China’s online purchasing power has risen sharply in recent years. According to the China Internet Network Information Center, the country had an online population of 210 million at the end of 2007, making it the world’s second largest market, just behind America’s 215 million. The number is 53.3% larger than the year before, and it includes 46.4 million people who are purchasing items online.
Even more impressive is the growth of Taobao.com, the biggest C-C E-commerce company in China. According to its official release -- which classified the company as a “retailer” -- total sales revenue reached RMB 43 billion (US$6 billion) in 2007, which makes the company number two on the list of China’s top retailers. Total sales in 2007 rose 156.3% compared with 2006, and the company even managed to outpace Carrefour in China. The number of registered users reached 53 million at the end of 2007, 76.7% higher than the previous year. Apparel is the top item in Taobao’s catalogue.
“Younger consumers in China are feeling increasingly comfortable with buying online -- that is where they spend their time entertaining themselves. For many products, they no longer feel the necessity to physically touch an item before buying,” comments Shaun Rein, founder and managing director of the Shanghai based China Market Research Group.
Those numbers and changes have convinced companies involved in distance selling – mail order, telephone and Internet shopping – to emphasize Internet sales. Traditional mail order companies are no longer content to sit offline. MecoxLane, China’s largest mail order company, received US$80 million (approximately RMB 570 million) from Sequoia Capital this February. MecoxLane’s millions of mail order members and its multi-channel distribution model "telephone plus mail plus Internet plus outlets" reportedly helped it win this investment. It plans to use its portal M18.com to expand its B2C website and increase the number of its Euromoda outlets to 100, with more than five million members.
Another distance selling giant, the French 3 Suisses International Group (3SI Group), is moving the focus of its apparel business in China online too, although it is not the first time international companies have tried to use the Internet in China. The first time was in 2000, when they started to build their websites to promote sales. But shortly after that, several of the companies quietly retreated from the China market.
“Around 1997, many international mailing companies arrived in China: Quelle, 3S, Otto, MecoxLane and our company started at about the same time,” says Anne Langourieux, General Manager of 3S China, an apparel subsidiary of 3SI Group, the France-based private company that includes the Otto and Mulliez families as its biggest shareholders. The group has 24 subsidiaries operating in 14 countries in Europe and Asia, with a total of 12,500 employees. It focuses on multi-channel distance selling via the Internet, telephone and mail-order catalogues.
Why is 3Suisses choosing this moment to focus once again on Internet sales? What has changed since 1997? What are the challenges and prospects for online sales? To answer these and other questions, China Knowledge@Wharton interviewed Anne Langourieux, General Manager of 3S China, and Pascal Nouvellon, deputy chief representative for Cofidis, the financial services subsidiary of 3SI Group in China.
Cofidis, the largest consumer finance service provider in France, develops credit products for distance selling. The company entered China late last year, and is now poised to provide credit to China’s online population.
Below is an interview with Anne Langourieux, followed by an interview with Pascal Nouvellon.
China Knowledge@Wharton: How long have you been in China?
Langourieux: I first came to China in 1997 to [head up] activities in China for 3 Suisses. I went back to France around 2000, came back to China to set up a cosmetic subsidiary of 3SI Group in 2005, and was named GM of 3S China in late 2007. So I have been in and out of China, mainly Shanghai, for more than 10 years.
It’s a perfect time to be here to witness the tremendous growth and change in China in the last decade. I prefer to work here rather than in Paris right now. It’s much more energetic and dynamic.
France now has 2% growth every year, and it’s much more difficult to make decisions and get them implemented because you have to secure all your costs. In France, it would be a very long and difficult process. Here in China, with this growth, you can experiment much more. Some ideas work and some don’t, but at least with the growth of the market, and the energy and the confidence of the people, you can do many things.
For the last six months, I have been working as GM for 3S and I have done a lot of analysis for the 3S group. It’s huge – we have Cofidis and a lot of other subsidiaries – but it’s all specialized in distance selling by telephone, without outlets.
