CH1601: Guangzhou 2000 New Products Retail Promotion

I. Objectives

Primary Market Development Activities

1. Generate local public and retail interest in new-to-Guangzhou U.S. food and beverage products
2. Find local importers and/or distributors for the new-to-Guangzhou U.S. food and beverage products
3. Research local consumer and retail acceptability towards the new-to-Guangzhou U.S. food and beverage products
4. Generate test marketing results which could be used in the future China marketing of the participating new-to-Guangzhou U.S. food and beverage products
5. Gain a better understanding about overseas food and beverage product importation and distribution in China, information which would be useful for future ATO Guangzhou promotional event planning and implementation

II. Barriers/Constraints

1. Local retailers hesitant about adding product lines unless they are proven good sellers
2. Local retailers will not place new imported products on their shelves unless these products have been inspected and registered by the local authorities
3. Imported product inspection and registration can only be arranged by a local importer or distributor, neither of which new-to-market products have

III. Strategy and Action Plan

U.S. companies that might be interested in participating in the promotion, the ATO Guangzhou reviewed its trade inquiry files for the last two years, China food trade show bulletins, and the 1999 FMI show bulletin. The ATO Guangzhou also contacted several state agriculture departments and the regional cooperators for recruitment assistance. From this search, a list was compiled and each company on the list was either emailed or faxed information about the promotion. When necessary, the ATO Guangzhou telephoned interested companies to better explain the details of the promotion. This recruitment process began during January 2000. A representative from the State of North Carolina Department of Agriculture assisted the ATO Guangzhou in this endeavor, especially with telephone explanations. At the 2000 Food Marketing Institute show in Chicago, ATO Guangzhou staff distributed a brochure on upcoming office activities which included this promotion.

To participate in the promotion, U.S. companies were required to pay a fee of $225 and contribute a minimum of 300 units of product. The fee went to pay for health inspection, import charges, transportation, label expenses, and other related costs. For participating companies which already had a local importer yet no distribution in Guangzhou, a reduced fee was charged. The fees covered most of the promotion's activities, but did not cover all costs. Remaining costs were covered by retail sales of the contributed products. The promotion had several purposes, but making quick money for the participating U.S. companies was not among these purposes.

Promotion advertising and Point of Purchase materials were treated as a totally separate activities in terms of cost coverage. Payment for their expenses almost totally came from the UES budget.

Seven U.S. companies representing nine U.S.-made products were recruited to participate in the promotion. Five of these products (from five different companies) were totally new to the China market. The other four products (from two different companies) already had importers in northern China, but at the time of the promotion none of these products were available on the shelves of any southern China retailer.

Before organizing this promotion, The ATO Guangzhou feared that retailer conservatism towards new products might be a major problem. Many retailers in China are reluctant to begin carrying new products for fear of negative opportunity costs. They do not want to add products with no track record and possibly no sales potential, while reducing the shelf space for or failing to shelve products which were proven sellers.

In order to entice retail participation, the ATO Guangzhou offered the following incentives: consignment sales, free advertising, and the freedom to set their own retail margins. Most of the retailers that the ATO Guangzhou approached accepted the deal without any problems. Since the supply of product was limited, the ATO Guangzhou limited retail participation to four chains in which only two of their stores would carry the products.

The ATO Guangzhou was selective when choosing which retail chains to approach to solicit participation. A mix of different types was desired, for example a regular supermarket chain, a convenience store chain, a joint venture retail chain, and a locally owned retail chain. The ATO Guangzhou avoided inviting hypermarkets to participate. The main reason had to do with post-promotion retailing of the participating products. Importers/distributors might be less inclined to start carrying products if hypermarkets which potentially could do their own importing appeared to have contact with the U.S. exporters. However, after one of the originally chosen retail chains was dropped from participation, one hypermarket was approached for participation. Their unreasonable request of selling the products outside of the front door of their store forced the ATO Guangzhou to withdraw the participation invitation.

