ADDRESSING MARKET FAILUES IN DIRECT-TO-CONSUMER RETAIL TRADE : EXPORTING TO CHINA THROUGH E-TAILERS Case Studies Provided by DC2foods.com (Direct-to-China, Direct-to-Consumer)
CONTEXT
Canadian businesses are looking for access to growing overseas markets for consumer products. In China, mobile and direct-to-consumer platforms like JD.com (the largest e-commerce company in China, as well as the largest Chinese retailer by revenue) offer the technological and logistics infrastructure to allow for direct-to-consumer distribution of nearly any product, including agricultural and temperature-sensitive goods. Companies like D2C (Direct-to-China, Direct-to-Consumer) can support Canadian companies to access these mobile/e-commerce platforms by providing language, cultural, and product marketing services, including managing payments to suppliers and receivables from customers. Large online distribution platforms like JD.com allow Chinese consumers to benefit from products from Canada, which is known to have high consumer product standards and provide for trade creation.
THE CHALLENGE
While there are many opportunities for Canadian companies and intermediaries like D2C, access to capital is a significant challenge due to logistics issues and extended wait times until Canadian companies receive payment for shipped product. (See case studies below). As goods destined for the Chinese e-commerce market leave via free on board shipping, the seller (e.g., D2C) pays for transportation of the goods to the port of shipment, but must wait until the customer receives the goods before receiving payment. In this scenario, payment may not be received for 100 days as a result of: shipment times from Canada to China; further distribution to the Chinese consumer; and potential additional wait times that allow for customers to return products to the e-commerce retailer if they are dissatisfied with the goods. RESOLVING THE MARKET FAILURE
There are three areas that require support from entities like Export Development Canada (EDC) and Business Development Canada (BDC) with respect to: 1) financing; and 2) logistics.
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The following mechanisms would help to address the current market failure: A pull facility, provided by EDC, to a Chinese e-tailer, like JD.com, would help to ensure consistent purchases of Canadian products on the platform. The pull financing would: provide for a commitment by the Chinese e-tailer to purchase Canadian product (he continuous shipment of containers could be linked to the financing to ensure a regular supply of Canadian goods); reduce the fiduciary risk for companies like D2C; and provide for funding, financing, and shipping of goods. As it relates to the pull facility, shipping/logistics support could be provided by a logistics provider through a memorandum of understanding (MoU) and in co-operation with EDC/BDC. This would allow small and medium-sized enterprises (SMEs) to partner together given that, on their own, they may not send enough goods to fill a shipping container. An agreement with a logistics/shipping intermediary could allow for regular (e.g., weekly) shipments between Canada and China to ensure that Canadian companies can take full advantage of opportunities in China. A line of credit could be provided by BDC and underwritten by EDC, and could be paid off based on the sale of products. This would assist with addressing the financing gap (between shipment and payment from the e-tailer).
CASE STUDY 1: CHALLENGES OF EXPORTING PERISHABLE GOODS – BEEF
For a beef slaughterhouse exporting product to China, transit times from Canada to China can average 30 days, followed by a 14- to 21-day quarantine period, before transfer to online stores. In comparison, normal transit time from a slaughterhouse to a domestic (Canadian) customer would be approximately seven days. In the case of China, on its own, a slaughterhouse would have to wait 90 to 100 days to receive payment. During this period, the slaughterhouse would need to pay the farmer (and other prospective players) while waiting for payment. Given this scenario, it’s ideal to have another company acting as purchaser of the beef, handling exporting, importing, sales, and financing until payment is received from the end customer. This company or outlet, acting on behalf of the Canadian exporter, would benefit from appropriate financing and credit insurance to bridge the payment gap. Financing would be needed to cover the following periods: From when the goods depart Canada (no credit offered to the Chinese customer in this scenario); From when the goods arrive in China until final shipment to the e-tailer (this requires the Canadian company to provide credit and related insurance to the Chinese entity); and From when the goods leave Canada until the e-tailer pays the bill (a combination of the examples above). 2
CASE STUDY 2: CHALLENGES OF EXPORTING CONSUMER PACKAGED FOODS – GRANOLA
In the case of granola, the exporting process is similar to that for beef, except that the Canadian manufacturer can – due to the nature of the good – wait longer to receive payment. In the case of granola, shipped via a Canadian entity, the Canadian manufacturer would not be paid until at least 45 days after the product lands in China; including transit time, there would be a gap of at least 75 days – 45 days longer than would be the case for shipment to a domestic consumer.
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