15 Oct 2018
Accessing the ASEAN Consumer Market: Houseware and Small Home Appliances (Market Entry Strategies)
In selling houseware and small home appliances to the major ASEAN markets - Indonesia, Thailand and Malaysia, Hong Kong SMEs should consider the pros and cons of various market entry methods, to choose an optimal market entry strategy which best suits their business needs.
Operate Own Retail Stores (Franchised or Self-owned)
While technology allows businesses to be conducted from anywhere in the world, the presence of a retail location enhances brand awareness and customer experience. This is particularly true in key ASEAN cities, as in-store shopping is a favourite pastime for urban consumers.
Some home furnishings and accessories retailers have opened their own stores in major ASEAN cities while others expand through franchising, with IKEA one of the biggest franchisors in this sector. In exchange for a fee, IKEA grants rights to another company to use its trademarks and to sell IKEA products within a defined territory. Apart from the use of its trademark, the franchisee gains access to the systems, methods and solutions from the franchisor to market and sell its product range. The Thai Home-furnishing retailer, Index Living Mall, has also pushed beyond Thailand into franchising in other Southeast Asia countries. With franchising in Malaysia and Vietnam, the company has expanded to Indonesia through a partnership with mega retailer, CT Corp.
Not all brands are suitable for franchising. Brands that have reasonable consumer recognition, a proven business model, good revenue records, and sufficient support to franchisees can consider franchising as a choice for overseas expansion.
Market to Retailers
Besides operating their own branded stores, routes to the ASEAN markets are becoming more diverse and competitive for imported housewares and home brands. For Hong Kong suppliers, selecting a distribution channel is an important aspect of building a competitive business advantage. Companies need to consider what a channel can offer, including location and reach, skills and resources, management costs and degree of control.
The right retail channel can help suppliers expand their geographical operations quickly, reducing their own stock-holding and distribution costs. Dealing with a retail chain gives supplier access to an additional customer base without investing in opening their own stores. If suppliers can build a good relationship with key retailers and department stores, they may benefit when those companies expand their networks across the ASEAN region. Notable retailers with regional exposure are Parkson Department Store, Central Department Store, Tesco, Giant, HomePro, Index Living Mall, and Best Denki.
One major short-coming of selling direct to retailers is that nowadays most retailers request that merchandise be delivered to them under a consignment agreement, rather than as a sale, which means that the merchandise is only paid for after it is sold. Under such an agreement, the consignee does not have the same pressure to sell the merchandise as it would if it owned the product. Whatever stock remains unsold can be returned to the consignor, usually at the consignor's expense.
There are a number of things that an overseas supplier or brand should be mindful of when selling direct to retailers in ASEAN:
1) Logistics – Retailers expect suppliers to ship requested volume on time. Some department stores have distribution centres (DC), and overseas suppliers are required to warehouse a minimum amount for each stock keeping unit (SKU) in the designated DC. Some department stores do not have a centralised DC and require suppliers to deliver goods directly to individual department stores. However, omnichannel fulfilment strategies, such as buy online/pickup in-store, or order online/deliver to home, require multi-logistics formats and real-time inventory visibility. Overseas suppliers need to consider a multitude of factors, including product availability, timeliness, freight costs, margins and the price point, when determining the best way to deliver products to retail customers.
2) Merchandising – Retail merchandising is the key to a supplier’s success. Products that are not properly displayed and not adequately stocked, will result in lost sales. Retail merchandising is something that requires constant attention. Ideally, suppliers should monitor store-level demand in real time in order to ensure the top-selling items remain in-stock. Even within the store, suppliers need to be sure that their products are right in the line of customer traffic. Products stand a lesser chance of getting purchased if tucked in the furthermost corner of the store where customers hardly ever go. Suppliers cannot rely on the retailers to do merchandising for them, especially if they are big chains. For housewares made of special material or small home appliances that have unique functions, a brief introduction with emphasis on customer benefits is essential.
3) Marketing – Most retailers require the brand or supplier to provide a comprehensive marketing plan. A promise to invest a certain percentage of sales for marketing and promotion is usually not enough. This requires the brand to have a basic understanding of the local market, consumer behaviours, as well as marketing and promotional channels.
4) Sales Personnel – To encourage retailers to sell their products, suppliers may need to provide product training for the retail sales teams, together with a programme of sales incentives. Department stores usually give suppliers an option to place sales personnel on premises to answer customer inquiries. Even though hiring sales staff involves extra operation costs, the presence of a sales person may make a big difference to sales.
5) Order size – Manufacturers and suppliers may want to enforce a minimum order to all buyers without exceptions. However, it will be difficult to negotiate minimum orders with established ASEAN retailers. Suppliers might have to consider “no minimum order” on the first purchase to incentivise sign up.
Through Local Agents/Distributors
Since selling direct to retailers involves cumbersome processes, overseas suppliers may need to set up a team on the ground in the local market. An alternative way to minimise initial investment is selling through a local agent or distributor. The HKTDC interviewed a Hong Kong houseware exporter who tried to sell direct to department stores, before finding it not worth all the effort. In the end, the exporter reverted to a distributor to handle all retail customers.
