China is the largest e-commercemarket in the world and one of thefastest-growing marketplaces. According tothe National Bureau of Statistics of China,online turnover of consumer goods in2015 reached Chinese yuan renminbiRMB3,242.4bn, an increase of 31.6%. Andfrom January-August 2016, the online retailsector grew 25.5% to RMB2,434.7bn, atotal that accounts for an 11.6% share ofthe entire retail market.

And few sectors within this marketplaceare as successful as the B2C cross-bordere-commerce channel. The cross-bordermodel is comparatively new. Established inearly 2015, an intricate system of so-called“bonded warehouses” located in specialFree Trade Zones allows foreign/Westernbrands and retailers to sell directly to theChinese consumer, without having to gothrough an official distributor or maintain aphysical retail presence in mainland China.

Chinese consumers, on the other hand,can buy food, cosmetics, fashion andaccessories directly from US and Europeanmanufacturers simply by logging on tomarketplaces like T-Mall or JD.com.Western products are popular in China, notjust because of their foreign allure but alsobecause of perceived product quality and,most importantly, product safety.

SECOND-TIER CONSUMERS For many Chinese customers based inso-called second-tier cities or rural areasthere is an added incentive for purchasingthrough the cross-border model: buyingdirectly from Western brands means lesslikelihood of accidentally buyingcounterfeited or fake products.

The tier system ranks Chinese citiesaccording to their size and annual GDP:top-tier (first-tier or second-tier) cities aremore urban and developed, tiers three, four

and five tend to be more rural. Originallythis classification system was introduced toreflect urban development; today theconcept is commonly used when talkingabout demographic development, socialstructure and consumer behaviour inmainland China.

In large cities such as Beijing orShanghai (two of China’s first-tier cities,with others including Shenzhen andGuangzhou), the big Western luxury brandsare represented with official stores or brandcounters in large department store chains.As a result, the chance of buying a fakehandbag, wristwatch or face cream iscomparatively small since the brands, theirdistributors and the retailers can make surethat only official merchandise is soldthrough these outlets.

In smaller cities, however, and especiallyin the rural areas, there is less control overproduct quality. Buying online from theactual brand is therefore considered saferthan buying the same product from a localdepartment store or other regional retailer.

HOW CROSS-BORDER WORKSAs a result cross-border online retail hasbecome enormously popular over the last 15months. According to US market researcherMcKinsey, the cross-border e-commercesector accounted for turnover ofRMB259bn (US$40bn) in 2015, more than6% of the Chinese online retail market.

Considering that the actual retail channel

Cross-border retail is changing the wayChina shops and has opened upopportunities for Western beauty brands,says Annemarie Kruse. But are the daysof easy access to China numbered?

November 2016 SPC 89

is not even two years old, these growthrates are even more remarkable. In March2015, the Chinese government establisheda Free Trade Zone in Hangzhou in a bid toencourage cross-border e-commerce andbolster the flagging domestic economy.

Over the last few years the economy inmainland China – especially consumerspending – has slowed down and thegovernment has been looking for ways toboost the domestic retail market, with aparticular focus on the burgeoning Chinesee-commerce sector. With simplifiedcustoms formalities and preferential taxpolicies, the new cross-border retail modelwas developed to encourage Westernbrands to sell their goods in China. Amongthe first members of this new e-commerceproject were Alibaba’s T-Mall (the biggeste-commerce platform in Asia) and JD.com,the second-largest online retailer in China.

Mei Graefe is the Founder of Intergate, aMunich-based brand consultancy thatspecialises in marketing European cosmeticsand lifestyle brands in Asia. Graefe explainshow the cross-border model works: “Thebig Chinese online retailers, like T-Mall orJD.com, operate their own warehouses inthese Free Trade Zones. Once thecustomers have placed their order throughthe respective online marketplace, theWestern manufacturers dispatch theproducts directly to these ‘bondedwarehouses’. The online retailer theninforms the Chinese customs authorities,

JD.com staff at thenortheast China-basedGu’an warehouse

chinaretail

EASYACCESS

089 SPC1116_china cross borderJWAK.qxp_spc feature template 28/10/2016 12:22 Page 89

retailchina

from April 2016 also included a so-called‘positive list’ of 1,200 product categoriesthat could be sold through cross-borderretail. And although the list still includedcosmetics, it also required imported beautybrands to provide an official productregistration at the customs point – de factorequiring these beauty brands to undergothe obligatory product safety tests,including animal testing.

After the first draft of this list waspublished, Graefe says, there were massiveprotests from the big online retailers, sincecosmetics (especially organic beauty) is oneof the most popular categories. TheChinese government then released a revised‘positive list’, which specified a transitionalperiod extending to July 2017. Until thatdate, beauty products can be sold throughcross-border online retail just like before,without having to provide an additionalproduct registration.

How the situation will develop after July2017 is still uncertain. Graefe comments: “Itis difficult to predict how the animal testingissue is going to develop. There are somepositive signals that animal tests for foreigncosmetics brands might be abolishedaltogether at some point. But so far, therehasn’t been an official announcement aboutif and when this might take place.”

