Developed by American scholars, Richard Thaler and Cass Sunstein, the concept of nudge marketing has been successfully applied in both public and private sectors in the Anglo-Saxon society. The key elements of the nudge theory include the choice   (reducing the mental effort to make a decision). In a nutshell, both governments and enterprises apply nudge in China to entice people to achieve expected behavior.

In the business context, nudge tactics are all around us

Nudge theory was popularized in 2008, but we have been influenced by nudging, even in a consumption context, our whole lives. Simply observing the online and offline ecosystems exposes the abundance of nudge marketing tactics in China. Anywhere a business creates the environment in which a decision is made will inevitably include nudges.

Individuals retain the power to choose among alternatives, but the structure of their choice favors one particular outcome. Nudging affects behavior while also respecting freedom of choice of the consumer. Whether it is placing sweets or other impulse purchases near the cash register, or listing the more profitable product in front of the less profitable one online, consumer choices are influenced by the environment around them.

Photo Source: Daxue consulting, Mechanism of nudge marketing

However, Nudge theory has low academic awareness in China

Even though “nudge” is a popular concept in the western world, it has been rarely cited for academic purposes in China. The official Chinese translation of nudge is “助推理论 (nudge theory)”. Other synonyms such as “助力发展 (development aid)”, “助推器 (industrial propellers)” and “助推 (nudge)” are used in ways irrelevant to the concept proposed by Thaler. According to CNKI, a key national research and information publishing institution in China, the attention degree of nudge theory has remained very low in the Chinese academic world. Even so, mare the translation of western academic papers and analysis of the nudge application in western society. These facts reveal that nudge theory, and nudge marketing in China has yet to become popular.

Photo Source: CNKI, Subject distribution of nudge theory in Chinese literature

Nonetheless, it is interesting to notice some enterprises, including online car-hailing platforms, have utilized nudge marketing in China. On the other hand, Chinese scholars have been discussing applying nudge theory to policy making in China. If so, in which context it is most suitable?

Nudge in the business sector: Software-as-a-service industry and E-commerce platforms have applied nudge marketing in China

With the increasing household incomes, improving legal measures regarding intellectual property and development of the 4G network, the software-as-a-service industry in China is booming. While lots of market players strive for market share, how can they attract consumers in China and stimulate the purchase behavior, by applying nudge in their businesses?

Case Study of QQ Music: auto-subscription and excessive exposure of promoted products are nudges

QQ Music (similar to Spotify), one of the leading online music service providers in China, has applied nudge in promoting their core product. Green Diamond (绿钻) is the premium membership that enables music consumers to unlock premium music services such as music quality, customized themes and profile pictures, and more access to paid digital music. In addition to the premium membership, regular membership is the second promotive product, and it merely consists of the basic service, limited access to paid digital music.

Application of heuristics: information availability

Information availability is related to the observation that as people see or hear something frequently, they tend to believe its perceived credibility. QQ Music has applied information availability successfully. On the home page of the member center, QQ Music mostly promotes the premium membership by placing multiple stimuli regarding Green Diamond. The images below display pages of the QQ Music member center.

Source: QQ Music screenshot, navigating a Chinese app means immersing ones-self in a series of ‘nudges’

Four activities which are circled in blue are related to obtaining premium membership. For users that are not familiar with the platform, these stimuli are likely to entice them to get premium membership directly as they might perceive that Green Diamond is the only membership they can obtain from this online music platform. However, they might not know QQ Music has also provided regular membership as this platform does not place any stimulus to promote it frequently.

Photo source: QQ Music, member center page

Inertia and auto-subscription

Inertia is related to the tendency of people to stay committed to current situations. It is caused by the fact that people are unlikely to be proactive to change things when there is no stimulus to do so. Likewise, QQ Music has applied inertia as the stimulus. Some subscription agreements take effect after users enable the auto-subscription condition. For example, users can pay 12 RMB/month by subscribing to the successively 1-month plan. Otherwise, they cannot have 6 RMB deductions per month as a benefit. Once users enable this condition, they need to cancel the plan manually if they want to terminate the plan.

Moreover, QQ Music does not send any notification to remind users of the end of the monthly subscription. Affected by inertia, users are too passive cancel the plan when they have not been prompted to do so, and thus their subscriptions would continue automatically. QQ Music tactic regarding auto-subscription leverages the other side of nudge marketing; consumers are less likely to react to a stimulus that is not present. 

Case Study of Tmall: Reviews, discounts and particular display of information are nudges

Likewise, Tmall has driven online purchase behavior with nudge marketing in China.

Photo Source: Tmall, Nudge marketing on Tmall platform

Social proof and reviews

High amount of reviews are effective in driving purchase behavior as they give more context and personal experience to products. Reviews are technique of social proof, which states that when uncertain, individuals will look towards the behaviors of others to help them make decisions.

Anchoring and discounts

Anchoring, a psychological pricing technique, is using existing information as a baseline for new judgements. The higher price “anchors” the individual to make the discounted price seem smaller.

Autonomy in decision-making

Being able to choose from various options, such as to check out, add to the bag, or paying in installments, it gives consumers the freedom of remaining autonomous in their decision.

Pushing the sales of a particular product

Placing the most attractive product next to similar products that aren’t perceived to be as good of a deal makes that option look even better. On Xiaomi’s page, the most attractive option would be the middle with its attractive specs, which justifies its higher price.

Photo Source: Tmall, Nudge marketing on Tmall platform

Credibility and labels

Labelling as implicit nudges boosts credibility of the product to make it easier for consumers to find what they want.

Photo Source: Tmall, Nudge marketing on Tmall platform

Similar nudges are widely used in video platforms, paying-for-knowledge apps, gaming platforms

In terms of other digital content and service providers, auto-subscription is a common nudge tactic in this market. It is noticeable that the applied nudge tactic in China’s business can be found in the western context. With the growth of globalization, more and more business tactics born in the west have been adopted in China readily.

Applications of nudge from China’s government

Nudge in the policy establishment is more insightful. More and more Chinese scholars have delved into this field and discussed its feasibility in the Chinese context.

Nudge in China’s public policies: it is applicable in the pension system while focusing on different attribute   

One of the most prominent applications of nudge is in the pension system. In western countries, in order to tackle the low propensity of saving, a nudge has been applied to  trigger their saving habits for retirement. Auto-enrolment and display of selected information are the main characteristics of nudge in the western context.

By 2020, China had established the pension system for over two decades. Considering the relatively high propensity of saving, it has not been a significant issue in China’s pension system. Instead, the main issue has been the low participation rate. Because of the unequal economic development, the penetration rate of the pension system in rural areas is low. Among these nonparticipants, some of them have limited education and do not know the benefits of investment in pensions. To tackle these issues, some Chinese scholars have suggested that the government should utilize the heuristic, framing and availability, to attract more Chinese people to participate in this system. By amplifying the benefits of pensions, offering limited investment plans and using plain descriptions, people’s willingness to participate are likely to increase.

Nudge applied to prevent the spread of Covid-19

On top of strict government measures to control the spread of COVID-19, China also used some more subtle tactics to encourage citizens to follow the rules. Simply putting a hand sanitiser dispenser or a tissue nearby will increase the chances that people use them, before entering a building, even when people are carry their own tissues and sanitiser.

Source: daxue consulting, 50 measures China used to prevent the spread of COVID-19 report, tissues placed at the doors of ATMs

Standing spots also served as a subtle reminder to keep a two meter from others. Though this measure could have been implemented without labeled standing spots, the spots remove the mental effort for people to have to figure out how far to stand from each other.

Source: daxue consulting, 50 measures China used to prevent the spread of COVID-19 report, people are nudged to stand on standing spots

Nudge theory in China has yet to be widely discussed

Regarding the nudge in China’s business sector, enterprises have applied nudge marketing in China readily. Nudge amplifies the universal trait of human behavior. Since nudge works well in the western society, it can also bring similar benefits in Chinese environment.

In regard to the application of nudge in China’s government sector, scholars are questioning the effectiveness of nudge in changing people’s behavior. Influenced by Confucianism, China has been rooted in a traditionally paternalistic system that features control and power. By 2020, the legislation in China has been to affect people’s behavior directly, rather than enticing them to behave in a certain way.

In the future, mitigating the differences might facilitate nudge’s occurrence in China’s policies

Nudge for good is meant as a plea and not necessarily an expectation. Richard Thaler, Nobel Prize winner

“Although there are cultural differences between Asia and the US or Western Europe, fundamental traits of human behavior are relatively stable around the world that would allow China to use the tools to design policies.” Thaler said. He also mentioned that applying nudge in government policy would help China’s government to obtain better outcomes. In line with some Chinese scholars’ opinions, nudge is a valuable tool that cannot be neglected. However, this isn’t to say we should ignore of socio-cultural and economic differences. Hence it is worth doing more research on nudge marketing in the context of China.  

Authors: Amelia Han & Della Yuzhou Wang

Many COVID-19 prevention measures were nudges, spot them in our report

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History of Marie Dalgar

In December 2006, Marie Dalgar ((玛丽黛佳) created its first grafted mascara, which completely overturned traditional view on mascara. It achieved an amazing sales performance: Marie Dalgar claimed that they sell one mascara every 15 seconds. In May 2008, the Chinese cosmetics brand formally established Shanghai Feiyang Cosmetics Co., Ltd., the marketing center. The brand has followed the rapid development path based in Shanghai and expanding to the whole country. In the same year, it launched its official website, providing consumers with a comprehensive information platform. 

In January 2010, Marie Dalgar opened its’ international factory in Shanghai Fengxian Industrial Park, covering an area of ​​20 acres, which is the largest mascara production base in Asia. Besides, it won the “China Cosmetics Annual Best Single Product Award” at the 2010 China Cosmetics Industry Conference.

In March 2011, Marie Dalgar won the 2010 “Best Makeup Brand” and “Best Single Product” awards in China’s cosmetics industry. In the same year, the brand joined hands with the well-known fashion women’s website Kimiss, and organized makeup contest with international brands such as Armani, Bobbi Brown, and MAC.

Currently, Marie Dalgar is one of the most promising cosmetics brands in the Chinese market.

Marie Dalgar’s brand concept

As the brand claims, besides the perfect effects, makeup is also an artistic master piece. It enhances confidence and it is a factor for different life expression. Marie Dalgar represents the spirit of modern woman’s personality and the attitude of women in this era.

Focusing on young consumers

From the user portrait, Marie Dalgar’s target group is 18-24 year old college students, and 25-35 young white-collar workers in China who have just started work.  Brand has a strong focus on young consumers and builds products that are easy for them to use on different occasions. The youthful brand naturally attracts young consumers through its product innovation and engaging cross-over marketing in the ‘new retail’ environment. Having its own research and development centers and manufacturing bases allows Marie Dalgar to innovate and meet changing demands quickly.

Data Source: NetVoices, 2018 Top Cosmetic Brands in China Report, Marie Dalgar’s consumers by age

Marie Dalgar’s marketing strategies

The domestic brand embraces the “New Retail” concept, taking a unique approach to increase the consumer experience and build brand awareness. On top of this, it has been a pioneer in collaborations.

Cooperating with third parties for campaigns

Co-branding is a key marketing strategy. These collaborations are through co-branding, such as collaboration with KFC and Heineken, and through collaboration with social media platforms like Douyin.

Co-branding rather than embassadors

Every year, Marie Dalgar holds Crossover Art Project. The brand invites artists to express themselves by using its make-up products. For example, fashion photographer Paco Peregrin chose the theme ‘Facing’ in 2015. The following year, photographer Damien Dufresne opted for ‘Through your eyes’ . For its products packaging, the brand also calls on artists, like the young Chinese artist JINLE, invited to celebrate the year of the pig. Out of a limited edition run of 3,000 units, Marie Dalgar sold 1,000 units within 10 minutes. The campaign reached 62 million consumers online, with a total of 50 million engagements.

Source: Marie Dalgar, Wechat, Year of the pig campaign 

Cooperation with KFC

The young makeup brand decided to take advantage of the expanding retail ecosystem by cooperating with third parties for special campaigns. Marie Dalgar outsourced sales efforts and found other ways to use partners’ e-commerce platforms in China. In 2017 Marie Dalgar cooperated with KFC on campaigns and advertising, pulling in traffic from KFC’s huge consumer base.

Source: Chinessima, Marie Dalgar’s cooperation campaign with KFC

Marie Dalgar and KFC created the “Pink is Cool” theme cross-border lipstick gift box. “Pink” and the shared target audience became the basis of this cross-industry cooperation. Marie Dalgar used this collaborative lipstick to create a cool makeup look, and attracted the attention of makeup consumers through the sharing on the Weitao platform. KFC used stores and offline resources to create a cross-border offline theme store to promote this cooperation. The campaign helped the brand win 1.4 million visits on Tmall’s official store and make over RMB 12 million in sales. Most of visits were from selling limited edition gift sets, which included both KFC coupons and lipsticks.

Cooperation with TikTok

In April 2018, Marie Dalgar and TikTok jointly launched challenge event. Being the first collaboration of its kind in the beauty industry, the video challenge had a maximum number of participants of 75,000. The event and related advertisements reached approximately 288 million people.

Cooperation with CCTV

Marie Dalgar partnered with the CCTV documentary series “National Treasure” for a limited-edition lipstick. It helped to build a well-earned reputation among consumers for championing Chinese heritage. Collaborations don’t even need to be in the realm of high culture as long as it will reach the masses in popular spaces.

Cooperation with Heineken

Marie Dalgar teamed up with brewing giant Heineken and Tmall in 2019 to release a “forgiveness” gift box. The gift box was released on Tmall’s “Fans Day” to coincide with the European Champions’ League soccer final, which Heineken sponsors. The hook: soccer lovers could give their partners a gift box to beg “forgiveness” and apologize for ignoring them while watching the final. “Wearing a green cap” in Chinese means “to cheat on your loved one”–in this case, with soccer. Two boxes were offered in “his” and “hers” editions. One box featured green lipsticks and green tea flavors, while the other contained limited-edition Champions’ League bottles of Heineken.

