April 14 2008

TV shopping increasing in China as sellers build trust
Frederick Yeung
South China Morning Post
(c) 2008 South China Morning Post Publishers Limited, Hong Kong. All rights reserved.

Growing mainland consumption has become a good enough reason for retailers, investors and media firms to consider expanding into television home shopping. But building trust between customers and retailers is crucial to whether television shopping succeeds or fails, industry watchers say.

Still in its developing stage, television shopping only makes gross sales of less than 7.02 billion yuan (HK$7.83 billion) per year, compared with the annual retail sales of 8 trillion yuan last year, according to research house Media Partners Asia.

But in terms of pace, television shopping is one of the fastest growing sectors in the mainland media market. In recent years several state-owned provincial broadcasters such as Shanghai Media Group, Hunan Satellite TV and even China Central Television have established ventures to offer home shopping service to audiences across the nation. An industry watcher estimated that should television shopping account for 5 per cent of total domestic consumption, its market size would exceed 400 billion yuan.

According to Euromonitor, a market research firm, sales from television shopping on the mainland increased at a compound growth rate of 19.5 per cent between 2005 and 2008. Media Partners estimates the market will grow to US$2.3 billion by 2013.

Customers of shopping channels are predominantly in the high-income bracket. More than 50 per cent of them have a car and an average monthly income of 10,000 yuan, according to Media Partners.

However, complaints of misconduct have been lodged against television shopping firms, including allegations of selling fake and low-quality products and poor after-sales service. This prompted the mainland media regulator in 2006 to impose a ban on television advertising in five categories, including health-related products, slimming services and medicine.

"TV home shopping all too often exaggerates the efficacy of the products being sold," said Liu Tingting, a Beijing-based consultant. "The products are strongly recommended by the programme hosts, but they are mostly only gimmicks. In fact, the products shouldn't be sold so expensively."

There are two business models for television shopping on the mainland. A company without a media background can establish a company and line up suppliers to join the network. The company then buys airtime from television stations to air promotional programming - infomercials.

Viewers can order products online or through a call centre, for home delivery.

"As dedicated 24-hour channels are not yet allowed, the retail format of television shopping will be the most significant driver of industry growth," said Media Partners executive director Vivek Couto.

Two leading television shopping companies are Nasdaq-listed Acorn International and Hong Kong-listed China Seven Star Shopping, both of which have been in the mainland market for more than 10 years.

China Seven Star Shopping, operates an infomercial channel, and has also established an integrated retail platform. It runs infomercials on more than 25 channels to 85 per cent of the country, and operates three call centres, 300 self-owned retail sites and 20,000 third-party points-of-sale.

It spent around HK$100 million buying a total of 140,000 minutes of advertising airtime shown over 25 provincial satellite television channels.

To boost revenue growth and attract more users, the company has increased its product mix to include mobile phones, insurance policies and investment-linked products.

Acorn International also buys airtime on satellite television channels. Its main products are mobile phones and cosmetic products. Mobile-phone sales accounted for 32 per cent of total sales in the third quarter last year, while stock-tracking software contributed 13 per cent of revenue.

Acorn saw its revenue drop by more than 30 per cent for two consecutive quarters because of intense competition from smaller infomercial operators.

"Due to the fixed-cost nature of the business, earnings visibility is low until the company identifies new hit products," Merrill Lynch analyst Denise Chai wrote in a research note.

Still, state-owned broadcasters such as Shanghai Media Group and CCTV enjoy the advantage of having their own television networks.

In 2003, SMG partnered with South Korea's CJ Group to form a joint venture called Dongfang CJ. Last year, the venture generated gross sales of US$20 million, or 5 per cent of the nation's television shopping market.