With surging demand for foreign products from Chinese consumers, China is projected to become the world’s largest cross-border e-commerce market by 2020, according to China Internet Watch. Over the last decade, Alibaba created not only an e-commerce ecosystem on their own but also an ecosystem of business solution providers for foreign brands that want to tap into China’s massive shopping market.
If a brand is targeting Alibaba’s B2C platform Tmall to sell their products, then chances are that they set up their own online store or they asked a TP (淘拍档, Taobao Partner or Tmall Partner) to run their e-commerce business in China.
TP is an online service provider that collaborates with brands, especially those who lack online resources, to open and operate brand’s official online stores through major Chinese market places such as Tmall, JD, and Vipshop.
“If a brand wants to run their own online store on Tmall, they should deliver products, keep inventory, hire people, and build their own flagship store. They can do it all by themselves, but it’s heavy investment and comes with high risk. I mean, it takes time to set up a team in China, to study China market, to communicate with Tmall,” Frank Cho, manager at major TP Accommate, a major TP based in Shanghai told TechNode. Accommate, started in 2009, serves mostly Korean brands such as Amore Pacific, YG Entertainment, SM Entertainment, and Emart.
“JD and Tmall cannot manage all the brands, and on the other hand, brands don’t have knowledge and experience in China. That’s where TP comes in and bridges those two,” he says.
Since Taobao formally launched its Taobao Partner plan in 2009, TP has grown into a huge business with now over 500 TPs in China. One of the biggest TPs is Baozun, founded in 2007, serving over 100 international brands including Nike, Burberry, Coach, Microsoft, and Samsung to set up their online brand stores. After raising four rounds from Ali Ventures, Crescent Point, Goldman Sachs, and Softbank, the Shanghai-based company listed on NASDAQ in 2015, the year when their GMV reached RMB 6,735 million.
What does TP do for brands?
So how does TP work for these brands? Aiming to provide one-stop-service, TP covers IT solutions, operations, digital marketing, customer service, warehousing, and inventory for brands. The price setting and all the content, from web design, image, and video, are provided by the TP, who then take roughly 10% to 15% of the transaction as commission, apart from their regular service fee.
“TPs have the know-how and we understand the rules on Tmall. For example, revenue from e-commerce heavily depends on events. One day sales made on June 18th, JD’s shopping day, take half the transaction made in that month. We know how many coupons you should give to customers,” Frank says.
On June 18th, not only JD, but all the e-commerce companies including Tmall, Suning, Amazon China took the chance to give discounts to drive up the sales. Seven minutes after June 18th midnight, Tmall recorded RMB 100 million ($14.9 million) in Gross Merchandise Volume (in Chinese).
“We build up an economy of scale because there’s a fixed cost. It’s also about bringing high working efficiency and cost efficiency. For brands, it makes it easier for them since they only need to communicate with the TP, rather than dealing with various Chinese e-commerce companies.”
One of the reasons TPs can stay lean is because they don’t hold any inventory. Rather they purchase the products directly from the brands. Some TPs build a big data team to analyze the customer needs and to improve their shopping experiences.
“Chinese people ask a lot of questions and they want them to be answered quickly. So we put in highly professional customer service teams to answer their questions. It goes same for me, because when I buy things on Taobao and ask a question, 10 seconds is my tolerance for waiting,” Frank says.
An inside look at Taobao, Tmall, and JD
China’s e-commerce apps annual ranking in 2016 shows that Chinese customers love shopping on Taobao first, followed by JD, Vipshop, and Tmall. Despite Taobao’s #1 position, more customers purchase brand products on Tmall rather than on Alibaba’s C2C platform, Taobao, since Tmall guarantees that all products sold on its marketplace are authentic. For that reason, brands can only have their flagship store on Alibaba’s B2C platform Tmall in order to sell official or authorized products where Tmall takes a 3~5% commission. For example, Nike can have only one TP on Tmall, but there can be a lot of unofficial Nike sellers on Taobao.
JD communicates with brands directly, working on the merchandise and the delivery side. Comparing Nike’s store on Tmall and JD, Nike has its one and only flagship store on Tmall, but on JD, there are many authorized stores that sell Nike along with other sports brands.
“Since TP model has become so successful, JD also tries to replicate this model and has approached a lot of brands,” Frank says. “Brands are also struggling to balance the relationship between these two channels.”
For example, Korean retailer Lotte Group closed its flagship store on Tmall, and signed an exclusive contract with JD, making it difficult to recover its relationship with Tmall.
Partner challenges
TP business has flourished through these years, but they are facing a number of challenges. Nowadays, Chinese internet companies are investing a lot of money into offline locations, leading their consumers to offline outlets to enhance their shopping experience.
“The cost of doing business online is rising, and the traffic is coming down. So these giant companies are trying to balance their online and offline channels. At this point, we’re not sure if Chinese customers will actually go there to shop,” Frank says.
China’s biggest travel agency operator Ctrip set up 30 offline outlets in Beijing. Alibaba joined the forces with Bailian group to set up brick and mortar Lianhua supermarkets (联华超市), and Xiaomi unveiled its offline plan to open 1,000 retail stores by 2020 in order to boost its revenue and customer’s experience.
Another challenge is brands escaping from TPs. After 2 years of using a TP, fashion brands Zara and Eland decided to run e-commerce store by themselves, which was a huge loss for their TPs, Baozun and Accommate, respectively. Another challenge is that TP is labor intensive industry, and requires a lot of manpower. As the cost of labor cost increases, they are making tough decisions on how many staff to keep full-time.
Advice for brands
For foreign brands, they should analyze which sales channel they want to mainly focus on. According to iiMedia Research (in Chinese), NetEase Kaola showed 21.6% of total cross-border sales volume in 2016, followed by Tmall International (18.3%), Vipshop (16.3%), and JD WorldWide (15.2%).
As Tmall is backed by Alibaba, and JD is backed by Tencent, brands need to make strategic moves when they choose their sales channel. While TP gives a one-stop solution to penetrate Tmall, there are other booming cross-border e-commerce companies like NetEase Kaola and JD. Japanese top e-commerce company Rakuten decided to abandon the Alibaba channels and opened their flagship store on JD and NetEase Kaola in 2015; by now, their transaction volume has grown 20-30 times from 2016.