Marie Dalgar uses AR to attract customers

Marie Dalgar and Ali jointly launched the “unmanned color vending machine” and the beauty unmanned store “TO GO “ combined with the platform’s big data to reach more potential consumers.  Marie Dalgar’s “TO GO” store features an augmented reality (AR) mirror to link offline consumers’ experience with their online purchase. This application of AI in beauty  boosted both offline and online sales.

Source: Chinessima, Marie Dalgar’s “TO GO” store in Shanghai

WeChat and Tmall are key platforms for brand’s retail and marketing

Marie Dalgar established the “Playing Color Academy” on WeChat. They use this mini-program to make more customers to reach offline channels. On top of this, Marie Dalgar uses WeChat database for analysis of user portraits and then send it to product development department.

Marie Dalgar actively uses Tmall and gained popularity among its users. In 2018 its rating there was even higher than such cosmetic giants as Armani, Estee Lauder and YSL. Besides, brand’s live streaming on Double Eleven was equally astonishing, with a total of nearly 100 live broadcasts for 300 hours and 1.3 million views. 

Data Source: NetVoices, 2018 Top Cosmetic Brands in China Report, Make-up brands rating among e-commerce users in China

Marie Dalgar is one of the leading cosmetic brands in China

Marie Dalgar is one of the fast-growing brands in the make-up market in China. Such foreign cosmetics brands in China as YSL, Dior and MAC are on the top of ranking.

Data Source: Kantar, Top-5 fast-growing make-up brands in China

Innovative products push Marie Dalgar’s sales in China

In its early stages, Marie Dalgar attracted attention thanks to its “grafting” mascara, especially adapted to the relatively short and sparse eyelashes of Asian people. “It lengthens eyelashes by 300% and increases their density by 700%”, according to Jumeili.

Marie Dalgar’s Innovative products:

• The world’s first grafted mascara
• The first micro-vibration electric mascara in China
• The first domestically baked eyeshadow and blush
• The first mascara with retractable brush in China
• The first vibrating mascara in China
• The first domestic mascara with adjustable thickness and variable extension brush

Pioneering projects:

• The first domestic mascara with 360° rotating brush
• The first custom-made DIY eye shadow in China

Marie Dalgar was the number one domestic makeup brand during the 2018 Double Eleven festival

On Double 11 shopping festival in 2018, Marie Dalgar’s online flagship store was on the Tmall’s Top Beauty brands list. Its mascara also was in TOP 3 hot single products. The daily turnover of offline shopping mall channel stores increased by 414% year-on-year during 11.11 festival. Marie Dalgar participated in Tmall Double Eleven many times, and won the “New Retail Outstanding Contribution Award” from Tmall. The relationship between Marie Dalgar and Tmall are complementary.

Marie Dalgar expands to the Asian market

All of these steps helped to make Marie Dalgar one of the best-selling local brands and advanced the company onto the global stage. It became the first Chinese brand to sell its products in Sephora stores outside of China.

Expansion to Singapore

At the end of 2018, the brand entered Singapore via Sephora. To Mary Dalgar’s CEO, Chen Haijun (陈海军), Southeast Asia is only a preamble before Europe and the United States. “Worldwide markets will represent 20% of the brand business within 5 years”, he said.

Because of it’s strong innovation power, and collaborations to expand it’s consumer base, Marie Dalgar is one Chinese brand that is worth learning from.

Learn more about China’s cosmetics market in our report

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Westin has over 230 hotels and resorts in 36 countries and districts in the world. It focuses on the market of high-end consumers. All Westin hotels are recognized by local authorities as five-star hotels. Westin prefers to place its hotels (resorts not included) in city centers, providing its customers with the most convenient location if they want to go sightseeing or shopping. Westin’s 160 hotels and resorts are all known for their modern design, exceptional customer service and relaxing atmosphere.

Westin Hotels & resorts provides customers with relaxing accommodations for them to come back to after spending a day enjoying the surrounding locations. Each Westin Hotel is located in areas that offer unique experiences for its customers. Westin has a history of focusing on wellness, and it continues its commitment to its travelers’ well-being and healthy lifestyle.

What is unique about Westin in China

Westin now operates 25 hotels in China Mainland: four in Guangdong, four in Hainan, three in Zhejiang, two in Beijing, two in Fujian, two in Shandong and one in each of Anhui, Jiangsu, Jilin, Hubei, Shanxi, Tianjin, Wuhan, Shanghai. The above hotels are located in Tier 1 or Tier 2 cities. Currently, China is home to the second largest number of Westin hotels worldwide, second only to the United States. In China’s luxury hotel market, Westin ranked eighth in terms of the number of hotels among all international 5-star hotel brands in 2008, while Sheraton had the most number of hotels (70).

Increasing demand in China’s luxury hotel market brings opportunity for Westin China

Since entering China in 1991, Westin has targeted wealthy Chinese customers. In the last 20 years, China’s promising GDP growth and increasingly affluent consumers have led to high demand for luxury goods and services. The growth of high-yielding consumers contributes to the blooming of the domestic high-end travel and China’s luxury hotel market.

According to GlobalData, China was the largest luxury hotel market worldwide in 2018, with year-over-year (YOY) growth of 18.3%. In 2019, China’s luxury hotel market still had a YOY growth rate of 10.2%. It is predicted that China will continue this momentum in the next few years with a growing number of high-net-worth citizens.   

How Westin adds Chinese elements

Westin also pays close attention to the local culture of the city and the country where its hotels lie and holds cultural events to accommodate these differences.

In Wuhan, Westin held a luxury traditional family reunion dinner to celebrate the Spring Festival. The event offered Westin customers dishes from different geographical regions of China. Various types of tea were also available.

In Hefei, the Westin held a “Mooncake Show” in late August. The show was held in preparation for the Mid-Autumn festival where mooncakes are traditionally eaten. The Westin offered each of its customers four different mooncakes at the show to give them a little taste of China.

In Beijing, the Westin offered its customers a variety of crab dishes. Chinese people love to eat crab in Autumn, but crab is not farmed in Northern China. The Westin gives Northern consumers a chance to enjoy a delicacy that they normally cannot enjoy.

Westin in China：leveraging the power of new marketing. Co-branding marketing

Source: Westin China’s Weibo, Co-branding marketing of Westin China × KEEP

Partnering with “KEEP”, an easy-to-use  Chinese fitness app, Westin is able to improve customer experiences and strengthen its brand image. Westin and KEEP cooperate to satisfy business travelers’ sports needs by providing a full range of fitness activities. 

The collaboration covers in-room courses, running-related and fitness center courses. First, for in-room courses, KEEP and Westin jointly open exclusive TV channels provided in Westin Hotel. Based on the space environment of hotel rooms, KEEP customizes a set of sports courses suitable for hotel guests to exercise in the room. Second, Westin China adjusted its “RunWestin” program, generating its characteristic health running map route in the KEEP App. Hotel guests and city runners can easily use the Westin health running map in the App, and the App can record and collect related personal performance data. Third, for fitness center courses, KEEP also provides Westin with a complete solution, including training, yoga and other courses. These are to better serve the personalized fitness needs of travelers. Hotel guests can easily scan the QR code in the hotel gym to get recommended courses and enjoy working out. 

Why the Westin x KEEP co-branded marketing works

Why is this innovative collaboration so successful? Two similarities between two partner brands can explain this.

First, both brands advocate healthy lifestyles and emphasize keeping fit. Westin hotel has focused on fitness since it was created and is committed to bringing customers health and wellness in addition to a comfortable accommodation experience. Westin promises to enable guests to maintain their workout routine during they stay in the hotels. Such a promise aligns with KEEP’s brand image that has always been centered on creating a “free sports ground”. Based on the same idea, two brands can join forces to help travelers stay fit and have a healthy lifestyle.

Second, two brands share a similar customer base. Westin and KEEP team up to explore the material and emotional needs of high-end traveler groups. Through this cooperation, both parties leverage rich experience in different fields to jointly develop deeper customer insights, and achieve a full range of sports needs for the target customers.

Innovative marketing method achieves better results

Different from simple co-branding marketing, in which two brands only jointly hold activities or produce products, the cooperation between Westin and KEEP has more significant meaning and better results. It embodies a common vision of two parties, and tightly integrates brand values, market experience and customer insights.

Partnering with KEEP, Westin creates some brand new elements to its traditional hotel identity. Hotel’s high-tech hardware facilities and services activated by the Internet help Westin shape a more active and rich brand image. Westin will attract more loyal guests by offering them one-stop solutions for sports needs in traveling. 

New marketing strategy: social media marketing

Nowadays, social media has built an instant and tight connection between brands and customers, especially for the hospitality business. More and more Chinese are used to checking peer reviews and comments on popular Chinese social media like Weibo, Xiaohongshu and Tiktok before purchasing products or services. In these cases, social media plays a vital role in deciding travelers’ purchasing choices. Several Westin hotels, which are instagrammable luxury stays, earn their reputation on Chinese social media.

Source: Weibo, Red –KOLs’ posts about Westin China

On Chinese social media platforms, it is easy to find some KOLs (Online Key Opinion Leaders) posts about people’s stay experiences at Westin hotels. Their posts usually show the luxurious decoration, comfortable environment, considerate service and stunning views of the hotels. With more and more KOLs sharing wonderful stay experiences, Westin raises its awareness among Chinese consumers. Currently, Westin hotels in some cities, like the Westin Chongqing Liberation Square, have become “internet-famous” hotels, attracting tons of travelers to stay or just take pictures.

Source: Weibo, Red –Consumers’ posts about Westin China

Many people, especially millennials, are keen to share their high-quality lifestyle experiences on social media. It is trendy for them to post fantastic photos of the hotel and share their feelings when staying in the hotel. These posts can have millions of views, and thus cause a “network effect,” which helps advertisement for the Westin.

Recovering from coronavirus: upscale hotels should take “smart” strategies

The tourism industry and the hotel market have suffered huge losses from the coronavirus outbreak. In order to reduce loss and raise occupancy rates, many hotels made dramatic price-drops during the period of the COVID-19 pandemic. Until now, a lot of hotels have still dropped the price to entice consumers. However, it is not a wise strategy, since starting a race by dropping the prices will hurt profits across the entire industry. All hotels will lose out and it would be hard for the hotel market to recover from the crisis. In addition, price promotion strategies may have a negative impact on brand images of upscale hotels like Westin.

To recover from the COVID-19 pandemic in a relatively short time, hotels could take action more smartly. For example, they should offer more “value-adds” services to attract travelers, like Westin’s co-branding marketing. Also, leveraging popular Chinese social media to have users advertise for brands seems like a wise marketing strategy.

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The founder of the Chinese e-commerce site Biyao, Bi Sheng was first to propose the C2M model in China. The C2M model is when consumers connect directly to manufacturers to purchase a product. In the C2M model, consumers place orders directly through the platform, and the factory receives consumers’ personalized orders.  

The C2M model short-circuits all intermediate links, such as inventory, logistics, general sales, and distribution. It cuts off all unnecessary costs, allowing users to buy ultra-high-quality products at ultra-low prices.

A major point of the C2M model is that it produces on demand. The user places an order first, and then the factory produces it. There is no inventory-sales ratio, which eliminates chronic inventory problems. The defining feature of a C2M model is highly competitive pricing brought about by connecting factories with consumer insights, such as preferences, location, and behaviors.

Victor Tseng, vice-president of corporate development at Pinduoduo said that “C2M is essentially evolving traditional manufacturing from an R&D and marketing-driven process into a consumer-driven process”.

Biyao – first C2M platform in China

A C2M model Chinese e-commerce platform, Biyao, started in July 2015. This is the first application of the C2M model in China’s e-commerce. This platform includes a number of companies in the automobile, home furnishing, clothing, eyewear and related industries.

After the user places an order on the platform, the order will be directly sent back to the factory. Then, the factory produces and delivers the order. E-commerce platforms can use big data to get customer group portraits and analyze consumption characteristics. It helps manufacturers to select products, transform processes and reduce inventory pressure.

Source: iResearch, Biyao C2M platform

Advantages of C2M model

First of all, C2M model realizes the direct connection between the user and the factory, removes all intermediate links, which increases the price. It also connects designers and manufacturers, and provides users with “big brand quality, factory price” products.

For consumers, the C2M model emphasizes user-centricity and organizes production according to users’ individual needs.

For manufacturing companies, the C2M model improves productivity and promotes the transformation of enterprise production lines, supply chains and internal management systems.

C2M in China as a driver of e-commerce

C2M in China is a new driver in the e-commerce landscape. In 2019, $420 million worth of C2M-related bookings and sales were made in a single day during China’s Double Twelve shopping day. According to data from iResearch, this figure reached $2.5 billion in 2018. Forecast shows it will reach $6 billion by 2022, which includes a compound annual growth rate of 24.4 percent. Though still a small percentage of China’s total e-commerce market, it’s a model that crucially enables brands to better address issues of inventory and supply chain efficiency. C2M is another indicator that brands which fail to listen to consumers on product preferences will miss a trick.

Data Source: iResearch, C2M in China market size

Big data and AI in China push the development of C2M in China

Companies like Alibaba and JD.com have both been utilizing C2M in China. JD.com, for example, has been testing the C2M model since 2017. The company launched its fashion technology research institute in 2018 to explore the application of AI, VR/AR in China, as well as big data.

Through the application of AI-powered data analytics, online retailers, consumer brands, and AI companies are jointly making mass-customization possible in China. The key for C2M is to connect consumers and manufacturers through data and computational infrastructure.

Young generation in China – the key users of C2M e-commerce platforms

Chinese millennials have diversified needs, while user channels have significant segmentation. They include a host of online marketplace platforms such as Taobao, Pinduoduo, and Douyin.

Customization options for consumers were previously costly and limited to luxury product categories. In the current e-commerce industry, the post-80s and post-90s generation is the key consumer group. The younger consumer groups have a stronger demand for product customization. C2M caters to the needs of personalized and differentiated products that young consumers pursued.

