A passage to Europe

Christmas goods companies from Yiwu look to turn the tide

Yiwu Yanghang Art & Craft Co Ltd was a late entrant to the Christmas products trade in Yiwu, but one of the early birds in overseas expansion.

Lou Luhui, general manager of the company, says that in May this year the company decided to set up a branch office in Germany to better cater to its customers in Europe.

The 300 square meter office in Selinger, a small town near Frankfurt, Germany, will also function as a showroom for other Christmas product companies from Yiwu.

"Through the showroom, we expect to attract more European customers. Our aim is to be a key player in the European Christmas goods market along with a full-fledged after-sales team," Lou says.

Set up in 2004, Yanghang has seen more than 90 percent its products go to supermarkets and distributors in Europe, while the balance 10 percent finds its way to South American markets.

"European clients normally place huge orders, the mainstay of our business. If they stop sourcing from us, we will be under tremendous pressure," Lou says.

"By setting up showrooms in Europe, we are trying to shorten the supply chain and directly source the orders from European companies."

The company recently shipped a container with more than 1,000 product samples to Europe, but has yet to clinch any firm orders. Lou says the container reached the European markets only in May, much after the purchase season in February and March.

Undeterred by the setback in the first half, Lou is now pinning hopes on the second half and the busy season in January and February. "This time around, we are looking at collective participation from Yiwu entrepreneurs/companies to push Christmas products sales in Europe."

Lou and a small team plan to spend the next three months in Germany to work out the finer nuances of online and offline marketing along with other promotional activities for Europe.

The company will also hold promotion parties for women, the main buyers. It also plans to register its own brands in Germany.

"Our primary goal is to ensure that product samples are readily available in the Frankfurt branch. Instead of pictures, customers can actually feel and experience the products. It makes it easier for us to win customer trust."

The initial investment in the German project is around 1 million yuan (125,600 euros, $158,000), and also has some local hiring components. But the investment is more than worth the effort, he says.

"Every year we spent about five days each to attend the Christmas World (an exhibition for global suppliers in Frankfurt) and a trade show in Hong Kong. This costs us about 200,000 yuan each time. Though there are prospects of big orders from buyers at these fairs, the gross margin is really limited."

"With a showroom in Europe, we can now advertise and promote our products throughout the year," he says.

The company clocked annual sales of over 20 million yuan in 2011, but with slender profit margins. Lou says that by selling products to buyers and distributors in Europe, the company can expect profit margins of 10 percent to 15 percent. In contrast, direct sales in Europe fetches margins ranging from 30 percent to 50 percent.

Chen Jinlin, secretary-general of the Yiwu Christmas Products Industry Association, says that more local companies are now joining hands to set up Christmas products supermarkets in foreign markets. "The huge profits that exist in the middle of the supply chain is the trigger for such moves," Chen says.

"Take a decoration ball for example. Buyers get it for 0.5 yuan from us and sell it at 15 yuan in the European supermarkets."

Chen admits that while it looks easy and profitable to expand overseas, there are also challenges like culture, management and recruitment. "Having new products does not necessarily ensure robust returns," he says. "Companies should build their own brand and enhance the added-value of products. They should also diversify sales channels to avoid cutthroat competition."

Supporting this viewpoint, Lou says that though many big companies have the capacity to execute orders in excess of 200 million yuan, it would be better to opt for small orders with higher added-value.

"We have a small factory with limited productivity and around 100 employees, and hence may not be able to execute the large volume orders. But we are capable of making high quality goods with better added-value."

The real success of the German venture will come from the company's ability to manage a full-fledged after-sales network, he says. Lou is also planning to rent a new 1,000 sq m warehouse in Germany. "Christmas products are seasonal. With a warehouse, we can collect the returned goods from our buyers, if they fail to sell them, after the Christmas season. We can also easily stock replacements and spare parts for our clients. In a way, it is also a way of promotion for us."

Lou says that to expand in the overseas market and face clients directly, companies must have high-end products, rather than low-end products with low prices.

"Being good is more important than being big. Big orders come with low prices and ruins the gross profit."

His plan is to eventually turn the company into a medium-sized company that can produce more innovative and new products, rather than large volumes of low-end products.

Mei Lin, export manager of Yiwu Youlide Arts & Crafts Co Ltd, agrees with Lou, saying that offering high-end products is an unavoidable choice, especially if companies want to test overseas markets.

"Price war is another option, but not a wise one. The sales strategy and idea will always be different in overseas markets," he says.

Mei says that high-end products should have more environmentally friendly materials with high quality and new designs.

"Normally buyers come to Yiwu with big orders and get a high discount for low-end products. But if we go out and face our clients directly, they will raise more requirements in quality and design," Mei says.

Lou has traveled to many countries in Europe, but was impressed by the orderly and precise German style.

Since Christmas lasts only for a few days, Lou also has plans to introduce other products from Yiwu for festivals such as Halloween and Valentine's Day in Germany or West Europe.

"With a branch in Germany, we can cover the surrounding countries such as France, Italy and some regions in North Europe."

Lou, who plays football and basketball every week, admits that he loves adventure. Though the route he often chooses is a bit risky, he is willing to test it out.

"The most important thing is that you have tried," Lou says. "I will have no regrets even if I fail.

"Going West is a widely discussed topic in China, but I think it needs more practice than just theory. If you do not try when you are young, there will be no chances later on."

Lou says that products, services and channels are the three important verticals for an export company, while the most critical one is the control of channels.

His long-term goal is to gather enough retailers and control sales channels both in China and Europe.

"With enough channels, we can take the initiative and our operation will become more flexible. We can also promote other products from Yiwu," he says.

(China Daily 09/20/2012 page16)