After the retail chains were recruited to participate in the promotion, not all of them behaved reasonably. In one instance, after agreeing to participate, one retail chain began insisting on a participation fee of 10,000 RMB ($ 1,211: $1.00 = 8.26 RMB) in the form of advertising in their bi-weekly customer flyer. The ATO Guangzhou eventually dropped this retail chain and found a replacement. In the end, four retail chains agreed to participate in the promotion and did not make unreasonable demands. They were: Dongjun Department Stores, am/pm Convenience Stores, Jusco Department Stores, and Yuexiu/Beatrice Supermarket Company Limited.

Since the ATO Guangzhou was an overseas government entity (in China) and thus prohibited from engaging in product importation and distribution, it was necessary to recruit a local importer/distributor to assist with importation and distribution activities for the promotion. The ATO Guangzhou recruited Envoy Development Company Limited to serve as the promotion's official distributor, because the office and this company had a long history of cooperation, plus the company had all of the necessary local licenses and connections to carry out the proposed activities.

For the promotion, Envoy was practically the only distributor. One of the participating U.S. companies with a northern China distributor also recruited Envoy to serve as its distributor during the promotion, resulting in Envoy representing eight of the nine participating products. This role later caused some confusion among the retailers in regards to the remaining U.S. company with northern distributors. Some retailers thought that Envoy was the only distributor and would not deal with anyone else during the promotion. Unfortunately, this problem did not become known until after the promotion started.

Health Inspection:

Envoy Development Company Limited assisted with all necessary health inspections for the participating new-to-China products, altogether five of the nine participating products. Inspections were carried out by the local branch of the China Inspection and Quarantine (CIQ) service. For each product' inspection, participating U.S. companies were required to supply at least two kilograms of product and product content details. All submitted products passed inspection.

One of the interesting discoveries from the exercise was that health inspection certificates had limited life spans. According to our official promotion distributor, health inspection certificates can be issued to cover a time period as short as one month or as long as two years. The life span of a certificate often depends on the quality of the relationship between the importer/distributor and the local officials.

For the new-to-China products, Chinese language labels are required by law. Since at the time of the promotion the Chinese authorities still allowed imported food and beverage products to use sticker labels, ATO Guangzhou arranged for the creation of this type of label and placement on all products.

The use of U.S. bar codes was not a problem with most of the retailers. A couple of stores did have a problems with programming one or two of the codes into their computer system and in these instances special store codes were used as replacements.

Setting the retail prices for the participating products was one of the most difficult activities during the whole promotion. Although the products were imported for retail sale, the arrangement was not a pure business exercise where everyone in the process was collecting a margin. Under such artificial conditions, price discovery relied more on the accumulated experience of the ATO Guangzhou and the official promotion distributor than actual market forces. This activity applied to nearly all products which were new-to-China, but did not apply to products which already had distributors in northern China. For these products, the northern distributors either worked through a distributor in south China or contacted the stores directly.

The starting point for this activity was the participating U.S. companies' export prices. To these figures, shipping and tariff costs were added. In addition, the official promotion distributor estimated the gross margins which importers/distributors would usually expect to collect from selling the product to others. Lastly, the retailers were given the authority to set the final retail price based on the "distributor's sales price". In the end, retail price differences were slight among the different participating retailers.

For one new-to-China product, the price setting activity was not used. The participating U.S. company earlier had researched the market and established what they believed to be the appropriate price range for their product. In deference to company wishes, this price range was used for its product.

Shipping of the contributed products from the U.S. to China was carried out by Supervalu International of Seattle, Washington. Participating companies sent their products to the Supervalu warehouse where the shipper consolidated the products with others going to Hong Kong. Shipment from Seattle to Hong Kong required approximately two weeks. At Hong Kong, the products were picked up by the Hong Kong to Guangzhou shipper who consolidated the products with others going to Guangzhou. Picking up the participating products and sending them to Guangzhou only required a little over two days, with the actual shipping lasting less than an evening.

While the shipping costs for across the Pacific and into the Pearl River Delta were reasonable, one unexpected cost was the Hong Kong "pick up" fee and demurrage. The costs were higher than the combined cost of the actual Hong Kong to Guangzhou shipping fee and the tariff charges on all items.