Data Source: iResearch, Age structure of Chinese online shopping app users 2019

Key e-commerce players in the Chinese market use C2M marketing

Pinduoduo is gaining popularity among Chinese consumers

Pinduoduo (拼多多) is an e-commerce platform that allows users to participate in group-buying deals. Using the app is simple, the consumer can buy a full price item or get a discount if they invite other people to participate in the purchase. After paying, there are many ways to invite friends, not only through WeChat, but also with QQ, QR code, image, or with a voice recording. In the end, they ship the discounted order when the required number of people purchase it.

It is especially popular in third and fourth-tier cities. More than 65% of users come from third-tier cities, while only 5.9% come from first-tier cities. Unlike other e-commerce apps such as JD.com or Taobao, it has decided to focus on small towns. This policy has made it possible to attract low-income families to the App. We can make a conclusion that people in the third and fourth-tier cities are more likely to use the C2M model.

Data Source: Statista, Pinduoduo user distribution in China as of October 2019, by city tier

In June 2018, less than three years after the launch, Pinduoduo’s monthly active users reached 195 million people. In 2020, 487 million shoppers use Pinduoduo for their online purchases every month. In addition, many international brands such as Huawei and Apple have launched their single-brand stores on the platform, further consolidating the company’s credibility.

Data Source: Statista, Number of monthly active users of Pinduoduo

Jiaweishi case

Shenzhen’s Jiaweishi is a manufacturer of brand-name consumer goods, including Philips and Whirlpool. In 2018, they established their own brand of robot vacuum cleaners. When they started selling online through Pinduoduo’s “New Brand Initiative” program, they got direct access to huge buyer traffic.

Following the success of the initial sales of the original robot vacuum, Jiaweishi is now able to greatly improve their product and further increase sales. Based on the data collected from Pinduoduo, the robot vacuum’s randomized cleaning route to a more orderly one. Besides, Jiaweishi redesigned product’s appearance to make it more appealing to consumers.
They also addressed consumer concerns with regards to the quality of an unknown brand’s product via live streaming videos. These live streams make the manufacturing process transparent to consumers, while simultaneously spreading Jiaweishi’s brand name.

The advantages of using Pinduoduo for manufacturers

E-commerce giant Pinduoduo has been able to tell manufacturers not only how to customize in great detail, but has also been able to advise on packaging redesigning and price point setting.

Pinduoduo saw the launch of 106 manufacturer-owned brands last year and is aiming to establish 1,000 more. Even automakers are engaging with C2M firms amid a prolonged slump in sales. Pinduoduo held a team purchase promotion with car dealers during the Double Eleven shopping festival in 2019. Some 3,100 cars from five major auto brands were sold in just nine hours. Carmakers were able to gain an insight into demand and better predict consumers’ intent to purchase. This could help them optimize manufacturing and save money at multiple stages, and these savings could trickle down to consumers.

JD.com enters C2M in China

JD.com rolled out its C2M unit Jingzao in 2018. The platform now offers products including custom shirts, luggage, towels, and bedding. Moreover, JD partnered with electronic brands such as Lenovo, Konka, HP, and Dell to develop tailored products under the C2M model.

In 2020 JD.com has signed a partnership with South Korean manufacturer LG Electronics to sell RMB 5 billion ($707 million) worth of products on the e-commerce platform. Under the partnership, the two companies will cooperate in a range of areas, including product development under the C2M model.  The two companies have already worked under the C2M model for small home appliances. In May 2018, they started to develop C2M air purifiers, beauty tools, hand-held vacuum cleaners, and clothing care steam “styler” systems based on JD.com data. 

Besides, in 2020, the Italian designer brand Sergio Rossi co-designed a new product based on JD’s big data analysis of customer preferences. The new product is a short boot (a style quite popular with JD customers) that features the brands’ recognizable Icona logo.

Alibaba launches C2M in China through Taobao

In March, Alibaba launched a new app on Taobao called Special Offers, which works with factories to create C2M products. Its goal over the next three years is to help 1000 industries build ‘super’ factories that can directly supply customers. By 2020, more than 500,000 factories and 1.2 million production-capable suppliers in China have signed up to the platform. Chinese apparel, sportswear, and fashion companies, such as Anta and Bosideng Group, have signed up for the app and opened authorized stores online. Bosideng already collects and shares information through enterprise resource planning that helps them penetrate consumer preferences and consumption habits.

Backed by Alibaba’s AI algorithms and cloud technologies, the C2M team was able to offer real-time analytics. It helps companies to respond to changing consumption trends and identify new growth points.

Data Source: Taobao, Taobao YoY sales growth on Women’s Day 2020

Odis case

Odis started producing car-cleaning products that consumers wanted and needed. These included portable sanitizing sprays containing at least 75% alcohol. In 2002, with the help of Alibaba, Odis was able to adjust its production lines in three days to create these items. The process would have taken Odis three months to complete on its own, said the factory. Based on analyses of consumer preferences, the factory also started making their sprays in plastic bottles instead of aluminum cans.

“Alibaba’s C2M team worked with us throughout the entire product-development process. We had a clear roadmap of exactly what consumers wanted and how many units they needed,” said Qu, Odis’s general manager.

To bring consumers closer to their products, Odis leveraged Alibaba’s digital ecosystem and organized a campaign on Tmall. It allowed consumers to pre-order the sanitizers in China before production kicked off. They sold more than 200,000 bottles of the spray within 24 hours. Alibaba also created a new section for car-sanitization solutions across its online marketplaces.

Thanks to the C2M team’s efforts, online sales accounted for more than 90% of Odis’ revenue during the pandemic. When the coronavirus spread overseas, Odis’ clients in other countries also started showing interest in the product. Since March 2020, the factory has sold close to 30 million more bottles overseas.

Prospects of C2M marketing in China

C2M model gains momentum during COVID-19 outbreak

First the US-China trade spats hit China’s huge manufacturing base with delays and uncertain revenue, which was then followed by the COVID-19 pandemic. Demand plummeted both domestically and overseas. The C2M model proved especially crucial during the COVID-19 outbreak in China. Factories across China had to halt production. Even when operations resumed, manufacturers have struggled to generate pre-pandemic levels of business.

When many of China’s brick-and-mortar factories found their production and sales channels disrupted during the Covid-19 crisis, digitization of operations became a new lifeline for survival. China’s e-commerce platforms are able to use their massive databanks of consumer behavior and algorithms to analyze and predict what China’s factories should make to respond to demand.

C2M will benefit in the long run

The move to C2M will benefit manufacturers in the long run. Firstly, it makes them more flexible in times of crises, by pivoting online and selling directly to users. Secondly, factories can also save an average of 20%-30% in production costs. The model has huge potential in China’s lower-tier cities. According to a study by Morgan Stanley, these consumers are in search of bargains but are also increasingly willing to pay more for things of higher quality.  Getting factories to embrace the C2M model, however, is not without its difficulties. Manufacturers need to be open to engaging with every step of production in order to succeed.

Author: Valeriia Mikhailova

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This article Prepare for the burst of C2M (consumer to manufacturer) in China: Pinduoduo, JD.com, Biyao is the first one to appear on Daxue Consulting - Market Research China.

A pop-up store is a short-term, temporary retail space that brands occupy. Regardless of whether the brands previously adopt a physical presence or not, it can be used for sales promotion purposes or for simply building connection with their existing and potential customers. Pop-up stores are usually designed or decorated creatively with the intention to provide a unique, engaging and memorable experience that can generate buzz in the short-term. It is apparent that pop-up stores are an effective marketing method, but what does it take to run a successful pop-up store in China?

Pop-up stores in China: An innovative new retail format to penetrate the market

Pop-up stores are often considered as a form of guerilla marketing that can help a brand to achieve strong short-term growth in sales, engagement or awareness.

Luxury brands open pop-up stores in China to connect with consumers

Brick-and-mortar stores play a very important and essential role for luxury retail brands as it is where brand story and consumer experience meet. While a long-term physical store is able to achieve so, a temporary pop-up store will be able to generate more excitement and a more unique experience for customers.

Chanel successfully launched a pop-up store in Shanghai named ‘Coco Game Centre’ two years ago. The Chanel arcade clearly went viral as people waited for over 2 hours outside only to get a peek inside. The store featured a make-up bar for customers to try on new Chanel beauty products, a series of arcade games for customers to win gifts such as lipsticks, lotions etc., and a few picture-worthy spots for customers to take pictures and upload on social media.

Chanel seeks to establish a closer connection with its customers through a pop-up store interaction. It is a fun and creative approach for the brand to create a unique, immersive and personal experience to the customers. The big Chanel logos upon the wall, and the red, pink and black colors all comes together in the pop-up store to communicate and convey the brand’s story and its core value.

With digitalization incorporated in the store, customers can scan QR codes and pay online at ease. In this way, they are not forced to make purchase, but are invited to experience the brand and make conversion in a more natural setting. Moreover, Chanel can also generate buzz around product launch and receive feedbacks on its new products. Big brands like Chanel usually has clear and defined target customers, in which utilizing a pop-up store will help attract right customers to give right feedback.

Online brands seeking an offline presence through pop-up stores in China

The best way for online brands to bridge the gap between their online and offline presence is a pop-up store. Pop-up stores are not only much more cost-effective, being 80% cheaper than a long-term physical store, but also is a great marketing tool in China to increase visibility and direct publicity.

In 2018, one of China’s biggest E-Commerce platforms, JD.com, tried their own version of pop-up retail in China —— ‘JD Fashion Space’. Its main object is to mix and match fashion, high-tech and Art Space. Consumers are invited to interact with the brand via digital dressing machines, shopping machines, games, and a designated selfie area.

Although consumers are becoming more digitalized than ever before, online brands like JD.com still seeks to create a cohesive brand experience offline to gain customer loyalty by opening pop-up shops in China. Consumers expect more different and engaging high-techs like immersive VR to become entertained in a technology-centric era. JD.com cleverly offered an interactive offline experience to their consumers’ taste, utilizing its digital strength, from VR fitting rooms to digital shopping windows.

As pop-up stores can generate short-term buzz, online brands can constantly remind customers their existence via both online and offline channel. This will be a chance for these brands to gain more potential customers offline and remind existing customers their online presence.

Other brands open pop-up stores in China to increase awareness

Other brands, regardless small or big, open pop-up retails in China to generate popularity in the short term and top-of-mind awareness in the long-term.

Last September’s pop-up buzz was all about a milk tea brand ‘Machi Machi’ because of its feature in famous Chinese singer Jay Chou’s music video “Won’t Cry.” The store in Shanghai, which will only be around for a few months, generated hundreds of people lining outside. The resale price of a cup of bubble tea was 10 times more than its original price.

The store has a photo-worthy wall for people to take photos and upload on social media. Many smaller brands like that will especially decorate its interior to make it more Instagram-worthy and hence more sharable on internet. These brands wish to create as much buzz as possible to bring popularity and boost sales in the short term, and the best platform to spread buzz is of course social media platforms.

Given that Machi Machi is planning to open an official store in Shanghai in the near future, pop-up retails in China are no doubt a fast, efficient and cheap way for small brands to test- new products and examine the decision to enter or expand the market. Just a few days ago, on June 25, an official Machi Machi store was opened in Hefei, Anhui province in China. The brand has positioned itself as a high quality and high face value beverage brand that has become a hot topic on social media platforms such as Xiaohongshu and Weibo. Regardless of what intention these brands hold, achieving awareness through a temporary pop-up store will be the key to further success.

Pop-up stores in China emerging as a major marketing tool for brands

Attribute to the success of many pop-up stores in China, increasing number of brands are seeking to generate more awareness and engagement through implementing this type of marketing tool in China. Although harder to breakthrough clutter in the recent years due to fierce competition, nevertheless pop-up stores are becoming one of the main forms of new retail in China.

According to a survey from storefront, 80% of global retail companies have opened a successful pop-up store and 58% willing to reuse the tactic. Pop-up stores are indeed a great way to fulfil excitement in those highly demanding Chinese consumers. However, if not properly executed or implemented, they will easily fall short and even generate an adverse effect then intended to. Customer expectation can skyrocket due to wrong location, failure to communicate brand value, improper execution or implementation etc. Therefore, it is important to carefully plan every step in order to open a successful pop-up retail in China.

How to set up a successful pop-up store in China

Define the goal

Defining  a clear goal for a pop-up shop in China is always the hardest. Although goals like increasing awareness, popularity, buzz etc., are essential, the decision to focus on sales promotion or just for pure marketing purposes will be the key to success. This decision is especially important to foreign than local companies because they subject to more regulations. Therefore, they need to be well-informed about China’s legal rules regardless which decision made.

Those who aim for direct sales, but do not adopt a corporate existence in China, will require partnerships, agents or distributors in order to engage in actual sales activity. On the other hand, pure marketing pop-up retails in China are much more simple to run, ruled under much less regulation.

The decision to sell the products or to market the products should depend on many aspects of company such as market share in China, presence in China, awareness in China etc.

Know your target customers

Millennials and Generation Z are becoming the most powerful consumers that all brands seek to understand. They are also a group of consumers who prefer experience over anything, which has lead the market evolving into an experiential-centric one. Therefore, opening pop-up shops in China that can engage with Chinese Millennial and Generation Z is a key to success. Brands should tailor the pop-up store to offer these customers different and personalized experiences and create an event that is both surprising and exciting to show them that they are no longer Dad’s Oldsmobile.

Find the right venue

The right pop-up store location is extremely important despite that it is often overlooked. The location can be anywhere: on a vacant street, in malls, in another store or event spaces. Regardless of where pop-up stores are located, the venue should generate enough foot traffic and buzz at the right time.

However, regulations need to be considered before picking any location. Unfortunately, due to strict rules in Shanghai and many other cities, pop-up stores are often only allowed to open in malls rather than on vacant street as no business will be granted to open in front of stores of or on side of the roads. Although street will give pop-up stores more space to occupy, shipping malls can offer a competitive edge for the brands. Shopping malls attract high foot traffic and right demographic, which makes it easy especially for smaller brands to target specific customers as they wish. Shopping malls are embracing pop-up stores as a form of new retail in China to save their lost traffic in the recent years, and more than welcome this win-win situation. Therefore, most malls offer convenience set-up process that will save many effort and time of pop-up stores owners.