China Knowledge@Wharton: Distance selling is a very new concept in China. We didn’t even know about it until several years ago.
Langourieux: Around 1997, many international mailing companies arrived in China – Quelle, 3S, Otto, MecoxLane – and we started along the same [path]. A lot of companies failed. Otto and Quelle stopped their business in China around 2001 or 2002. Otto is our shareholder. We came at the same time, but we are sister companies. Now they are in Japan and Korea. We have a strong relationship with them and we are inspired by their expertise in Asia. E-commerce in Korea is really developed.
China Knowledge@Wharton: How big is your customer base?
Langourieux: We now have more than one million members. In China, it’s not huge. But by European [standards], it’s already a good size. With these members, our strategy is to have consumers order even more from our company, to increase their loyalty and to increase their repeat sales rate. The other objective for us is to have more members.
China Knowledge@Wharton: What are the main difficulties for distance selling in China?
Langourieux: Basically, the first challenge is that, as you said, it’s a new concept. People don’t know it, they don’t trust it and they don’t know how it works. So you have to … educate the market.
3S in France has 75 years of experience. When you say 3S to French people, it’s like saying Coke to an American. In France, we have 3S in books, movies … you even make jokes unconsciously or in phrases like, “You are a 3S girl.” It’s part of our culture. But here in China, you have to educate people again and again.
China Knowledge@Wharton: What are the other challenges?
Langourieux: The other challenge is that because it’s new, it’s difficult to build a customer database.
China Knowledge@Wharton: Why?
Langourieux: For example, there are no third parties that provide database service. In France, there is a very powerful third party database. A lot of companies put their data in it. It’s huge, with maybe 12 million numbers, so you can run your database and send your catalogue from that system.
Here, you have to build it yourself, step by step, stone by stone, catalogue by catalogue. We have 80 people in Shanghai. But it’s not really how many people are working on this issue; it’s the capacity to make and distribute catalogues, and to build partnerships.
We are not stores, so we don’t have traffic as stores. For distance selling companies, you have to build traffic yourself. If I don’t send catalogues, emails, sms and so on, [consumers] naturally won’t know there is something new going on. That’s why e-commerce and the Internet helped this industry to grow. I think the rise of this industry is the beginning of the Internet.
That’s why I think all those international companies left China too early. They left before the arrival of the Internet. It will be a little bit expensive for them to come back.
China Knowledge@Wharton: Yes, the Internet boom has also gotten Chinese consumers to get used to online purchasing.
Langourieux: It’s a very good way to get entertainment, to get information on products. The Chinese consumers are very smart. In France, the Internet is a little passive. You go there to see what the brands are saying, what the magazines are saying. They are now talking about web 2.0. But for me, web 2.0 was the beginning of the Internet, which, in China, was web 2.0 from the beginning. People exchanged ideas online all the time. I am amazed at the number of people who are willing to give their comments online. For example, I go to the Internet to find restaurants, and I look at all the remarks online.
China Knowledge@Wharton: Yes I go to Ctrip to book hotels and view all those comments. But is this not happening in France?
Langourieux: Very late on. China has been [doing that] from the beginning, and now people trust online comments even more than what the brand says.
China Knowledge@Wharton: Back to your Internet strategy: You started quite early?
Langourieux: Yes, we are moving to an e-commerce company. We have been [focused on the Internet] since 2000. But the market share of our Internet sales started to boom three years ago. Catalogues are our main channel for the time being, but it is now switching to the Internet. Three years ago, we had 10%-12% of our sales from the Internet. Last year, it was 30%. It will be more than 50% this year.
China Knowledge@Wharton: You said it’s the right time to switch your strategy. Why?
Langourieux: We are already online, but we are starting to put [even] more effort there. Why? Because then we will have some natural traffic. For me, the Internet is like a big city: People come to the city and go to different streets. So we have natural traffic, and we also have people coming back. It’s different than when you distribute your catalogues and have partnerships with some companies, which is very costly.
