For much of the past 20 years, the Youngor brand has reigned as China’s largest manufacturer and retailer of men’s dress shirts. Using a network of 1,500 retail stores nationwide, the company now sells a whopping 13,000 shirts every day. The Chinese name, “ 雅戈尔,” which translates as “elegant apparel for you” is well known among consumers nationwide as a reliable and ubiquitous supplier of standard office-wear for men.
But ask Chinese consumers to name the nation’s No. 2 supplier of men’s dress shirts, and most will falter. Even those who regularly purchase men’s shirts likely will not guess that the chief contender is PPG. That’s because the company, despite being extremely successful, until recently operated on a business model of low cost and little traditional marketing. The company is entirely internet based. Customers “shop” by visiting the website or phoning the call center to order from among a limited number of styles, colors and patterns. Orders are then outsourced to six factories located near major consumer markets around China. Finished orders are delivered via an affiliate of Federal Express.
Launched less than two years ago, PPG now sells 10,000 shirts daily throughout China, rapidly catching up to Youngor. “I ask my students ‘Who is the biggest competitor to Youngor?’ No one can believe it is an internet company,” says CEIBS Marketing Professor Zhou Dongsheng.
The lesson to learn, Zhou advices, is that successful marketing in China today requires constant adaption to the changing demands and preferences of consumers. As more Chinese are rapidly gaining access to the internet, for example, companies such as PPG are rushing to tap the growing demand for web-based services. Such companies stand to reap huge benefits while those that fail to track and respond to technology-based trends stand to lose. In other words, many other companies in China may soon face a similar fate as Youngor - a sudden threat to a sales base that had seemed loyal and secure. “Even those industries not related to the internet are being affected by the internet now,” says Zhou.
PPG is just one China-based company using an innovative marketing strategy to successfully keep pace with today’s domestic consumers. A race is under way across China among smart and innovative companies eager to keep pace with morphing popular preferences. To gain an understanding of the challenges and opportunities that China-based companies now face in tracking the nation’s shoppers, The LINK this month asks CEIBS marketing professors Zhou Dongsheng, Kwaku Atuahene-Gima, Waldmer Pfoertsch, and Per Jenster to predict how the demands and expectations of domestic consumers will change over the next five years. Each interviewee also named their own Professor’s Pick Case Study for innovative marketing. Read on for the results of our interviews.
China Consumers: diverse, demanding and fickle
Before looking to the future, The LINK asked the four CEIBS’ professors to describe the main challenges currently plaguing marketing executives in China. The first obstacle to successful marketing here, they agreed, is the scope, scale and complexity of the domestic market. Across the country, consumers vary widely in terms of tastes and preferences, income level, international exposure, and sophistication. “China is more complicated than the EU ? it is not one market; it is a few dozen markets,” says Prof. Zhou.
Because of the wide range of consumer profiles and preferences, Zhou says marketing is “not a mature industry” in China. “In China’s coastal cities, we see quite a lot of sophisticated marketing methods being tried. But elsewhere, it is a new thing,” he says. “Marketing in China also varies according to industry. The home electronics retail sector, for example, is hyper competitive right now, so it is quite advanced in marketing skills but in protected industries, marketing is still new.”
The professors also agreed that Chinese consumers tend to be both informed and demanding shoppers ? educating themselves and comparing quality and functionality before buying. On top of that, they tend to be quite demanding on price. Prof. Atahuene-Gima says while the importance of price as a factor will likely diminish over time, it remains a critical factor in many purchasing decisions of many domestic consumers today. Prof. Zhou agrees: “In general, Chinese consumers are more price sensitive and have less brand loyalty [than their counterparts elsewhere]. It is easier to steal customers by lowering the price.” As a result, many industries face a fiercely competitive operating environment in which profit margins are stripped lean.
One characteristic that may surprise newcomers, or those not paying attention to recent trends, is that the Chinese public is in some cases quite pampered compared with their peers worldwide. “Chinese consumers are in some ways now receiving better service than those in the U.S. or Europe,” says Zhou. “In China, if your PC or internet connection breaks down, [the service provider] will come within two hours to fix it. In the U.S., or the U.K., it would probably take 24 hours. Even China’s telecom service providers are faster than those in Europe now. Here they are very competitive. It is not easy to be the market leader in China.”
