The idea of establishing BabyCare was not only a unique business model in that it was based on a direct sales strategy; the distribution strategy of the company was such that the management was in a position to control it from within. Additionally, the business idea for establishing BabyCare in China was with a view to taking advantage of an intense appreciation of the vibrancy of the consumer products that are on offer in the Chinese market (Desai & Veblen 2003 p. 1). This became possible when BabyCare placed more emphasis on the basic needs of the consumers. The growth of the BabyCare business was primarily due to the need to fill a demand in the market for products and information that would assist mothers in ways that would see them offer the best care possible to their children. Accordingly, BabyCare, through the services of a sales force that had received ample training in direct sales, was able to offer to these mothers a premium product line. This product line was composed of nutritional products. Furthermore, the sales force was also adequately trained on answering questions raised by mothers regarding either the issue of pregnancy or child-rearing.
The sales strategy that BabyCare adopted was unique, compared to the one employed by the conventional Chinese companies dealing with consumer products. These placed more emphasis on wholesalers, distributors and retailers. On the other hand, BabyCare opted to explore direct selling. In this case, the entire supply chain was directly handled by the company. The main distribution and sales mechanism for BabyCare consisted of the company’s customer representatives. Although initially, the Chinese government appeared quite receptive of the model of direct selling, nevertheless the appearance of pyramid schemes, along with the difficulty with which the collection and enforcement of rules on VAT (value-added tax) led to the government banning MLM (multilevel marketing) organizations in 1998 (Desai & Veblen 2003 p. 3). However, those businesses that were legitimately practicing direct marketing were not restricted from operating as MLMs. Consequently, a license was issued to BabyCare, enabling the organization to operate at the national level. In this case, the organization would be allowed to sell individual branded products from the sales outlets that it had opened.
By employing a ‘direct-to-consumer’ model, the marketing strategy by BabyCare varied in comparison with that of the other typical MLMs on a number of fronts. The company used BabyCare centers to sell all its products at retail prices that were standardized. This was in line with the Chinese government directive, as this arrangement made it easier for the sales tax collection. Secondly, the customer representatives at BabyCare were also employees at the organization, subject to benefits, in addition to a salary. In contrast, the other MLM organizations relied on agents to act as their sales force (Desai & Veblen 2003 p. 4). The decision by BabyCare to use sales representatives was strategic, in that a majority of them were mothers and as such, they were best placed to identify with the target market for the organization, in this case, their fellow mothers. Accordingly, the founding entrepreneurs of BabyCare were alive to the realization the company owed much of its success to these sales representatives. By and large, the customer representatives at BabyCare were between the ages of 25 and 40 and most likely female. If possible, the customer representatives needed to be mothers as they could best identify the pregnancy needs of an expectant mother and those of the child as well.
The retail centers for BabyCare enabled the company to realize high sales volumes. Usually, the members would be issued with a card that the customer representatives would use for purposes of making purchases for members. This way, the purchase of individual members of BabyCare would be tracked using the organization’s database. The purchased products would also be personally delivered by the customer representatives to the offices or homes (Desai & Veblen 2003 p. 4). Consequently, the ensuing ‘direct-to-consumer’ system of delivery proves to be less expensive when compared with the other methods of distribution that the conventional companies dealing with consumer products employed. Furthermore, the existing connection between the organization and the members was also strengthened.
Technology-wise, BabyCare, through the use of an ERP (Oracle enterprise resource) system of planning, was able to keep a daily track of inventories and sales. The investment proved to be a competitive advantage for the organization, relative to the other competitors in the market. The other competitors in the market include Lederle and Wyeth (Desai & Veblen 2003 p. 4). In this case, the ERP system enabled BabyCare complete visibility of both the sales and inventory cycle, even as the rest of the companies who had local distributors had access to limited information regarding the true levels of their stocks, as well as the real off-take of consumers.
