The Consumer - How to get ahead in China
February 17, 2016
China is a vast market, both geographically and demographically, which can make it a daunting prospect for overseas businesses looking to start business there. And it will come as no surprise that there is no one right way to do that. It will depend on – among other things - your category, your international experience, your operational expertise, and your brand strategy. For brands, first mover advantage remains a key factor, as few Western names enjoy widespread brand recognition and those who get in first can secure leadership positions. Operationally, however, the safest assumption to make is that what works in Western markets will almost certainly not work there. For example, even the most successful foreign supermarket chains have struggled to make their model work in China, including Tesco and Walmart, largely because economies of scale don’t apply so far from home, buying premises is expensive, and distribution is tough. And the competition is tough, local operators have home advantage and name recognition, and e-commerce is a major disruptive force in grocery.
Packaged consumer goods, by contrast, don’t need the same investment in physical infrastructure, and over the last five years the big multinationals have done very well in China, riding the first wave of growth and establishing strong brand awareness. But now growth is slowing and they’re facing new issues. A new generation of young consumers are looking for different things, and the channel landscape is definitely changing, as more shopping migrates online.
China is already the world’s largest e-commerce market – there are around 650 million people online, and 85% of those are on mobile. Social media platforms are the real digital powerhouse in China, and foreign businesses need to understand how these work in China, because it’s not quite the same as in a market like the US: in the US, for example, people will search online by brand, but Chinese consumers are more likely to search by category. That means social media and ‘online malls’ are really important to build consumer awareness. And given China’s huge geographical area, it’s important to tailor your online offering to products with the right value to delivery cost ratio. For example, Kimberly Clark distributes its products both through small ‘mom and pop’ shops and online, but concentrates on higher-value items on the web, rather than products like tissues where the price can’t justify the delivery costs.
Distribution is always a challenge in China, and you basically have four possible routes to market: you can build your own system, which is very tough; you can use a local distributor, which is easier in practice but dilutes your control of your brand; you can operate through a joint venture with a local partner, which in theory gives you the twin advantages of local knowledge and shared risk; or you can short-circuit the whole process and buy a local business outright. In our experience, the JV approach remains the most popular, but can take a long time to agree and is complex. And even after it’s operational, there are challenges to achieving real co-operation and aligning the parties’ respective goals.
But whatever route you choose, and whatever category you sell, success in China will require a unique value proposition that tailors to Chinese tastes and needs, and which is clearly differentiated. Chinese consumers are much more demanding in terms of product and service than they were ten years ago, but on the other hand, the country’s rapid urbanisation means it’s getting easier to reach them, and digital is a huge opportunity if you understand how best to use it.
To learn more about some of the key trends in the Consumer Goods sector, read our latest edition of 'the Consumer'.
What’s the key to success for getting ahead in China? Share your thoughts below or schedule a meeting to discuss your situation in confidence.