Balancing online and offline

This case study looks at how O.C.T. Mami, China's leading maternity wear brand, has to balance online and offline sales, so that they complement each other rather than compete.
Li Shanyou, S Ramakrishna Velamuri, Dong Liang and Xu Leiping         Print Edition: April 12, 2015
Balancing online and offline
Double bonanza: A retail outlet of O.C.T. Mami. The company also sells products on the Internet.

EXECUTIVE SUMMARY

China's leading maternity wear brand, O.C.T. Mami, took advantage of the rising affluence of the country's consumers and their growing affinity towards consumption for fashionable goods, to build a sizeable business, selling quality products tailored for pregnant women. Then it went online through third-party e-commerce platforms. Very quickly, online sales shot up taking advantage of the medium's inherent strengths, particularly convenience of shopping for pregnant women. Eventually, the online business outstripped the traditional offline sales numbers. The big challenge facing O.C.T. Mami now is to balance online and offline sales, so that they complement each other rather than compete. There is a host of other questions, too, that needs answering.

Checking the traffic stats for her company's website in May 2012, Tu Wenhong, Founder of maternity wear brand O.C.T. Mami, was pleased with what she saw. Since early 2011, the company's e-commerce business had been growing rapidly, showing handsome revenues and profits. However, she still had some concerns. O.C.T. Mami's original business relied on traditional brick-and-mortar retail outlets, but the company had recently expanded into online sales channels as well. How could the company best leverage the advantages of both online and offline sales while avoiding conflicts in terms of resource allocation, positioning and pricing? Most of the company's online revenues came through sales on third-party platforms such as Taobao.com. Would it be wise to depend on third-party sales channels over the long term, or should the company invest in creating its own platform? O.C.T. Mami's rapid expansion had put it on the path for an IPO (initial public offering), yet its basic strategic positioning, mission and value statements were not yet clearly defined.

DEVELOPING O.C.T. MAMI

In 1997, when Tu and her husband Zhao Pu started their business, the concept of fashionable maternity wear in China was a novel idea. Purchase of high-end and well-designed maternity wear was considered unnecessary and even extravagant, since pregnant women required new maternity wear every one or two months due to their fast-changing body shape, and people were in general not conscious of their appearance at that time. However, along with China's economic reforms in the 1980s, the standard of living of the Chinese people gradually improved, and their vision and attitude towards consumption and lifestyle also changed.

So, when Tu and Zhao noticed that there was an unexploited market opportunity for maternity wear, they decided to take advantage of this gap. They both quit their well-paying jobs at East China Design Institute and the Foreign Trade Bureau and set up their company - Uki Industry & Trade Co., Ltd. They opened their first O.C.T. Mami maternity wear store in Hangzhou's fashionable West Lake district, which in their opinion was a suitable place to start. Hangzhou is the capital of Zhejiang province located in eastern China, and was one of the most fashionable and developed cities in China with one of the highest per capita income. Business at the first store was unusually brisk. In the beginning, Uki Industry & Trade Co. was also the agent of Lego Toys from Denmark and Chicco Toys from Italy. Soon after O.C.T. Mami became popular, Tu and Zhao decided to give up the agency for the foreign brands and focus on their own brand.

Uki also took a professional management approach towards R&D. O.C.T. Mami's creative adjustable design for the chest and stomach areas made one garment fit multiple phases of pregnancy, so that consumers were willing to pay more for a single garment. Due in part to their efforts, China's maternity wear market began to grow. In line with the business model typical for regular women's clothing, between 2003 and 2006, O.C.T. Mami began to expand across China with both owned and operated retail outlets and franchisees, making it the market leader in China's maternity wear sector. Thereafter, along with the growing idea of "healthy, comfortable, sexy, and fashionable" maternity wear and the continuously high concern of radiation, O.C.T. Mami introduced newly-developed radiation-proof products, which further enhanced its sales performance.

