Posts Tagged ‘China’

#108 Someone may eat Ronald McDonald’s lunch in China

Tuesday, December 16th, 2014

MaiDangLaoToday’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…

#106 CostCo Gets it Right in China

Sunday, November 30th, 2014
costcoA few weeks ago, I have written on Hermes’ activities in the Chinese market. Today, I am happy to report that another company seems to join the ranks of those who are smart about their entry into the Chinese market: CostC, the Issaquah, Washington based company. According to recent media reports, CostCo has teamed up with Chinese eCommerce giant Alibaba to sell products through their Tmall website. Why is this smart?
Well, first CostCo is going slow. They are starting with the marketing of a limited range of products from their food and health brand, Kirkland. This is not only low-risk, but it also caters to Chinese consumers’ growing appetite for foreign food products. Consumers can get used to the products and become increasingly familiar before other products and brands are introduced. This should help CostCo to get their product portfolio right for China – something that other retailers have found challenging. Most importantly, CostCo is not investing in physical infrastructure that is expensive to build, costly to maintain, and complex to manage.
Secondly, in a time when even first year business students all over the world know what the word “guanxi” means, entering the market with a will established Chinese partner is a good idea. Chinese consumers trust the Tmall brand and, by association, will trust Costco. Tmall also offers volume and instant traffic so that Costco doesn’t have to invest in promotion the same degree it would have to in order to drive consumers into stores. Not to forget that online retail is growing rapidly in China. In July, China-based consultancy iResearch had raised it’s 2014 growth forecast from previously 32.4 to 45.8 percent – totaling at an expected (and staggering) 450 billion dollars this year.
Down the road, Costco may add a few Chinese stores to its existing 19 stores in Japan, 11 in Korea, and 10 in Taiwan, but for now Costco is observing and learning. This slow and smart way of entering China will provide CostCo with an opportunity to learn about the Chinese market and its consumers without a lot of risk.

#105 Barbie, eBay, Google

Saturday, November 15th, 2014

usa chinaI 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.

#103 A tale of two companies in China – Hermes and McDonald’s

Friday, October 24th, 2014

shangxiaMost 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.

#102 Groupon in Romania and China

Monday, September 29th, 2014

GrouponI 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?

#101 Think a hundred times before you “Best Buy” in China

Sunday, March 30th, 2014

best_buy bai si maiYes, 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”!

#100 Media Markt Exits China

Friday, February 28th, 2014

mediamarkt-chinaAfter 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.

#99 Global Price Discrimination Still Works

Saturday, December 7th, 2013

bmw chinaIn 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.

#98 Someone seems to get it right in China

Thursday, November 14th, 2013

H&MIn 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.

#97 Ooops, they did it again….

Sunday, October 6th, 2013

Danone-LogoPeople who follow foreign companies in China are well aware of the challenges that Danone has had in that market over the last few years. We’ll never quite know why Danone’s joint venture relationship went sour (not good for a company dealing in dairy products…) but it may not be completely unfair to assume that it often takes two to make and two to break a relationship. The simplistic and official story is that Wahaha reneged on a deal to let Danone buy the majority stake in the joint venture, after which Danone filed for arbitration and then took legal action. It probably was right there when the real trouble started. In China, you don’t sue your partner before a court of law, you chit-chat it out. But there was definitely more to it, including the fact that the Chairman of Wahaha, Mr. Zong Qinghou didn’t exactly appreciate the tight shackles that Danone placed on him in all business decisions – not recognizing that China is a market that often calls for entrepreneurial approaches rather than the central control that French companies are known for.

But these are things past. More importantly, Danone seems to be in the middle of its next quagmire. Granted, it was unfounded allegations of contamination that caused their Dumex baby food division to recall baby formula on a large scale, but the allegations of price fixing in the same product market were very real and ended in a fine ordered by Chinese courts (a total of $ 110 mio including five other companies) and more negative press by the media which is just waiting for Danone to get more scrambled egg on its face.

Then, as the Wall Street Journal reported last week, Danone’s Nutrica unit, a division which specializes in medical nutrition, had to deal with allegations that it bribed more than 100 doctors at more than a dozen hospitals in Beijing. How much more does Danone want to work on the image of the ugly, imperialist company? If that’s their goal, they can stop, because they have succeeded! If not, they can stop, too, because it is time to embark on a focused campaign to restore their own image and that of Western companies in China in general. And if they don’t care about image (let alone about being a good corporate citizen), maybe Danone should simply look at their challenges in China from a bottom line perspective as sales are already declining.