Think BR: So you think you know the Chinese market?
By Toby Southgate, brandrepublic.com, Friday, 16 November 2012 08:00AM
For many domestic and Western companies, cracking the Chinese market and getting cozy with the Chinese consumer represent the Holy Grail for business success, writes Toby Southgate, chief executive officer, UK & Ireland, The Brand Union.
All too often, marketers and brand fail in their attempt to break into the Chinese market, dragging their million dollar investments down the drain.
This article discusses five conventional assumptions that marketers and brand owners often make when planning their entry to the Chinese market, and the reality shifts that are happening on-the-ground.
Assumption Number one: The emerging Chinese middle class represents the most attractive consumer segment for goods and services.
Reality shift: Indeed, the growth of the middle class in China has been dramatic in recent years, with McKinsey estimating that 75 million urban households will enter the middle class between 2008 and 2015. Yet, long-term success will not be delivered by targeting this one consumer segment alone.
Companies need to compete in the lower-end of the spectrum, in the same aggressive way as they do in the higher one. Courting the working class, which comprises the bulk of the Chinese population, is paramount.
Not only is the current working class the future middle class, but also, it shares the same aspirations for using good quality products and services. It is a myth that the working class only cares for the cheapest and most practical solution. It wants beauty and comfort too!
After P&G marketers and R&D staff spent many days observing how women in rural China live, they were reminded that washing clothes was still a manual chore. So they developed Tide Naturals, a skin-sensitive detergent for women who wash their clothes by hand.
Companies must intimately understand how these poor consumers live, in order to identify their needs, and develop innovative products and services that meet those needs.
Assumption Number two: Location, location, location. Beijing and Shanghai are the key cities in China to set up operations.
Reality shift: The China market is no longer limited to Beijing and Shanghai, or even the provincial cities of Hangzhou, Dalian and Shenyang. While these cities have the most advanced economies and the wealthiest, most sophisticated consumers, they are also among the most expensive and most competitive cities to operate in.
For both international and Chinese brands alike, these cities offer mature opportunities for growth. So if you are not a first-mover, then you are almost too late to reap any rewards.
Real growth lies in reaching China’s next 600 cities, from Harbin in the north to Fuzhou in the south, Wuhan in the center to Urumqi in the west. Here, appetite for brands and consumer spending are on the rise.
However, consumer tastes can vary widely across these 600 cities. Culture, dialect, cuisine and climate all influence how consumers respond to marketing, their product preference, their sensitivity to price and quality, and even their shopping habits.
Spare a thought for the much talked-about withdrawal of the US electronics retailer Best Buy from the China market. Why did Best Buy decide to close all its nine stores located in the most affluent cities of Shanghai, Beijing, Suzhou and Hangzhou?
Aside from being perceived as too expensive for the same products you can find in local stores, Best Buy could not match the scale and scope of Chinese electronics giants such as Gome and Suning, whose stores number over 1000 nationwide. Best Buy made the wrong assumption about the China market: it built large but few flagship stores rather than smaller but numerous and conveniently located stores.
Xiang Piao Piao (XPP) is a successful Chinese brand of instant milk tea cups, an innovative product offered in single servings, convenient for impulse consumption and priced affordably. Though the existing market for milk tea products were concentrated in the bigger cities, XPP decided to launch its product in roughly 600 smaller cities, which did not have prohibitive market entry costs.
It deployed a vast sales force to target traditional channels, which characterize the retail landscape of those cities, ie, independent supermarkets, mom-and-pop stores and small retailers in schools and universities. In a very short span of time, XPP achieved market leadership, thanks to its strategy to target China’s next 600 cities.
Assumption Number three: The young generation, aged 18-35, are the prime consumer target for products and services.
Reality shift: China’s senior citizens are emerging as a highly attractive, stable and profitable consumer group. Yet they are often overlooked. In 2009, China had 169 million people aged over 60, which represented 12% of the population. That number will swell to 250 million by 2025.
