What do we need to consider when we want to distribute our products on E-Commerce platforms in China?

Almost one in three yuan is spent by Chinese consumers on online purchases. The two large platform operators Alibaba and Jingdong (JD) dominate the Chinese e-commerce market. Together they control approximately 75% of the Chinese e-commerce market through the platforms of Tmall, Tmall Global, Kaola, JD.com, and JD Worldwide. However, many other platforms such as Pinduoduo, VIPShop, Little Red Book (Xiaohongshu), and WeChat shops are catching up. These new players offer more options for online sales, which makes the Chinese e-commerce market even more complex for foreign brands.

In the past, many foreign companies decided to distribute their products directly via the cross-border e-commerce (CBEC) platforms Tmall Global, Kaola or JD Worldwide in order to test the Chinese market and increase awareness of their products.

These CBEC platforms offer Chinese consumers the advantage of being able to buy the products directly from the foreign producers or authorized foreign dealers, which gives them a higher security that the products are not fake and in good condition. For the foreign producers, distribution via these CBEC platforms has the advantage that they do not have to open a subsidiary in China to directly distribute their products in China.

However, sales through CBEC platforms are associated with high costs that many foreign brands have underestimated. Brand owners are dependent on cooperation with various partners. Chinese customers expect fast delivery of purchased products. Hence, the products must be stored in a Chinese free trade zone, from where another local delivery partner manages the last mile delivery. If sales volumes are low, these costs can account for a large proportion of the costs. The operation of a flagship store on a CBEC platform incurs further costs from the CBEC platform and the local operation partner.

Swiss consumer brand owners must decide whether selling via a CBEC platform makes sense to them or, if they should consider marketing their products through a local distributor on local e-commerce platforms and to local retailers.

In the latter case, the big challenge is to find the right distribution partner(s). The markets have become very competitive and the distribution partners have specialized, even within a product group. For instance, a distributor of coffee products may not have the experience and network that is required for the successful distribution of dairy products. The Swiss consumer brand should be prepared to invest sufficient time in selecting a distributor.

The Swiss supplier would typically enter into a written distribution agreement with the local distributor who will then sell the products on local e-commerce platforms and to local retailers in its own name and on its own account. A well thought out distribution agreement makes a significant contribution to success.

A good distribution agreement governs inter alia the distributor's duties regarding the brand image, business development, marketing and promoting, sales targets, and reporting. It also governs the terms and conditions of the individual purchase contracts between the Swiss supplier and the distributor. The Swiss company must also make sure that the distributor is responsible for customs clearance and regulatory compliance.

A major advantage of collaborating with a local distributor is that the Swiss company does not have to bother with the extensive rules and procedures of the local e-commerce platforms that typically impose major liability and indemnification obligations on the merchants. Nonetheless, the Swiss supplier must make sure that its liability towards the distributor is limited, in particular for damages claims by the distributor for consumer or e-commerce platform claims.