WESTERN RETAILERS ON T-MALLHowever, the animal-testing issue onlyapplies to the cosmetics sector. For foodbrands there are no such limitations andover the last year, many Western retailershave opened storefronts on T-Mall and T-Mall Global. One of the first Westerncompanies on T-Mall Global was USwholesaler Costco, which started sellinggrocery products through T-Mall in late2014. At around the same time, Koreanmanufacturer LG Household & HealthCare began retailing six of its best sellingbeauty brands through T-Mall; Japanesedrugstore retailer Matsumoto Kiyoshiopened a T-Mall store around a year later.And in March 2015, the UK’s Royal Mailpostal and delivery service announced thatit would open a storefront on T-MallGlobal to sell typically British productsfrom various UK companies.

Several European supermarket retailershave also jumped on the bandwagon,including Dutch food retailer Albert Heijn,UK supermarket chain Sainsbury’s and theGerman Metro group.

Sainsbury’s, the second-largestsupermarket chain in the UK, launched itsT-Mall store in September 2015. Andbusiness seems to be going well: Sainsbury’srecently announced that it would double thenumber of its own label products sold

driving the success of cross-border retail. There are two ways for Western brands

to retail through T-Mall. T-Mall Classic isfor companies who already sell theirproducts in China, have bricks-and-mortarstores, sales staff and an official businesslicence. And T-Mall Global (which waslaunched in early 2014) is for brands thatdo not have an official product registrationand are not retailed in mainland China yet.

For many FMCG brands, and especiallyfor personal care manufacturers, T-MallGlobal is an interesting option. Foreignbeauty brands can find it difficult to enterthe mainland China retail market: currentlegislation requires any non-Chinesecosmetics brand, no matter how manyEuropean or Western certifications italready carries, to undergo various productsafety tests – including animal testing – inorder to receive their official registrationfor the Chinese retail market.

For many European brands, especially fororganic and natural cosmeticsmanufacturers, this is a major stumblingblock: admitting to animal testing on theirproducts – even if these tests are conductedoutside of the European Union (whereanimal tests on cosmetics are strictlyforbidden) – would mean damaging theircredibility in their domestic markets andthus endangering their entire brandidentity. The cross-border model, however,offers the opportunity to sell productswithout going through the official productregistration procedure.

The new tax and customs regulations

90 SPC November 2016

giving them the requisite customer andorder information. Once the customsauthorities release the goods, the order isthen picked up by a courier service anddispatched to the customers.”

Graefe says that although this processsounds complicated there is still less redtape involved than going through theofficial distributor route. And the pilotproject turned out to be an enormoussuccess. According to Intergate Consulting,more than 1.3 million sales orders worth atotal of RMB290m (t40m) wereregistered in just one of three trade zoneareas from March-August 2015.

In January 2016, the governmentestablished further Free Trade Zones andthere are now 13 cities in mainland Chinawith e-commerce zones, includingChongqing, Hefei, Zhengzhou, Chengdu,Dalian, Ningbo, Qingdao, Shenzhen,Shanghai, Suzhou Hangzhou, Guangzhouand Tianjin.

The cross-border e-commerce channelcontinued to grow by leaps and bounds overthe following year until its success wasthreatening to erode the domestic retailmarket for luxury goods. In April 2016, theChinese government took action: in anattempt to regulate the cross-border market,the state introduced a set of tighter taxregulations and raised parcel and customsfees for both retailers and consumers.

However, Chinese consumers areundeterred by these tax increases and thecross-border e-commerce retail channel iscontinuing to grow apace.

T-MALL CLASSIC VS T-MALL GLOBALE-commerce group Alibaba, whose Taobaoand T-Mall marketplaces account for some70% of all online purchases in China, is thebiggest online retailer in Asia. The Alibabagroup is enormously influential in Chinaand its T-Mall site has been instrumental in

Taobao and T-Mallowner Alibabaaccounts for 70% of allonline purchases inChina

089 SPC1116_china cross borderJWAK.qxp_spc feature template 28/10/2016 12:22 Page 90

Germany buy these products in bulk totake them back home. In DM stores inBerlin or Munich, Chinese customers oftenbuy up an entire shelf full of Das GesundePlus nutritional supplements or Balea’shyaluronic acid face creams.

Very often, these products end up onvarious Chinese e-commerce marketplaces, sold by intermediary retailers orprivate individuals. According to marketresearch company Azoya, Balea is one ofthe most top selling beauty brands in thecross-border business. And in September2015, German financial magazineWirtschaftswoche made headlines bypublishing a photo, which showed whatappeared to be an entire DM outlet,complete with company logo and slogan,built in a shopping centre in the NorthernChinese city of Shenyang.

DM is viewing this development withconcern. Christoph Werner, head of DM’smarketing division, said in a recentinterview with Lebensmittelzeitung, that DMwas looking at different strategies toprevent Asian intermediary retailers frombuying up and selling such large amountsof DM own label products and retailbrands through the grey market in China.

