Today’s Wall Street Journal (European Edition) ran an interesting piece on the Chinese market for fast food. Many domestic and regional competitors, so the Journal, are giving foreign fast food giants such as McDonald’s and KFC / Yum Brands a run for their money. Competitors such as Xiabu Xiabu (which serves Chinese hot pot), Da Niang Dumplings (serving – yes – dumplings), or Taiwanese Ting Hsin International Group’s dico’s (serving fried chicken) are expanding rapidly in China. Not only do they seem to cater better to local tastes, they are also moving into less-developed cities that their foreign competitors have largely neglected so far. Foreign competitors, in an entirely rational manner, often focus on target groups that have exposure to Western lifestyles and want foreign fast food – which often restricts them to affluent populations in a few select cities along the coastline. For many a company, that reduces the astronomical potential of a market with 1.35 billion population to an addressable market of a puny few million. In a way, it appears as if some street-smart Chinese companies patiently waited and intentionally let McDonald’s do the heavy lifting. Being a first mover can have its disadvantages, but often, it turns out to be more of a burden and a disadvantage. It is not uncommon for the first company to overcome certain regulatory or cultural hurdles, only to have the second mover and everyone else walk through the door that they have pushed open with much difficulty. It could well be that McDonald’s invested its time and resources to educate Chinese consumers, have them develop a love for fast food, and now its competitors are reaping the benefits. Nobody’s fault really, just interesting to observe…
Archive for the ‘International Business’ Category
Although Burger King has had its fair share of failures in international markets, things haven’t been going all that bad for the fast food giant over the last decade. Last month, however, the King was (partially) deposed in Germany. After repeated reports of poor hygiene and sub-standard working conditions, Burger King has terminated the contract with its largest franchisee in Germany. Over night, franchisee Yi-Ko Holding was ordered to close 89 stores or more than 10 % of all Burger King stores in Germany. Approximately 3,000 employees all over Germany were let go. What had gone wrong? In bare bone terms, investigative reporters had reported on severe breeches of the franchise agreement. The franchisee allegedly had ordered employees to alter the expiration dates on food products. Also, according to the reports, some of the restaurants didn’t even have the most basic restaurant equipment like dishwashers or garbage disposals. So much for the facts. But what has happened behind the scenes? If a franchisee of a global brand is in severe breech of the most basic stipulations of a franchise agreement, then the blame is often shared – particularly when it takes investigative journalism to uncover such a massive failure. It is hard to tell at this point, but in general it is the franchisor who sets the stage for success or failure. Successful global franchising starts by setting clear performance expectations and unambiguous language about contract enforcement. Another critical issue is the selection of the right franchisee who understands the culture of the global brand and has the capacity to implement the franchise system. If the franchisee acquires a master-franchise, then contractual arrangements, ability, and trust become even more important as the master-franchisee has the right to appoint sub-franchisees, leaving the brand owner even more removed from the market. And then there are training, permanent quality control and enforcement. In the recent case in Germany, it is almost certain that Burger King headquarters must have failed in some aspect. Once again, it has suffered from a disease that many global brands suffer from, a certain inability to transfer competitive advantage coming from a global brand and a well-oiled defined business model. So in some way, the King was not deposed in Germany. He has abdicated.
I recently came across this older post that discusses why American companies fail in China. The author of the post singles out Mattel, eBay, Google, and Home Depot and also offer his opinion on the reasons for their failure: a lack of flexibility, the failure to localize, or the existence of a strong competitor. In summary, so the author, it boils down to the fact that American companies have an inability to grasp how different the Chinese market is. I say, tell me something that is new! It’s not a secret that China is a difficult and different market; and it is also not big news that American companies often fail when entering foreign markets (e.g. WalMart in Germany, The Gap in Germany and Korea, Pizza Hut in Austria, eBay in Japan). The analysis therefore has to go a little deeper. It is not uncommon for large multinational corporations to side with standardization in case of doubt. Adaptation to foreign markets can be feasible and affordable if a company is only dealing with one, two, maybe even ten foreign markets. Beyond a certain number of markets served, however, adaptation becomes very costly and very complex. If preserving a business model (marketing approach, processes, etc.) is important to a company, then the question should not be HOW do we enter a market such as China, but SHOULD we enter a market such as China? If standardization is so important to sustaining competitive advantage of a company, then it should probably not sacrifice it on the altar of a very different market, but select foreign target markets very carefully. Sometimes this may mean to say no to markets even as large and juicy as China.