Nars opened a pop-up store in Beijing in 2018 utilizing the open entrance area of Taikoohui Shopping Mall. The boutique was fairly eye-catching, easily grabbing people’s attention as they walk pass by.

Establish effective brand communication

Pop-up stores must align with and communicate core brand values. A consistent brand story should be narrated regardless of a press interview, a launch party or just a pure experiential store.

PUMA launched a pop-up experience museum in downtown Shanghai earlier this year, allowing visitors to go on a blockbuster journey of experiencing the blurring borders of reality and illusion. The theme goes with their featured new product, the “Future Rider” shoe, and allows consumers to fully experience what the brand has to offer. Added to the thrilling journey, consumers can enter PUMA’s flagship store at the iAPM mall nearby to win more products online. The purpose of the pop-up is not to drive sales, but to spread brand awareness. PUMA is inviting its customers to become a part of its brand and to be on their journey.

Be present on Social Media

In an ever increasing digitalized world, it is especially essential for brands to be present on social media, and of course will be the same for brand pop-up stores. Pop-up store in China relies heavily on short-term traffic and attention. In order for it to go viral and gain success, brands must encourage consumers to take photos in the store and share location on different social media platforms. Collaborating with KOLs and celebrity endorsers will be a powerful marketing tool to build anticipation and generate buzz before store opening. Stores can further enhance the engagement effort and accelerate social media impact by adopting hashtags that relates to the pop-up store theme.

Apart from traditional forms of Social Media like WeChat and Weibo, companies should also consider the growing importance of Xiaohongshu. Millennial and Gen Z spend their leisure time activity on this platform daily, searching up interesting places to visit.

When searching for pop-up stores in Shanghai on Xiaohongshu, a countless number of posts appear. This means that this platform has indeed became an important platform and marketing tool in China, which brands should utilize to generate buzz and increase traffic among its target customers.

Be creative and be exclusive

The most successful pop-up shops in China create unique and interactive experience for its customers. In order for a pop-up to offer a higher level of interaction and engagement, getting creative and think beyond simply selling products will be the key to differentiate from traditional retail.

YSL Beauté launched a pop-up ‘hotel’ in Shanghai early 2019 to promote its new product. The hotel was located in an Art Museum featuring three floors of themed rooms. YSL creatively incorporated its sales effort in this pop-up store. Customers are encouraged to engage with the brand through make-up station, digital interactive activities, and many photo-worthy spots. They are also invited to redeem YSL Beauté.

products using activity points earned along the way. In the hotel, they can become fully immersed in the situation and receive a unique and exclusive experience.

Pop-up stores are an effective marketing tool in China

Overall, successful pop-up retail in China will allow you to create awareness from potential customers, connect with your existing customers, learn more about their needs and hence better tailor your service accordingly. Plan your steps and utilise this marketing tool in China to make further developments on your brand.

Author: Chenyi Lyu

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Matthieu David interviews Josh Gardner, CEO at Kung Fu Data. The e-commerce sector has never been more relevant and richer in China than the present and Kung Fu Data is a big reason why businesses succeed in this field. Gathering the right data combined with having the right business relationships and taking advantage of present opportunities has made Kung Fu Data a force to be reckoned with in the e-commerce business. Find out why in this new China Paradigm podcast.

• 0:15 Guest introduction and Kung Fu Data’s history
• 6:48 Current company size and workflow – pre and post COVID-19
• 17:13 The quality of the shopping experience – is it changing?
• 19:55 Calculation of conversion rates during a live stream – the new way of shopping
• 25:23 What other changes might occur as a result of the coronavirus outbreak?
• 28:50 Owning the marketing strategy – shopping platforms are integrating with social media platforms in China
• 31:51 Learning about e-commerce – how did Kung Fu Data come to be?
• 39:41 Rigging the Game – building strong professional relationships makes long term sense
• 47:46 How does Kung Fu Data gain it’s clients’ trust?
• 53:39 Valuable Intel – sacrificing a year to learn the market
• 58:57 Kung Fu Data strategies for optimizing e-commerce marketing
• 1:06:49 The smallest details matter – a Kung Fu Data approach to e-commerce today
• 1:13:48 What books about China has inspired Josh Gardner the most in his entrepreneurial journey?
• 1:23:47 What surprising success or failure has Josh Gardner witnessed in terms of business in China?

 China Paradigm website

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We believe, that China, with 20% of world population and as the second world economy, is impacting every single business, small to big. That is why it is a new paradigm. How does China impact your business is the ultimate question we will answer through those podcasts.

China paradigm is a China business podcast sponsored by Daxue Consulting where we interview successful entrepreneurs about their businesses in China. You can access all available episodes from the China paradigm Youtube page.

This article China Paradigm 110: How to score a 1.5 million RMB sales day through live-streaming twice is the first one to appear on Daxue Consulting - Market Research China.

The incredible success of bubble tea in China since 1996

The story behind the success of bubble tea in China

Bubble tea is a drink made from tea (usually black tea), milk, syrup, and a special ingredient that captivates the hearts of Chinese people: tapioca pearls. Bubble tea is also known as 珍珠奶茶 (Zhen Zhu Nai Cha) directly translates to pearl milk tea, but is also known as boba tea in parts of the world. Far from healthy, the drink contains a lot of caffeine and sugar, especially due to syrup sweetener. 

What is captivating about this drink is that it is both drank and eaten at the same time. Tapioca pearls, which can be different sizes, offer a unique chewy texture and a sweet taste.

Where does such a successful drink in China’s beverage market come from?

Bubble tea originates from Taiwan, in the city of Taichung. It was reportedly created in the 1980s in a tea shop called Chen Shui Tang where the owner, Liu Han-Chieh, was selling oolong tea. With the innovative idea of changing the way Chinese people consumed tea, and a bit of influence from the Japanese way of drinking cold drinks, mixed tea, milk, and ice in a cocktail shaker. Following the popularity of his cold drinks, he experimented with pouring tapioca pearls into the milk tea. This marks the birth of the world-famous Bubble tea beverage in China.

The rest of the story is well known: bubble tea has been a great success, spreading throughout Asia and even gaining popularity throughout North America. Today, bubble tea is an integral part of Taiwanese and Chinese culture.

More and more brands on China’s beverage market

Source: iiMedia – Number of milk tea shops in China

China’s bubble tea market seems almost saturated: at the end of 2018 iiMedia counted 450,000 milk tea shops offering bubble teas in China. The number of milk tea shops in 2018 increased by 74% from 2017. Bubble tea is the best-seller in almost every milk tea shop. There are dozens and dozens of players in the milk tea market in China. Equal Ocean ranked the 19 most powerful brands in this sector earlier this year listed below:

Bubble tea brands in China can be divided into two types: traditional and new style, embodied by the famous Heytea brand. The differences are mainly in price and design. The new ones attract younger consumers who see them as a way to show a cool and international lifestyle.

Among these bubble tea brands in China, some will catch your attention, either by the pertinence of their marketing strategy or by their product innovation or even their financial power.

Top bubble tea brands in China

• Yi Dian Dian is one of the three most powerful bubble tea brands in China, coming directly from Taiwan. It is considered a classic brand, serving traditional bubble tea milk. Yi Dian Dian has more than 600 stores in China and is now conquering Europe and other Asian countries such as Japan. Yi Dian Dian keeps their prices lower than most bubble tea stores.

• Coco or Coco Fresh is also one of the 3 brands mentioned above, with more than 2,000 stores worldwide and 20 years of experience.Coco offers a wide variety of toppings and the adjustment of all recipes, and have entered the coffee market in China.

• Heytea, whose success has made a lot of headlines in Chinese media, the Starbucks of Bubble Tea, is one of these new styles brands and has easily competed with Coco and Yi Dian Dian. Attracting mainly Chinese millennials, they are an example of innovation in a standardized sector and successful brand launch. With their first boutique opened in Shanghai in 2017, they are now also present in Singapore and Hong Kong, and with higher prices, hey are positioned towards the premium end of the bubble tea market in China.

• The Alley is probably the brand that has focused the most on the aesthetic side of beverages. Known for its brown sugar tapioca pearls, and layered matcha and black tea drink, its drinks are also among the most caloric bubble teas in China. The brand has succeeded in its commitment to be present throughout the world, on all continents.

• With its first boutique opened in Shanghai in 2006, Happy Lemon is also an interesting bubble tea brand in China because its identity differs slightly from that of its main competitors with design and values more focused on freshness and fruits.

In search of innovation for tea beverages in China: format is constantly evolving

Although most tea shops offer two main options (milk teas and fruit-flavored teas), harsh competition boosted the number of innovations. Non-fruit flavors such as avocado, ginger, mango green tea, taro or mocha are very often available and toppings such as tropical fruits, lychee, coco cubes, aloe jelly, coffee jelly, coconut jelly, pudding or chia seeds can be chosen as well.

The segment of cheese teas, also known as milk cap, is also new: Heytea is very well known for adding salty, creamy cheese to its beverages. The idea is to add creamy cheese to the tea. This helps to compensate for the bitterness of tea, which is less popular with younger generations of Chinese people. This salty cheese balances the sweet taste of the tea and fruits that are added to the drink. Surprisingly, cheese tea seems to appeal to people who care about their health thanks to the low-fat options available.

Happy Lemon has also developed Oreo Milk Tea which consists of adding oreo pieces to a milk-cap tea. But innovations do not stop at taste, design, and format. Shops try to offer the best customer experience. This is the case of Happy Lemon. They went viral on social media thanks to their robotic arm present in some of their shops, which embodies their desire to embrace the trend of new retail.

A report from Mintel recently showed that Chinese people prefer to buy their tea in physical stores. That is why many bubble tea brands in China try to innovate offline. The owner of the boutique explained that it was a pure marketing initiative, to attract consumers in a very competitive landscape.

Instant milk tea in China: different marketing, different codes

China’s tea market is by far the biggest in the world with a retail value of US$9.6 billion. Where it becomes particularly interesting is that 38% of its value comes from the instant tea category. One of the top segments of the instant beverage market in China is milk tea and bubble tea.

China’s instant teas imitate the flavors of bubble teas that can be bought in shops and sometimes even add real tapioca pearls to drinks. How does it work? In a cup, often made of plastic, you can find a sealed pouch of instant tea, a straw and another small pocket with tapioca pearls. Then add hot water, mix and in two minutes, bubble tea to take away is ready. Consumers’ favorite instant bubble tea brands in China are U-loveit and Xiangpiaopiao.

Packaging plays an important role in this market: on-the-go packaging is perfectly adapted to the fast-paced lifestyle of urban and overbooked Chinese millennials. Although more limited than what can be found in the shops, the choice remains quite wide: Xiangpiaopiao offers milk tea with green tea, chocolate, caramel, strawberry, sweet potato, etc.

The brand U-loveit has even worked with celebrities and KOLs in China to promote its bubble teas, collaborating with the world-renowned actor, singer-songwriter, Jay Chou.

The conclusions that can be drawn from the success of bubble tea in China

Drinking bubble tea is something you need to show on social media, that you share with your followers to show your very cool lifestyle, especially with the increasingly aesthetic drinks

On Chinese social media, the bubble tea trend is definitely huge and several pictures of milk teas are posted every single minute. Indeed, bubble tea is fashionable, fun and the most beautiful drink in China’s beverage market. The tapioca pearls and the colors of the tea mixed with milk make very shareable pictures. On Xiao hong shu or Weibo, there are thousands of photos of all brands. The Alley has particularly succeeded in making drinks beautiful enough for social media.

Social media is a showcase opportunity for Chinese consumers

This success of bubble tea in China shows us once again how much social networks are an integral part of Chinese life and that sharing with friends is the daily activity of millennials.

However, social media are also used by brands to advertise. Thirst marketing is thus leveraged by a large amount of bubble tea brands in China, such as Heytea which success relies heavily on its smart use of social media. The brand used the ‘network effect’ of social media and is mainly famous for the extremely long waiting time to get its products.

It uses a controversial technic: scarcity marketing. Heytea posted several pictures of lines in front of their stores explaining that waiting time could reach 6 hours! This went viral online and encouraged customers to share a picture when they finally got the precious beverage. Heytea’s famously long waiting time actually became a selling point.

China’s tea market, an invincible market

One of the first conclusions that can be drawn from the success of bubble tea in China is that the Chinese are still tea drinkers. It should be recalled that tea was discovered in 2737 BC by the Chinese Emperor Shen Nong. An emperor that became mythical precisely because he taught agriculture, medicine and the art of using plants to the population. Since the Tang dynasty, tea has become the main drink in China’s beverage market. Despite the growing success of coffee and the arrival of new coffee brands, tea remains a staple among Chinese. Moreover, the consumption of milk tea in China has exceeded the consumption of coffee. According to Ibzuo, Chinese people consume five times more milk tea than coffee.

Starbucks trend going to an end?

The success of bubble tea in China also leads us to question Starbucks’ supremacy in China. With existing 3,300 stores in over 90 Chinese cities and around 2,700 new stores expected to open by the end of the 2022, Starbucks’ success in China is undeniable. The American and international way of life promoted by these coffee chains has pleased Chinese people for years. Costa Coffee used the same sales argument, with nearly 350 stores in mainland China.

However, the atmosphere of these coffee shops and the values they convey still appeal to the Chinese.

What a tea entrepreneur says about the threat of coffee consumption

In an expert interview with tea entrepreneur Martin Papp, he shared his experience conducting market research in Starbucks in China.

 “China is still a tea-drinking country. I did some market research in 2014 when I was planning on starting this company. So I went to multiple Starbuck stores in China and surveyed customers in the store on whether they prefer drinking tea of coffee. I found that about 50% of Starbucks’ customers prefer tea over coffee. ”

Papp’s research suggests that people who prefer tea still went to Starbucks because tea shops did not offer the desired atmosphere in 2014. However, now things are changing, and milk tea chains have begun to adopt the same codes. People no longer have to go to Starbucks to find a hip place to socialize over a drink. Whether in the names of the drinks, the aesthetics of the drinks, the decoration of the shops and the values conveyed in the advertisements, everything reflects the enviable codes of Starbucks. Recently, HeyTea and Nayuki have even created tea rooms which are comfortable spaces for their customers to relax. So going to Heytea has become just as cool, even cooler given the long queues in front of the shops in Shanghai.