In 2007, O.C.T. Mami roped in actress Dee Hsu as a brand ambassador in a bold advertising strategy that turned out to be a success.
In 2007, O.C.T. Mami roped in actress Dee Hsu as a brand ambassador in a bold advertising strategy that turned out to be a success.
O.C.T. Mami spent lavishly on brand promotion. In 2007, as a small company with annual revenue of 70 million RMB ($9.6 million), it signed an expensive endorsement deal with Dee Hsu, a popular actress from Taiwan, and focused all its media investment in subway video advertising. The bold advertising strategy turned out to be a success. Dee Hsu was a well-known "Spicy Mother", and her sexy and fashionable image matched O.C.T. Mami's market positioning very well. The celebrity effect also broke the low recognition of maternity brands, enabling O.C.T. Mami to distinguish from other brands. Through innovative brand promotions that included sponsoring entertainment programmes and creating useful informational materials for pregnant women, O.C.T. Mami endeared itself to its target consumers. O.C.T. Mami also became involved in charity projects, such as publishing books and making videos about caring for pregnant women.

By June 2011, O.C.T. Mami had more than 600 stores (over 200 own outlets plus over 300 franchisees) nationwide, with annual sales of RMB 600 million ($93 million) and a 20 per cent market share, making it the leading brand for maternity wear. The annual sales revenue of the second-largest brand was less than one-fourth that of O.C.T. Mami. Venture capital firms Sequoia Capital China and Pegasus Capital became strategic investors of Uki in October 2011. At the time of signing the contract, Sequoia Capital urged O.C.T. Mami to go public before 2015, but Zhao insisted on postponing the IPO schedule to 2016, due to his plan of building up the online platform and solidifying the foundation of the brand.

ONLINE BREAKTHROUGH

Beginning in 2010, alongside the rapid advancement of logistics, payment and Internet technologies, China's online sales channels had undergone qualitative changes. Tu was well aware of the need for the business to keep up with these advancements.

"Among our 600 outlets nationwide, a majority is located in large cities; we have limited influence in small- and-medium-sized cities," she says. Instead of going out to shop frequently, pregnant women prefer the convenience of online shopping on the computer or mobile devices. O.C.T. Mami's strong brand presence offline can also have an influence on consumers shopping online. An advantage of physical stores is that the sales staff can offer recommendations. But online platforms can offer consumers a variety of photos and videos to assist them with their purchasing decisions. Due to rent and labour costs, it is difficult for offline sales channels to offer large-scale promotions. It is more cost-effective to do sales promotions through online platforms.

Tu moved enthusiastically into the online business. O.C.T. Mami launched its website, www.octMami.com and also opened branded online shops on well-established e-commerce platforms such as Taobao.com, JD.com, Dangdang.com and Amazon.cn. Tu handled everything from product positioning and pricing to ad buys and promotion planning. "Every night after my family goes to bed, I am up looking at the e-commerce websites, staying abreast of what our competitors are doing and thinking about how to stay ahead of them," she says.

The newly-organised online business team for O.C.T. Mami was drawing on its years of experience in offline marketing and putting itself in the shoes of consumers to find new ways to continue to optimise the brand. The team had hit its stride and was finding it very efficient to cooperate with third-party service providers such as logistics companies.

When launching its online business, O.C.T. Mami went to great lengths to implement integrated marketing solutions. The company leveraged its endorsement deal with actress Dee Hsu to mount the "O.C.T. Mami - S-sized Women" Talent Show and "Baby on Board" Badge Launch Ceremony together with China Women's News and Eladies.sina.com.cn. These campaigns received much attention from online and offline media and consumers. O.C.T. Mami also created useful informational branded products for pregnant women. It received a lot of attention for its hip-hop song, short movie and ring-tone- themed 'Here comes an Expectant Mother', which was available for download. The 40,000-copy print run for the first O.C.T. Mami pregnancy book, Care for Pregnant Women, quickly sold out. Subsequent print runs followed and it set a sales record for books on pregnancy and delivery. It also became a must-have promotional gift on e-commerce platforms. O.C.T. Mami launched a pregnancy calendar mobile app that provided detailed information to guide women through the various stages of pregnancy. The company also created the Baby Face mobile app that helped predict what a baby's face would look like. These informative and entertaining apps were instant hits with consumers.

O.C.T. Mami's online business developed rapidly. Its monthly sales in 2011 rose from RMB 28,000 in January to more than RMB 5 million in September and more than RMB 10 million in November. It had taken the company's offline business five years to reach these same milestones.