The cost of sales and marketing that characterized BabyCare was high since the customer representatives earned high commissions. As a way of counteracting this high cost, it meant that the products of the company in its flow channel would bear high gross margins. Even then, the food products line helped the company realize a 65 percent gross margin, while the nutrition products had a gross margin of between 70 and 80 percent. BabyCare managed to sustain a premium shelf price for its products because the company ensured that the ingredients were of high quality (Desai & Veblen 2003 p. 5). The distribution channel for BabyCare products was under the control of the company’s sales force. This is unlike the other companies dealing in consumer products in China that relied on distributors to deliver their products to the market.
The company sought to educate mothers on the usage of their products, to match the evolving needs. The result of this was the development of a product and information matrix that acted as more of a guideline for the company’s sales force, in effect enabling them to assess the specific needs of the customers. Furthermore, this matrix helped the sales force to determine with certainty the development path of a child. As a result, it was possible for the customer representatives to ensure that the right products were given to the customer when needed. The cash cycle of BabyCare was such that the company could comfortably function on the minimum requirements for working capital. This is because the sales at various BabyCare centers were on a cash basis fact the firm also lacked any receivables, a first in China, in addition to no credit sales. In a move that was aimed at obeying local laws in China, BabyCare would obtain intermediate goods from the United States in bulk, and then package these in a Chinese packaging plant.
Opportunities for growth and expansion
Between 1998 and 2000, the market for health supplements in the People’s Republic of China experienced a two-fold increase to stand at $ 6 billion, up from $ 3 billion. This was due to a rise in sales volumes of health supplements. Accordingly, BabyCare sought to address its marketing strategy to this $ 6 billion market. Out of the more than 50 million Chinese who resides in the urban area, approximately 350 million of these were ken purchasers of health supplements. This is an estimation of nearly $ 10 billion worth of the sale of health supplements on a global scale, a figure expected to rise to $ 51 billion come 2010 (Desai & Veblen 2003 p. 6). The expectations of the company are that the trend can only be expected to witness further growth, based on the prevailing low base that characterizes the Chinese personal income, in addition to the country member’s consumptive patterns. The driving forces of the growth of the health supplement market include increased awareness about healthy living, increased affluence amongst the urban Chinese and changes in lifestyle.
The company has been recording positive net income earnings since 2004. Furthermore, the cumulative cash by BabyCare has also been on the increase between 2001 and 2007. From a figure of 2 in terms of markets with sales in 2001, BabyCare has witnessed a tremendous rate of growth, to a figure of 2007. This is an indication of a company on an upward growth in its area of trade. On the other hand, BabyCare managed to increase its rate of investment in new markets from a low of 1 in 2001, to a high of 12 in 2007, a further testament of an emerging company. In terms of gross revenues, BabyCare has realized a huge increase from 2,142,000 in 2001 to 107, 912, 000 in 2007. At the same time, the company’s cumulative cash has also increased from 1,099,000 to 20, 919, 000 between 2001 and 2007 respectively (Desai & Veblen 2003 p. 16). On the basis of a cash flow that has been realizing positive earnings in terms of the cash accumulated, this is an indication of the potential by the company to maintain its capital expenditure, working capital, as well as a realization of its cash investment. In light of this, this would be a good chance for one to make an investment in an emerging and growing company.
The market dynamics of Chinese consumer products
BabyCare established a framework for assessing the market dynamics of the Chinese consumer products that the company dubbed, “two Ds and four Hs”. With regard to demographics, the company noted the healthcare sector in China spent more than 90 percent of its expenditure on prescriptions, while only a partly 10 percent of its budget went to services like childbirth education. Accordingly, an information gap existed amongst young parents regarding childbirth and care for the child.
Given that China ranks as the fastest growing market in the world, BabyCare anticipated that the disposable income of the Chinese would ruse in tandem with the growth of the economy (Desai & Veblen 2003 p. 7).
