs that understand the new regulation and its impact—and that implement the right strategies—will be better positioned to outperform in China and its e-commerce landscape.
This concludes our three-part series on daigous and the second series we have done on the topic. Interested in learning more about how you can make daigou part of your larger China strategy? Through our Shanghai office, FSG is supporting multinational executives in China who leverage our expertise in channel management to explore, establish, and manage the daigou channel.
If you are a client, please contact your client relationship director to learn about this solution. If you are not a client, contact us to learn more about how FSG can support you.