Another defining characteristic of Chinese consumers, and potentially the most frustrating for marketing executives, is the general lack of brand loyalty - a phenomenon that companies can more easily make use of in developed markets in which consumers often develop familiarity and attachment to specific brands over time. By contrast, the purchasing public in China can be easily swayed new products, price-cuts, flashy advertising, or new conveniences.
How is a company to cope? To give marketeers a headstart, CEIBS professors identified three main trends they expect to influence the consumer population between now and 2012.
TREND #1: Rise of New Media
Over the next five years, China will gain an ever increasing population of tech-savvy users of PCs, top-end cell phones, Blackberries, and other communication tools, professors say. This presents vast new possibilities for marketing executives. Prof. Atuahene-Gima points to mobile phones messaging and blogging as two high potential marketing channels in China.
“The internet and mobile phone will have a huge impact on marketing [in China]. The trend is clear,” agrees Prof. Zhou. “These will be very important in marketing channels - some companies are leveraging this new technology to become very strong competitors.”
To avoid being blindsided by a tech-savvy competitor, China-based companies must constantly under go a “PEST” analysis, identifying the opportunities and the threats emerging from changes to the business environment in terms of political, economic, social, and technological elements. “When the market changes, it brings threats to existing players,” says Zhou.
Prof. Jenster adds that China is ripe for developing a workable system for online or mobile payments, stressing that major changes will take place once truly functional systems are developed. “These [payment] systems are emerging; and we are going to see very exciting developments in the whole Internet space,” says Jenster. He points out that the use of mobile phones for making payments is beginning in other countries and he expects the technology to enter China soon. “It’s going to surprise some of the telecom companies because they are actually going to start becoming banks. People may not have yet understood the potential of the tools available, but it is going to come in a big way here in China.
One side effect as China’s “new media” gains influence is an eventual slipping of the power of traditional media so that, by 2012, Chinese consumers will be slightly less influenced by traditional media such as the nation’s state-run TV stations. Prof. Zhou stresses that while China’s national TV stations are extremely influential today - 95 percent of the Chinese population now tunes in to CCTV, for example - this will likely change. “That degree of impact may be reduced in the future because there will be more competition within the media.” Thus marketeers may see the effectiveness of their ad-spend via traditional media fall from current levels. Whereas fast-moving consumer goods companies purchasing TV ad time may see a 10:1 return on their investment today; such returns will likely diminish over time, Zhou says. “In the future, my guess is that such a big impact will be reduced.”
Finally, professors expect “alternative advertising” to also experience a chill before 2012. In recent years, China’s urban centers have become a commercial Wild West in which marketeers use a range of channels to deliver their message, such as the flat-screen monitors installed in subway trains, taxis, elevators, and even hospital waiting rooms. Such methods have sparked criticism from consumers for being invasive. In taxis, patrons cannot turn off the video images, even if the displays cause car-sickness. “That is the bad side of marketing here,” says Prof. Zhou. While regulations in the U.S. and other developed markets protect consumers against invasive advertising, Chinese law has not yet developed to control new advertising formats. As another example, Zhou points to the boats with giant screens that can be rented to beam a neon-lit message along Shanghai’s Huangpu River every night, interrupting the romantic view of the city’s famous Bund. “It is visual pollution,” says Zhou. “My prediction is that in a couple of years, the government will regulate this.”
TREND #2: Survival of the Fittest = More R&D
The next five years will see no slow-down in the evolution of Chinese consumers in terms of tastes, preferences, buying power, technological adeptness and other factors, CEIBS professors agree. For example, the gap between rural and urban areas will likely narrow as the development of the nation’s First Tier cities trickles down to Second-, Third- and Fourth-Tier cities. Meanwhile the shopping population will become even more sophisticated and worldly as multinational companies expand operations domestically and domestic companies expand operations internationally.
