China Consumer

Everything must go

Why Chinese consumers benefit when export firms cut prices and sell locally

Everything must go

New deals for China's shoppers

A case of the pen being mightier than the sword? Not exactly, but the protests at a Dongguan factory gate did involve pencils, reports the 21CN Business Herald. They were brandished by an angry group of domestic supermarket bosses.

“We didn’t know that what we sell in our supermarkets was trash, till we looked at these goods,” yelled one of the bosses.

China’s retailers are having their eyes opened – as unsold export goods find their way into domestic shops. They don’t quite know whether to be thrilled at the new quality reaching their shelves or outraged that they have been short changed for so long.

This all stems from the declining market in foreign exports. Until recently, factories that manufactured for overseas buyers usually preferred to stick to international business.

In fact, it was often tough for domestic retailers to source “export-oriented” goods at all. Some even recall being refused promotional material at trade fairs, once it became apparent that the interested party was selling locally. “Domestic selling” was a last resort, the Herald reports.

But 2009 is a year of last resort, as far as many of the erstwhile export snobs are concerned.

The experience of Gu Guojian, a professor at a Shanghai business school, points to how the two-tier manufacturing model is beginning to break down.

Gu had long noticed that local supermarkets lacked the organisational discipline to negotiate procurement deals like those on offer to foreign players like Carrefour and Walmart. So early last year he decided to try an experiment. He gathered together a group of domestic retailers, pooled their demand and led a reconnaissance team into Guangdong manufacturing land.

He struggled to make it past the factory gates. Export manufacturers were comfortable with their foreign buyers, especially their credit quality and respect for contracts. They were less confident about dealing with their own countrymen, and looked down on local practices like three-month payment terms and the option to return unsold merchandise.

But by late 2008, says the Southern Weekly, the mood was changing. When the purchasing team returned to Guangdong, the credit crunch was biting hard and, this time, the factory gates were swung open. Manufacturers were desperate to sell off inventory left over from the cancelled orders of foreign customers.

Gu’s initiative does not seem a particularly revolutionary one. But it might be revealing that it took an academic to kick off the pooled purchasing missions, as well as demand to meet manufacturers face-to-face.

It turns out that many retailers have tended to rely almost exclusively on middlemen for their procurement, and have lacked direct relationships with their suppliers. One manager at a Guangzhou retail chain admits that few of his buyers bother to seek out new products. Many don’t even concern themselves with customer sales figures either, as the supermarkets can always return unsold goods.

So Gu’s team may have broken the mould. But is this the win-win situation that they claim?

In the current circumstances, the consortium’s purchases must have saved supplier jobs. Gu’s association has 72 supermarket members with more than 4,700 shops between them – a lot of new sales channels.

It looks like there is money to be made by the retailers too. A Shandong supermarket chain mentioned in the Herald article is buying export-quality jeans at Rmb20 a pair – a 60% discount – and then selling them on for more than twice as much. Stock sold out almost immediately.

High quality goods, large sales volumes and a huge profit margin – a retailer’s dream.

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.