KFC has been in China for almost 30 years. The first of Yum Brands’ restaurants to move into China has reported sharp profit and revenue declines for their first quarter China business recently. Some media outlets such as the WSJ argue that, with competition increasing, the novelty character of brands such as KFC simply seems to wear off, while others such as Reuters reason that recent food scandals have hurt consumer perceptions of the brand. Yum Brands actually seemed to have done a decent job to cater to Chinese tastes by enriching their offering beyond the usual staples by offering localized variations and entirely new menu items, including coffee drinks. For a company that runs more than 6,000 stores, these are not trivial changes. Reality, however, is that the Chinese market is complex and adaptations to the market strategy have to be made constantly. The Chinese market has many moving pieces from being hyper-competitive to low brand loyalty to being very prone to ever-changing fads. Another cultural trait, the relatively distinct status orientation of Chinese culture makes Yum’s latest move an interesting one – the addition of high-priced Italian restaurants to its portfolio. Viewed from the rabbit hole of international marketing, the question seems to be how much of this development is rooted in the many idiosyncrasies of China and how much is just the normal maturity of a brand along the product life cycle?
Posts Tagged ‘China’
According to a variety of news outlets, California-based restaurant chain Johnny Rockets is planning for a major expansion in China. The 1950s themed chain currently has more than 300 corporate- and franchise-owned restaurants, about a third of which are in international locations. For the expansion, the company already entered into a joint venture agreement with its operator and franchise partner in Malaysia and a Malaysian owner-operator of department stores (that will also serve as locations in China). Beginning in 2016, Johnny Rockets will put approximately 100 stores into various locations throughout China. China definitely has an appetite for foreign fast food, especially if it is tied to a unique experience, but the road may be bumpy. The chain is following the likes of McDonald’s, KFC and Burger King, which have all had to manage steep, painful and expensive learning curves. It is to be hoped that Johnny Rockets will learn from their competitors’ mistakes, and make important adaptations to their business model and their menus. This author is not so sure if the chili cheese fries will catch on in China. Maybe we’ll read about Johnny Rockets again in the not too distant future…
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…
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.
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?
Yes, this is somewhat old news, but it’s also an ongoing story. In early 2011, several media outlets reported that US electronics retail giant Best Buy was failing in China. In a year when Chinese overall retail sales grew by a monthly average of 18 percent, Best Buy shut down all of its nine mega stores. It would be easy to blame the Chinese consumer for their price sensitivity, their tendency to haggle over discounts, their unwillingness to pay for quality service, and the rapidly rising competition from online retail, but that would be – well, too cheap. Foreign companies entering a new market carry what the international management scholars call the “liability of foreignness” – their task is not to educate consumers and reshape and entire culture, their task is to adapt to local conditions. Or, if their internal environment and business model doesn’t allow them to do so, to simply stay away. Also, local Chinese competitors such as Gome (Electrical Appliances Holding Ltd.) themselves started to introduce fixed prices and to take sales personnel off commission a while ago, thus getting closer to the Western retail model. In Best Buy’s case, the failure might have been a combination of many different things from costs that were too high to mistakes in product portfolio decisions to the building of monumental flagship stores. Maybe Best Buy even overextended itself on a global scale. Almost parallel announcements to withdraw from the UK and from Turkey point to a mismanaged overall global expansion strategy. Anywho, back in 2011, it seemed that another arm of Best Buy’s operations in China, the acquired local, Nanjing-based Five Star chain and its mobile business units would be the solution to the company’s trouble. In fact, Five Star was where Best Buy’s involvement in the Chinese market started altogether in 2006. Two years later, Five Star’s market share had been steadily declining and calls for Best Buy to completely pull out of China grew louder. In late 2013, however, the company’s new CEO, Hubert Joly, renewed Best Buy’s confidence in the Chinese market, citing steady progress the company had been making. In 2014, it remains to be seen if Best Buy’s future will be able to attract more Chinese consumers or if they’ll continue to do what one of the translations of Best Buy’s name in Chinese, 百思买 (Bai Si Mai), could mean: “Think a hundred times before you buy”!
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.