The number of visits to our website is already much bigger than some countries. That’s natural, given the size of the Internet community in China.
China Knowledge@Wharton: What’s new about your Internet strategy this time?
Langourieux: We are in the process, with an agency company, of reinventing our website. It will be image- and community-driven. In addition, our clothes reflect lifestyle. [For example], we explain to you how to match clothes. We have a lot of advantages in fashion design in France. It’s also going to be really community driven; all our customers who bought our clothes can comment online.
China Knowledge@Wharton: When are we going to see a new website?
Langourieux: July, or September at the latest.
China Knowledge@Wharton: But you won’t open stores?
Langourieux: Not for the time being. I may do some tests. For me, the question is not whether you are going to open stores, because multi-channel is part of the world today. It’s more a question of what percentage [of your effort] you are going to [devote] to your retail and to your distance selling base. Everybody -- including all the normal retailers -- is going online today.
So for me, it goes without saying. The distance selling companies have to go to the retail market, too. If I am a customer and I like a brand, I would like to buy it by Internet, mobile or in stores. For me, the real question is, what [part] of the core business do you want to keep.
Clearly our core business is distance selling. We have more than 70 years of history in distance selling. Maybe one day we will have some stores. We already have a showroom. Certainly we try to make the brand available to everybody, and maybe it will represent 10% to 20% of my sales one day. But I won’t put all my effort into it, because the DNA of my brand is not in retail. Some companies in France are much bigger than our company in retail. So it will be a complement, not the main channel. I am part of the group, and that group is an expert at distance selling.
China Knowledge@Wharton: What are the challenges of moving online? Does E-commerce need some new effort and new focus?
Langourieux: Yes, because we have offline service already, we have some experience. But you are right; there are a lot of challenges. We have learned half of them. We discovered that day after day, when we have a website, we are looking at how to improve the number of people who can come to the website. And the second challenge for me is to keep the website vivid. You have done a great website. Then you have to update it every day or every week with new items, new concepts, new things for your members and passers-by, to attract them back to your site.
The third challenge is that traffic can be huge in China. You have a lot of people visiting your website, but you have to e-commerce them, make them buy. So that’s a big learning curve for us. We are already quite good at the conversion ratio, but I think we can be even better. We can learn from our sister companies within our group in Japan, Korea and Europe. Their experience is quite useful.
The fourth challenge for me is that because the Internet is such a huge virtual city, you have so many websites. So you have to be visible on the Internet. Of course, traditional ways -- like search engines, key words and so forth -- are among the most important efforts of our website, but there are a lot of other marketing efforts to help us become known by the Internet community.
China Knowledge@Wharton: When will you earn a return on your investment?
Langourieux: It won’t be tomorrow. It’s like construction. But the great thing about the Internet is that you can see right away whether it’s good or not. The other good thing about online sales is that you can react to changes very fast. For example, you have this monthly catalogue. Once you have a new item, you can’t update it. Or if that item is out of stock, our call center girl will say, ‘Sorry it’s out of stock.’ But for the Internet, you could make that change right away. It’s automatically taken out [of stock]. And we could also offer you a discount after your personal purchase has reached a certain amount. So it’s really powerful and quick.
The counterpart of this is that you have to stay alert all the time. It’s a learning process every day. But it’s great.
China Knowledge@Wharton: Do you have production based in China? And where are your designers based?
Langourieux: Yes, we have one centralized warehouse in Shanghai, and we buy clothes from our suppliers in China. Only the designs are from France.
The dream I have -- not for the time being, but maybe in five years – is to have a designer team in Shanghai which doesn’t design only for China, but also for the whole group. Their work will also be in our global catalogues. We are trying to see that happen. For the time being, I take the expertise from France to the Chinese team. But one day, I think Chinese expertise will be sufficient for the world and we could have designs from China to put into the catalogue.