And what of their spending power? Chinese seniors account for 300 billion to 400 billion yuan in annual disposable income. Over the next three decades, this figure will rise to 5 trillion yuan.
Chinese seniors are the main grocery shoppers in the family. They tend to be loyal to products and services they know and like. They have wide social networks. They have time on their hands, and are eager to share their opinion when asked.
But they also adapt to the changing times. Chinese seniors are technology-savvy, keeping in touch with friends and family via email, shopping on taobao.com, and even trading stocks online. They spend more on telecommunications than on medical bills on a monthly basis. In Shanghai, over 200,000 seniors hit the web every day.
In targeting the Chinese senior segment, the obvious opportunities exist in the healthcare category, especially products that promote preventive medicine, exercise and a healthier diet.
The property sector presents emerging opportunities, with the rise of ‘silver towns’, retirement communities targeted primarily for senior citizens.
Cherish Yearn is one such example, offering all the modern conveniences to enable seniors to live comfortably and independently, and even stay fit, with its in-house gym and recreation facility. Vanke, China’s biggest property developer, is also launching retirement projects across the country.
Assumption Number four: Innovation and new product development are best done at headquarters, and adapted to the Chinese market.
Reality shift: Companies serious about attracting the Chinese consumer are investing billions of dollars on local research and development efforts to generate home-grown innovation. And why shouldn’t they?
Consumers demand products that are tailored to their needs, tastes and income levels. Chinese universities are producing high-calibre (and low cost!) talent in research, innovation, engineering and design.
Add to that the thousands of foreign-educated Chinese professionals coming back to China to apply their knowledge and experience. And Chinese regulators are only too happy to endorse local innovation.
True innovation must be driven by a compelling consumer insight.
Minute Maid Pulpy is a China success story born from the consumer insight to consume ‘healthier’ juice drinks. By adding fruit pulp to juice drink, Coca-Cola’s R&D center in Shanghai created not only a healthy image for the Minute Maid brand, but also a new product.
Minute Maid Pulpy was developed and launched in China in 2005. Five years later, it reached billion dollar brand status, joining the ranks of Coca-Cola, Diet Coke, Coca-Cola Zero, and Sprite. Today, it is selling in 18 countries across Asia, Africa and Latin America.
Its success marks the first time that a brand of The Coca-Cola Company, developed and launched in an emerging market, has reached the billion dollar mark.
Assumption Number five: China’s manufacturing sector is a key source of its global competitive advantage.
Reality shift: Traditionally known as the ‘the workshop of the world’, Chinese companies are moving up the value chain, transforming themselves from OEM (original equipment manufacturer) to ODM (original design manufacturer).
YLD is a privately owned Chinese sportswear manufacturer based in Quanzhou in China’s Fujian province. After perfecting the technology to make shoes and apparel for domestic sports brands, as well as supporting its own ‘YLD’ brand, the company decided to transform its own YLD brand with a new fashion lifestyle proposition.
Enter ZipZap, a new apparel brand that offers premium fast-fashion at an affordable price. TBU mobilized its global network to create the brand’s positioning, name, tagline and visual identity. ZipZap’s strategy is to open doors not in the already crowded retail capitals of Beijing and
Challenging conventional assumptions to achieve future success
P&G, XPP, Cherish Yearn, Minute Maid Pulpy and YLD have a few things in common. They have all succeeded in their respective categories.
Their success has come from challenging one or more conventional assumptions about the Chinese market or consumer. They are satisfying the ever-increasing demand from domestic consumers.
More importantly, they are striving to realize more value from their operations, thanks to the B word: Brand. Long-term success is guaranteed for those brands that can continuously nurture creativity and innovation.
Local brands, in particular, have the added test to shake off their copycat, ‘me-too’ reputation. The next biggest hurdle then remains: mastering the art of being a brand owner, ensuring that every action increases the physical and emotional space their brands occupy in consumers’ minds.
How to be brand owner, do we hear you ask? Now, that’s for another article.
Toby Southgate, chief executive officer, UK & Ireland, The Brand Union
This article was first published on brandrepublic.com
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