Healthy or unhealthy: a still difficult choice?

Finally, bubble tea drinks with a lot of sugar, raise the issue of healthy drinks in China’s beverage market. According to the Daxue Consulting report on healthy snacks in China, Chinese people, and especially women, have been paying attention to what they buy, the composition of products and the origins of ingredients.  Baidu Index demonstrates searches on healthy products has been stable throughout the past year, showing a real interest in better products. Although, searches for healthy products takes a dive during the spring festival when Chinese people tend to eat more sweet things and other family dishes.

Source: Baidu Index, Daxue Consulting report – The search frequency of “healthy snacks” in 2018 and 2019

How does bubble tea adapt to this trend?

A mix of milk and tea seems not caloric but because of the added sugar and tapioca pearls, bubble tea is a very caloric drink, heavy in carbohydrates. The typical glass contains more than 200 calories and 33 grams of carbohydrates.

According to Meituan, who delivered more than 210 million orders of milk tea last year, Chinese women are the largest consumers of milk tea and bubble tea, far ahead of men. 95% of women under 26 who use the Meituan app typically order milk tea every week. This means that bubble tea brands in China have had to adapt to new health concerns by offering more healthy alternatives and being more flexible on the amount of sugar. It is anyway a trend that is going to reshape the whole F&B industry in China.

Thus, in a highly competitive market, there is no shortage of innovations. Bubble tea brands in China are working hard to keep their current customers and attract new ones. Despite the growing trend of a healthy lifestyle, bubble teas in China still have a bright future ahead of them. The craze for bubble tea is so huge that we are even starting to find bubble sushis, bubble sandwiches, bubble noodles, and bubble pizzas…

Author: Steffi Noël

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Full transcript below:

Hello everyone. This is China Paradigm, where we, Daxue Consulting interview season entrepreneurs in China.

Matthieu David: Hello everyone. I’m Matthieu David, the founder of Daxue Consulting and its podcast, China Paradigm. Today, I am with Guillaume Sergent. He is French. You are the founder of Ailion Golf. I was asking you how to pronounce it. It’s a very good name. I really like it because I think it gives both a sense of elegance and something like flying. I don’t know if it is the influence of French in this word. With power and also easy to translate in terms of pronunciation for Chinese and we are at China Paradigm, you are based in Shanghai and that’s why I am insisting on the Chinese perception. You started a business in 2015 first in France and then you developed in China and my sense is that it took off and you dedicated more time to your business when you arrived in China because at the time, you found suppliers, you found people to work with and today, you focus more about the brand that is focusing on golf apparel in China. So, it’s about golf apparel in China including jackets; maybe more and you are going to tell us if it’s more. Some numbers about China’s golf industry. You are selling in China and in France. I would say to France because I believe it is more on the website in France and more offline in China’s golf industry. So, the growth market in China; a few numbers and a few dates. In ’93 there were no golf courses in China. Not a single one. The country had opened to the world nine years before and still, there were no golf courses, no China’s golf industry. The first one opened in 1983. It’s said that we have about 1.2 million players in China. France would be 2% of the population, but for China, it’s still pretty niche. Golf is associated with success, to wealthy people and used only 1.4% of the worldwide golf in China compared to 45% in the US. So, if you compare the room for growth, it is huge. It may be a bit mistaken to compare it this way, but still, we are at a ratio which is ten times less. So, we can imagine that it is going to improve. It is a conception. You use golf to show off. You use golf to show you are successful, but yet it is not something that the government wants to show. So, officials are not allowed to join golf clubs (learn more about the golf ban in China). So, it’s sort of a paradox in China as always and golf is represented as one of these that we are presenting as a paradox. Thanks for being with us. It is a long intro because I’d like you to say a few words about China’s golf industry. So, what about Ailion? Can you tell us more about what you do and about the size of the company?

Guillaume Sergent: Yes, thank you so much. A great introduction. I really like first how you explained the business and the golf and the paradox of China’s golf industry. It is exactly like this here. So, about Ailion, I would like to come back to the name. As you guessed, Ailion in French it is a mix of two words. Eagle is that is called “aigle” in French and “lion” which is the lion. So, it’s two words that are combined and we try to make it easy for everyone around the world to pronounce the name of our French golf brand in China. So, that’s the name, and as you pronounce you can say, Ailion, “Ileon”. It depends on the nationality of the consumer. Then about our DNA, I would say we are a fashion lifestyle brand inspired by a golf-like style. The idea about our French golf brand in China at the beginning was, “I’m a golfer” and when I play golf in France, it’s in the middle of my normal day which is the morning I could go to the driving range and I could have a meeting. So, I don’t want to change my clothes and still look elegant and comfortable. So, it was really the beginning of the idea to create a brand, especially pants which are our aero products. Then about our size. We are still a start-up so, we are basically less than 5 people working and we have partnerships here in China and in France, we are just using consultancy. We have Sonny Anderson who is a former football player who played for Barcelona. In the past in France, we sponsor a lot of big events which are the oldest prom in France; 25 years existing with more than 400 players and also the biggest growth charity in France which has helped to increase our brand awareness. In China’s golf industry, we developed our partnership with golf clubs and as you said, we try to mix offline and online shops because as a new French golf brand in China, people need to touch and to see our real product.

Matthieu David: So, you gave a sense of the size of the team. Would you mind sharing the number of clients, number of SKUs, revenue; a bit of a sense of where you are in terms of development. Still recent captains, fifteen or let’s say sixteen. So, it is still as you say a start-up. If you can share any number that would help people listening to us to understand where you are in your development?

Guillaume Sergent: Yes, so at the beginning, we started just by one product because it was just a crazy idea to give to all golfers and also like normal guys like you, for example, to be able to wear pants that is elegant and you can play golf or even ride a bike without having to be wearing sportswear. So, we started just by one product and then, with the success of this product we decided to have more SKU’s and so now we are around 20 SKU’s, but we are not thinking about in terms of SKU’s because now, since a few months by chance, the retail mindset changed a lot and the fashion mindset changed a lot and this is something that we tried to improve which is sustainable predictions. Start producing tons of SKU’s which just makes no sense for everyone and not even for the customers, but even also, for the world. So, we have like reasonable SKU’s with products that you can wear like Diva Life and also then the outdoor activities.  In terms of revenue, we are around 10 000 revenue which is still like the beginning and we are still looking for the second investing time. So, during this special time because as you know, with the Covid-19 it is really special. We try to induce more change with this business model of making on order which we have started to think about before the crisis. So, we will see because, to be honest, this time we are facing a big change.

Matthieu David: Yeah, we are recording on the 18th or 19th of March, 2020. No, it is 20 March 2020 and the crisis seems to be averted in China, but still, it’s recovering. Retail is not I think entirely open, but it’s on the track of being 90% open and it’s in Europe and the west that difficulties are appearing (learn more about China’s Covid-19 recovery). I’d like to talk about the product. What is interesting in the start-up and especially when we are in China is how do you create your first product? I don’t think you have the background of the fashion industry, or as a designer or in finding a clothing manufacturer in China and I think that is a question people have. Where do you start? What do you start with? I listened to one video and you said you found a clothing manufacturer in China at the campus and you saw people shooting and you were asking these people what they were shooting and then they connected you to a producer, but more largely, how do you find a clothing manufacturer in China? How do you manage it and how many can you produce for a start because that’s also an issue you mentioned;  all the factories you have met initially were asking for a huge amount of production. So, if you could give a sense to the people who are listening to us on how you deal with low orders, finding factories you can trust; knowing that you can trust the and there is one more thing is that you are mentioning that you have an innovation with your croquet which can clean golf balls. That is also something that could be interesting. How do you establish innovation? Is it all by yourself? Is it with the factory? So, about the product generally speaking, how do you develop it and how do you produce?

Guillaume Sergent: Okay, so first I had the idea a really long time ago. It was funny; maybe more than 10 years. I even don’t think about launching a company or a product. Just, I realized when I was playing golf and you know when you are playing golf, the only moment you can catch and bring your ball and clean it is when you are on the green and as a golfer, I am really picky with my style and I don’t want to dirty my red pants and so it was really annoyed and in France, we don’t have caddies as they have in China. My type was really far away. It took me really long to think of how to clean my ball and finally, the gamers behind us wanted to play and my friend says, “Hey, we have to play now.” I missed my shot. I was really, really angry and I felt like, “Oh, why?” Why couldn’t we have accessories to help us focus on the stroke? So, I started to have a look on the internet and I just found really just weird things; accessories that you could put on your pocket, which was really not convenient. So, I started to think, “Okay, why we never wrote golf pants?” I mean a golf brand pants itself because it is super expensive, first and then you will not wear it a long time or for example, in the beginning, I was playing golf and I would say, “Oh, I want to buy one pant I will wear like what; 3 or 5 times a year.” So, I think about, “Okay, what about creating a product that you can wear like for your everyday life and also, which could be really easy and comfortable for golf” and then about the accessories about the pocket, we said, “Okay, golfers like to have excuses if they are badly made shorts. So, in the beginning, we thought about just a towel you can plug on all the pants, but most of the time people are not warming up and I was sure they will give the excuse about this accessory. So, we started to think about what about integrating this pocket on our own products. So, we did research. I just did it by myself. I’m just a fashion addict and I’m a golfer, so I just know what I don’t like and if when I swing, I feel discomfort, I say, “Okay no, I don’t pull the pocket on this way. I just use a zipper and not a button.” So, we just iterate a few bends. During this time, I was in Paris.

Matthieu David: So, the first prototype – we talked about a prototype earlier – so, you created it yourself, right?

Guillaume Sergent: Yes. I created it myself.

Matthieu David: So, when you had to find a clothing manufacturer in Chinayou would be able to already show a product?

Guillaume Sergent: Yes, definitely. Before that, of course, I designed it on paper, but then to make it, I hired some designers to just make it.

Matthieu David: How did you find a designer?

Guillaume Sergent: One of my best friends created a company; a professional company and they gave me the first advice of, “Okay, hire a designer.” So, then I just contacted a fashion school which is plenty of designers and they are all looking for experience. So, I met the woman and she did a good job. I gave it to her and we think of how to plug all the details; the feet of the pants. I gave it to her. They are not my favorite pants and said, “Okay, I want it like this fit and it has to be like this; the button” and all the details and so we built it together.

Matthieu David: I see. Which fashion school did you contact? I try to be as specific as possible.

Guillaume Sergent: It’s the classic one; ESMOD.

Matthieu David: ESMOD is in Paris and they have also a school in Beijing. I believe there is an investment from China? The founders are both in China.

Guillaume Sergent: So, I was able to draw, but I was not able to make it. By the way. I choose my own fabric that I really like and then, the same as I had the advice from my friend to hire the designer. I started looking for good fabric and so then I went to an exhibition in Paris to find the proper fabric which I had a really high expectation because during my marketing research I just showed really sporty pants or really fashionable pants. I want to give my customers something really in between, but if you are wearing golf apparel in China; the purpose was, “Okay, you need to be able to wear it with a jacket and with a tie.” It was really tough at the beginning to say, “Okay we need elastin, but not too much because if you put too much elastin you can guess, it is like really sports trousers. So, finally, I found in Switzerland has a very famous manufacturer which is Solo, which used to supply Nike and so on. So, it was pretty expensive, but it was real and it is still the best one. The first words from my customers when they try the pants are, “Oh my god. It is so comfortable. You didn’t lie.” I say, “I know.”

Matthieu David: We’re talking about the fabric? 

Guillaume Sergent: Yes, the fabric of the pants. So, then I did one prototype with the final fabric and to have the exact shape. Also, the number of meters and seeing like manufacturers. So basically, at the beginning as you said, I was in France and at this exhibition, I met some manufacturers, but they asked about ten thousand or like a thousand pieces. So, I was like, “No, I don’t want that. I want around a hundred pieces.” So then, by chance, I moved to China and I followed my wife. She was relocating here. So, I was thinking., “Okay let’s go and see China. It is really known about manufacturing and so I am sure we will find a manufacturer.”

Matthieu David: For the prototype; by the time you had a designer, the designer is doing drawings. I understand you found the fabric. I understand that you created your own prototype yourself, but if you want to go beyond the prototype and to have something comfortable which fits people you need to work with someone who knows how to produce those pants. Who did you work with to produce the prototype? Was it in a small shop? Was it with a small designer who was also able to produce a prototype? Was it yourself?

Guillaume Sergent: No, no, no it was the designer. Me, I provided the drawings and then we worked together about the fit, and then she stitched with the fabric I bought in Paris and we said, “Okay, here you have like too many fabrics. Here we need to add some blabla.” So, we did it like this. At the beginning towards like almost the final prototype which is not really final, but which fitted and then, which was the most important thing which is we did the final drawing on Lectla which is a software you could print the drawing and make the pants through the drawing and you just cut the fabric with the drawing.

Matthieu David: How do you spell Lectla?

Guillaume Sergent: L-E-C-T-L-A.

Matthieu David: Very interesting. So, you have this software that helps you to communicate with manufacturers and with people who produce easily with these standards.

Guillaume Sergent: I will add, ‘supposed’ to talk with the manufacturer. Why suppose? Because in Europe they are using this software and I came into China and so as you said, I found-

Matthieu David: So, we go back to China now?

Guillaume Sergent: Yeah, so those women who are just photo shooting for a fashion brand; they look like say westerners, but they are French. So, it was funny, easy and we started to talk and they gave their contacts to me about their manufacturers which were really small. So, able to make small quantities. So, I was super happy to find a clothing manufacturer in China. So, I met this woman who was managing the smaller manufacturer, and then that’s probably how it started. Why; because they didn’t have like traffic here in China. They are not using this software. So, it was like I had something, but we couldn’t print and we started because China is really strong to make garments. So, we talked together and they were doing fashion in small quantities and so they introduced to me their suppliers. So, when I met her, I came with my software drawing and I say, “Okay I have everything. So, let’s try to make some samples.” Unfortunately, I discovered in China electro was really not used. So, I did just by a copy at the beginning and what I did… 

Matthieu David: You gave the product to them?

