Direct sales model opens opportunities for Chinese brands

Pre-sales for China’s Nov. 11 Singles Day shopping festival began this morning, marking the kickoff of the country’s biggest e-commerce season. As a dizzying array of activities—including steep sales and weeks-long promotional games—push product, Chinese brands will rack up the year’s biggest sales figures.

An increasing number of Chinese brands are finding success in overseas markets, and more are going around third-party platforms to sell directly to shoppers hailing from North America to Southeast Asia. The trends sees export brands attempting to circumvent the global sourcing soup which has ensnared conventional selling channels during a year in which they have been walloped by the Covid-19 pandemic and hobbled by geopolitics. 

Refining the overseas sales model

E-commerce in China is dominated by a few massive platforms, which offer sellers an array of infrastructure and services from payment to marketing. When Chinese brands have looked for overseas markets, they’ve tended to rely on Amazon as the global equivalent. 

This situation, however, is changing, with more Chinese consumer-facing brands and retailers choosing to build their own online channels—either websites or apps—to sell directly to consumers rather than relying solely on marketplace platforms.

Direct-to-customer sales are on the rise amid a growing trends for Chinese businesses to sell to overseas markets via digital cross-border channels.

• We don’t know how big the direct sales market is, but e-commerce site tools company Ueeshop CEO Lin Yongpeng predicts 50% growth year-on-year.
• “The changes of consumer behavior that’s brought about by the pandemic is here to stay. Considering the supply and demand, we are optimistic about the long term development of cross-border e-commerce businesses in the long run. Of course, companies that take their bets early will enjoy the first-mover advantages,” Tiger Brokers analyst Eline Wang told TechNode.
• China announced in May plans to build 46 cross-border e-commerce pilot zones across the country, bringing the total number to 105. The zones will offer preferential policies such as tax exemptions on retail exports.

Third-party shopping sites, such as Amazon and Alibaba cross-border e-commerce platform Aliexpress, are benefiting from the shift, but their role in helping Chinese cross-border brands expand globally is taking a back seat to direct-to-customer channels.

Singles Day

Nov. 11 began as a day when single adults celebrated their unattached status—symbolized by the standalone “1” numerals in the 11-11 date. Alibaba first popularized the day as a shopping promotion in 2009, marketing the day as an opportunity for singles to treat themselves with a little frivolous spending. Falling five months after the mid-year 618 shopping festival and a month after the Golden Week holiday, it has evolved into a weeks-long sales season.

But this year, there’s a question mark over the sales season: shopping platforms and governments have been subsidizing consumption almost all year in a bid to drive post-Covid recovery. These sales produced the biggest-ever 6.18 spending festival. After a year of heavy shopping, do consumers have any appetite left? 

China’s cross-border e-commerce market

China’s cross-border e-commerce market, which includes both imports and exports, has grown swiftly over the past few years. Sales for this retail segment hit RMB 186 billion ($27.8 billion) in 2019, with average annual growth of 49.5% each year since 2015, according to a report (in Chinese) from Askci Consulting. Sales are expected to reach RMB 280 billion in 2020.

• The proportion of imports among total e-commerce sales surged past 20% in 2018, from less than 10% between 2008 to 2012, the Askci showed. 
• China cross-border online sales jumped (in Chinese) 52.8% to RMB 187.4 billion in the first three quarters of this year, compared with the same period a year earlier. To compare, overall import and export trade volume rose 0.7% year on year during the same period, according to data from the General Administration of Customs.

Direct to customers

More Chinese brands are taking an approach to online sales familiar from Western brands. Fashion brands like H&M and the Gap have always tried to get customers to buy from their own sites or apps rather than a third party platform. Unlike them, however, Chinese brands adopting direct sales models have stayed online, avoiding costly investments in brick and mortar.

• Many Chinese brands have been active in global markets for years through platforms like Amazon, but increasing traffic from social networks like Instagram has encouraged Chinese brands to try self-run online stores built on brand awareness. With online marketing costs hitting a historic low, there seems to be little reason to continue relying on a single selling channel.
• The number of brands opting to sell directly to customers is rising in markets across the globe. Direct-to-consumer brands in India, another vast and growing e-commerce market, reported 78% annual growth in third-quarter sales through their own websites, compared with 31% year-on-year growth during the same time period for the overall e-commerce industry, according to a report from e-commerce platform Unicommerce. The report showed the number of brands building their own websites jumped 51% during the same period. 

Shein: the pioneer

Shein, a Nanjing-based fast-fashion brand, has been one of the most successful companies at leveraging direct-to-consumer sales to boost international growth. Practically unknown to Chinese customers, the retailer is already the leading fast fashion app in a handful of Western countries, including the US, France, Spain, and the UK.

