Cross-border e-commerce in China: opportunities and challenges

Virtually all major global consumer brands see China as a major source of growth in the future. Pet care brands should be no different.

Challenges
While market dynamics make China attractive, there are challenges to entry. For example, tight import regulations often prevent brands from entering and winning in the market. Product formulas must comply with stringent ingredient standards, and production facilities must pass Chinese Good Manufacturing Practice (GMP) standards and be officially registered.

Even products with compliant formulas produced at approved factories require a lengthy and expensive approval process. Many brands have explored traditional import and decided that regulations posed insurmountable challenges. Or that the process was simply too costly.

If traditional import were the sole option, only the most patient and well-capitalized brands could go into other markets. Fortunately, there are alternatives.

Alternative options
In the mid-2010s, a new form of e-commerce developed in China. Strong demand for foreign- made products in highly regulated categories (such as health and beauty) prompted major e-commerce companies like Alibaba and JD.com to establish online marketplaces exclusively selling foreign brands.

Working with local and central governments, these e-commerce giants staged products outside China (or in bonded warehouses within free trade zones) and shipped them directly to Chinese consumers. The government levied a nominal VAT on these transactions, and imposed some import limitations, but the goods were generally exempt from stringent import regulations.

This new model – cross-border e-commerce – has become an enormous sales channel and, according to data from 100EC.CN, 140 million shoppers accounted for over $60 billion (€54B) in retail sales in 2020. In recent years, the market has grown at least 25% annually and a double-digit CAGR is expected through the rest of the decade.

How to enter the market: 4 steps
When done thoughtfully, cross-border e-commerce is a strategic and lucrative way to pursue entry into China.

Step 1: Review the market and assess regulations specific to your products
For brands that want to enter China for the first time, a market review analyzes the market potential, competitive landscape and relevant regulations. Whether brands can enter the market with a full complement of products depends on the results of this analysis. Most start with a few high-demand SKUs, while others reformulate products specifically for the Chinese market.

Step 2: Test the market and develop brand positioning
In China, all brands need to position themselves differently to their home market. There are various ways to run initial in-market tests to determine brand positioning, such as sending samples to local influencers for feedback or setting up a marketplace mini-store to test sales.

Step 3: Develop an entry strategy
A market entry plan must cover assortment, channel, supply chain and brand positioning strategies. While highly dependent on positioning, a premium pet care brand would include an initial phase of using top-tier e-commerce marketplaces to build online storefronts. Combined with smart social media management on platforms like Red Book, strong brands can quickly build awareness and drive sales.

Step 4: Find partners and execute the plan
The right partners will guide a brand through the execution process. With traction in sales and consumer awareness comes the opportunity to expand quickly through distributors and additional e-commerce platforms. Sometimes, it’s even possible to identify SKUs for traditional import. Sufficient sales data and knowledgeable partners allow you to confidently enter this challenging process.

Cross-border e-commerce is a fast and relatively inexpensive market entry strategy for brands new to China, and those wanting more control over their brand image and customer engagement. It is a proven method of serving pet parents in China that every North American or European brand should explore.