Li Shufeng, a 60-year-old Shanghai homemaker,, is a discerning shopper, comparing prices when she can and only making purchases from vendors she trusts. She is also an avid TV watcher. That's why she recently gravitated to TV home shopping — albeit with a degree of trepidation, given the number of fraudulent TV shopping businesses in China that she's heard about. But having just spent around RMB 300 (US$48) on kitchen utensils from Shanghai SMG CJ Home Shopping, she's impressed. “They were of very good quality. I certainly will buy more stuff from them,” Li says.
It's on people like Li that China's shrinking legion of TV shopping networks are pinning their hopes. While her latest purchase is a far cry from the big-ticket items like BMWs and gold jewelry now up for sale on many TV shopping channels, no one is complaining. The retailers want all the customers they can as their industry embarks on a new era.
A wave of upheaval began around five years ago when regulators at the State Administration of Radio, Film and Television (SARFT) closed down many of the hundreds of TV shopping shows. Some were legitimate, but plenty of others weren't, flogging a vast gamut of goods, no matter how dubious, and casting a cloud over consumer confidence. SARFT stepped in again late last year and banned another 19 TV shopping companies. Of the 150 or so infomercial and TV shopping networks that remain — that is, those that could prove to the watchdogs that they had at least RMB 10 million of capital to run their businesses — stricter oversight awaits, including a ban on advertising “growth enhancement” drugs, medical equipment and weight-loss products.
The shake-up was a long-time coming, according to experts. “It is not the products the government is worried about, but TV as a means of mass communication,” says Yujun Qiu, China retail and consumer analyst at Planet Retail, a U.K.-based consulting company. Whatever the larger motivation behind the cleanup, “it was a good idea to shut them down because there was a lot of rubbish,” notes Paul French, Shanghai-based China chief market strategist and retail specialist of the U.K.’s Mintel Group.
But in a burgeoning economy being hailed around the world as the new haven for consumer goods, the big question for China's TV shopping business is, where to from here? Once considered a maverick in the world of TV shopping, China is now lagging behind other countries. A case in point: the U.S., says Erin Armendinger, managing director of Wharton's Jay H. Baker Retailing Center, citing the multibillion annual sales of TV shopping giants there, including QVC and HSN. TV shopping in the U.S. "has definitely evolved and [the networks] have really pushed the envelope and made the whole shopping experience more real," she states. Cleaning up their industry's poor reputation among consumers is just one of many issues China's TV shopping companies need to address if they stand a chance to do the same.
Attention, All Shoppers…
Though launched before their counterparts in other countries in the 1990s, TV shopping companies in China account for a miniscule share of national retail sales, at only RMB 30 billion in 2011, or 0.3% of the total. In comparison, it's about 10% of total retail sales in the U.S. and South Korea and 8% in Japan. Yet TV shopping in China has a lot of advantages over other retail outlets in the country. For one thing, it is able to offer far greater variety and convenience than bricks-and-mortar retailers. For another, it's a good counterbalance to online shopping. Despite the Internet's growing popularity (it accounted for around 3.3% of all retail sales in 2011), not all consumers — particularly from older generations — feel comfortable using a computer for shopping. With at least one television set in every household in China, TV shopping networks have a captive audience.
Armendinger says the experience in other countries suggests that TV shopping has a number of other attractions. "I think it has something to do with being an alternative to the web. It's more interactive, more experiential than what e-commerce has provided," she states. "You have people showing you exactly what a product looks like and different ways to use it. They have real people calling in and talking about what it's like to use the product. And you see on the screen how many products are being sold. So a lot of questions you might have … are being answered."
Something else that TV networks have that other outlets don't: a following. With TV shopping, Armendinger says, "it's personal. The audience knows the host…. The core customer becomes sort of like an ambassador for the brand, and it becomes credible and authentic."
But TV shopping also shares a problem with other retailers. “The issue with TV shopping in China is exactly the same as with the Internet, which is trust," French points out. "Can you trust them to send you the products? Can you trust that they aren't selling fakes? Can you trust that they're asking a fair price?” As Qiu of Planet Retail notes, “The trust issue is the biggest obstacle. TV shopping has a very negative reputation in China due to fake products, products that don’t match the advertising, hard-to-return products and difficulties with refunds."
There are exceptions, of course. Building trust has, in fact, been a cornerstone of the strategy at Shanghai SMG CJ Home Shopping (or OCJ as it's often referred to locally). Launched in 2003 as a joint venture between state-owned Shanghai Media Group, the largest media company in East China, and CJ O Shopping of South Korea, it's now the country’s top TV shopping company, with sales of US$1.15 billion in 2011, up from US$716 million in 2010.
In OCJ's early days, building trust meant convincing shoppers that the products on offer were top quality, and weren't counterfeit. As Kim Heung Soo, the company's president and CEO, recalls, the solution was to focus on selling products produced by foreign multinational companies, such as Phillips, Sony, Samsung and Henkel, "so that our customers would know the products were not fake.” After showcasing multinational brand names to help build its reputation, the company began branching out a few years later into luxury items, such as gold, jewelry and diamonds, as well as food, another “quality-sensitive” product category in a country rife with food safety scandals.