Upon reaching Guangzhou and after passing Customs, the products were stored on the premises of Envoy Development Company Limited until distribution to the participating retailers.

The only major problem that occurred with shipping was some confusion between the ATO Guangzhou and Supervalu over specific procedures. Given the time differences between Guangzhou and Seattle, communications was slow and eventually lead to a delay in holding the promotion. The original promotion dates were in early July.

A problem also occurred with the Ginseng wine. Since the product was an alcoholic beverage, Supervalu would not allow it to be packed with the food products. Special shipping rules apply to the shipment of alcoholic beverages. Due to this situation, an alternative shipment method was arranged by the participant and the wine arrived on time for the promotion.

The specific customs arrangements for five out of the nine products participating in the promotion were handled by the Hong Kong to Guangzhou shipper. According to our official promotion distributor, inspection lasted less than a hour. According to the promotion's official distributor, the amount of time necessary for customs inspection often depends on shipment size. During inspection for the promotion's shipment, the officials opened several of the packing boxes and took one or two samples from each of these boxes.

The specific customs duties charged against individual products is unknown. The Hong Kong to Guangzhou shipping costs also covered the tariff duties. However, before customs inspection took place, the promotion's official distributor requested an estimate of value for the entire shipment. The shipment's estimate of value was calculated according to product values that were submitted to the ATO Guangzhou by the participating U.S. companies. According to the official promotion distributor, customs used this estimation of value to calculate tariffs owed on the shipment.

Customs arrangements for the other products in the promotion were handled by their existing importers/distributors in China.

Public advertising of the promotion was limited, because the costs of using various local advertising media were high and the ATO Guangzhou sought to place the products into a retail setting which was close to "normal" retail conditions as possible. On the latter point, the ATO Guangzhou felt that too much general advertising about the promotion might yield final results which gave an unrealistic impression about the product's true acceptability by local consumers. It is probably easier to sell an importer/distributor on a product if shown good results with minimal advertising/marketing than one with good results generated by a large and expensive advertising/marketing campaign.

For advertising, the ATO Guangzhou printed handbill flyers and distributed them in front of each participating retailer during the initial two days of the promotion. Altogether 10,000 flyers were printed and nearly all were gone before the promotion's second day ended. The ATO Guangzhou chose this method, because local marketing experts who have worked with U.S. cooperator groups informed us that flyer distribution was the least expensive yet most effective advertising method. Most of the participating retailers had been practicing this advertising method long before they were approached to participate in the promotion.

In addition, the ATO Guangzhou placed an advertisement about the promotion in "Purchasing" magazine's August edition which came out days before the promotion began. "Purchasing" magazine is published in Guangzhou, covers a wide variety of issues relating to supermarket products and the local retail industry, and has nationwide distribution. Its readership includes both retailers and importers/distributors.

Participating retailers, according to the promotion participation agreement with the ATO Guangzhou, were required to order participating U.S. products through the designated distributors for the promotion. However, no conditions were set on the amounts ordered or placed on shelves.

Contrary to expectations, participating retailers waited until less than a week before the promotion began to place orders for participating U.S. products. One retailer even waited until the day before the promotion started to place their order. The short time frame did lead to supply problems in one case. One of the retailers placed huge orders for both of its participating stores. Orders, if completely filled, would have absorbed nearly all of the existing supply, leaving all of the others stores with little to no product. For products with northern distributors, rush orders were placed. For the others, discussions were held with the retailer to limit their order. In the end, partly due to the limited supply available for some products, one of the chain's stores dropped out of the promotion only a couple of days before the beginning.

In addition, contrary to expectations, orders were placed by the individual stores and not each chain as a whole. This situation held true for all chains despite their ownership arrangement (i.e. locally owned, Sino-overseas joint venture, etc.).

Product delivery was made by the official promotion distributor only days before the promotion began. A majority of the stores received their products the day before the promotion's start. Except in one case, products were delivered to the individual stores and not to a centralized chain warehouse.

