Author: Lucy Liu, Co-founder of Airwallex
The fall from the top
The sudden downfall of Tasmania-based organic baby formula company Bellamy’s has opened the floodgates to a fierce blame game. But while the company’s management team and actions have been called into question, lying at the centre of the disaster appears to be the Chinese distribution strategy and its cultural intricacies.
From trading at a high of $15.48 last year, Bellamy’s shares collapsed to $6.68 on 2nd of December, with many commentators pointing to China as the source of the company’s woes. By January this year, their share price had dropped to $3.93 on 27th January, reducing Bellamy’s already diminished value by more than $200 million.
Part of the issue seems to be related to Chinese regulations passed in April 2016, which increased duties and restricted which international goods could be sold to Chinese consumers online. However, it also appears that Bellamy’s may have mismanaged its Chinese distribution strategy by under-pricing its products and alienating its primary distribution channel: the daigous, a unique Chinese cultural phenomenon.
Thorough research into a new market’s cultural and social considerations, not just it’s economic landscape and marketing opportunity, should be at the heart of any successful international trading venture. But it seems Bellamy’s failed to fully grasp the influence of daigous.
What are Daigous?
‘Daigou’ means ‘to buy on behalf of’ in Mandarin, and is the term given to members of the Chinese diaspora in countries like Australia, the US, France, Japan and Korea who buy popular foreign goods to ship back to China. Daigous are a relatively recent phenomena, arising from the tragic ‘Chinese milk scandal’ of 2008, which saw six infants die and around 300,000 become ill after consuming contaminated baby formula. Consumer trust in local goods fell to an all-time low, and the Chinese turned to foreign brands which were perceived as higher quality due to their more stringent safety standards.
While some daigous sell to friends and family, others advertise their services on popular social media such as WeChat and Weibo. In general, daigous sell foreign products at a lower cost than a consumer could buy in-store in China, due to the duties imposed by the Chinese government on foreign goods.
Given the daigous’ origins, one of their key selling points is trust. They acquire customers through word of mouth, and will go to great lengths to ensure their customers know their purchases are legitimate. This includes filming themselves in stores while buying goods and sending pictures of the product with the receipt.
There are an estimated 40,000 active daigous in Australia and it can be a lucrative profession, with some claiming to make revenues of up to $100,000 a year. They’re often students or young adults looking to make a bit of cash on the side, but for some it becomes a fully-fledged business. While there are no recorded numbers, it’s estimated that daigous make a margin of around 5-15 per cent on every sale.
Daigous and the power to persuade
But daigous are more than just middlemen; they’re influencers. Daigous promote and sell a carefully curated selection of trusted goods that resonate with their customers. Products are chosen depending on how convenient they are to buy, how advantageous their price point is and whether they match current trends among Chinese consumers.
The mistake many foreign businesses make when trying to break into the Chinese market is underestimating the daigous’ influence. In fact, some companies choose to avoid daigous because they don’t like the way they market their products, and see them as more of a liability than a potential distribution channel.
But, as Bellamy’s experienced, this approach can have huge consequences for international brands selling to China. So confident were they in their product’s popularity that Bellamy’s decided to sell their goods directly to the Chinese market via the online ecommerce platform Tmall Global. Goods were listed at the same price as in Australia, which destroyed the daigous’ margin. With no reason to sell Bellamy’s baby formula anymore, daigous stopped promoting the product and moved onto other brands. But what Bellamy’s didn’t expect was that the daigous’ customers would be more loyal to their daigou than to the Bellamy’s brand, choosing to switch to new brands rather than opt for a new sales channel.
In addition, Bellamy’s pricing confused Chinese customers. In a culture where a product’s legitimacy hinges on its price, pricing their formula too low was a recipe for disaster. Wary consumers steered clear of the brand’s ecommerce shop and things took a turn for the worse, both for Bellamy’s and its CEO.
Whether Bellamy’s will turn its fortunes around remains to be seen, but in the meantime the company stands as an example to other Australian businesses looking for their big break in the Chinese market: don’t underestimate the daigous.