Faculty & Research
Faculty & Research
Strategy for Winning Chinese Consumers
Will there be a drop in purchases of consumer goods in 2019 as the Chinese economy slows? Do you have a strategy to win over and retain Chinese consumers? Which international firms have managed to recover, after stumbling, adjust their strategy and succeed? CEIBS Associate Professor of Marketing Yi Xiang provides answers in this Feb 14 interview with AmCham Shanghai.
Q: Consumer spending has historically been a positive for China’s economy. But lately, we’ve been seeing slowing growth across certain retail sectors. What do you expect for consumer goods sales in 2019 given that the economy is expected to slow down to 6%?
Yi Xiang: The economy is slowing down, but consumer spending is actually not. If you look at the data, the growth rate of consumer spending for city dwellers was roughly 6.8% last year. For rural areas, there was even a 10% growth rate. So that means spending is not slowing down; it's actually growing at quite a healthy level.
Having said that, we do observe different slowdowns in different retailing areas. So if you decompose spending into different categories, we do observe a decrease in spending on both food and clothing, actually decreasing in terms of percentages, not slowing down. But what is increasing is the spending on healthcare, and in rural areas people are spending more on education. So those two areas are actually growing. So that's what might partly explain our observations in the cities and the actual data.
So my take on that data is, generally, people are becoming richer and richer. No matter whether you're in the city or in the villages. When you are rich, you tend to spend less on ordinary necessities such as food and clothing. You do tend to spend more on items that will increase your quality of life in other aspects such as education, healthcare, entertainment and those things. So people are actually shifting their consumption towards other categories.
Q: Do you see any other big growth areas in consumer spending?
YX: First of all, I need to explain that you should not look at the Chinese market as one market. At the very fundamental level, you should break it down into cities and the rural areas. If we take those two segments, then we can see that people living in the cities spend slightly more on healthcare and entertainment. In rural areas, they spend more on communication, family equipment, white goods, and healthcare. And you should never forget that people keep spending more on housing. I do not mean spending on mortgages and those things, I mean rental. That's basically where people are spending more and more.
Q: What about the falling auto sales, is that a concern? How should we interpret this?
YX: The growth rate in the car industry has been slowing since 2014. It was particularly hit last year and that might partly be linked to people's willingness to spend in the future. In the past, people had positive expectations about their future income. Now, that expectation of their salary growth is less optimal, so they tend to be more stringent when it comes to big purchases. But if you look at white goods sales [home appliances], if you look at communications [such as] cell phone sales they're not slowing down. It's just car purchases where we see this slowdown.
Q: Could you give an example of a foreign consumer products company that has built a successful business in China, and one that has failed? And what can we conclude about their China strategies and operations?
YX: There have been many successful foreign firms. The most successful is Coca-Cola. They came to China in 1981 and have been very successful throughout the years. There are also many, many examples of foreign firms that failed, like Best Buy. They came to China and after opening nine stores in major cities, they had to close down. And there are also firms in the same category as Coca-Cola [that faced challenges], such as Pepsi which had to sell its Chinese division to a Taiwanese firm. There are various reasons behind their failures.
I will give you two examples of firms that initially failed but quickly adjusted their strategies and eventually became very successful. One is a Korean firm called Innisfree. They specialize in skincare products. They came to China in 2004 and within two years had to withdraw from the market. It was a huge fail, no one bought their product. They had come to China assuming any foreign skincare product should be premium. They saw the success of L’Oréal and other French brands and they said, "Well, we can do that". They couldn’t. So in 2012, six years after their first failed attempt, they came back to the Chinese market with totally different positioning and branding strategies.
They now positioned themselves as a younger brand, more natural, and targeted girls at a younger age. Because their target consumers are younger, their disposable income is relatively limited, so the brand shaped their pricing strategy to fit their targeted customers. And it has been very, very successful throughout the years. If you ask young girls in high school or the college, they know the brand. This is one example of a company that failed and then returned with a modified strategy because they found the proper segment of consumers within the larger pool of Chinese consumers. They found a segment that is proportionally small; but when it comes to absolute numbers it’s actually a huge market. And they have been very successful.
