China Esquire

All Roads Lead to China recently did a post on China Sourcing and how WalMart has continued to succeed based on its Chinese operations and how it can save the consumer money in a recession. This is what I have been arguing all along in response to the Trader Joe’s news, and so, I am glad that there is agreement that U.S. recession scares will drive people toward Chinese products, suppliers, manufacturers despite product safety concerns.

Here is Richard Brubaker’s take in his post:

Last summer, the ONLY topic in the news was product safety. Everyone, including myself, was covering it in some way, and going into Christmas I saw Wal-Mart’s association to China as something that could lead consumers away from WalMart. Nothing new here, their production lines are deeply rooted in China and other low cost countries, and I think a lot of the news media showed WalMart more than anyone else. It was not good news for the firm that has been shown to have done so much to help consumers reduce their monthly expenses.

At the same time, you had clouds forming on the horizon of an economic slowdown the in the U.S. It wasn’t high priority in the media until the subprime market started crushing the U.S. banks, but once that happened it highlighted the fact that a lot of people had been getting crushed before that… and so the news cycle kicked into full force. Talk of over-extended consumers loosing confidence in the economy were at the top of the news hour, and questions of how this could impact retailers begun coming out soon after the holiday shopping season started.

Where I saw this as good news was that Wal-Mart has built a model of providing the lowest price points in the retail industry for many items. It is an issue that has been cast in a negative light by many, but the reality is that consumers really don’t care. If their pocket books are tight, it is a 5 minute ride in the family war wagon to the nearest Wal-Mart.

Target on the other hand has always tried to be a notch above, perhaps a couple notches above, Wal-Mart in terms of product placement… and price. Target usually puts more into the stores, and the demogaphics of the typical buyer will reflect this…. when the market is on the way up.

Bringing this all together, it is once again Wal-Mart’s investment in China that really saved them, and the news cycle of product safety bring trumped by the economy. with some experience working with big box retailers, one of the most interesting phenomonon I have seen is that while Wal-Mart has invested so much, and made so much money from that investment, others have yet to really take the same steps. Instead, they chose to continue working through the traders in Chicago, NY, LA, etc who will purchase from a trader in HK/ TW… who will buy from a trader in China… who will buy from a factory in Suzhou.

In an up market, when consumers are not worried about making minimum payments this works, but in a down cycle these intermediate steps become insurmountable in a couple of ways. first, the ability of a group like Target, who operates through more trading firms than through direct relationships, cannot bring their prices down to the level of Walmart – even for the same goods because all those traders who are in the middle need their take too.

Exactly what I have been feeling all along.

There is another reason as well. Not only are products from China cheap, but a lot of them are well done. Take baby toys for example. Some of my friends have amazing toys for their babies and toddlers. One I saw recently was a plastic bongo drum set that made noise if you hit it, but also comes with pre-recorded beats that play on it. I kept thinking, “Wow, stuffed animals and Clifford-the-Big-Red-Dog books were all I had as a toddler.” It didn’t even come close. If you compare stuff from NMICtoys.com, which is wood and blocky, to what you can buy from Playskool at a local Toys-R-Us, which is plastic, but beeps, sings, and moves, it’s a no-brainer. Cheaper + more innovative = sales, particularly in a down economy.

Don’t be scared by a lot of the negative P.R., unless your clientele is like Trader Joe’s. Really. Do your QC and due diligence, but don’t think China sourcing is disappearing anytime soon.

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