Given the scope and pace of change, professors agree that accurately tracking customer preferences will become a make-or-break ability for companies. “China’s marketing conditions are evolving and new competitors are entering the market constantly, so the level of understanding is very important for any company that wants to succeed,” says Zhou. “Companies have to be humble and have to realize that the strategy that worked yesterday, may not work today.” Zhou points out that customer tastes can change dramatically in a very short time. As an example, he points to the 2005 Super Girls phenomenon - the made-for-TV singing competition that took China by storm that year. The show offered a free chance at stardom to any and all contestants, causing a flood of 150,000 would-be singers to try out, and attracting 20 million fans to tune in. When audiences were invited to vote for their favorite songstress by SMS - then a brand new concept - viewers took to the streets to rally support for their favorite singer. As the sponsor of the competition, Mengniu Dairy reaped record sales revenues of RMB2 billion for its yoghurt drink line that year, after providing free yoghurt products for the top contestants. But the show’s overnight success quickly lead to copycat shows on competing TV stations in 2006 and 2007, resulting in fractionalization and an eventual backlash from watchers. Thus, the show has never recaptured its initial appeal.
The rise and fall of Super Girls is just one example of the pace of change among domestic consumers. To keep pace, professors say, more companies will invest in R&D. “In the future in China - in terms of distribution, of customer relations, and product design - companies are going to use more technology and conduct better research,” predicts Prof. Atuahene-Gima. “Chinese companies are investing more in R&D now. They are recognizing that you cannot have good marketing without having very good R&D process from the beginning, in determining the product itself and then addressing other aspects such as distribution, pricing.”
As an example of effective use of R&D in determining the product, Atuahene-Gima points to Mongolia-based Mengniu Dairy Co. - a company that has rocketed into prominence by using unorthodox but effective methods of improving milk quality among its cows - and publicizing these methods well. BusinessWeek has reported on the company’s experiments in feeding their cows gourmet grasses such as Canadian Alfalfa Violet Flower, as well as providing foam mattresses to sleep on, and playing soothing music while being milked. “Their research shows that, when cows are not stressed they produce better quality milk,” says Atuahene-Gima. “They have a very expansive view of marketing - it is not just the marketing department’s job, marketing is the whole company’s job,” he says. These innovative - and well publicized - operating methods, coupled with the company’s engaging advertising campaigns (such as sponsoring the Super Girls) have pushed the company into position as China’s top-selling dairy company, with annual revenues of RMB16.25 billion in 2006.
(Note: For his Professor’s Pick Case Study of innovative marketing, Prof. Atuahene-Gima chose Mindray Medical. See story, page 24.)
TREND #3: Global standards
“It’s like the cowboy saying, ‘You either make dust or you eat dust,” says Prof. Jenster of the highly competitive China environment. Over the next five years, he expects to continue to see fierce competition across many sectors. “I think China is going to be the leading market worldwide in a number of sectors soon - students of market development will have a field day here.”
Already, he says Chinese companies are “catching up with the best of them [internationally]” in terms of developing customer loyalty, building their brands, maintaining market position, managing the distribution channel, and creating “distance” between themselves and their competitors. “The intensity of competition here has pushed domestic companies faster and further than you would normally see in an emerging market,” says Jenster. The next step for many Chinese companies will be to head overseas, he adds.
The “overriding change” to the consumer market during the next five years, Prof. Pfoertsch says, will be “China’s shifting role in the global economy - the change from the workshop to selling to marketing.” Pfoertsch agrees that the recent product quality news stories in China will help force sub-par companies out of existence. “The companies that don’t understand - that cheat and cut corners - they will crumble. This is good for the Chinese economy,” he says.
The next step for Chinese companies will be to begin playing “the branding game” by building their own brands both domestically and internationally, he adds. Since building a brand from scratch (a la Haier) takes 10 to 15 years, Pfoertsch predicts that other Chinese companies will jump into branding by taking over established foreign brands. Successful examples of such a strategy are growing, including not only Lenovo’s purchase of IBM PCs but also TTI’s acquisition of the Dirt Devil and other European and American brand names.
The years 2008 and 2010 will be pivotal in instilling international product quality and marketing standards for China, Prof Pfoertsch believes. “I strongly believe that the Olympics and Expo will change the understanding of marketing among Chinese companies.”After these events, those companies following a path toward international standards can boost themselves further, while those not adopting international standards will fall even further behind.” In other words, it is survival of the fittest - only those companies that can adapt their marketing strategy to changing consumer demands, will thrive.
