Andrew Chmielewski, founder and CEO of Harrison Township-based Dave’s Sweet Tooth, didn’t think about China as a market. His handmade toffee is a hit in the states. The seven-year-old company is set to surpass $1.2 million in sales this year thanks to tireless efforts to get its product into 5,000 grocery stores like Whole Foods Market, Busch’s Fresh Food Market, Fresh Thyme Market and Kroger Co.
But Alibaba Group Holding Ltd.’s Gateway ’17 event last week at Cobo Center opened Chmielewski’s eyes to China’s desire for U.S.-crafted candies and the potential from the e-commerce platform’s more than 500 million online shoppers.
“Candy is trending really high in China; something I was only vaguely aware of before this event,” Chmielewski said. “Even getting a small piece of that market would be a huge win for us.”
It’s hard to argue the facts. China’s middle class is about 300 million people, with expectations to reach 600 million in the next five years, according to a 2016 McKinsey & Co. report. Even as China’s economic growth has slowed in recent years, its middle class continues to flourish — 76 percent of China’s urban population will be considered middle class by 2022, according to the report. In 2000, that figure was just 4 percent.
China’s retail market totaled $5 trillion in 2016 and is expected to be 11 percent larger than that of the U.S., the current world leader, by 2020. Much of that will be growth in online sales — where 60 cents of every dollar spent online worldwide will be by Chinese consumers by 2020, according to Alibaba.
“There’s quality here (in the U.S.),” Joseph Tsai, Alibaba’s vice chairman and co-founder, said in an interview with Crain’s. “Consumers in China, what they care about is anything they eat, they put on their face (cosmetics) and baby products. They want safety and quality. That search for quality is only going to increase with the growing middle class in China.”
Alibaba held Gateway ’17, its first non-investor event in the U.S., to find small businesses like Dave’s Sweet Tooth and sign them up to sell on its platforms like its business-to-consumer portal Tmall and consumer-to-consumer portal Taobao. More than 3,000 attended the conference, with roughly 700 businesses from Michigan.
Anthony Montalbano, managing director and partner at Detroit-based website and mobile app development company Ambr Detroit LLC, attended Gateway to learn more about opportunities for his clients.
“This is unknown territory for me,” said Montalbano, who was invited by Goldman Sachs 10,000 Small Businesses program, a sponsor of the event. “I came for info gathering, to find awareness of what (Alibaba) is trying to do. What I’m realizing is there’s a hell of a lot of opportunity outside the U.S.”
For Dave’s Sweet Tooth, that’s toffee that could retail for $10 or $12 in China, compared with just $5.99 in the U.S., Chmielewski said. This is in line with the spending habits of the Chinese consumer, according to a recent Boston Consulting Group study, which said 61 percent of Chinese consumers indicated they’d pay more for products made in the U.S.
That extra margin would be needed to export to the Chinese market due to extra expenses for warehousing, chilled shipping containers, marketing and packaging in the Mandarin language, among other considerations.
Chmielewski said he discussed those options with half a dozen service providers at the Gateway ’17 event.
“Shipping chocolate around the world is a scary thing for us,” Chmielewski said. “Logistics are a concern; warehousing, fulfillment, etc. It has to be the right fit, but I think we’ve made some really important connections here (at the event).”
But using Alibaba’s services and selling into the China market are not without risk.
Many of the small companies that sign on to Alibaba’s services will be exporting for the first time, many without fully understanding the Chinese culture, Tsai warns. The companies that perform the proper due diligence to understand shoppers in China will have the most success, versus those that are looking to just dump product as-is into the market, he said.
“Selling in China is not for everybody,” Tsai said. “(The U.S. business) has to have an open mind about taking their offering to a consumer population that’s very, very different than the U.S.”
Tsai said the exporter must understand that packaging in China is different and fashion styles are different. So while people are eager to spend money on U.S. products, there are cultural norms Chinese shoppers expect.
Legal hurdles are also important to consider for any business, but particularly small businesses that lack legal and cultural sophistication, said Steve Richman, partner and attorney focused on international commercial law for Detroit-based Clark Hill PLC.
“The main concern with China is always enforcement; it’s a very different legal system in China that is politicized, heavily influenced by the Communist party,” Richman said. “Using Alibaba may alleviate some legal concerns, but you better have lawyers on the ground in China, so if something does go wrong, you have the proper help in navigating that system.”
Alibaba has also struggled for years in preventing counterfeit products from showing up on its sites. In December, the Office of the U.S. Trade Representative put Alibaba’s Taobao marketplace on its “Notorious Markets List.” The list is meant to steer U.S. shoppers away from marketplaces that reportedly engage in and facilitate counterfeiting and violating of U.S. intellectual property laws. The U.S. removed Taobao from the same list in 2012 after it began a new strategy in combating counterfeit products.
Michael Evans, Alibaba’s president, questioned publicly whether the move was politically motivated against the Chinese company, noting Alibaba had taken significant steps in battling piracy, including blurring trademarks in product images and technology that prevents counterfeit sellers from returning to the sites.
But the opportunity is worth the risk, said John Nemazi, partner and co-chair of patent protection for Brooks Kushman PC in Southfield.
“There are issues with counterfeiting on everywhere, even Ebay,” Nemazi said. “It’s hard to police those things, but I don’t think it’s any more risky doing business in China than it is here. You’ve got to protect your intellectual property to get maximum value … but the market opportunity in China is just too big to ignore.”
For Chmielewski, the risks aren’t great enough to sway his desire to expand.
“They can replicate our packaging, I suppose, but I don’t think they could replicate our quality,” he said. “Why worry about a threat I can’t change? The opportunity outweighs that risk, in my opinion.”
Learn more in our Global Ready China Seminars
- Alibaba Launches Data-Driven Marketing Tools To Target Chinese Consumers
- Alibaba’s Gateway ’17 Reveals Focus on Small Businesses