And there is another seriousconsideration for Western brands whoseproducts are sold through unauthorisedretailers. Mei Graefe says: “There is a strongrisk of parallel brand communication.Private sellers on Chinese market placesoften use incorrect terminology whendescribing the product or brand they areselling; there might be wrong informationabout the brand, about what the productdoes or the ingredients it includes. InChina, consumer goods or productproperties are often described withwords like ‘magical’ or ‘divine’ – andthese terms are, of course, strictlyforbidden in brand marketing. Thisunprofessional brandcommunication can have a

through T-Mall, with a particular focus onthe categories British breakfast, drinks,organic foods and baby products.

German retail group Metro also openeda T-Mall flagship store last September. TheGerman retailer already successfullyoperates 80 Metro Cash + Carrywholesales store in China. Metro’s T-Mallstore is currently offering some 100 foodand personal care products, including dairyproducts, coffee, chocolate and tinned foodfrom Metro’s C+C (Cash & Carry) brandas well as own label C&T from Metro’sReal supermarket chain.

However, Metro and Alibaba are alreadyplanning ahead. Metro has announced thatthe strategic cooperation with Alibaba willextend to helping other European retailerssell products through T-Mall. In early 2016,Alibaba opened its first German office inMunich, followed in June 2016 by an officein Amsterdam to serve the Benelux area.

GERMAN GROWTHInterest among German retailers is growingstrongly and not just because German foodsand cosmetics are popular in China.

In July 2016, German retail tradepublication Lebensmittelzeitung reported thatGerman drugstore chain DM had begantalking with Alibaba about a possible DMstore on T-Mall. With some 1,800 outlets inGermany and an additional 1,480 stores ineleven further European countries, DM isthe market leader in Germany’s competitivedrugstore retail channel.

DM’s own label products have a veryhigh reputation among its German andEuropean customers, and they are popularwith Chinese consumers, too.

The number of tourists from mainlandChina to Germany has increased rapidlyover the last few years. According to theGerman Federal Ministry of EconomicAffairs and Energy (BMWI), more than 2.5million Chinese tourists (from mainlandChina and Hong Kong) visited Germany in2015, an increase of 24.8% compared with2014. Chinese tourists are also the largestvisitor group in the domestic tax freebusiness, accounting for 35% of the entiretax free retail turnover in Germany lastyear, says BMWI. And despite the fact thatthe ongoing terrorist attacks are currentlycausing a dip in the number of Asiantourists visiting Western Europe, industryexperts do not expect this to have a lastingeffect on tourist numbers.

DM’s personal care brand Balea andsupplements brand Das Gesunde Plus are inhigh demand among Chinese visitors, as arethe retail brand milk powder and infantformula sold by DM and competitor chainRossmann. Many Chinese tourists in

chinaretail

negative influence on the brand’s imageand even damage its reputation.”

US beauty company Estée Lauder andFrench C&T giant L’Oréal are alreadypresent on T-Mall with individual shops fortheir luxury brands, as is German C&Tmanufacturer Beiersdorf, which is runningan official Nivea T-Mall brand shop.

And Lebensmittelzeitung just reported thatDM’s competitor Rossmann is alreadytrying out T-Mall. According to the article,Rossman has just opened a test store onT-Mall shop for some of its own labelproducts, including personal care brandIsana. The Rossmann shop will officiallylaunch in early November to coincide withT-Mall’s Singles’ Day shopping event. Andpresumably, DM will not be far behindwith its own store on T-Mall.

Although the Chinese economy is stilllagging, Alibaba’s sales have not beenaffected by the slowdown: on the contrary,in the second quarter of 2016, groupturnover rose turnover 59% toRMB32.15bn ($4.84bn), driven by cloudcomputing services and online retail.E-commerce retail turnover alone grew49% to RMB23.38bn ($3.52bn) and threequarters of this turnover was realisedthrough mobile revenue.

And there is still a vast potential inChina’s rural areas where there are fewphysical retail stores.

According to the Chinese Ministry ofCommerce, there were some 186 millioninternet users living outside of the largecities as of summer 2015, 60% of whichhad never made an online transaction.

The big e-commerce companies havealready started to improve their facilitiesin the rural areas. Alibaba, for example,is operating a ‘Rural Taobao’ onlineplatform to encourage two-way tradebetween urban and rural China,

making agricultural productsavailable to urban customers whilerural consumers get easier access toconsumer goods. In addition, thecompany runs Rural Taobao servicestations in some 14,000 villages tohelp purchasing and deliveryservices in rural China.

At the T-Mall Beauty Awardsceremony in February 2016, Alibabaannounced that 29 Western brandsand 37 Korean and Japanese brandswere running storefronts on T-Mall,with a further 20 beauty companiesplanning to launch their ownpresence on T-Mall in 2016.

And the continuing growth ofAlibaba and T-Mall also means theongoing prosperity of the cross-border e-commerce market.

November 2016 SPC 93

Western companies selling own brandgoods using the China cross-bordere-commerce model include the UK’sSainsbury’s and German store DM

089 SPC1116_china cross borderJWAK.qxp_spc feature template 28/10/2016 12:23 Page 93