There are many commonly accepted myths as to why electronic retailing has had such a hard go of it in China to date. Of those, perhaps the most persistent myths revolve around the logistical issues of actually getting something to the customer - logistical issues that do not exist in, for example, an America with pervasive credit cards, FedEx (NYSE:FDX), UPS (NYSE:UPS), and DHL.
The best summary of the issue comes from my old boss Bill Schereck, who led the creation of TVSN as a Sydney-based Asia-Pacific clone of QVC International back in the mid-1990s. Even though he was originally thinking of television shopping, the Five Logistical Challenges he isolated apply neatly to electronic retail.
Schereck's Five are:
- Reaching the Customer - The first challenge is actually building a channel to the customer so he or she can find you and find the merchandise you are selling. That seems like a non-issue for electronic retail, until you realize that a) creating a decent, trustworthy-looking site is harder than it looks, b) most Chinese don't have Internet access, c) even if they do, how are they going to find you?
- Taking the Order - In the case of e-tailing, this means creating a system to take orders, actually getting someone to stick something in their shopping cart, then having them actually place the order. This is a challenge no matter where you do business, not just China.
- Getting Paid - Getting the customer to promise to pay, and then actually collecting on that payment. This is usually the first issue people jump on about China - how do you get paid for an order when a tiny fraction of the populace even has debit cards, much less credit cards, and the banking infrastructure to clear online payments is not up to global standards?
- Delivering the Order - Ensuring that the right product is delivered to the right customer at the right place in the promised time frame. This is usually called "fulfillment." FedEx, UPS, and even DHL have limited rights to deliver products from one part of China to the other, and direct shipping from overseas is complicated (thank you, Customs) and prohibitively expensive for your average Chinese. Not only does actual delivery pose a challenge, but you need an onshore warehouse as well.
- Processing the Return - People in the trade euphemistically refer to this issue as "reverse logistics." This is what happens when something is broken, is the wrong size, wrong color, or when the customer just changes his or her mind. How do you refund the money, get the product back to warehouse, restock it, and put it into a condition to resell or dispose of without incurring a financial loss? Surprisingly few novice e-tailers think this bit through, or even get it right, and it entails such issues as "what IS our return policy?" It is especially tricky in China.
I would add one more that actually belongs between the #1 and #2 that has proven especially sticky in retail in China:
Stocking stuff people actually want to buy - Merchandising - the art and science of choosing which products to sell in a store and how to stock, display, and promote them - is in its infancy in China. Most retailers are actually in the real estate business, leasing space to manufacturers or manufacturers reps who handle the merchandising functions. What that means is lots of look-alike stores with salespeople who are pathetically uninformed about their product. It also means that China lacks people who understand how to turn consumer trends and local preferences into a winning combination.
So there you have the challenges.
Challenges 1, 2, and 6 are perceived as largely micro issues: they can be solved by the inpidual company. Payments and delivery, on the other hand - and the related issue of reverse logistics - are seen as systemic deficiencies in China, and thus the most serious barriers to electronic commerce.
Our next installment will demonstrate that these aren't really issues at all in China - and haven't been for over a decade.