Another example is Uniqlo. We all know Uniqlo. The firm came to China in 2002, and by 2005 all their stores in China were losing money. When they came to China, they believed their original positioning that they used in Japan should work. They assumed that they share a similar culture, similar norms [with Chinese consumers], [so] they should be successful. Unfortunately, their relative positioning of being a ‘cheap’ clothing [company] in Japan did not mean ‘cheap’ in China, so that approach didn't work. In 2006, they dramatically modified their strategy. They positioned themselves as a clothing firm that provides high price-to-performance ratio. So you come to the store, you pay a reasonable price, and you get good quality clothes. By quality I mean the fabric. You get average design, you get ordinary clothing, but you get ‘good enough’ stuff.
And that strategy has been attracting lots of consumers, especially in the cities, the middle classes, even including the super rich. I know quite a few super rich people who wear Uniqlo every day. So Uniqlo has been very, very successful. They, again, found the proper market, the proper segment and positioned themselves to that particular segment of Chinese consumers. So the lesson from those two examples is: when you try to enter the Chinese market you just need to find the proper segment; just one segment that is big enough for you to make a good start and good money.
Q: What are the most effective ways to target Chinese consumers today? Is it through social media? Do you think that traditional advertising channels are not as effective as they were before?
YX: When we talk about targeting consumers, there are actually different stages [involved]. If you try to sell something to consumers, you have to go through several stages. The first stage is always to try to increase their awareness, to let them know [about your product]. Then after that, you have to keep throwing information at them to persuade them. And those two fundamental stages have to be taken into account when you try to communicate with your target customers.
If you look into the data on how consumers spend, in terms of how they collect information, they spend more time on digital media. On average, they now spend six hours [on media]. Half of that is on digital media, and that's actually quite a lot of time. They spend about two hours on TV. The time spent on TV has been relatively stable, it has been gradually slowing down and decreasing, but not dramatically. What has been losing [ground] is the press, in particular, newspapers. This is the one segment that has been hit dramatically. Magazines are actually ok.
So people are gradually shifting from newspapers to digital media, especially mobile and digital. If you are a firm trying to communicate with your customers, you probably have to adjust your strategy. Even senior citizens, retired ones like my mom, for example, they don't read newspapers anymore. They look at their cell phones. So if that is the trend, I don't think any [smart] company [would] do anything that goes against the trend. Having said that, this is just to increase awareness.
When it comes to persuasion, providing detailed and convincing information to consumers, that's a different story. There, I believe, both digital media and the TV, and even magazines play a role because the way people process information is totally different on digital and cell phones vis-à-vis [when they are] facing a big screen.
Q: What can foreign companies learn from their Chinese competitors? In what ways are local companies leapfrogging ahead of their Western counterparts?
YX: They need to know Chinese firms learn fast — so whatever you come up [with] they will learn from you. Anything that makes money, they will try to learn from you. I think Chinese competitors’ eagerness to learn is the most formidable competitive force. And when you face such competitors — ones who try to learn everything from you, and they’re fast, and they're smart — you have to take that into account in your mid-term and long-term strategies. That's the first thing.
For example, let's take skincare products as an example. We see the success of L’Oréal and other French brands. If you look at the skincare industry in China, there is one company called Shanghai Jahwa. They have been producing skincare products positioned as more herbal [in nature]. And that has been very successful because, traditionally, Chinese consumers believe herbal things are good and more natural for people's health.
So in their advertising they have been positioning their products as completely herbal. And that positioning has attracted a lot of Chinese consumers. In other words, you need to know two things about Chinese competitors. One, they’ll learn all about modern business practices from you. They also know more about Chinese culture and what Chinese consumers are looking for. So you have to take those two things into account, that's from one consumer product example.
Another example I can give you is based on a company called La Chapelle. It's a Chinese firm and I'm an Advisor to the Board. The company is a public firm, listed both in Hong Kong and Shanghai. It’s a competitor of H&M and Gap, slightly cheaper than them. But unlike H&M, they don't open big stores. They open stores that are 200 square metres, and they have roughly 9,000 stores all over China. Their strategy is very simple: "I do not compete directly with H&M because I do not have the competitive capacity to manage giant stores. But I do know that, in terms of labour supply, there are tons of good salespersons and store managers that can manage 200-square-metre stores." And they know that when it comes to shopping for clothing, ladies like to see the real stuff. In other words, the availability of the product in front of the consumer is very important. For that reason, they have been opening their stores all over China have been very, very successful.