China Knowledge@Wharton: Why would you say it’s a great time for you to be here on the Internet?
Langourieux: On the Internet, there is a kind of learning curve. In the beginning, it was very slow. China didn’t have that many people connected with the Internet. Now, if you look at the patterns, it’s a very sharp upward curve in recent years and there are 210 million Internet users in China. So it’s really a good moment. When you arrive too early, you invest a lot and get too little. Now is a good [time], because when you invest, you have a suitable impact.
Interview with Pascal Nouvellon, deputy chief representative for Cofidis China:
China Knowledge@Wharton: Can you give us a short introduction to Cofidis in France?
Nouvellon: Cofidis is a very established financial company based near Paris. It was founded and managed for 25 years by the same person, and it quickly became one of the leaders in consumer finance in the French market [because of] one concept: credit via telephone.
So you will never see a Cofidis branch office anywhere. If you need money, just call me. It worked out very well in the French market, and today, one family out of five is a Cofidis customer. Consequently, we are very key players in consumer finance in France.
In the 1990s, Cofidis decided to go abroad. It moved into Eastern Europe, Spain and Portugal. China will be the first country for Cofidis outside Europe.
China Knowledge@Wharton: Why did you come to China?
Nouvellon: Our strategy is, never go to a developed market, but always to developing markets. The decision was made a year and a half ago to go for China. The China market is very regulated; it’s making things very difficult for foreign players, especially if you are not a bank. Cofidis is not a bank; we are a specialized financial institution. Our main objective now is to finalize an agreement with a local bank before we can start business.
We think there are real opportunities in the China market, especially online and that Cofidis has some expertise that could benefit the market. Take Internet payment for instance: Cofidis has developed an online credit system called 1Euro.com that could be very helpful as an additional service on Alipay for instance.
China Knowledge@Wharton: To me, an online payment tool like Alipay is like an escrow service. Why would we need Cofidis?
Nouvellon: But it doesn’t come with credit. The idea with us is to link the credit with payment services, such as Alipay service. [If] you are on Taobao or on Ebay, you can pay directly from Alipay or Paypal, or you could choose to pay at the end of the month by installment.
China Knowledge@Wharton: Why would they want your service? Couldn’t Alipay do it themselves?
Nouvellon: Well, yes and no. The key point here is not technology, but risk. In Europe, we are used to taking the risk as we are a financial institution. Here in China, we cannot do so. But we are looking at bringing our experience to our Chinese Banking partner.
That’s where we see a very big opportunity in the Chinese market with the online payment [business]. But there are other opportunities – [such as] for people to apply for credit cards online. We have done a lot of research on strategies and competitive analysis, and there is huge … demand for credit cards when it comes to the Internet.
Today, about 60% of the people are willing to apply for credit cards online. At present in Europe, we sell about 50% of our credit cards directly from our website. When we see the websites of the banks here in China, we think there is still [a large amount of] room to deliver the promise of the Internet.
China Knowledge@Wharton: What websites are you talking about?
Nouvellon: Basically all the websites. They are making some improvements. Take China Merchant Bank (CMB), for instance. They are doing improvements of course. But still, it takes you too many steps before you can apply online. We think we could simplify that. In Europe, it takes you about 10 minutes to apply online.
China Knowledge@Wharton: How do you evaluate one’s risk?
Nouvellon: That’s the whole expertise of the company. The other thing is that most of the Chinese banks sign their credit based on personal assessment. We do it based on statistical analysis. So we profile the people. By asking you to fill out a few questions, we can tell, with a high rate of certainty, how much we can grant you on credit. We call that statistical analysis-- a “scoring” technique. Our bad loan rate is below industrial average as evidenced by an A- rating from Standard & Poors, which is one of the highest for an European consumer finance company..
China Knowledge@Wharton: How do I repay in China?
