Last week the British e-commerce site, ASOS closed their China e-commerce website for the final time with all future orders being fulfilled via their international site. With China’s online sales of physical products in 2015 growing 31.6% year-on-year to USD 493 billion, this leaves us with the question - why did they fail when so many brands are scrambling for a presence on China’s ‘lucrative’ e-commerce platforms?
In this article, Catesby's CEO, James Rogers breaks-down what he believes to be the key reasons the e-commerce operator failed and ended up calling time on their China business.
Failure to Understand the Market
One of the explanations given by ASOS for the closure of their China business was due to the restrictions and bureaucracy associated with entering the local market. When they entered the market in late 2013, they made the mistake that many Brands make - they failed to fully understand the market and the complexities involved. As with all brands entering a new market, there are a number of challenges that only become apparent as and when they start trading.
There are others however which should have also been identified prior to entering as these could have lasting implications on the success of the local business. Operating in the fashion sector, one of the first areas where they would have faced challenges is with China’s very strict labelling laws with items often failing to pass customs if they do not meet the strict criteria. Knowledge of this prior to entry ensures integration into a brand’s future strategy. In addition, the management blamed the diverse climate across China. Again, this together with the difference in consumer taste and trends can be easily analysed prior to entering.
There are a number of very strong domestic operators in China who are operating multi-brand e-commerce platforms. There are the familiar giants such as Tmall and JD.com which sell a number of fashion brands from across the world, but there are also a number of smaller platforms which are equally strong and should certainly not be overlooked. In addition, for the brands which have an offline presence in China, have or are at least planning to establish their own local e-commerce platforms.
USP? What USP?
In our view, ASOS thought that they had a strong point of difference, selling brands which were not available on other platforms. While this should have been the case, the issue that ASOS together with a number of other brands have faced in the past is that few consumers in China are willing to buy items from brands which they haven't previously bought or heard of and don’t know how good the quality is. They prefer to touch and feel items prior to purchasing. In order to get the consumer to buy brands previously unavailable and unheard of in China, ASOS would have needed to educate the consumer about the brand and product offering.
While this sounds relatively easy, all the competition (both domestic and international) means there is a lot of noise. Each new brand to the market needs to work incredibly hard and invest heavily both financially and resource wise to promote the business and get the target consumer to try the service. While this often takes considerable time and can be slow to see positive returns, this can often lead to repeat custom as well as positive recommendations by word-of-mouth and social media.
A number of brands without a presence in China are themselves now shipping to the Middle Kingdom and with the rapid rise over the last 18 months of cross-border e-commerce, this has meant it is becoming far easier for the Chinese to buy items not yet available in physical stores in China and at local prices. This in our view ended up diluting ASOS’s USP.
While the business model devised by ASOS makes sense on paper, it provides added complications for the business. With the decision to fulfil orders locally by opening a distribution warehouse in China, this meant that all the products being sold had to pass the Country’s strict testing criteria and undergo local testing. Again, this takes time and is a considerable upfront investment.
For all brands that have attempted to crack the China market, they will all confirm that success is not instant and cementing one’s position in the market cannot be seen as a short-term project. There are many brands that have been in China for over five years, who are still finding their feet and while many are starting to see positive growth, they are yet to make the colossal returns that many expect. The difference is however, that they see China as a long-term project. With the investment in the local app, one would have thought that ASOS had the same view, but it was obviously not the case. While there are other markets that may be better in the short-term, a retreat from the market could have long-term implications. Closing an office and making a reported 60 people redundant is going to make it difficult to revisit the opportunity in the near future. It needs to be remembered that the market is still immature. We are seeing the early stages of brand loyalty however this takes time. The brands who are investing in the long-term future of China will at least be in the mix when this time comes.
What needs to be remembered is that China is not for everyone. We see Boards / Shareholders continually putting the management under pressure to have a presence in China often failing to understand that success is not guaranteed. They are often sold on the numbers believing that with a population of 1.37 billion, there is potential for everyone. They fail to appreciate the dominance and strangle-hold that some of the domestic brands have on the market. These domestic operators understand the consumer, are fully committed to the project, and willing to invest heavily for the long-term.
So what can one learn from ASOS’s demise? Invest in due diligence prior to market entry. This will help brands to appreciate the local market nuances and will allow them to determine whether there is actually an opportunity and if so, what the appropriate action plan should be.