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Economists' Pick > HKTDC Research Reports > Research Articles

Can wholesale marts bring brand success in China?Development of Chinas consumer marketChinese consumers have become more sophisticated, demanding and mature as the

economy of their country took off. They are attaching greater importance to the quality,design and brand image of products. In particular, the middle-class and high-endconsumer groups not only generate a growing demand for high-grade commodities, butalso have rising expectations in respect of the shopping environment, services andexperience offered.

Following the rapid development of various retail formats such as supermarket,hypermarket and convenience store in the commercial districts and residential areas onthe mainland, consumers are now used to shop for daily necessities and food from thenearby supermarkets or convenience stores. Apart from department stores, brandedspecialty stores and specialist stores have also become the major shopping channels formiddle-class consumers to purchase general merchandise in recent years. Meanwhile,

online shopping for general merchandise is becoming popular among consumers of theyoung generation.

Of late, modern shopping complexes have developed rapidly on the mainland. Providingconsumers with comfortable shopping environment and a rich product mix for selection,together with a full range of leisure, entertainment and dining facilities, these shoppingcomplexes have already become the popular weekend and holiday destinations ofmainland families and young people.

Today, new development plans, particularly those for the new urban districts in first- andsecond-tier cities, generally include large-scale shopping complexes as the major

commercial and living support facilities. These shopping complexes usually draw indepartment stores, hypermarkets and large home appliance specialist chains as anchorstores, with open recruitments to solicit other store and brand operators.

In face of more and more intense market competition, retail enterprises on the mainlandincluding retailers of fast-moving consumer goods (FMCG) and general merchandisehave started to step up the management of their brands and supply chains with a viewto developing new product types and sources that are competitive. For large retailenterprise chains with massive sales volume, they even consider developing their ownbrands.

To win over middle-class consumers and those with high spending power, department

stores and shopping malls on the mainland are becoming increasingly brand-orientedfocusing on quality products. They strive to upgrade and maintain their market

6 Sept 2012
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positioning and product grades by drawing in well-known brands.

For the urban consumers of the working class as well as those third- or fourth-tier cities,towns and villages with slower economic development, they have less demand for

brands and their daily consumption and shopping activities still focus on ordinaryshopping malls and stores that are basically selling low- to mid-range products.

To tap into the middle-class market on the mainland, not only should there be qualityproducts and successful brand development, but a sales network should also be set upby carefully selecting the wholesale and retail channels with appropriate positioning andimage.

Wholesale and distribution channelsAs Chinas urbanisation gathers pace, more and more supermarket and hypermarketchains are setting up shops in the new commercial and business districts of cities and

towns. With an increasing number of stores coupled with larger purchasing quantities,chain groups tend to adopt centralised purchasing process as a way to raise efficiencyand minimise costs.

Supermarket, hypermarket and convenience store chains on the mainland generally seekout suppliers in three ways. First, authorised regional distributors / agents ofmanufacturers take the initiative to contact the purchasing departments of supermarketand convenience store chains for business discussions. Second, suitable products orsuitable distributors / agents are identified in recruitment activities organised bysupermarket and hypermarket chains. Third, suitable products are identified bysupermarket and hypermarket chains at third-party exhibitions / trade fairs for

subsequent cooperation with distributors / agents of the products concerned.

Once an FMCG brand has established some reputation on the mainland, considerationcan be given to selling directly to supermarkets / hypermarkets / convenience stores ofgood standing as a way to cut out the costs of intermediary distributors / agents,thereby improving profit margins. Yet in third-, fourth- or lower-tier cities where theretail channels for FMCG mainly consist of independent shops or small market chains andwhere the purchasing quantities are still insufficient for direct ordering frommanufacturers, reliance on regional distributors / agents or wholesalers is still necessary.

More and more general merchandise retail enterprises adopt the centralised purchasingmode to minimise the intermediaries. For example, nearly all mainland department

stores are making centralised purchasing. Some major general merchandise retailenterprises have even started to upgrade from centralised purchasing by individualstores to centralised purchasing by the group. In other words, the purchasing authorityis withdrawn from the stores to the head office of the group for purchasing directly fromthe manufacturers or their national sole agents.

Mainland department stores generally adopt two modes of operation: direct sales (self-operated and consignment sales) and specialty counter sales. Similarly, there are threebasic purchasing modes for department stores: (1) a product supplier appoints /authorises regional distributors / agents on the mainland to negotiate with thepurchasing department of a department store / shopping mall; (2) a brand ownernegotiates directly with the purchasing department of a department store / shoppingmall; and (3) the purchasing department of a department store / shopping mallidentifies suitable brands and products in exhibitions / trade fairs.

Can wholesale marts bring brand success in China?