In general, the shelf space allocated for the products in the promotion was good. In nearly all of the stores, the space was close to the cash register or along a main shopper route within the store.

The store decoration situation was mixed. Some stores handled their own decorating for the promotion, while others allowed the ATO Guangzhou to do it for them. Some stores were restrictive about the amounts and types of Point of Purchase material used, while others had no restrictions. The retailer which did the best decorating job for the promotion was Dongjun Department Stores. In regards to Point of Purchase materials for the promotion, the ATO Guangzhou only prepared posters featuring all of the participating products. However, the ATO Guangzhou encouraged all participating U.S. companies to supply Point of Purchase materials for use during the event. Only three out of the seven participating U.S. companies took advantage of this arrangement.

The ATO Guangzhou alerted a sizable number of local importers/distributors about the promotion. A total of 60 letters were sent to local importers/distributors. The letters included a copy of the promotion flyer and a note explaining that these products were in search of local importer/distributors.

The ATO Guangzhou in the March issue of Purchasing magazine also announced this promotion.

IV. Evaluation

The promotion succeeded in achieving most of its objectives. However, success was mixed for some of the participating products. While market information was gained for all products, some of the products failed to immediately attract importer/distributor interest. The lack of interest might be due to recent local legal changes rather than the acceptability of the product by local consumers and retailers. The greatest success of the promotion probably was the increase in the ATO Guangzhou's knowledge base on how food and beverage product importation, distribution, and retailing actually works in China.

One of the objectives of the promotion was to link participating U.S. companies with importer/distributors. A few products achieved this object, but most did not. Despite publicity efforts on the part of the ATO Guangzhou, many importers/distributors did not seem interested. Whether the reason for limited interest was due to the products themselves or other circumstances is uncertain due to the timing of one particular event, the implementation of the new Chinese labeling law. The ATO Guangzhou failed to anticipate the general importer/distributor reaction to the new labeling law. Although the ATO Guangzhou had prior knowledge that the law was scheduled to change on 1 October 2000, importers and distributors during the months before the promotion did not seem to think the new law would have much impact on their business. However, during the promotion, the general attitude seemingly changed and both importers and distributors mostly adopted a "wait and see" attitude about the law, thus limiting their interest in representing new products. This attitude change was learned during post-promotion follow up contact with some local importers and distributors. Although the new labeling law is now in place, local CIQ officials say that this law unlike in Beijing and Shanghai is not being enforced in Guangdong province at the present time. These officials also say that enforcement should take effect in the near future.

This situation does not mean that the participating products which did not immediately attract importers/distributors wasted their time, money, and product by participating in the promotion. Involvement in and the data generated from the promotion should help in any future marketing efforts targeting China. Chinese importers and distributors often prefer dealing with exporters who prove that they are interested in the market and participation in the promotion is major proof of interest. In addition, the information gained from the promotion could assist in any future marketing activities in China by the participating companies.

The products which seemed to have received the most out of the promotion were those with distributors in northern China. Through participation , Global Foods Inc. who imports U.S.-made Slim Jim beef jerky, Mike & Ike candies, and Peeps candies not only found a distributor to handle the three products in the south China region, but also picked up new retail buyers in northern China thanks to the promotion's advertisement in Purchase magazine. A couple of the new-to-China products generated some interest (mainly retail) and the ATO Guangzhou, long after the promotion, still is working to recruit agents for these products.

By playing the role of a distributor during the promotion, the ATO Guangzhou's knowledge of importing, distributing, and retailing food and beverage products in China increased tremendously. Although in many cases the experience only reinforced earlier product importation and distribution knowledge gained through interviews and discussions with local importers and distributors, organizing and implementing the promotion changed some of our beliefs about how the retail sector actually operated. In particular, the office gained a better understanding of the health inspection process and the limitations on certificate approval, the decentralized behavior of retail chains, and Chinese customs operating procedures.

V. Recommendations (Projections)

These "recommendations" are lessons learned and will be adopted for ATO Guangzhou's future new products promotions.