Honing customer service has also been important. When OCJ began selling Sony digital cameras, they cost RMB 2,200. Customers complained after discovering that local electronics stores were selling the same product for RMB 1,800. “I spoke with the Sony manager about this and the company decided to give free memory sticks, worth RMB 600, to those customers. The Shanghai customers said they had never been treated that nicely before by any TV shopping network,” says Kim, a South Korean, who has been with OCJ since its founding in 2003.
OCJ employees also have had a big role to play in this regard. “We do not pay bonuses to our TV hosts or call center staff that depend on how much they sell, so they will not exaggerate [what they're selling],” Kim notes. The ultimate objective is for customers to “say OCJ is different from other TV shopping companies in China and that we are pretty good.”
Trial and Error
Alongside repairing damaged reputations, another home-grown issue vexing TV shopping is logistics. In China’s biggest cities, deliveries are generally fast and efficient. But elsewhere, wobbly infrastructure is a major hindrance for expansion, says Robert W. Roche, co-founder and chairman of Acorn International, a Shanghai-based, NYSE-listed TV direct sales and infomercial company with around US$380 million of annual sales. Roche runs Acorn with local partner Dongjie Yang.
“When we started our business in China in 1998, the biggest obstacles were a lack of phone lines and delivery services. Delivery is still a problem,” Roche notes. “Sending a box of cookies is no problem. The post office can handle that. But sending big shipments, such as 150,000 packages, is a different ball game." Unlike in, say, the U.S., next-day delivery is either too expensive or simply impossible, a problem that "the Chinese government recognizes" but has yet to help resolve, he adds. Pa
Inefficient and hard-to-manage payment systems are another challenge. Cash-on-delivery accounts for over 90% of payments in China, both because of the relatively low penetration of credit cards and ongoing concern about fake products. “Typically, a customer opens a package to ensure the product is real before paying for it, or even uses the product to make sure that it has no problems,” according to Taishi Nakatani, secretary general of Leading Products Association of Japan, which helps Japanese companies sell products over China's TV and Internet networks.
Meanwhile, the industry must also contend with the rise of the Internet. Teng Yue, a retail analyst at Euromonitor International in Shanghai, predicts that TV shopping sales will grow 17% a year between 2011 and 2016, while online shopping will grow more, by as much as 29% over the same period. China’s online shopping grew 289% from a year earlier to RMB 81 billion in 2010 in value terms, and doubled in 2011. "[Online retailers] do a better job in terms of handling payments and after-sales service and are gaining better credibility in China," Yue says.
As a case in point, various experts cite Taobao, China’s equivalent of eBay. Along with a system for customers to rate their experiences with the site's service, “Taobao has to guarantee their products are not fake. They have a good refund system. All those [factors] are increasing the confidence in consumers,” notes Waldemar Jap, managing director of Boston Consulting Group (BCG) in Hong Kong. “If you sell poor-quality products online in China, people post comments [online] and that will quickly spread. People will know that a shop is not a good shop."
Qiu of Planet Retail agrees. “Consumers trust online shopping because they can find true reviews from other users and they can easily compare products." Yet online shopping can be a friend as much as a foe for TV shopping companies. Like in other countries, TV and online shopping are converging. The TV shopping companies "want to be wherever the customer is," says Wharton's Armendinger. "A website is another vehicle, and so is being able to shop by remote control."
So far, at OCJ, however, TV shopping accounts for 75% of total sales, with 20% from online shopping and the remainder from catalogues. “We would like to shift our ratio to 50% TV shopping and 50% new media, such as the Internet and mobile phone by 2020, with an annual sales target of RMB 100 billion,” Kim states.
Switching Channels
The good news for China's remaining TV shopping channels is that they now have more leeway to sell around-the-clock, as long as they abide by the rules and have the correct license. “There are 35 TV shopping companies with proper TV licenses from SARFT," says Nakatani. "I think that there are, all together, about 50 professional and decent TV shopping companies, including infomercial companies.” For its part, OJC offers live 10- to 24-hour TV shopping programs, selling thousands of products. Others "rent" air time from TV channels — as is the case with Acorn International, which runs seven- to 12-minute commercials for around 20 products.
China's TV shopping lag may be a matter of needing more time to develop a sophisticated consumer culture as in the U.S., Japan and South Korea, according to Wharton's Armendinger. It may also be that the TV shopping companies in those countries have simply raised their game faster and better than their Chinese counterparts have, "appealing across the board" to both old and young shoppers, providing better value and financing than in other outlets, and running exclusive offers. "It's interesting to see how lots of things that people thought could never be sold on TV are sold on it now, and even at the high end," she says.
And it's at the high end that OCJ's Kim sees big opportunities. Generally, TV shopping in China has been reaching an older demographic than online outlets. That may help explain why bigger-ticket items are more likely to be sold on TV than online. A 2011 report by the Japan External Trade Organization found that the best-selling items online in China cost less than RMB 100, while the best-selling TV shopping purchases — like consumer electronics — cost at least 10 times that. At OCJ lately, in fact, there seems to be no price limit to the products that can sell, including cars, such as Audis and BMWs. “We sold about RMB 600 million worth of cars in 2011,” says Kim.
While shelling out for a fancy new set of wheels or even a condominium over a TV network may be a step too far for some, Li of Shanghai is keeping an open mind. If the price and quality are right, "I will buy something expensive from the TV shopping,” she states.