Q: How is advertising content different in China versus in Western countries? Do advertisements for the same product carry different messages when the audience is Chinese?
YX: If you look at the U.S. advertising industry, the regulations are relatively less stringent. And you will see tons of advertisements that you may not necessarily trust. In Europe, the regulations are much more stringent. The advertisements have relatively more content, and [there is more of an attempt] at persuasion.
In the Chinese market, the regulatory environment has been changing. About 15 years ago, there were virtually no regulations for advertisements. You could see TV ads telling you that you can spend 150 RMB to buy a Rolex. Obviously, any educated consumer would not believe that. But less educated people would, and they would try to buy that ‘Rolex’. Recently, those kinds of "deceptive advertisements" as we would say using business school language, have been decreasing dramatically in China. The regulatory agency in China has put a lot of effort into regulating these kinds of illegal behaviours and practices. That's one aspect where we can say we do observe a change in the regulation.
In terms of content, my answer is, “Yes and no.” For the same advertisement, because of the cultural differences and because of language issues, Chinese consumers may perceive it differently compared to foreign consumers. One example I can give you is a TV ad by Lexus, a Japanese luxury car. They used to have a commercial showing the car passing by a palace. In front of the palace, there are two stone statues of lions, and those two lion statues were bowing to the car. They were trying to send the message that the car is so attractive and has very high status.
That advertisement should be OK but it irritated Chinese consumers because in Chinese tradition the stone lions means respect, emperors, high-end products. It [is seen as] Chinese; and they should not bow to a Japanese car. So there was a call for that advertisement to stop. And even worse, Lexus had to change their Chinese brand for that car model to a more moderate direct literal translation of the English brand name. So that's how people may perceive it differently, even for just the average advertisements.
Q: For a company that’s relatively new to the China market and relatively small compared to established, more well-known brands in the market, how should they begin marketing their product?
YX: For a medium-sized to small-sized firm trying to enter into China, I think the number one thing is not to be [overly focused on the large size of] the Chinese market. It is big, but it might be small when it comes to what you can take. So that's the number one thing: you have to have a precise, accurate estimate of what you can get from the market. And sometimes being pessimistic may be optimal for you.
Number two is, you need to understand the different levels of Chinese consumers and figure out where you want to enter the market. If you look at the pyramid of Chinese consumers’ willingness to pay, there are three levels. The bottom level is what we call Aspirers. Those consumers are looking for things that can increase their quality of life. So they don't have a TV, so even one that’s crappy quality, as long as it shows something on the screen, in colour, is going to be good enough. Because those are people who aspire to have a better quality of life. And their number is not small, it's roughly 300 million.
The second category, I call them Shoppers. They are relatively OK, relatively middle-class. But when it comes to shopping or consuming, they do comparison shopping. They have to compare prices, the attributes, the brands, the particular features of the products. Those shoppers are very difficult to satisfy, and they are the majority of Chinese consumers nowadays.
The third category, I call them Affluent. By affluent, I do not mean their income level. I mean that they are less price sensitive to a certain product, so they just take the highest quality.
If you look into the three categories of consumers, you have to figure out where you want to go. In which segment will you be facing more competition? Is your cost structure, is your production technology suitable for that particular category or suited for another category? You have to figure this out by yourself.
The same consumers may belong to different categories for different products. For example, one consumer can be very picky in terms of shoes. Let's say, a soccer player, he might be very picky in terms of what kind of soccer cleats he can pick. He may be less sensitive because that's the sport he loves. But the same person may be less sensitive when it comes to shirts. He might be OK with an average shirt from Uniqlo. That's good enough for him for his daily life. So for this particular consumer, in the soccer boots category, he is an Affluent consumer. For shirts, he's a Shopper.
So the same consumer might be different categories of consumers depending on the product. So as a foreign firm, when you enter into the market, you have to figure out what kind of consumers you are facing, and if your firm is suitable for that particular segment.