At the end of last month, Indian Prime Minister Modi traveled to the United States to lure US companies back to India to invest. According to the Wall Street Journal, just four years ago, the US investment stock in India amounted to approximately $1.9 billion, and now four years later it is only around $800 million. PM Modi tried to assure the likes of Boeing, IBM, GE, Citigroup or PepsiCo that he is cutting through all red tape and making sure that foreign investments are safe in India. The reality, however, tells a different story. The second largest cell phone company in India, Vodafone, has been battling the Indian government in arbitration courts over the imposition of retro-active taxes. Before entering India, Vodafone was promised tax breaks by the government, but after the check cleared, parliament instituted a new law that required Vodafone to pay taxes AND back taxes. Amazon is stuck in limbo, too. When Amazon entered it was fairly certain that as an online platform it would not be subject to retail regulations, but now it seems it will. WalMart, which had announced lofty plans for the Indian market not too long ago, has also put India on the back burner, and only operates wholesale stores there under a joint venture agreement. In most Western countries, the law is the law. In some countries, however, there are no laws or there are sometimes even contradictory laws. And in yet other countries, laws are either changing constantly or they are subject to interpretation. It seems as if some cultures have laws to make their lives easier and more predictable, while other cultures have laws to because … well … why … I mean….! The lesson is that companies need to pay close attention not only to differences in the law, but also to differences in how law is applied and practiced.
Most of the time, it catches my eye when companies fail internationally. This focus on failure may be the result of my academic training, and it may have something to do with my cultural roots. However, every once in a while I am really intrigued, even fascinated, by how smart some companies are. Hermes International SCA has developed a completely new brand for the Chinese market, Shang Xia. As the Wall Street Journal recently reported, Hermes has now spent several years to build the brand and isn’t expecting to break even before 2016. They understand that Western luxury brands will not continue to harvest the benefits of newly gained affluence in China forever. With the growth in the segment slowing down – from 20 % annually to about 2 % this year – the high demand for foreign brands will eventually cease. Chinese consumers are becoming ever more discerning and new brands, and more and more local brands, will succeed. Hermes has recognized this many years ago and made the right decision by building a strong local luxury brand. McDonalds (and yes, I admit, they compete in quite a different industry), however, is experiencing rapid declines in China for the exact same reasons. Competition from newer entrants is intense, and more and more Chinese alternatives eat into their market share. The time when being “foreign” or “American” was enough to drive purchase decisions will soon be over, and companies worldwide are well advised to adapt their China strategies.
And, by the way, I just realized that I ended up talking about failure again, after all.
I had been thinking about the Groupon model and its appeal in various countries for quite while when a Google alert recently hit my inbox – Groupon was to shut down its service in Romania. At the beginning of September 2014, Groupon pulled the plug on this market of just under 100,000 square miles and around 20 million population. Groupon simply stated that it never gained traction and failed to attract critical mass. Spoiled by impressive global growth of 23.5% globally and 42.3% YTD growth in its Europe, Middle East and Africa regions from 2013 to 2014, this acknowledgement of failure must have come hard to executives. So far, they have not not commented on the reasons for the failure, so all that can be said are wild guesses. What is known is that Groupon entered Romania in 2010 through the acquisition of local competitor CityDeal, a move that had spurred the emergence of smaller local deal sites – around 100 in 2012. Besides the competitive environment, another factor may have been that Romania is still a country where the digital divide continues to exist. The ultimate clue with regards to the reasons for the Romanian failure may lie in a far more distant and much larger market – in China. Groupon has had its fair share of difficulties in the Middle Kingdom: poaching of employees through high salaries didn’t show the results Groupon needed, the bid to take over local competitor Lashou had failed, aggressive commission tactics were rejected by vendors, and the practice to staff even remote regional markets with foreign managers who lacked both the knowledge and the “guanxi” didn’t go down well with the Chinese market. After years of trying in China, Groupon has decided earlier in 2014 to exit that lucrative market. Is it too far-fetched to assume that it’s been a similar lack of appreciation for local differences in the market has been the reason for the Romanian exit?