ONLINE CHALLENGES

Since 2012, China's e-commerce sector has progressed in fits and starts. Though she was eager to establish a clear niche for O.C.T. Mami's online business, Tu had yet to iron out the strategic issues for the entire brand.

Though they both serviced the same brand, the company's online and offline businesses were in conflict in terms of sales channels, product positioning and pricing. In spite of performing well, the traditional offline retail business was being considerably outpaced by the fast-growing online business due to limited resources. Rising costs and shrinking profit margins were particularly an issue for the traditional retail stores. Not only was the online business now larger, it was generating substantial profits. Tu believed that although the offline business would not die out or be completely replaced by the online business for the moment, strategies and policies needed to be tilted to favour the online business. Nevertheless, the company needed to find the right balance between the two business models. Would O.C.T. Mami eventually become an online-only brand? If not, how should the company address the strategic imbalance between the online and offline sales channels?

How would you face OCT Mami's challenge
Question to the reader
Despite its large size, the online business remained reliant on third-party e-commerce platforms. Should O.C.T. Mami spend more resources to create its own e-commerce platform? Tu was worried that few e-commerce companies had ultimately survived in this fast-evolving sector. Was setting up an independent platform just a dream or a feasible business plan? When was the best time for the company to begin channelling more resources into creating its own online platform so that it could survive and thrive?

Tu was also concerned that the company's vision, mission and values were not yet clearly established. Should the company aim for scaling up further or operate as more of a low-profile business organisation? The lack of a clear corporate vision, mission and values was making it difficult for O.C.T. Mami to establish a credible talent strategy, and Tu was conscious that this could hold the company back. Apart from a shortage of external talent, it had long faced a mismatch between existing talents and corporate needs. Generous rewards offered to new employees would likely be wasted if their service to the company failed to live up to expectations. How could the company set out a clear vision, mission and values that not only demonstrated a human touch, but also met the organisation's need for sustainable development?

Li Shanyou, Adjunct Professor of Entrepreneurship; S. Ramakrishna Velamuri, Professor of Entrepreneurship; Dong Liang, Case Writer; and Xu Leiping, Research Fellow at China Europe International Business School (CEIBS).


EXPERT SPEAK

'O.C.T. Mami needs to move to single-price, single-promotion for both offline and online'

TR Harrington, Founder and Chief Strategist, Darwin Marketing, Shanghai
T.R. HARRINGTON

Founder and Chief Strategist, Darwin Marketing, Shanghai

O.C.T. Mami is a very successful maternity clothing retailer, prominently displayed at over 600 large city retail stores built over the past 15-plus years and widely advertised via a strong celebrity endorsement from Dee Hsu, well known in China as 'Spicy Mother', throughout city transport metro stations.

By late 2011, O.C.T. Mami was experiencing a rapidly-growing online business, breaking into new customer segments of smalland medium-sized city locations, while achieving a milestone of RMB 10 million monthly sales numbers in months, a figure that had taken the offline business five years to achieve. Retail in China is very, very competitive and one could only expect that while sales were strong and distribution was widespread, offline margins were already declining by end of 2011.

Unlike the US or Europe, where marketplaces like eBay or Amazon account for less than 15 per cent of total e-commerce revenue, China was dominated by the Alibaba marketplace (70 per cent of e-commerce in China), while brand-only e-commerce generally struggled to carve out more than a small minority of any brand's online sales.

On the Chinese e-commerce marketplaces, promotions are rampant, pricing is lower, and the marketplace management often greatly influences brand positioning, promotion and pricing control. Participation in Alibaba's famous cyber holiday, Single's Day, often expects brands to offer discounts of 50 per cent or more or lose out on valuable visibility, and the resulting sales.

There are clearly benefits to developing a brand's own e-commerce website (closer client relationships, better understanding of online buying behaviour, pricing and promotion control, etc.), but the costs of owning and operating are high relative to the likely low sales volumes. If brands hoped to achieve any substantial e-commerce sales volume in China, the marketplaces were not an option but an absolute channel necessity.