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Many brands in the department stores are directly introduced through their purchasingdepartments. Some well-known brands will initiate cooperation discussions withdepartment stores / shopping malls through their headquarters. Brands which are moreglobal and more famous with a larger clientele will have greater bargaining power when

negotiating with department stores. If a new, branded product is unique or has not beenlaunched in the mainland market, department stores are also willing to discusscooperation terms.

For specialist stores, product varieties and brands are relatively limited and they mostlyadopt centralised purchasing and management. In general, specialist stores eitherindependently operate the purchase and sale of products, or they operate in the form ofbuy-out, consignment sales or sales of house brand products (that is, the store placescustomised orders with manufacturers to produce its own branded products).

Franchise operation has been growing rapidly on the mainland in recent years. With theincrease in modern shopping complexes, in particular, many brand enterprises engagedin clothing, footwear, jewellery and other consumer goods have accelerated thedevelopment of their mainland distribution network through franchise operation. By wayof sub-franchising, some capable franchisees with better management ability are evenentrusted with the market development of the region and assist in the management ofother franchise stores within the region.

For individual retail stores and small- to medium-sized operators that still take up asubstantial share in the overall retail market of China, their main purchasing channelsinclude regional distributors, wholesalers and wholesale markets. This is because theirmarkets are scattered, their purchasing quantities are small, and their products basicallybelong to the low- to mid-range.

Wholesale marketsCommodity retail and wholesale markets first emerged in the 1980s as marketplaceswhere people traded in all kinds of products. As such, they are a product of Chinasopening-up and reform. Subsequently, as the development of retail channels on themainland became more mature while the income and tastes of consumers improved, theoperation of these markets has gradually changed. Today, these wholesale marketsserve as a support to the rural markets. They target the low- to medium-end markets insome mainland cities as well as in overseas markets. They have become specialisedwholesale centres (or wholesale markets for short).

Guangzhou, for instance, has been striving to develop wholesale markets since the1990s by virtue of its regional location and industrial advantages in the PRD. At present,there are more than 100 wholesale markets of industrial consumer goods that arerelatively large, and many of them have an annual sales of more than Rmb100 million.Among them, the clothing wholesale market at Liuhua district of Guangzhou (comprisingBaima, Tianma, Hongmian Bubugao and Xindadi clothing markets), the footwearwholesale market near the junction of Huanshi West Road and Zhanxi Road (consistingof Bu Yun Shoes World, New Continent Footwear Plaza, Euro Commercial Plaza ShoesCity and International Shoes City) as well as the toys and gifts wholesale market aroundYide Road and Haizhu Road in Yuexiu District (including International Toy and StationeryCollectibles Plaza, Yijinyuan Toys and Stationery Market, Jinjin Toys and Stationery

Market, Haizhu Toys and Premiums City, and Zhonggang Toys Market) are all famousnational trading centres of consumer goods.


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n t e asis o t eir simp e unctions o oot easing an commo ity tra ing in t epast, the operating mode of some large and successful specialised wholesale centres onthe mainland is transforming into a multi-functional specialised marketing centreintegrating the functions of trade fairs, major commodity order-placing meetings and

general services. These large wholesale markets always host specialised trade fairs andmajor commodity order-placing meetings. They also organise site visits for companiesand even invite foreign companies or manufacturers to conduct trade discussions in a bidto assist them in product sourcing or marketing. All these aim at making use of effectivemeans to change the operating mode of traditional wholesale centres which is morepassive.

In the past, the products available at wholesale markets are entirely those manufacturedby small- to medium-sized enterprises and township enterprises. Yet to satisfy thegrowing demands of consumers in quality of life and consumption level, the productsources and product mix of some wholesale market have begun to move towards higherquality and higher grades, thereby attracting some major enterprises or some brands

with nationwide reputation to set up product showrooms and marketing offices at thewholesale markets.

As large numbers of suppliers and products are concentrated in the wholesale markets,the cluster effect can attract individually-run business operators and wholesale agentsfrom across the country, including those from third- and fourth-tier cities and townshipdistricts to come for sourcing. In recent years, mainland manufacturing enterprises havebeen actively developing brand business. A majority of them set their positioning atmass market brands and target at second- and third-tier cities. These enterprises alsochoose to develop brand franchising business through wholesale markets. Kaiser andGirdear, for instance, are both mainland brands hatched at Guangzhous Baima

garment wholesale market earlier on.

Some wholesale markets have been transformed into display and trading platforms offactory direct sales for receiving agents from across the country. For example, HighsunBin Bin Plaza is engaged in the franchising wholesale cum retail business, mainlyinvolving upmarket womens wear and the wholesale of imported Taiwan and Hong Kongfashion. Their customers come from all parts of the country, particularly from thenortheast.

