China: rising costs push products online | beyondbrics | News and views on emerging markets from the Financial Times –

China: rising costs push products online

March 22, 2012 11:01 am by beyondbrics

By Kathrin Hille and Patti Waldmeir

It is no secret that it is no longer that cheap to make things in China. But now, it is becoming expensive to sell there, too.

Neiman Marcus, the US multi-brand luxury retailer, plans to enter China via e-commerce rather than traditional bricks-and-mortar. And it is not the only one. A report due to be published on Friday shows that the spiraling cost of doing business in the country is driving other foreign companies with new products away from traditional retailers and into the arms of e-commerce firms.

The problem for retailers looking to get into China may be two-fold. Listing costs are high – but brand recognition may not travel online. The Neiman Marcus news was greeted with scepticism by local retail analysts. Shaun Rein of China Market Research in Shanghai said: “nobody knows who Neiman Marcus is in China.”

Rumours have been swirling for years about Neiman trying to get retail space on the Shanghai Bund for a large new store. Most analysts see it as essential for foreign brands – especially luxury brands – to have bricks and mortar shops to bolster their credibility in a country where seeing is still believing.

“Customers really need to be able to see and touch the product and feel the brand heritage in a physical environment,” said Rein. “Luxury sales are booming online but people still tend to equate e-commerce with cheap,” he said, adding “I don’t think it’s possible for a foreign brand to come in and sell at high prices just online”.

But the costs of physical retail space may force a rethink. According to the report by Data Driven Marketing Asia, the marketing consultancy, the cost of listing one new product “with an established supermarket chain can be as high as $27,000”.

This adds to steep rises in labour, rental, logistics and marketing costs. Distribution costs increased 200 per cent over the past five years. Warehousing cost was up 23 per cent last year, while the cost for advertising on CCTV, the national broadcaster, has risen almost 50 per cent since 2007. And retail rents in China’s largest cities are forecast to increase by an average 12 per cent this year, according CB Richard Ellis. The cost of employing more experienced white-collar staff in the more affluent parts of China has risen almost 60 per cent over the past three years.

Sam Mulligan, China Director at DDMA, said: “Over the past three years, these costs have started to become prohibitive. When we work with customers on a new market entry, once we get to formulating a retail strategy, the metrics fall out of the window.”

As a result, companies are shying away from traditional retailers. Yihaodian, the online grocer in which Walmart recently raised its stake to 51 per cent, is trying to grab that business by offering a one-stop-shop service for new market entrants. It helps them register their brands, deals with import formalities, transport, logistics and advertising.

Yihaodian has already seen a steep increase over the past six months in requests from foreign companies that want to bring new products into the Chinese market. The online retailer saw the number of products available in its store jump to 180,000 in the fourth quarter of 2011 from just 50,000 a year earlier.

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