Strategically then, the question was how best to leverage these marketplace channels while maintaining strong brand identity and customer relationships. Given the success of O.C.T. Mami's pregnancy book, the brand seems well positioned, along with the ongoing endorsement of Dee Hsu, to reach and engage its target audience both in offline retail and online.

Brands that focus on using their websites not just as e-commerce destinations but instead as a customer hub for target-user communities, such as providing expectant mothers and families with valued educational informational content or advice, and likewise leverage their retail locations not just as stores but as location-based customer touch points, should be able to maintain stronger customer understanding and relationships.

Offline stores provide valuable brand awareness, trust and a customer touch point that may be a key differentiator against onlineonly competitors. Further, transforming retail from transactional to experiential, such as hosting location-based events to share knowledge and expertise around maternity, could also help maintain their knowledge and brand leadership in maternity.

In terms of offline-meets-online strategies, Chinese electronics retailer Suning has been among the largest in China in terms of managing the tricky balance and eventually moving to single-price, singlepromotion for all channels, both offline and online, which is exactly where O.C.T. Mami needs to move in the near future.

While it is still possible to negotiate with franchisees to follow their integrated offline-meets-online strategies, one thing O.C.T. Mami may need to strongly consider in future is taking back control over franchisee retail locations as Starbucks and others have in recent years in order to implement single-price, single-promotion cross channel without experiencing ongoing channel friction.

'O.C.T. Mami's success depends on its ability to define a mission and vision'

Pragya Singh, Associate Vice President -Retail, e-tailing and Consumer Products, Technopak
Pragya Singh, Associate Vice President -Retail, e-tailing and Consumer Products, Technopak
PRAGYA SINGH

Associate Vice President -Retail, e-tailing and Consumer Products, Technopak

The dilemma before the O.C.T. Mami management is not unique. Multichannel companies find themselves at a crossroads when their online sales share becomes significant and starts impacting offline performance. The advent and growth of the digital revolution in the last decade has brought about one of the biggest changes in consumer shopping behaviour globally. This has led to an almost disruptive growth of online shopping. Embracing the online channel, like O.C.T. Mami has done, is a prudent decision for any consumer facing organisation, which will keep it relevant in the changing consumer paradigm.

Multichannel retailing is basically aligning the business with the cross-channel consumer behaviour to offer a seamless experience. Globally, players in more mature e-tail markets have successfully adopted strategies such as Brick and Clicks and Click and Bricks to leverage their online and offline channels. O.C.T. Mami has the advantage of an extensive network of stores and it should look at defining an integrated strategy where roles of both its offline and online channels are clear and complementary. For example, using stores as fulfilment/return and experience centres, using online for new launch feedback, allowing consumers to scan barcodes in stores to get access to product reviews, check product availability in a particular store online, etc. It is not necessary that in the evolving retail environment, the format and role of all its stores remain the same, especially in those geographies where online traction is high. Technology will play a big role in this integration.

While third-party multicategory sites can remain important in terms of reaching out to a broad base of consumers and be volume drivers, there is always a risk and unrealised potential associated with being just another player on a multicategory, multibrand portal. Eventually, O.C.T. Mami can look at pushing its own portal for direct and higher customer engagement in a decluttered environment for more flexibility, control and multichannel integration.

The second issue faced by the company needs more internal deliberation. O.C.T. Mami has done well so far in identifying a market opportunity and gaining market leadership in its space through product innovation and marketing initiatives. With the recent relaxation in the one-child policy in China, the market can continue to be attractive for O.C.T. Mami. However, having reached a considerable scale, it is imperative for the player to chalk out a clear path for itself, especially with an impending IPO. While a company is small it can be guided by the promoter's vision, but once it achieves a critical size it is important that its purpose and values are laid out through vision and mission statements. The company's business and talent strategy will then be guided by these statements, which will help it plan for short- and longterm objectives.

While technology implementation can be challenging, an equal, if not bigger, challenge for a retailer is often implementing a mindset change. O.C.T. Mami should view itself as a multichannel player rather than viewing online and offline businesses through separate lens. The success of the company will depend on its ability to define and imbibe the organisation's vision and mission along with a sound multichannel strategy.

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