Guillaume Sergent: Yeah just my size to be able to wear it, to see and to test them, but at least you really need to have all the software because the software gives you all the sizes. The idea of our product was to be like not tailor-made, but half tailor-made. So, we did the gradation which is like we are using American sizes for our golf apparel in China. So, from 30-40 with the lengths of the legs. So, we need to print these. It was quite tough and finally, by chance, I found the contact of Electra in Shanghai who printed for me the drawings of our golf apparel in China. So, then I could give my small manufacturers the drawings and they could cut my fabric and make the first batch. 

Matthieu David: So, at that time it was a prototype. How much money did it involve? Did you need to pay them for consulting for the time spent with you or what are we talking about? Is it something that they were willing to waste time on before you produce more?

Guillaume Sergent: You have to pay to put it up then they deduct the price when you get your order. The kind of money to make this kind of prototype; because you need to run around and buy fabric and also your time, but at least it is around 5 000 Euro, at least.

Matthieu David: 5 000 Euro for the prototype and the fabric and so on?

Guillaume Sergent: Yeah because you buy the fabric and you are buying small quantities and the small quantities mean it’s more expensive and then you hire the designer to have the drawings. Yeah so, maybe I add more than ten prototypes in my wardrobe that we are not using at all because at the beginning we had these that they made the prototype but on the wrong side of the fabric. Our fabric is waterproof and so on so, that was inside. 

Matthieu David: I see.

Guillaume Sergent: You can guess. You couldn’t have just 3 meters of the fabric. You need at least 10 meters of fabric.

Matthieu David: And then you produce about 100 units? Is that correct?

Guillaume Sergent: Exactly.

Matthieu David: So, we talked about the product. I understand now how you started and I understand the key differences and the unique proposition of the product. Let’s talk about marketing (learn how to achieve your marketing goals in China). You said that you do offline marketing in China’s golf industry and online marketing as far as I understand; online sales with France. Could you tell us more about how you connect clients with your French golf brand in China? In some interviews before you said it’s a lot of connections, it’s a lot of contacts; building clubs, golf clubs, going to shops as well to add your products. Would you mind elaborating more on that?

Guillaume Sergent: Yes, so first what is really interesting is to remember our agents. Four years ago, all of WeChat, Weibo, and KOL (learn more about KOL marketing in China) was not so strong in China. It was really the beginning and now, the game has changed completely. So, at that time you didn’t have so many and so many groups like this. I even don’t know if TikTok was still existing? So, you couldn’t have any chance to promote your product like this, which is the case now for two years, I would say. In France, we realized and when I started a project there, I met golfers and for me, it was the best way to help people to know the brand because we are not known at all and you have so many brands, so many competitors. Everyone is not just a golf brand, but just fashion brands. So, the big thing was, “Okay, how a French guy could sell a product without speaking Chinese in China’s golf industry.” So, I talked with friends who of course were playing golf a lot. I started to meet golf directors and so on and we decided to follow the same strategy as we did in France, which is sponsoring golf events in the golf courses to promote our golf apparels in China. We met our customers and we helped them to know the French golf brand in China and know me, even play with me golf and also, what I learned in China and all the advice I got from people like you who are living there for a while said, “Okay, you should promote yourself” and at the beginning, to be honest, it is a bit tough to promote yourself and sell yourself because you are not the brand and I am not famous. So, it was more about the product. So, that’s the strategy we tried to have; sponsor different golf tournaments and help people to know about our French golf brand in China, know about our value proposition and start this and also, what is fabulous with China is you talk (learn about the importance of networking in China) with people and if they like the product they say, “Okay let’s go.” We started it just like this throughout some shops and throughout some pants and said, “Okay, why not? We try it and that’s it.” It failed. It worked on others. So, it was quite like fun to see how these things go fast in China compared to France.  

Matthieu David: One thing I’d like to go back on is you talked about sponsorship. What kind of sponsorship are we talking about? Is it about moderating an event? Is it about giving some products for free? Is it paying for your logos to be somewhere? I believe that is maybe something you may spare for a later time because that may be costly, especially for golf because golf is where wealthy people go so it should be an expensive place to do advertising and to show your products. Would you mind sharing more about what a sponsor can be when you start your business in China’s golf industry?

Guillaume Sergent: True. So, as we did that at the beginning it was, we tried to pay and give money because people want money, but hopefully, we are a brand so in all golf competitions they are looking for gifts. So, in the beginning, we started like this; providing products like caps and for the winners some pants, some Polo shirts and so on. Then also, a chance at how to promote a brand was to organize by ourselves or with other companies and so as I developed a good network in the golf club, I started to meet some others in the industry of hospitality, fashion, retail, as F&B to say, “Okay, I am a French golf brand in China. We are organizing or we are trying to organize some competitions. So, what do you think about joining us?” You could meet like the final customers which are really tough in China to meet them and to meet us. So, also with the French government, we organize a big and huge competition at the Sushant Golf Course in France. So, the idea was the gathering of the French community, the French style on the competition and all the golfers of course really, really loved it. So, this is the first part of it and then of course as you mentioned, you need to give free gifts and free products to influencers and this is the part that is tough because you give some products to teachers, you give products to people who have good networks, but then you need to push a marketing plan to be involved and when you are starting a fashion business, marketing is really key. Of course, for us, it was our weakness because as you mentioned, my background is a bit funny. I did a business school and so I was really bad at marketing. So, I hired some consultants and we improved that, but then it was also after that, the next step to build brand awareness; a brand story because at the beginning it was a product story. So, that was really key and really expensive also and of course, we did mistakes. I guess this is a start-up life. 

Matthieu David: I see. It is interesting to look into sponsorship at this time because when you look at luxury brands, some took off with strong sponsorship and we are talking about one that is very famous, which is Louis Vuitton (learn more about Louis Vuitton in China). It took off in the US by sponsoring the American Cup and being very present at this competition. That made a difference and we know with horse riding which is sponsoring races; it is also actually a key component of luxury events or gatherings where you have sponsors and myself; my first company was a gift box company and I sponsored as well. There was a question: What is the return on the sponsor in China’s golf industry? It is not clear. WeChat now with the fact that people can write articles on you and sell it themselves after the product gets commissioned. I feel that it’s getting more and more trackable, which is I think the good news for the future.  How do you get an ambassador? You have an ambassador which is I think pretty famous.  I am not good at football (learn more about the football industry in China). I am not good at sports, but he seems quite famous. How do you get him to work with you? He is called Sonny Anderson, right?

Guillaume Sergent: Yes, exactly. It’s a funny story. Because of China, it is funny. So, as you know, we have a lot of WeChat groups here and a friend said, “Oh, my cousin is working in the sports industry and we want to know about the sports industry in China.” It was funny. It was three years ago and almost no one was there and I remember all the comments were, “Oh wow, why is your cousin now coming on this time that no one is there?” Instead, I say, “Me, I am interested and blabla.” So, I was available and I said, “Oh, I want to meet you.” We connected through WeChat. We got a drink and we talked about his business, my business and I said, “Okay” it was already like 6 to 8 months I was doing business in China’s golf industry and I was looking for more things in France and I know France is really important for them to have like luxury and so we started to talk and he was really involved in football which is really famous in France and I just asked, “Do you know any famous people playing golf?” He told me about, “Yeah I know Sonny Anderson.”  I was like, “Oh my god. Are you kidding me” and it was funny because he was one of my idols when he played in Europe and France? So, I was surprised and said, “Okay maybe I would like to meet him or to be in contact with him.” In fact, I learned by the past that he was the best friend of his daughter. He gave me the contact of the daughter and we started talking. It was really interesting and then we got phone calls and I have to say, he is really amazing. He’s really kind, really mindful and we made it through there in France and we started and he helped to develop a business in France, introduced me to some good relationships of him and we started like this, but he liked the product, again and he wanted to also involve himself in start-up’s and so that’s why I think he came into the project.

Matthieu David: Has he invested in the company? Has he done within the company or you… what do you give to him? Is it purely kindness or truly help?

Guillaume Sergent: No, of course. We ‘ve got a contract. He didn’t put money, but he is wearing and advertising us on his social network and we try to develop networks with people inside his network, but for now, he did not invest.

Matthieu David: You said in one article that you have a partnership with CTrip (learn about the possible secondary listing of the company in Hong Kong) and I interviewed another entrepreneur and she is in the travel business. So, it’s more understandable that she is partnering with CTrip and one of the questions we had is, how come CTrip which is a huge company is partnering with the small companies, start-ups who have just started? How do you enter it? How do you contact that? If I am correct. You said that you have some partnership and contact with CTrip, right?

Guillaume Sergent: So, it was funny. During trade golf once, I saw on the golf course, a CTrip event which was organized by the Citroen golf branch. So, I talked with a woman and I said, “Oh, I have French golf brand in China. I would like to sponsor one of your events. Could you introduce me to your boss?” She said yes. So, we had a couple of meetings with them and we sponsored one of the events in the Chi Chong golf course. It was purely random and it’s just because I was playing golf during an event and as I know, every time you organize a competition, you are looking for sponsors so it was a good opportunity and again, they liked the product. They liked the cap very much and it was like this.

Matthieu David: The learning I get from the talk today so far, is that it is important to be present at events, to connect, to be openminded and even to connect with online players like CTrip because actually, they go to the event, they connect as well and here you have your opportunities. Do you agree with that? Is it the way you see immerging your business to be active in the communities, to be present, and to engage with people?

Guillaume Sergent: Yeah, I completely agree. Even big companies need to have new projects, new products and they need to innovate. So, they don’t care if you are a start-up or not and even I think what is funny is just you have to pretend that you are bit bigger than who you are and what you have to be careful of is, don’t pretend you are bigger than who you are, but just be able to deliver good products or I don’t know; good things. Good training, good whatever and even big companies would be happy to have an innovation or to provide innovation to their customers. What they provided in this competition was a unique brand, a unique French golf brand in China and after that event, it was really funny because we started to see some Chinese golfers with my cap with my logo and it was fun because my friends sometimes send me pictures of those  Chinese guys wearing my caps and they were like, “Oh my gosh. They are starting to wear your brand.” So again, I think as you say, the most important is what is the risk to just try to talk to someone except a no? So, it’s really my mindset about that in China’s golf industry.

Matthieu David: What I feel and correct me if I am wrong, but the fact to be a foreigner in China actually is opening you up some doors. It is clearly closing some doors to some settle that you cannot join, but it’s also making you so different, so unique in an event that you can get access. You can get into contact with people and people will not dare not to answer. We are not there not to help you a little bit. So actually, opportunities happen as well by your own identity as a unique identity. Do you agree with my conclusion?

Guillaume Sergent: Yeah completely. I think they are curious and they want to know, they want to learn and again as you say, of course, we can’t access from a certain circle until you are speaking Chinese until you are speaking full about their habits and so on. So, for me, this is the best thing that I would like to bring back the day I come back to Europe is to be open-minded and full. Just listen to people and you don’t care about this Chinese, this American.

Matthieu David: And I feel it’s not happening necessarily in the rest of the world not necessarily in Europe. You are seen as an outsider.  You are seen as someone we don’t want in a lot of circles in Europe, but in China, when you are on this site, we are very different. We want to know why you are here, what do you do? You are a foreigner in a country where it is difficult to make business when you are a foreigner. You are on the golf course and you are a foreigner. What are you doing here? You are creating some curiosity. I’d like to talk about marketing which is more like offline marketing with people. I went to your website because I like technology and we do a lot of research with tech. I understand that you are using Shopify, you use Google Analytics and Facebook Pixel as well. So, you do a bit of online marketing to the west, I believe otherwise you wouldn’t use Facebook Pixel on Google Analytics. So, what do you to create traffic on the website? Do you do anything? I didn’t see anything for the newsletter I believe you have, but I didn’t see a Mail Chimp or anything. Could you tell us more about what kind of technology you use?

Guillaume Sergent: So, we’ve got two strategies. First, for China and another one for Europe because after a few months ere, we tried to use the same marketing and communications tools (learn more about what marketers in Europe can learn from China), but it didn’t work at all. So, for China, we are using Weibo and WeChat and articles not promoting at all almost our product.

Matthieu David: Sorry to interrupt, but do you sell on WeChat because you cannot sell on Weibo, but you can sell on WeChat. Are you selling on WeChat? You don’t sell on Tmall, Tao Bao, but you decided to sell on WeChat?

Guillaume Sergent: Yes, exactly. So, we are using this offline and for now, we are still thinking of how to provide a new program that would be different so we need to think of how and that is really important.

Matthieu David: Why would you need a new program, if I may ask? Is it to add a layer of engagement to other mini-programs?  

Guillaume Sergent: I think it could be more about if you are reading a new program it is more about the experience and how we can give something different because again, we sold a lot of mini-programs, but for me, they are just like embed something or just like embed and/or the classic process and you didn’t have any purpose on this so, again I don’t like to do something like everyone else does because you have to do it. Be different because if you are not different people will give up the mini-program and so on. So, it is more we attract people to be different and do like different content which is creative with China. For Europe, we used to have a light newsletter and we are using a lot of Instagram and Facebook and we are also using our KOL’s a lot because we have got also golf teachers now and they are promoting themselves and help us to promote the brand and also, of course, Sonny Anderson.

Matthieu David: How do you help them because helping; I believe there is something like a relationship with them?

Guillaume Sergent: Yes, we give them some products for free.

Matthieu David: Alright so it does not commission on what they help you to sell? It’s a few products for them for free and if you find out that they are very active, you would continue to sell them products.

Guillaume Sergent: Exactly it is more about steps and if they are able to introduce us to some business. We can talk about the next steps, but until they are, we are just like this, but to be honest, at the beginning we thought about this business model just engage teachers to sell our product, but it didn’t work because teachers are teachers. They are not sellers. So, it was interesting because at the beginning we really thought about this.

