China is emerging as the next playing field for direct-to-consumer startups.
The footwear brand Rothy’s, which sells online and recently announced it made $140 million in revenue in 2018, built a team of five based in Shanghai in 2018 and began selling in China earlier this year. Everlane is building up business in China by shipping to customers there. Allbirds co-founder Tim Brown said that China was on the brand’s horizon for future expansion. Investors in the space are also seeing opportunity: Firms like GGV Capital specialize in U.S. brands that have the potential to launch in China.
“We look at this customer, and the shoe fits. We look at the market, and we spend a lot of time here,” said Kerry Cooper, president and COO at Rothy’s. “The market is massive, our customer is here, so why not?”
It’s a good time for DTC brands to descend, even if they may have to access the Chinese market through platforms like Tmall and WeChat.
Thanks to global e-commerce and tariff regulations, the power dynamics in the market have shifted in the favor of direct selling. In the past, getting a product on sale in China was through a series of “joint ventures” — distribution partners, manufacturing partners and agencies — that would handle government approval, fulfillment, production, retail strategy and marketing in the country. Now, thanks to a push from e-commerce players like Alibaba and JD.com to make it easy for brands to sell online to Chinese customers, as well as willingly share data like customer demographics and purchase patterns, U.S. brands selling in the region have more control over businesses.
“Selling in China today is easier than it has been, no matter the size of your brand. It’s a good time to be a direct brand — you have much more control,” said Humphrey Ho, the managing director of Hylink Digital, an agency that helps U.S. brands market to customers in China.
For retail brands spanning categories, all eyes have been on China as e-commerce sales climb. According to Digital Commerce 360, China’s e-commerce sales hit $1.2 trillion in 2018, projected to climb 22 percent to $2.6 trillion in 2021. That’s 2.8 times the size of the market in the U.S. And it’s a good time to break into the market: Chinese millennials have higher spending power at a younger age, according to a report by KPMG, and are looking to discover new brands.
Rothy’s door to China was WeChat. The brand recently launched a WeChat store and plans to consider selling on Tmall in about six months. The brand has a Rothys.cn site, but you can’t purchase from it, since little traffic makes its way to native brand sites in China, even for big brand names, and handling logistics without commerce partners is difficult and expensive. Since the infrastructure is different for a startup brand used to selling in the U.S. — there’s no Facebook or Instagram or Google to buy ads on, for instance — Cooper said that a native China team, as well as a local agency and PR firm, was necessary to navigate the market.
“It’s not like launching in the U.K. or Canada, where you can replicate your strategy,” said Cooper. “With China, In China, you’re in or you’re out, and you have to be very thoughtful about your market presence and who you want to be.”
Cooper said that Rothy’s kept its same marketing materials, but looked to its local PR firm to get placement in Chinese Vogue, Elle and Travel and Leisure magazines, as well as visibility from China’s influencers. For now, that publicity plus native ads on WeChat will drive customers to Rothy’s WeChat store to purchase. When the brand amasses more volume in China, it will start selling on Tmall. Not unlike Amazon, Tmall has its own advertising business that grants better visibility to the brands that have more resources to spend.
“Nobody has enough money to market in China, technically,” said Ho. “It’s incredibly expensive, especially when you don’t have a history of sales and relationships to help you get better deals. Suddenly, you’re paying Alibaba more than the equivalent of $1 million a year just to stay afloat.”
Cooper said that learning how to best market to customers in China is like “building a different muscle.”
It helps that Rothy’s has a manufacturing factory in Dongguan. Factories are often a foot in the door for brands to do business in China. DTC apparel brand Grana sells in both the U.S. and China, with its main manufacturing partners in Hong Kong, and about half of its business is between Hong Kong and China. Everlane doesn’t have a China-based team as of now, but it has delivery operations to start building a business there thanks to its four Chinese factories. Fashion brand Ellie Kai launched e-commerce in China after getting positive reception from the women working in its manufacturing factories.
Young brands, essentially, see a “global” status as a mark of validation and success, beyond sales, and making it in China is a guarantee that a brand can launch anywhere. Luggage brand Away is currently figuring out its China strategy in order to become a global travel brand, according to co-founder Jen Rubio.
But there are still barriers for small brands launching in China. For the custom hair care brand Function of Beauty, selling directly in China isn’t an option because local product regulations require that all beauty brands test on animals. According to CEO Zahir Dossa, that goes against the brand’s anti-cruelty stance, which has been made visible to customers.
“It’s not that big of a deal for big conglomerates, which have legal resources under their umbrella to deal with this type of thing,” said Dossa. “We know our customer is in China, we can ship to them from here, but we can’t market or sell directly there.”
Brands with big budgets still have the upper hand: They can work for better deals with companies like Alibaba that want their business, and they have the existing brand awareness with customers and influencers alike. But as DTC brands need new avenues for growth, China will become a bigger part of the conversation. Cooper’s glad the brand is starting now.
“This market is hard and it will take time to build it. So let’s get going now — we want this customer, we love the market but it’s going to take time to build a brand,” said Cooper. “Getting in early will be a good thing.”
“Brands should plan on going to China. They should always by arming themselves with the e-commerce strategy to sell there. They’ll regret it if they don’t,” said Ho.