The difference between agents and distributors is that the agent takes orders in the supplier's name, while distributors act in their own name and may stock products purchased from the manufacturer for resale. The choice depends on the nature of the business and the relationship with which the supplier is most comfortable.
Pros and Cons of Using a Distributor
The process of finding and selling to retail customers in an unfamiliar ASEAN market can be costly and time consuming. Many exporters would rather deal with a regional distributor or a local distributor in each country than a retailer. When Hong Kong manufacturers or suppliers appoint distributors to enter the ASEAN market, it becomes the distributor’s responsibility to find local retail customers. Manufacturers or suppliers can start retail penetration in a selected ASEAN country through the distributor’s network without having to spend much money or involve company resources in channel building.
Distributors can help arrange cross-border shipment and handle customs clearance. They may have a system in place to keep track of inventory in the distribution centre and individual retail stores and help replenish merchandise in a timely manner. They also understand the cultures, consumer tastes, and shopping behaviours of the local market. An experienced local distributor can be very valuable as each ASEAN country has its unique mix of ethnicity, language, and religion.
Moreover, a local distributor can reduce the need to invest in customer service provision. Under a typical distribution agreement, the distributor would take up the responsibility of dealing directly with local retailers. That said, if a manufacturer relies solely on the distributor to obtain orders and answer all questions from retailers, it could be a fatal error. Building a direct relationship with local retailers is a must to gain a clear understanding of the clients’ businesses, and tailor relevant service offerings accordingly.
Despite the numerous advantages of working with a local distributor there are some down sides. First, in return for taking on the supplier’s trade-related risks and burdens, distributors will expect heavy discounts and generous credit terms (up to 60 days). Second, suppliers may lose some control of the way products are marketed and priced. Third, distributors often demand a long period of exclusivity, so Hong Kong suppliers need to be sure that the distributor they choose has experience selling their type of products and has existing customers on hand.
Local retailers may also prefer dealing with distributors for convenience. The most important thing to a retailer is keeping their shelves stocked with products that turn. If they deal direct with manufacturers, they have to visit the factory, reviewing product catalogues, setting up a new business credit form, sending business information, setting up efficient ordering and accounting, and so on. Distributors make things easier for retailers, and more importantly, most distributors will bulk purchase products but retailers will not. Some distributors sell multiple brands, they act as aggregators and offer bulk discounts for retailers buying multiple brands, as well as ensuring consistent delivery times.
For distributors, the distribution business is a margins game, so distributors will gravitate toward products that are easy to sell with the least effort. For a product that is complex, manufacturers or suppliers should make promotional and sales materials ready to support distributors’ sales efforts. Sufficient training and communication are crucial for any distributors to perform and grow their business.
How to Find an Overseas Distributor
One of the best places to connect with potential partners is at trade shows, either in Hong Kong, or even better, in the markets exporters are targeting. Attending international trade shows is often a good starting place for relatively new exporters. They can also get a snapshot of the competitive landscape. (For details, please refer to the upcoming article “Accessing the ASEAN Consumer Markets: Houseware and Small Home Appliances (Marketing)”)
B2B online marketplaces, such as Alibaba and Amazon Business, are another means of connecting with potential overseas partners. Perhaps the best way to find good partners is always word-of-mouth. Suppliers who know the right person in the local market can steer to the right place faster. Trade associations are usually the starting point to get to know people in the same trade. But not all associations are the same, with some are more active and business oriented than the others. Hong Kong suppliers should do their own due diligence to find out which associations can help them realise their export potential.
Creation of a Distributor Agreement
If Hong Kong exporters decide to sell through a local distributor in ASEAN, they should ensure the creation of a properly drafted distributor agreement in which some important clauses are not omitted. Calling for annual termination and semiautomatic renewal should always be included for cautious exporters. Distributorship can either be exclusive or non-exclusive. Distributors usually make a request for an exclusive territory, as an incentive to allocate resources toward development of sales for the overseas supplier. Once the supplier agrees to an exclusive territory it forfeits its right to engage an additional distributor.
One alternative to assigning an exclusive territory is to draft the distribution agreement in a way that the distributor is non-exclusive, but the supplier only appoints one distributor in that territory. Such an arrangement provides encouragement for the distributor to perform without restricting options of the supplier. It is advised that the agreement should be reviewed by both a legal professional and a local industry professional who are aware of industry norms.
Sell Direct to Consumers via E-commerce
Whether it is an entrepreneur considering whether to sell online or offline, or a wholesale home appliances brand that has been successful selling through a distributor, selling direct to consumers should always be on the agenda of a business. Today, brands no longer need to solely rely on their distributors or retailers to stay in business, many online platforms offer brands or manufacturers an opportunity to expand overseas by selling direct to consumers. Even traditional retailers, such as Index Living Mall and H&M Home, or established conglomerates, like Central Group in Thailand and PT MAP Boga Adiperkasa (MAP Group) in Indonesia, are embracing e-tailing as an opportunity to better serve their customers and reach out to a wider audience.
Benefits of Direct Selling to Consumers
There are many benefits of direct selling to consumers. Time to market is significantly decreased. In this fast-changing market where product cycles are significantly shorter, being able to launch the newest products to the market quickly has a definite advantage.