This promotion was originally scheduled for early July, but problems with shipping arrangements forced a change to early September. Although the schedule change caused some concern from a few of the participating retailers and forced a couple of drop out, early September might remain as a preferred time for this promotion. Some Chinese retailers always will have a problem with participating during early September, because the time period is part of the Chinese Mid Autumn festival lead up period when Moon cake demand is at its peak. Nearly all retailers feel that they should be selling Moon cakes, sometimes at the expense of their other products' shelf space. However, since this period also is a gift buying/giving season, some retailers as proven this year still will want to participate, because new products make good gifts. Holding the promotion during early September also might help with U.S. company recruitment.

The methodologies employed to recruit U.S. companies to participate in the promotion were good and would be used again during the next similar promotion. The only addition might be more visible onsite recruitment at the Food Marketing Institute trade show. Since future promotions of this type might be in September and the FMI show is always in early May, adequate time exists for the U.S. companies to sign up for the promotion and ship their products if they commit immediately. Through ATO staff visiting the show, promotional literature could be distributed, formal explanations of the promotion made, and recruitment carried out.

While preparing for the promotion, setting an appropriate price was a major concern. The ATO Guangzhou did not want to set it too low and fail to recover promotion costs. While on the other hand, there was a fear that setting it too high would prevent some companies from participating. In the end, the participation price was at approximately the right level, because all costs were covered. However, based on comments received by the State of North Carolina Department of Agriculture representative who was assisting with U.S. company recruitment, participation price at the set level did not seem to be a big problem. He felt that the price could have been higher and it still would not have had a negative impact on recruitment. Given these comments and the possibility of unforeseen expenses, the next event would have a higher participation price, but not too much higher. The amount would be somewhere between $250 and $300.

The arrangement that was made with retailers for this promotion should be continued for any similar events in the future. Under the arrangement, a good balance was struck. The ATO Guangzhou got the products on the shelves, while the retailers made money from the products and returned any that did not sell well. Little disruption to the retailers' operations took place. However, in the future, the retailers will be asked to order all of the products, not just the few that they may like. Promotion organizers will carefully monitor the ordering process and immediately react if any retail orders do not comply with the promotion goals. The monitoring and speedy reaction is especially important, because retailers more than likely will wait until the last moment to order.

This aspect of the promotion will change the most in the future. Although the ATO Guangzhou targeted 60 importers/distributors with letters, the response was poor. Only a couple importers/distributors made the effort to contact us about the products. In the future, a luncheon or a seminar for potential importers/distributors might help promotional efforts towards recruitment. During the event, a presentation about the products and the retail arrangements would be delivered. A short pamphlet about the participating products also should be prepared and distributed at the meeting. Due to the ATO Guangzhou's continuing working relationship with Purchasing magazine (a local retail industry publication), an advertisement was placed in the publication and it did generate retail interest in the products. Another low cost activity to help to generate importer/distributor interest would be telephoning the local companies to explain the promotion and to encourage interest in representing the products in this market.

For this promotion, the ATO Guangzhou limited product participation to shelf stable products. Any similar promotions in the near future will continue this limitation. The main reason for adopting this limitation is to avoid the extra costs and problems involved with handling either fresh or frozen products. Until methods and means to reduce or eliminate these extra costs and problems are discovered, there are no plans to change the arrangement.

For this promotion, the ATO Guangzhou kept advertising simple and focused. The campaign encompassed two activities: using flyer distribution at the participating stores to attract consumers and a print ad in an industry publication to attract industry interest in the products. For future promotions, the ATO Guangzhou would run the campaign in similar fashion, especially since other forms of media to attract consumers will be comparatively more expensive. The only modification would be expansion of the activities, print and hand out more flyers and run more print ads in industry publications. An additional activity which would be included in the campaign would be adding a page or two to the ATO Guangzhou web site and use the page(s) to highlight the products (and link to participating U.S. company sites).

In the future, given the new Chinese labeling law, the ATO Guangzhou will work more closely with CIQ to facilitate product clearance. This arrangement will require a much longer lead time.