The company had anticipated that the cost of advertising would consistently grow, in effect translating into inflation in the cost of their products. Furthermore, the channels of distribution are quite expensive in China, and this acts as a principal hindrance for business operations in China. Apart from poor service and high costs that are a characteristic of distributors in China, manufactures are at times forced by distributors to extend generous terms of trade, resulting in high receivables (Desai & Veblen 2003 p. 7). Ultimately, high channel costs, high costs of the media, as well as high receivables have ensured that companies dealing with consumer products find it hard to operate profitably.
The business model that BabyCare has adopted to market its products directly to the customers through the use of its sales representatives is unique, in that, virtually all these customer representatives happen to be mothers, in effect making it possible for them to adequately connect with the target market, in this case, the mothers. Accordingly, it would be foolhardy to argue that the company has tailored its business model to take advantage of the peculiarities of an emerging market.
In the late 1990s, amassing enough venture capital into the Chinese market proved quite a tough challenge. At the start of the 1990s, a majority of the multinationals had sought to venture into the Chinese market, prompting several venture capital firms to follow suit. However, mid-way through the 1990s, a majority of the companies discovered that in reality, it was far more challenging to operate a business in China than they had initially anticipated. Accordingly, when BabyCare required startup capital, there were only a handful of sources. Not even investors from the United States could agree to finance the BabyCare concept (Desai & Veblen 2003 p. 8).
After searching for a financier for a whole year, the company received two term sheets, one from orchid Asia, a venture firm based in San Francisco. The other term sheet was from a subsidiary of an investment bank from the United States, based in Hong Kong. Although BabyCare settled on Orchid, the negotiations took a whole eight months to complete, and they only provided $ 6.25 million, out of the expected $ 10 million. The second phase of financing for BabyCare came in 2000, at which time the management had anticipated having attained a 75 percent generation of margins (Desai & Veblen 2003 p. 9).
On the other hand, the growth of the business was slow. Also, the initial fund was stretched by management to last 30 months, instead of the projected 14 to 18 months. The second capital financing came from Pacific Group Ltd, an investment firm with its headquarters in Hong Kong. This helped the company to realize its growth plans. BabyCare needed funds to expand before it could break even. Towards this end, the board approved the raising of $ 2.5 million by the management (Desai & Veblen 2003 p. 9).
The management was faced with three choices. First, could opt for a low valuation and small investment. Secondly, the management could target a higher and larger investment valuation. The mid-range valuation investment was desired by the management, although one of the company founders, Mumford, was apprehensive about a strategic partner making it difficult for a future sale of the firm. An innovative investment structure was also desirable.
Evaluation for the 3 funding opportunities
|Advantages||-Venture firm that was not only financially prepared to make quick decisions but also motivated. |
– Venture arm of the investment bank of choice boasted operational expertise, in addition to a number of years of experience in the Chinese market.
|-The management of BabyCare was able to stretch the initial amount of venture capital funding to 30 months, from the initially projected timeline of between 14 and 18 months.||– Through a low valuation, small investments financing, financing, this would assist in raising traditional capital |
– A mid-range investment valuation that was in the offing by a bay accessory firm in Hong Kong would provide BabyCare with the needed synergy opportunities in such areas as market expansion, product development, and savings in cost.
|Disadvantages||-Venture capital was proving to be a challenge during the late 1990s, in China |
-The source of venture capital that were left during the inception of BabyCare were few
-Venture arm would have wished to get more involved in the day-to-day operations of BabyCare.
|-BabyCare was faced with a difficult environment for fund-raising |
-A lack of follow-up financing by venture firm
|– This third round of financing could make it difficult for BabyCare to offload its share in the company in later years. |
– The proposed higher valuation, large investment by a leading healthcare provider in the US would assist BabyCare to expand their products
Desai, M. A. & Veblen, M. 2003. Growing Up in China: The Financing of BabyCare Ltd. Harvard Business Review, 204(029), 1-16.