In addition, brands can have complete control of their brand image, not subject to distortion or dilution by third parties. Consumers like it when they can interact directly with a brand as they can get information about the product promptly. In a direct to consumer model, manufacturers or brands can have price control as well. Direct selling allows manufacturers to further reinforce manufacturer’s suggested retail price (MSRP) and communicate directly with consumers about price points.
Most importantly, selling direct allows brands to gain access to consumer data. Making use of customer data effectively can result in better products, greater relationships, easier conversion, more sales, and ensure long-term brand success.
Risks and Mitigations
If Hong Kong brands and suppliers of houseware and small home appliances see the rise of e-commerce as a catalyst for direct selling to customers, they should carefully consider the risks associated with selling direct and have a plan for mitigation.
Risk One: Disrupt Existing Channel Relationship
The first risk of selling direct is damage to existing relationships with distributors and retailers. Under such circumstance, the brand has to remind its business partners that many consumers will continue to demand access to multiple brands, something that one brand cannot provide. The brand can offer exclusive products to its distributor or retail channels. These can be exclusive designs, packaging or bundling offers that are not available on direct-to-consumer channels.
Risk Two: Underinvestment in Infrastructure and Manpower
Brands that leap into the direct market without the proper infrastructure and manpower will only damage their brand. First, they need to have a deep understanding of local customer expectations and behaviours. Second, they need to have the shipping and customer service infrastructure in place to support direct sales. Third, they have to set up facilities for online customer inquiries, such as chat and click to dial in their websites to make it easy for customers who want to contact customer services. Most importantly, they need to have a comprehensive digital marketing and social media strategy that allows interaction and engagement with potential customers and divert traffic to their websites. They also have to be prepared to ship quickly and handle returns flawlessly.
Picking the Right Platform
One of the most important decisions when suppliers intend to migrate to selling direct is the selection of the right platform that is powerful enough to operate efficiently and flexible enough to customise for sophisticated consumers demands.
If suppliers decide to use their own websites to be the online representation of the brand, consumers will interact with the brand directly. Sales are made directly on the site. On the plus side, the brand can keep all the revenue and all the customer data collected with each visit to the website and each transaction. On the downside, the brand has to localise its websites, assume all the risk for credit card fraud and must achieve and retain high rankings on search engine results to maintain website visibility.
By listing on key regional marketplaces like Lazada and Shopee, brands can build a better presence in new markets and boost search engine results. Many of the marketplaces in the region provide cross-border logistic support for their sellers. Another benefit is that regional marketplaces have a reach across ASEAN. That said, foreign brands and sellers are responsible for localisation of product information uploaded to the marketplaces. On the other hand, some marketplaces will charge a commission on sale, brands have to compete with numerous online merchants on the same platform, and they cannot capture the customers data that will open up future direct marketing opportunities.
Some homeware and small home appliances brands have started to embrace third-party marketplaces in ASEAN, even if they already have their own localised websites. The reason is simple: these marketplaces put the brand and its products directly in the path of consumers who are looking for products with wallets in hand. If a brand’s products are not showing up on the B2B or B2C platforms where the customer is choosing to search for them, then the brand is not even able to compete for the consumer’s business. Today’s e-commerce industry is multichannel. If a brand is planning to join the legions of selling direct to consumers via online channels, building its own websites and listing on online marketplaces are equally important.
Omnichannel Redefines the Retail Experience
An omnichannel business model uses both offline and online channels to connect with customers. Consumers’ web and mobile experience can bring them back to bricks-and-mortar stores, and vice versa. Online and offline integration is a must to drive customer satisfaction in the ASEAN markets.
A retailer with physical stores might have a competitive edge. Bricks-and-mortar stores have traditionally added value by providing product display, interaction with customers, and staff services. Even online shoppers will choose to buy from a familiar and trusted retail brand. Despite the remarkable range of products and price advantage offered by online-only, they do not enjoy the same brand heritage and loyalty as legacy retailers. For this reason, Lazada has organised online-to-offline (O2O) events, including physical pop-up stores, in ASEAN markets, partnering with brands and local sellers to broaden its engagement with local shoppers.
While online-only e-commerce is making moves offline, traditional offline retailers, like Central Group and Power Buy are scrambling to move their businesses online and embrace full e-commerce integration in order to stay competitive.
Central Department Stores has introduced an Instant Messaging Shopping Service with personalised assistance to make shopping a lot easier. By connecting with Central Department Store via WhatsApp in Indonesia and LINE in Thailand, a digital personal assistant will help customer find the desired shopping items. If the item is available, the customer can choose to have it delivered to the doorstep or can come and pick it up at the Click & Collect service counter. Power Buy, part of Central Group, continues to invest in its business operations for online shopping, such as improving the online order system, delivery and online payment system.
It is expected that more ASEAN online marketplaces and legacy retailers will adopt an omnichannel strategy, which will create both opportunities and challenges to Hong Kong brands and suppliers. Big data analytics, social media and seamlessly transitioning across different channels are key to thriving in an omnichannel environment.
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