Matthieu David: I found out that we always think that people are rational economist people and if you tell them that they will get 30% commission on it, they would sell and they would think to sell, but actually they would do a better job if you actually get them involved in building the product, getting feedback, offering for free or thanking them on Facebook or Weibo or WeChat and soon; getting them involved, getting them visibility and also, thank them actually for most people who could help. That’s good enough and they are not looking for an additional business to make it as a business. That is maybe the mistake of business people or entrepreneurs who always think rationally about relationships. You said that you do Instagram and you are using also Shopify as a tool for your website. For people who don’t know about it, when you create a shop online in the west, you have a few choices with Shopify and it is certainly one that is growing faster. You could use Woo Commerce with Word Press, you could use PrestaShop which is very fresh and you can use Shopify which is Canadian and is doing like 40 billion, I think USD now. It’s is growing fast. 14 or 20 billion to open your own shop, not like Amazon where you would actually be on the marketplace competing directly with people. So, when you need to create a brand, Shopify is a very smart solution. Could you tell us more about your experience with Shopify?

Guillaume Sergent: So first, in the beginning, I started to use Word Press and Woo Commerce because it was just a landing page, but it was too basic and really not appropriate for e-commerce from my point of view. Then we switched from Shopify because PrestaShop is great, but at the beginning of a start-up I will never recommend it and all the consultants I met said, “Okay, you can have PrestaShop, but it’s like give it to you and you just get your license.” So, don’t go and don’t invest in something that you will not use as it has to be used. So first, I did like Shopify and you can make something really, really nice and really friendly. So, that’s why we pick Shopify.

Matthieu David: The comment you just said is also usually what people say about Magento which was built by E-bay which is a very heavy solution and people have the same comment as you said for PrestaShop. You need to start low key. You need to start with a few sales. You don’t want to build a gas factory when actually, you need a small shop to start. 

Guillaume Sergent: Exactly, so then also, I was really inspired by China for making Shopify wide because in China, you buy in maximum and all the solutions we got in Europe was really too slow, but I tried to find a way to make it really short because again, we didn’t realize how European and French people are not really internet friendly, especially when you are in the golf industry which is more on budget. We say 40 or a bit like 30 people, but most of them are between 45 – 65 years old. So, they are not really open-minded and even they are going more on the internet, they don’t know how to buy it. So, we think about that and we try to make something really smooth and simple, actually. In three clicks you can buy it. For me, it was really the most important thing with Shopify and again, we just have really good feedback about our website.  I guess we did it well.

Matthieu David: saw by looking at your website and inspected your website in code, you are using Facebook Pixel. What do you do with Facebook Pixel? Are you retargeting people going to your website through Facebook and Instagram? Are you doing a custom audience? Are you doing look-alike? What do you do with Facebook and does it work?

Guillaume Sergent: Customer audience. It works. We have more and more traffic and we have more and more sales. So, Facebook is not really a complicated tool. It is really useful. I am not managing this on my own. I have a consultant doing it for me. Again, what I learn and what we learn is it takes time. So, you have to be patient to build and to know more your target and to learn your audience because you make tests actually with Facebook and they change a lot or really frequently the tool and you have to try to say, “Okay I pick up someone who is following this kind of brand from this part of the world; Europe, France” and then sometimes you don’t know why your agents are increasing or sometimes it didn’t work. So, we did some tests and sometimes the tests were really good and some were really bad for two reasons from my point of view is just again, in Europe they have more and more advertising, more and more processes so with the new LGBD policy in France it was a bit complicated at that time to target it and to know and people don’t want to get bored about advertising and also because you are a new brand, you need to investigate some ways. So, until that, it was really up and down and now starting to be more stable.

Matthieu David: So, first of all, you need to test on Facebook, but I understand as well that Facebook is a bit working like the brain itself. The more data it has, the more it would be able to target actually your custom audience with the Facebook Pixel helping. So, that takes time because it needs to learn who likes your post? Who is spending time on your post? Who is going on your website from Facebook and so on? So indeed, that’s not like Google where you pay and you get immediate traffic. That is something that takes time. It is so true. It takes time. About funding; you talked about funding in some articles and interviews in the press. Have you gotten any funding and what is your view on getting funding in the fashion industry? I am especially asking that about the fashion industry because fashion seems like something that people want to start because they like it themselves and not necessarily because there is a business behind it, not necessarily because there is a rationale behind it. So, I think the investment industry is less mature in this segment because a lot about the likes and the fun to start a fashion brand. Could you share a bit of your view on that?

Guillaume Sergent: Yeah, it’s even if I can say, irrational because as you say, fashion is kind of a dream. It is like for me to have a sports club and you see all these billionaires are buying football clubs and it’s funny how it’s the same comparison. People want to have their own brand to sell, “It is my brand.” So first is we go to smaller investing as I say, family and friend investors and then we got another investor from the fashion industry and so that’s the product and that’s how we started.

Matthieu David: In France, right?

Guillaume Sergent: No, no in China.

Matthieu David: At the time you were in France?

Guillaume Sergent: No, no at the time we were in China, but it was a French investor.

Matthieu David: Okay.

Guillaume Sergent: So, then I think again about funding that was a key point at the beginning. Involve people who are concerned about you or the industry and not just about money because at the beginning if you are involving people who are not committed to the industry, they will put too much pressure on your business and on you and you don’t need pressure. You already have so much pressure as an entrepreneur. So, that’s the thing and then also, the business model is crazy. We are talking now about the crisis and everything, but if I can, I just have feedback and a reminder that since 6 months, now people are more aware of how to change the fashion business, but before that, when you talked about a new model or producing by orders and everything; people were laughing at you. So even investors, when you present this kind of model, were really skeptical about that. So, it was and it is about finding how you will make your plan first, and then you have to adapt your speech regarding the steps you are funding. So, at the beginning like family and friends, it is easy then. You need to have a plan about how you will settle the brand and so on and then the other steps for a bigger investment are more of what is your new value proposition about fashion because I will not say it is easy to make T-shirts, but almost, you know? If you have a bit of money tomorrow, you can start. I am sure you will have followers and people, but how you can be sustainable and why people will buy our T-shirts more than mine or more than picking other kinds of shirts? It’s more about that. It is a complete process about how to promote your projects and find a good investor for good funding. So, that’s a bit crazy and be aware of me, if I can say that advice; like how you choose the funds and it is really important when you have funders to make some setup’s really clear meeting about who you are, what you want to do, what is the target because fashion is crazy and it can change in one click. So, just be aware of that.

Matthieu David: Thanks for your time. It is one hour already. It goes fast, as you can see. I hope everyone is doing fine, who is listening to us. Stay safe everyone. We are still in the middle of a crisis in the world and thanks for listening to everyone. Thanks for joining us.

Guillaume Sergent: Thank you, Matthieu.

China paradigm is a China business podcast sponsored by Daxue Consulting where we interview successful entrepreneurs about their businesses in China. You can access all available episodes from the China paradigm Youtube page.

Do not hesitate to reach out our project managers at dx@daxue-consulting.com to get all answers to your questions

This article China Paradigm transcript #96: The reality of brand building in China’s golf industry is the first one to appear on Daxue Consulting - Market Research China.

Can you provide interesting cases on how brands on Xiaohongshu adapted to new conditions during the crisis?

I think I’ve seen some interesting cases. For example, one is from HeyTea. We know HeyTea is one of the most popular milk tea brands in China, and during this time, because people can’t go out to their store to buy the milk tea, through their official account, they started to teach their followers to DIY their own milk tea at home. So, they started to provide recipes to the followers and this I think is a very interesting way to connect with your followers and to engage with them. Red is targeting female customers and female users on Red, and they love the milk tea and even when they stay at home they want to drink the milk tea, therefore they are more willing to learn how to DIY this milk tea. The recipe shared by the official account of HeyTea makes them feel like this is the official recipe from the brand, although we know that this is definitely not the official recipe, but this will make the followers feel a closer relationship with the brand. They are also more willing to engage with the content, such as comment, like or collect the post. So, this is also very interesting.

Another example is the brand called Super Monkey, a chain fitness gym in China and because people can’t go to the gym to do exercise, Super Monkey started to launch the online exercise course or even live streaming course to teach people to do exercise at home. They even asked their followers to do homework, like every time you need to check our brand account and you need to do at least 20 minutes exercise. So, this is also a very good way to engage with your customers.

And we also see some beauty brands have changed their marketing direction during this time. Because we have to wear masks every day, some customers may ask – how do I do makeup if I need to wear masks every day? So, we see, beauty brands like MakeUp Forever actually add these key words, add these trends in their content, and they started to teach people how to do makeup when still needing to wear a mask.

For example, they focus more on eye products, like eye shadow, mascara, eyeliner; they teach you how to do this nice makeup even though you still need to wear a mask. So, I think this is also a very interesting case on Red.

How have brands’ behaviors on Xiaohongshu changed during the coronavirus?

More and more brands are trying to host live streaming and host them more often because before coronavirus many retailers are pure offline, and now they have to go online and they have to launch their online shops. Therefore, they started to host live streaming, to engage with their customers online, and to do more online marketing. And we even see some brands even invite their CEO’s to join their live streaming to talk to the customers directly. Also, we see brands are more willing to engage with their followers. They will host more interactive activities, for example, sending out free gifts or give special discounts during live streaming or have lucky draw games to engage with the followers. For the customers, they have to stay at home so they spend more time online, and they are also more willing to engage and interact with the brands. In turn, brands also want to keep a close relationship with their followers.

We also see some brands even changed their marketing direction. For example, they would add some popular key words in their content and also some brands even change their best sellers. For instance, when you stay at home, you don’t need to wear the makeup, so maybe cosmetics may not sell really well for a beauty brand, so they would start to push more skin care products as their bestselling products instead of the cosmetics products.

Also, we see many companies want to show more social responsibility and they would post content related to covid-19. For example, Starbucks launched contactless delivery, so if you order a cup of coffee from them, you don’t really need to contact any employees. They would provide this kind of contactless service for you to get the coffee in store. This is how companies are showing social responsibility and their support to the doctors and hospitals during this crisis.

We know that Xiaohongshu is testing personal Shu shops for certified influencers, can you tell us a bit more about them?

Shu shop is a new function of Red and it’s still testing. Shu Shop in Chinese we call it 薯店, and it allows the certified influencers or KOL’s to have their own personal shops which can be linked to their KOL accounts, because currently on Red only companies can open a shop, unlike Taobao where you can actually use your own personal ID to open your personal shop. So, this is what Red is testing to allow influencers to open their own personal shop, and KOL’s can also add the product links during the live streaming or links to their post, so the audience can purchase directly and go to their shop.

Currently only several KOL’s have this new function because it’s still testing, and we actually see that many KOL’s actually own their own personal shop on Taobao, mostly selling apparels and accessories and they are also trying to develop their own brands. I think this is what Red is testing — to see if they can push some niche brands, KOL brands, and influencers brands on Red, which is why they started to allow some influencers to have their own personal shop.

I think this is a good testing because many KOL’s are trying to develop their own indie brand, since Red is also trying to enhance the social commerce function. I think this is a good try to see if the influencers can bring more self, can bring more traffic to their own shop, and this also I think provides more possibilities for brands if the KOL’s are allowed to have their own personal shop. In the future, maybe we can also have some of the brands’ products in the KOL shops so that KOL’s can live stream it and also ask people to purchase it from the KOL shops. After all, this is a new function, so let’s see how it goes in the future?

Any questions? We will find an expert to answer them. Drop your questions in the comments or send us an email – dx@daxueconsulting.com

This article Daxue Talks Transcript #62: How are brands adapting to the coronavirus outbreak on Xiaohongshu? is the first one to appear on Daxue Consulting - Market Research China.

How can sports brands optimize distribution in China to gain market share?  The sports equipment market in China is booming, and brands and distributors are interdependent. In this piece we evaluate the sports equipment distribution distribution channels in China of market leaders.  Lastly, we see how brands responded to two recent disruptions in the sports equipment distribution landscape in China.

Overview of the sports equipment market in China

Sports equipment market size is growing at double digit pace

Promotion from the State and general improvement in quality of life pushed more people to work out

State Council has made the sports industry a top strategy since 2014. Based on statistics from General Administration of Sport of China, the population who regularely exercised grew 48% in urban areas and 148% in rural areas from 2007 to 2014. According to Qianzhan Industry Research Institute, as of 2018, the absolute number of people exercising regularly hit 420 million, almost 32% of the Chinese population. Since it’s still behind 70% of the United States, there is still room for growth. What’s more, this increased interest in sports is manifested across all age groups. According to YiGuan Analysys and China Merchants Securities, the penetration rate of sports has almost doubled from 2007 to 2014.

[Data source: YiGuan Analysys and China Merchants Securities, “Sports penetration improved across age range in China”]

The passion for sports and an increase in disposable income have led people’s attention to a wider range of physical activities

More and more people are not satisfied simply with running, football, basketball, but also participated in skiing, diving, yoga, hiking and other specialized sports. According to Official Website of Chinese Athletics Association, the number of people who run marathons grew 8 times from 900 thousand to over 7 million over 2014 and 2018, and the sport clubs almost doubled from 45,465 to 80,106 in the same period. According to Wind and China Merchants Securities, the average expenditure on sports equipment is growing at a CAGR at 11.2% and is expected to attain 3,448 RMB by 2020.

[Data source: wind and China Merchants Securities, “Annual per capita sports expenditure is rising in China”]

The two important factors of sports equipment market size are both on the rise, making the sport market size bigger than ever. The State Council issued a program called Fitness for All which predicted that by 2020, the market size for sports consumption will be 1.5 trillion RMB, 58% more compared to 910 billion in 2018.

In this growth context, the Covid-19 pandemic caught everyone off guard. Many department stores were forced to temporarily shut down, and economic slowdown curbed consumer expenditure in the short term. In the medium to long term, we can expect a shuffle in the industry with weak sports equipment brands being squeezed out and leaders self-upgrading. This is likely to consolidate the growing internal demand and make the leaders even stronger in the market position.

Profile and segmentation of Chinese sports equipment customers

It is to be acknowledged that sports equipment market encompasses a wide variety of equipment and accessories. They could be consumer facing (2C) or gym facing (2B), suitable indoors or outdoors, for leisure or for competition. Also, each category requires a distinct set of marketing and distribution strategy to best target their specific market segment.