Haizhu Toys and Premiums City also pursues the branding strategy where all the tenantsof the mall are agents of toy brands such as Goodbaby, Blue Box and Smart Toys. Thedecoration and layout of the mall is highly modernised where each tenant has a separate

unit to serve as show room and office. Meanwhile, the International Toy and StationeryCollectibles Plaza has followed the operating mode of Haizhu Toys and Premiums City indecorating the top floor as a display parlour which is let under a separate lease with aview to attracting some large enterprise or major brand to set up showroom and officefor specialised wholesale business.

In respect of footwear industry, more than a dozen footwear wholesale markets arecentralised in Zhanxi area of Guangzhou for the distribution of a wide range of footwearproducts from low- to high-end. This location has become the largest footweardistribution centre of China offering a full range of product mix that are sold across thecountry and overseas including Southeast Asia, Middle East, South America, Europe, theUnited States and Russia. Among these wholesale markets, Bu Yun Shoes World, NewContinent Footwear Plaza, International Shoes City and Euro Commercial Plaza ShoesCity are offering top-grade products with a relatively large number of brands that arewell-known in the domestic and overseas markets, serving mainly footwear companies


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that come to place orders. In particular, Bu Yun Shoes World is the largest footwearwholesale market of the highest grade in Guangzhou operating with the best supportingfacilities. It has more than 1,000 operators coming from across the country andoverseas. Bu Yun Shoes World targets at the footwear export market and companies

sourcing here mainly come from the United States, Canada, Europe and Africa.

However, products available at most wholesale markets are of varying qualities butsimilar designs, with many produced at small workshops. There are highly imitative fakegoods as well as low-end counterfeits. In consideration of their image and targetmarkets, enterprises planning to develop medium- to high-end brands on the mainlandseldom choose to set up operating points at these wholesale markets. As for somefamous international clothing and leather brands that enter South China City atShenzhen, they only aim at promoting the sale of their leftover stock at an outlet venue.

ConclusionWith rising income and growing consumption awareness, mainland consumers arebecoming more demanding towards the brand, design and quality of products. Largedepartment stores and shopping malls at first-tier or even second- and third-tier citiesbasically focus their operation on medium- to high-end products and well-known brands.Brand store chains that are taking up an increasing market share on the mainland andexpanding their sales network through franchise operation also focus on the sale ofinternational and local branded products. Coupled with the growing maturity andpopularity of online sales platforms including B2B and B2C websites, the traditionalcommodity wholesale mode of operation on the mainland is beginning to change.

In face of the increasingly intense competition of the mainland market, brand suppliers

have to adopt more proactive and aggressive strategies in building up sales channelsand brand image so as to earn a slot or a ticket for setting up stores or counters atdesirable shopping malls, department stores or hypermarkets with appropriate marketpositioning. To tap the mainland market more effectively, many international brandshave, in the past few years, withdrawn the operating rights of their mainland marketagents and set up their own task force to liaise with department stores / shopping mallsdirectly for market development.

Changes in the market have also driven the wholesale markets on the mainland totransform their operation into brand and product display cum wholesale business. Thesuccessfully transformed wholesale markets find their clients in low- to medium-endmarkets at home and overseas, as well as individually-run businesses and regional

distributors in second- and third-tier mainland cities.

In dealing with large distribution and retail enterprises in first- and second-tier cities,brand suppliers have to take the initiative in soliciting business through door-to-doorvisits. To build up a medium- to high-end brand image on the mainland market, it isalways necessary to set up flagship stores at some shopping malls of good standing andadvertise. Today, mainland consumers seldom shop at wholesale markets for fear thatproduct qualities are varied and fake products prevalent.

For the more successful wholesale markets on the mainland, they usually have verysound history of development with advantageous geographic factors where a large group

of wholesale markets with numerous commercial operators are centralised and producean obvious cluster effect. For example, the area around Yide Road and Haizhu Road inGuangzhou is the earliest and largest toys and gifts wholesale cum retail centre of thecity. Apart from hundreds of traditional roadside stalls and shops, there are also 12 large


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wholesale malls in this toys and gifts wholesale market which is well-known nationwide.Large wholesale market can attract purchasing clients not only because of their fame,convenient location or rich choice of suppliers and product mix, but the managementability of the operators is also an important factor.

Yet to sum up, in face of the increasingly sophisticated demand of mainland consumers,the move towards direct purchasing by retail enterprises and the emerging popularity ofonline B2B and B2C sales platforms, the role of wholesale markets in the domesticwholesale channels of China will continue to be put to test in the days to come.

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permission is prohibited. While every effort has been made to ensure accuracy, the Hong Kong TradeDevelopment Council is not responsible for any errors. Views expressed in this report are not necessarilythose of the Hong Kong Trade Development Council.


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