Nouvellon: We see huge opportunities in repayment service. Here in the branch offices of some banks, you have to wait 60 minutes. Hence the recent developments of online repayment services such as 99bill. You can now repay your credit bill online. I think that trend is going to develop very quickly and there is also some experience that Cofidis could be bringing.
China Knowledge@Wharton: On the other hand, your activities largely depend on your partner.
Nouvellon: Everything depends on partners. And in China, there are a lot of things we can’t do. The only thing we can do is to bring our technology and expertise to our partners here, and put it together. Then our partners will have a better offer for our customers. We can’t do it alone.
China Knowledge@Wharton: CMB is very innovative, and they are doing a lot of things online. Do you have strong local competitors here?
Nouvellon: Yes, [CMB] is innovative; today it is one of the very few recognized by the user for the effectiveness of its internet services. Their online repayment is efficient, and their credit card online appears to operate better than other banks. But we think that a local bank could do a much better job online by partnering with a specialist from overseas.
Banks like CMB have a huge team and therefore may be less flexible. They are also growing a little big and too fast, which could hinder innovation.
Our acknowledgement is that other actors that are starting to outpace CMB at the moment. We think the market is very immature right now. But for such a huge market share in China, there are still lots of opportunities for newcomers like Cofidis to help their Chinese partner. Another French financial company, Cetelem, is also here. They signed a contract with the Bank of Nanjing in 2007 and their biggest shareholder is BNP Paribas.
China Knowledge@Wharton: Going back to the Internet issue, banks tend to be a conservative group, and you are now moving online. What are your concerns?
Nouvellon: We think the Internet is a very generational thing in China. The most promising customers for credit cards are also the most intensive Internet users: they are young people, young white collars. We think they behave very differently from their fathers. They are pioneers on the Internet, and they are more into the Internet than their counterparts in Germany or France. People here like to express themselves. We do think online activity is a much more day-to-day habit in China than in Europe.
Look at the BBSs (bulletin board systems), online forums and blogs in China. It’s amazing how those things have boomed and become important in people’s lives. It’s much more active than in Europe. We did a big survey with a media partner in China. Almost all the Internet users read blogs and have blogs, and the rate of bloggers is much higher than in Europe. That’s very promising for people like us who are going to provide service online.
It’s true that banks are conservative. But if they want to get attention from their customers, they have to do that, especially for those young kids. We think there is a huge gap between what people want and what the banks offer in China. There will be challenges in terms of connectivity and especially online payment, and we still have a long way to go.
One thing we find critical is the “trust” issue. A few years ago, people didn’t pay online because they didn’t trust putting their credit card numbers online. That’s why an escrow service like Alipay is so popular, but we think the mindset of people, especially the young people who are using the Internet, is evolving very quickly. People now trust paying online, and that process is accelerating. Another driving force is the advent of improved technologies.
China Knowledge@Wharton: Do you enjoy being in China?
Nouvellon: Yes, very much. I have been in China already from 2001 to 2004 and was eager to come back. For the time being, we are putting all our focus and energy on negotiating a cooperation agreement with that local bank. I am now looking forward to the signature of that agreement to kick-off our operational activities.
China Knowledge@Wharton: What is the biggest challenge in such negotiation?
Nouvellon: If I could compare the different approach to negotiation of these two countries to a soccer game, the German soccer team is very organized. They move in squares in the field. The Brazilian team, on the contrary, is much more passionate. I think doing business in China is a little bit like the Brazilian team. You have to be very fast and very flexible, don’t keep the ball too long, try this way or that way to see which one really works. For Europeans, their mindset is very organized.
In China, to sign the contract is only the beginning of the story. You keep some terms open and flexible because the market changes so quickly. But us French people we want everything concrete and fixed, because everything is so fixed for the French market. Two years later, things are still the same.
Today the biggest challenge for a company like Cofidis is to manage such cultural differences. That is why Cofidis has put together a multicultural team mixing Western-trained Chinese and Western people with experience in China. That helps bridging the two cultures!