The Chinese are Coming: More and More Suppliers are Selling Directly to Consumers

When I first started importing roughly 10 years or so go, the Supply Chain at the time looked much different than it did now. It consisted of manufacturers, importers, distributors/wholesalers, and brick-and-mortar retailers.

Thanks to the internet, we had managed to eliminate two middle men from the equation, the distributor and the brick and mortar store. The result was a more efficient supply chain and cheaper prices for the consumer.

At the time, I knew there was one massive problem with this equation: it included one box too many – us, the private labeler/importer. The more perfect supply chain would look like below, with the factory going direct to the consumer.

For better or worse, I think this new supply chain model is slowly starting to creep up on us. Chinese Suppliers are now, more and more, selling direct on Amazon. Last year Amazon reported sales by Chinese merchants on Amazon.com doubled. On top of this, I have anecdotal evidence of this quickly rising tide. I’ve been importing from China for nearly 10 years. Only in the last year or so have my Suppliers casually start mentioning “so you sell your products on Amazon right Dave?”.  Quietly, I can hear the gears grinding in their head and them thinking “why do we need him?”.

“Amazon has an edge to help Chinese companies expand out of China. We operate 109 fulfillment centers and serve 285 million active users all over the world. We plan to increase our [ability] to facilitate Chinese manufactures creating their own brands for global consumers.” , Global Senior Vice President at Amazon.

Amazon recognizes this as well and is trying to help Chinese Merchants as much as possible to sell overseas. It has been hosting events in Shenzhen and other areas in China exclusively for helping Chinese merchants sell on Amazon.com. Sebastian Gunningham, global senior vice president at Amazon, didn't hide Amazon's ambitions in a recent interview, “Amazon has an edge to help Chinese companies expand out of China. We operate 109 fulfillment centers and serve 285 million active users all over the world. We plan to increase our [ability] to facilitate Chinese manufactures creating their own brands for global consumers.”

Private Labeling – the New Drop Shipping?

Several years ago, drop shipping was the big fad. Manufacturers and distributors didn’t know how to sell their products online so they were happy to drop ship products for entrepreneurs that did know how. Then these manufacturers and distributors began to catch on that they could do this themselves (either they caught on or Amazon and Shopify made it a lot more simple to sell online). This might be slightly premature to say, but the business of drop shipping is now more or less dead.

A similar revelation is occurring with Chinese factories. Chinese factories are realizing that they can ship their goods to Amazon FBA much like me or you can. Considering that most of us mark up our products by at least 100% or more, one can't blame Chinese Suppliers for wanting to keep that margin for themselves.  However, Chinese Suppliers will face many unique challenges that include:

• Overcoming language and cultural differences for handling customer service.
• Marketing to a Western audience is as difficult for the Chinese as it would be for Western people to market to a Chinese audience.
• Amazon FBA solves many of logistics hurdles for overseas merchants but at some scale a local presence is needed.

However, even with these challenges, as we all know, many consumers will sacrifice a well written product description and excellent customer service for a slightly lower price.  However, I do think these barriers to entry are far greater than the obstacles traditional distributors and manufacturers overcame to kill the drop shipping business model.

What's Your Competitive Advantage as a Private Labeler?

Many years ago it may have been enough to simply source products from China and put a listing on eBay. Many people still have the illusion that this is the raison d'être of private labelers. It's a component of it obviously, but to be a successful private labeler today means possessing many of the qualities below:

• Find top in demand products and get them quickly and inexpensively from China to the U.S. (the U.S. isn’t the only Western market, but I’ll generalize things to say only the U.S. as it’s the largest target right now by Chinese Suppliers)
• Manage logistics such as consolidating freight and breaking it into smaller shipments once it arrives in the U.S.
• Maintaining quality control to make sure customers receive only the highest quality products
• Ship orders quickly and efficiently to customers
• Take photos, videos, and create excellent product descriptions
• Creating packaging and product documentation
• Advertise and market the products on different channels including: listing products on Amazon, eBay, and your own website, managing PPC campaigns, and manage display advertising
• Manage customer service, handling customer inquiries via email and telephone, warranty claims, etc.

There's no doubt that most Chinese Suppliers will have an edge in sourcing products and maybe even logistics. Everything else I think most Western businesses will have an advantage in. Sourcing products, putting them up on Amazon and providing sub-par customer service with poor photographs and product descriptions might have worked in the past and it might even work in the short term. But in the long term, the expectations of private labelers will grow enormously.

My Predictions

So here are my predictions for how the private labeling landscape will change within the next 2-5 years.

• Small, high demand items that can be cheaply shipped via air to FBA warehouses will be the first product categories to be pervasively invaded by Chinese manufacturers. Large, bulkier, low demand  items that require sea freight (and slightly more complicated freight to FBA) will be slightly later.
• Amazon will increasingly make it easier to ship direct from China to FBA either through Chinese warehouses or better door-to-door logistics services (think Amazon the Freight Forwarder and Customs Broker).
• The Chinese will develop better awareness of American customer service and quality expectations. Chinese Suppliers will be forced to actually pay attention to customer reviews and dictate their customer service accordingly.
• Within 2-3 years, many Suppliers will turn down strictly online sellers, much like Drop Shippers do now. They will want to see that you have sales channels that they cannot easily replicate themselves. Or alternatively, they will only sell at ridiculously high prices and undercut online retailers on price.
• Profit margins will decrease over time.
• Sticking your logo on a product and saying you ‘have a brand’ is like putting a hockey stick in your hand and calling yourself Wayne Gretzky. Your brand has to mean something more than a logo (a topic for another day).
• The Western private labeler will still exist, albeit with higher expectations, more sophistication, and lower profit margins.

What Can Private Labelers Do to Protect Their Businesses?

So what can we do as Western merchants who don't actually own factories in China? I think there's a lot we can do:

• Develop better products, ideally protected with IP and patents.
• Develop distribution channels that Chinese factories cannot so easily tap. Selling local and/or B2B are excellent examples.
• Forge strategic relationships with your Suppliers including potentially profit sharing and joint ownership.
• Bundle items purchased from different factories.
• Grow your Email List, Facebook page, and anything else that grows your customer base and weans you off of Amazon's customer base.
• Expand to non-American markets (American markets, specifically FBA, is the low hanging fruit that will attract the Chinese the quickest).

Conclusion

Some may argue that Chinese Suppliers have already arrived and some may argue that the barriers to entry are far too great for them to ever pose a serious threat.Of course, the truth probably lies somewhere in between. I personally believe that the business model of private labeling will never die, but margins will begin to creep down and for one to create a truly successful business will require a higher degree of sophistication than is currently needed.

What do you think? Can Chinese Suppliers ever cut out local private labelers completely? Or will they always need the knowledge and expertise of a private labeler?