• Reuters ranked the Chinese retailer is ranked the largest online fashion company in the world by sales of self-branded products, overtaking established rivals like Zara and H&M, citing data from Euromonitor.
• The Shein app notched 229.4 million downloads as of end September, compared with H&M’s 123.5 million and Zara’s 90.6 million, Sensor Tower data showed.
• Though it sells to nearly every country, nearly half of Shein’s customers are in North America, according to September data from Similar Web. Europe is the firm’s second-largest market, where Italy represents 11%, France 7%, and Spain 5% of the company’s total users.
• The 12-year-old fashion retailer doubled traffic and sales from its official website in 2019 compared with the previous year. Annual gross merchandise volume (GMV) hit RMB 20 billion in 2019 and exceeded (in Chinese) RMB 40 billion for the first half of 2020. It is expected to reach RMB 100 billion this year, local media reported.
• Shein’s success could be attributed to a range of factors, from its affordable fashion positioning to viral online marketing strategies on social platforms like Instagram and Pinterest. But its direct-to-consumer model is the foundation for its success, facilitating brand storytelling, a CRM system, and cost management.
• The company reportedly received in August hundreds of millions of dollars in its Series E at a $15 billion valuation, and is aiming for a US listing as early as this year, a source with knowledge of the matter told TechNode.
• It hasn’t all been smooth sailing. The company has seen its fair share of controversy, from selling a necklace featuring a swastika pendant to alleged copyright infringement (in Chinese).
• Other Chinese brands exporting to overseas buyers through self-run websites include Anker, a Changsha-based electronic accessories manufacturer, and electronics gadget seller Banggood.

When in-house makes sense

Brands considering self-run e-commerce websites need to weigh a number of considerations built into each selling model, including time, effort, access to customer data, and upfront costs as well as long-term cost-savings.

• Sales or branding: Selling through third-party e-commerce platforms is, in a large part, buying traffic from their huge user bases. Platforms leave little space for merchants to create a unique customer experience; the priority is driving sales rather than connecting with customers and brand-building. Proprietary e-commerce platforms, meanwhile, are better platforms for companies looking to tell a brand story and increase customer interaction as well as brand loyalty. However, third-party e-commerce platforms, with its massive user base, may offer brands an easier start and better chance to take off.
• Cost of traffic is higher for brands operating on third-party e-commerce platforms due to competition between rival brands listed on the same marketplace. Direct channels can be more profitable in the long term; however, brands need to invest time and effort in building its user base in the beginning. Incremental costs for getting self-operated channels up and running reduce over time, said Tiger Brokers’ Wang. 
• User data ownership. Brands that are leveraging marketplaces like Amazon don’t have direct access to user data, a coveted asset for precise customer targeting and other marketing and merchandising functions. On the contrary, brands operating their own online stores have full ownership over customer data, local media (in Chinese) points out.
• Regulations: Marketplace sites have their own set of rules, governing everything from product categories to the number of SKUs that can be listed. For example, Fulfillment by Amazon (FBA) sellers, who partner with the platform to keep large inventories in the company’s warehouses for quick delivery times, are vulnerable to the platform’s policy changes. In 2016, Amazon raised its fees before the holiday season due to limited warehouse space, impacting many FBA sellers. 
• However, the absence of platform regulation in direct sales also creates risks of shady practices like sales of counterfeits, inviting new regulations. In April, the General Administration of Customs rolled out a set of rules for supervising product returns on cross-border e-commerce sites, offering streamlined processes for product returns and expanding logistical support, and more.

Why now?

B2C commerce sites selling directly to customers isn’t new. Chinese e-commerce companies Lightinthebox and DX.com reached their height of popularity around 2013 before losing ground to third-party platforms due lack of branding and sales of counterfeit items.

• A new wave of direct sales pioneers, including Anker and Shein, have seen impressive growth over the past two years. Their success is drawing more followers.
• The US was the most important market for most Chinese direct-to-consumer e-commerce sites. Markets such as Mexico, Italy, and Ireland are also seeing robust growth, Ueeshop’s Lin said in a recent speech (in Chinese).
• A wide array of supporting tools and services have helped pave the way for self-operated channels. E-commerce site builders Shopify and Magento, sorting systems (in Chinese), and third-party payment solutions have lowered the threshold for brands looking to build their own channels. Companies servicing self-run e-commerce sites are enjoying the boom as a result: Shopify’s total revenue in the second quarter nearly doubled to $714.3 million from the same quarter a year earlier. New stores created on the Shopify platform grew 71% in Q2 2020 compared with Q1 2020.