A humble categorization of this vast Chinese sports equipment market can be defined into 3 parts:

• Sports shoes and sports protection equipment like running shoes and yoga clothes,
• Special sports equipment and accessories like treadmill and dumbbells,
• All the rest that does not fit into the first two subcategories.

The first category, the sportswear market is mostly consumer facing. This requires the sports equipment brands to incorporate brand image, comfort and performance into the product design. Likewise, the sportswear distributors have to first emphasize on in-store experience and second develop the distribution channel that covers the most potential customers with the help of e-commerce and management information systems.

[Source: heiyd.com, “Example of special sports equipment in China”]

The second category of special sports equipment and accessories usually has final clients like schools, businesses, gyms, communities, and governments. Consequently, it’s important for sports equipment brands and manufacturers to have several trustworthy wholesalers. The distribution channel doesn’t necessarily need to be as widespread and stretched as the sportswear market, but it has to ensure big quantity supplied to viable clients.

The third category should adopt a distribution depending on the specific characteristics of the sports equipment. As there are no distinct commonalities, the distribution strategy might be a mixture of the two models mentioned above.

Sportswear takes up a big part of total sports equipment market and has most visibility in the distribution issues. According to the State Council, the leisure exercise industry is an important subcategory to the general sports industry and could take 60% of the total market size (3 trillion out of 5 trillion RMB) in the market projection for 2025. In order to better illustrate the supply chain for sports equipment distribution in China, the following report focuses mainly on the sportswear market.

[Source: heiyd.com, “Examples of sportswear sold in China”]

Sports equipment brands, sports equipment distributors and their interdependencies

The sports clothes and sports shoes industry has seen several major brands fighting for market share in China. According to Euromonitor and China Merchants Securities, Nike and Adidas each claim 18%, followed by Anta with 7%, Li Ning 5%, and FILA 3% in 2018.

[Data source: Euromonitor and China Merchants Securities, “Market share of top 5 sportswear brands in China”]

The major sports equipment distributors operating in china include international-level distributors such as Baili International (holding company of Top Sports) and Paosheng international (holding company of YY Sports) as well as regional distributors like Really Sports in Shanghai, High wave Sports in Chengdu, Sanfo Outdoors in Beijing, Sanse in Guangzhou. There are also international players such as Intersport and Decathlon. The fact that the manufacturers of sports equipment are mostly in the southern provinces like Zhejiang, Fujian, Guangdong, Jiangsu and Shanghai in some way explains the prosperity of distributors in those regions.

Sports equipment brands and sports equipment distributors are both important business partners but also partially competitors. For example, when the sports equipment brands adopt self-owned distribution channels through digital means, the distributors lose some of its market competitiveness to the brands. Inversely, when the distributor collects a big number of sports equipment brands and consolidates the local demand, they gain bargaining power.

The intricate relationship between sports equipment brands and sports equipment distributors imply different strategies for getting ahead. For distributors, their success relies on securing vast retail points through M&A, regional networks, and their own sports equipment R&D. A beautiful example is the French Intersport’s strategic partnership with Chinese distribution conglomerate Suning. On the other hand, brands benefit from developing proprietary distribution channels, enhancing brand identity, and cutting-edge R&D in sportswear innovation.

Sports equipment brands have more bargaining power than sports equipment distributors in China

Unlike the home appliance market in China where Gome and Suning, two famous appliance distributors have taken the lead in the distribution landscape, the sports equipment market seldom sees distributors build up their own brand name or decorate their own boutique, even though they own thousands of chain stores. Additionally, this phenomenon is also in contrast with the sports equipment market in the West where retailers like Foot Locker or Decathlon have total authority in the interior decoration of their stores.

Yihong Chen, the president of DX Sport, a Hong Kong-listed sportswear company in charge of all the equity of Kappa in China observed this too: “in the international market, sports distributors and sports brands are equally competent when it comes to branding or sponsoring. But in China no, in China it’s the brand that nurtures the distributors.”

One explanation is that, compared to home appliances, sports equipment has a shorter life cycle and emphasizes more on personal experience

This gives more power to sports brands rather than the channel. As sports equipment poses a greater need for direct feedback between brands and end consumers, there is less need for the existence of distributors. Nike for example, disclosed in its annual reports that sales revenue coming from self-owned channels has increased to 30% of total sales revenue in 2018, a big jump from 13% in 2009. What’s more, according to China Merchants Securities, while the Year-on-Year growth rate of self-owned channels kept at remarkable double digits from 2010 onwards, that of Nike’s distributor only fluctuated around 5%.

[Data source: Nike, China Merchants Securities, “Self-operated stores increased for sports equipment brand Nike”]

A second reason is related to the timing

The sports equipment market in China only started developing in the late 20^th century, while in the United States the sports equipment market was already growing at an annual 10%. Consequently, China entered into digital era so quickly that the traditional distribution pyramid had not fully matured compared to the Western countries. This enables sports equipment brands to further take power away from the distributors by setting up direct online sales channels. Take Nike again for example, its e-commerce sales revenue has risen from 12% (2013) to 27% (2018) out of the total revenue from self-owned channels, making the e-commerce a major driver for self-operated growth.

A third reason is the lack of brand sense and brand awareness in the reasoning of Chinese sports equipment distributors

Having a strong distributor brand is not yet appreciated by consumers from 2^nd or 3^rd tier cities, therefore not a strategic asset for distributors. Also, brands seldom choose only one distributor, as exclusive rights to sell can feed into complacency and under-exploitation of market. Having multiple dealers give brands more bargaining power but puts distributors under pressure. Naturally, the primary concern of distributors is to cut down cost and not build up own brand equity. In order to outcompete other distributors and have more customer, they have to offer a bigger variety of sports equipment in the store, which, unfortunately, resulted in even thinner branding.

A chronological review of sports equipment industry in China

In the 80s in 20^th century, the budding sports equipment industry in China developed elementary retail outlets scattered mostly around department stores and gymnasiums. The retail stores were small, under decorated, selling a collection of products manufactured by various factories and enjoyed minimum brand awareness.

From the 90s on, Chinese sports equipment brands such as Li Ning and KangWei started to roll out their distribution network though a combination of franchised retailers and self-operated outlets. The characteristics of this decade include:

1. A traditional pyramidal distribution chain with multiple intermediaries,
2. A strong bargaining power on the side of manufacturers for the convenience of downstream logistics,
3. Wholesalers were of small scale and only influential in a limited geography.

These attributes on the one hand laid out a solid ground for rapid development in the coming decade, on the other hand resulted in a lack of understanding of the end customers due to the long distribution chain for products, information and cashflow.

The first decade in the 21st century witnessed a big stride in the development of sports equipment distribution in China

The 2008 Beijing Olympics boosted not only a general passion for sports, but also a fierce growth and competition in the sports industry. According to China Merchants Securities, the industry annual growth rate was at an amazing 20%. Internationally, Nike and Adidas entered the Chinese market by working with top national distributors such as BaiLi (who owns Top Sports) and PaoSheng (who owns YY Sports) in the top tier cities, and Puma, Kappa, Misuno followed suit. Domestically, new brands such as 361, Anta, ERKE appeared and also further developed their distribution foothold, mostly in 2^nd and 3^rd tier cities.

Distributors were working hard to expand and consolidate, and brands needed that partnership, but brands were also exploring self-owned distribution channels to bypass all the intermediaries. Li Ning for example, had almost 90% of its retail stores franchised to distributors who were selected rigorously. While the self-managed stores grew 30% from 2004 to 2006, the franchised stores grew 70%, showing Li Ning’s determination to obtain deeper grip in the distribution.

The distributors had similar logic. Naifeng Cai, CEO of YY Sports said in an interview with Sina: “We lifted our original goal of 1000 retail stores up to 4000 by end of 2009, because we’ve reached the 1000 target 3 years ahead of schedule.”

In fact, everyone knew that distribution depth and width is the key strategic advantage, so everyone did just that. By end of 2010, according to China Merchants Securities, the 5 top brands of Nike, Adidas, Li Ning, Anta and 361 together claimed 44.7% of total sportswear market share, largely thanks to the increase in retail stores.

[Data source: China Merchants Securities, Sales revenue soared for sports equipment in China]

The 3-year inventory crisis from 2011 to 2014 had forced both brands and distributors to rethink about their strategy

The huge increase of distribution veins seemingly strategically important, however, led to three years of inventory crisis and sector-wide slowdown from 2011 to 2014. The revenue of PaoSheng international, the biggest sports equipment distributor in China even hit negative growth rate in 2013, according to its annual reports.

[Data source: PaoSheng International annual reports, “Negative growth for biggest sports equipment distributor in China in 2013”]

There were several reasons contributing to the downturn

Firstly, consumers’ needs turned slowly from leisure equipment to high-performance sports equipment, and their shopping habits were moving from street stores to online shops or shopping malls. Secondly, brands had focused too much on distribution development that product R&D and innovation were neglected, then marketing problems such as unclear brand positioning and low differentiation followed. Third and most importantly, the competition among distributors were fierce and they were under pressure of getting rid of a surplus of inventory. They did so by cutting margins for market, to the point where many shut down and the rest reduced order amount and delayed payments to brands.

This crisis eliminated the brands who didn’t differentiate in product features and the distributors who harbored too much inventory from overestimating the demand. It also tested the strength of partnership between brands and their dealers.

Everyone knew that it was only by working together, could the industry restore prosperity

Li Ning took out 2 billion RMB to reform its distribution channels by better locating and decorating its stores, as well as opening experience boutiques in shopping malls. Anta did a very good job turning around. It took several effective measures all with the end goal of clearing excessive inventory and upgrading brand position in the turbulent time:

1. Bought back the inventory excess at a very low price
2. Set up its e-commerce and channeled all these stocks
3. Introduced an ERP system to have full transparency in retailers’ KPIs such as stock-to-sales ratio
4. Finally made organizational changes to flatten out the distribution pyramid.

Thanks to Anta’s distributors who were exclusively serving Anta, and therefore better mobilized and teamed up with the brand, Anta surpassed Li Ning in market share by 2012.

The recent years witnessed integration of digital solutions in the sports equipment distribution chain

E-commerce has been an indispensable part of sports equipment brands’ self-operated sales channel

Brands can either build up its own e-commerce site or open an official account on third-party B2C e-commerce platforms such as Tmall, JD and VIP Shop. The benefits of e-commerce are as follows:

1. Its real-time feedback and big data generation offer invaluable insights into customers psychology and segmentation, which in turn better instructs distribution.
2. It shortens and flattens the supply chain, cutting down costs and margins of errors all along the distribution channel.
3. E-commerce also transcends the geographical and time limits, making the most recent product launches immediately available at the fingertips of consumers across the country.
4. It offers the possibility of drop shipping and pre-ordering, thus mitigating the make-to-stock pressure from the distribution chain.

Those benefits clearly attracted sports equipment brands. According to a sportswear industry full report by China Merchants Securities, Adidas has achieved 2 billion Euro in e-commerce in 2018, up from 55 million in 2010, which puts its CAGR at a startling 57%. Amer Sports had appeared on 100 e-commerce sites in 2018, 80% more than in 2012. Li Ning also hit a remarkable 61% of CAGR of its e-commerce sales.

However, it is to be warned that e-commerce in China might imply counterfeits, so sports equipment brands have to be careful and monitor the e-commerce outlets that are not entitled to sell their branded sports equipment.

Another important digital transformation for sports equipment brands is their self-developed APP

For example, Nike China has developed Nike+Run Club, Nike+Training Club, and Nike SNKRS. These applications not only empower the end consumer to produce user generated contents and build up a digital community, but also integrate digital marketing, e-commerce and offline distribution into a comprehensive whole.

[Source: Nike self-developed apps, “The digital transformation of Nike”]

Information system also plays an important role in upgrading sports equipment distribution in China

Nike has put in place an information system that shares the real-time inventory data of 90% of retailer stores across China to its HQ, which enables better decision in stock order quantity and replenishment frequencies. Anta, being the first to recover from the inventory crisis, also understood the importance of information transparency. Its ERP system coverage rate improved from 43% in 2008 to 98% in 2017, and maintained at 100% at present.

The future of sports equipment distribution in China

Newcomers never stops disrupting the traditional sports equipment distribution in China

Hey Sports (Hei Yun Dong in Chinese), a B2B e-commerce platform for sports equipment founded in 2016, is a product of Internet+, the Chinese way of saying digital transformation. It provides integrated supply chain services of lead generation, logistics, payment and information to help manufacturers quickly establish a flat retail channel to their end clients, in the hope to downsize the supply chain cost by 30%.

Xusheng Wang, its founder mentioned in an interview with Sohu Sports: “The sports equipment distribution in China is a fragmented business represented by local wholesale markets, each fighting its own battle. Other than the professional and high-end sportswear brands such as Nike, Adidas, Anta, most brands with limited annual sales cannot afford a nationwide sales network, and that’s how the idea of a B2B e-commerce for sports equipment came into being.”

The brands listed on the website of Hey Sports are mostly manufacturers for physical training in schools and gymnasiums. Thanks to years of experience in the sports equipment distribution in China and a solid network of over 30 thousand retailers in 22 capital cities, Hey Sports became the first digital disruption in the B2B sports equipment distribution domain, making the B2B sector more visible.

[Source: heiyd.com, “Examples of sports equipment brands listed on Hey Sports”]

Another disruption comes from the fitness industry in China

Keep, China’s largest social sports APP, was founded in 2015 and reached 14 million monthly active users in January 2020. Its first genius is to implant the sales of sports equipment in the context of digital course offerings, naturally and precisely grapping the target customer. Its second genius, is to build its proprietary e-shop inside the mobile APP. It fully understands that the package delivery industry is so mature in China that consumers can order a treadmill on this app.

[Source: Keep, “E-commerce is embedded in the social fitness app Keep”]

These 2 disruptions constantly remind players in the Chinese sports equipment industry that new opportunities never cease to germinate, and that no one is ever too safe in a competitive landscape.

Author: Della Wang

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This article Sports Equipment Distribution in China is the first one to appear on Daxue Consulting - Market Research China.