After only three years in China, German electronics retail giant Media Markt in 2013 joined the list of companies that have left China after years of trying, including US-based companies Best Buy and Home Depot. Not too long ago, the store, owned by Metro-group had lofty plans of 100 and more stores. In 2014 it’s a distant memory at best.
According to some analysts, the Metro-group owned chain simply didn’t understand the mechanics of the very competitive Chinese market. Some even say that they didn’t know why they were in China in the first place. What was it that went wrong. First, Media Markt didn’t understand how price-sensitive Chinese consumers are. While Media Markt focused on the consumer experience, Chinese consumers were using its stores as showrooms before buying the products they wanted online or at another retailer. In addition, other retailers, such as local competitors Gome or Suning kept their cost down by setting up shop in less fancy locations than Media Markt. Chinese competitors usually also sub-let space to brand manufacturers who bear the bulk of the risk. Media Markt’s flagship store, however, not only was fully self-operated, but also occupied too much space on one of the most expensive retail streets in China. That amounted to cost pressures and brought Media Markt’s (necessary) nationwide expansion to a screeching halt. While Suning had built 1,700 stores all over China, Media Markt had only 7. This resulted in a situation where Media Markt only made about 5 % of local Chinese competitor Suning’s revenues. As a result – according to the Financial Times – the group didn’t want to invest the several hundreds million Euros annually needed to establish a significant Chinese operation. Media Markt wanted to build a famous brand for its store, in a market where consumers are looking more towards products as brands.
In the past few months, U.S. federal prosecutors have cracked down on shipments of high end cars to China. Dozens of luxury vehicles at U.S. ports and millions of dollars in U.S. bank accounts have been seized. What had happened? Are U.S. car manufacturers no longer interested in the Chinese market? Not at all! The seized cars were mostly BMWs that were purchased by straw men and their “employers”in the U.S. for resale on the grey market in China. With a sticker price for a BMW X5 xDrive 35i of around $56,000 in the U.S. and around $153,000 in China - almost three times as much – there’s a huge potential for profitable wheeling and dealing between the two countries. Driven by their need for status and prestige, Chinese consumers are willing to pay the price for a foreign luxury car, and BMW and other manufacturers naturally want it all for themselves, and so they have taken legal action. All legal aspects aside, what’s interesting is that this is a perfect case of global price discrimination / differentiation – volume positioning in the U.S. and premium positioning in China. Based on the cultural conditions in the local environment, global companies are leveraging these price differentials to their advantage and – as has been shown in this case – are trying to protect this advantage as long as possible.
In the past, H&M may not always have met analyst’s expectations, it may have taken some heat over the use of Photoshop in some ads, it has been criticized over unfair labor practices, but from this blog’s angle, the Swedish multinational seems to be doing things right in international markets. Considering high profile retail failures such as The Gap’s in Germany, Fresh & Easy’s in the U.S. or WalMart’s in Korea, H&M has been navigating foreign waters without major blunders so far. One of the markets where H&M is very active and expanding is China – a market in which many foreign entrants fail. While H&M did have some run-ins with authorities in China over product quality – excessive PH levels, weak crack resistance, and lower fiber content than claimed, it has all been very contained and hasn’t hurt them. In September 2013, after a year of rapid growth and expansion, H&M opened it’s 3,000th store globally in China where it currently has 170 stores. While this puts H&M behind Inditex’s Zara’s 400 plus stores in China, H&M has ambitious plans for future expansion in the Middle Kingdom. Analysts say that H&M is filling a mid-range gap between sports apparel and high-end luxury clothes in China. By bringing affordable clothes to the market they are catering to the needs of younger Chinese consumers who want Western style shopping experiences and clothes that provide some degree of status that an established global brand conveys.