#179 Qiaokeli for China

Founded in 1999 by Josef Zotter, Zotter Schokoladen Manufaktur is an award-winning Austrian manufacturer of artisanal chocolates. Annually, about 600 metric tons in several hundred varieties of chocolates, wrapped in artist-designed packaging, leave its Fair Trade bean-to-bar production in the small city of Riegersburg in the Southeastern part of Austria. After establishing a strong foothold in the Austrian market with its signature 70g rectangular chocolate bars with fillings, including exotic and unusual flavors such as eggnog, hemp, pork greaves, sauvignon blanc, stone pine, or cheese and walnuts, a brand new show factory called “chocolate theatre” was opened in 2007, and Zotter put the finishing touches on its “bean to bar” concept of sustainable sourcing according to “Fair Trade” standards that had started as early as 2002. Zotter became ever more successful and started to turn its attention to international markets. By 2009, Zotter had entered the German market and now weighed two global options – the United States or China. With the US being a relatively saturated and price-sensitive market, China was a more logical choice that combined growth potential with quality awareness and less focus on price. Besides, Josef Zotter’s daughter Claudia had been on a student exchange program in China and spoke some Chinese. The Middle Kingdom appeared to be a natural next destination for international expansion – no matter how challenging it might be: While double digit growth was predicted for chocolate, China was not (yet) a market with high chocolate consumption, and the sector was dominated by a few multinational companies such as Cadbury, Hershey, Mars, Ferrero, and Nestlé and a small number of local brands by manufacturers such as Liangfeng, Hollygee Foods, Fujian Yake Food Co, Tianjin Heijingang, or Yunnan Sibeijia. While the average European consumed more than 7 kilograms of chocolate per year, Chinese consumption was at only a mere 70 grams.

At the time, a personal acquaintance of the Josef Zotter had established a successful company in China, through which the company already sourced items such as gift boxes or glassware that it sold through its retail channels, its online shop and at its show factory in Austria. In return, the company in China had started to sell small quantities of Zotter chocolates. Even more importantly, Josef Zotter’s contact introduced him to two of his own contacts, former executives at a European multinational company in the chemicals business, who were excited about Zotter’s growth potential.  

Starting from the initial idea of a small retail shop, the ambitions grew ever bigger. When Josef Zotter himself flew to China to visit several possible locations, he fell in love with a building at a picturesque former cotton factory that was turned into the Shanghai Fashion Center. The plans for market entry soon ballooned from a small retail outlet to a “chocolate theatre” in the style of the one in Riegersburg. At the time, the Yangpu area of Shanghai where the Shanghai Fashion Center was located had little appeal and no convenient transportation to other parts of the city. To make things worse, its buildings were located in a low-income area full of dilapidated and neglected buildings. Nonetheless, the company relied entirely on Josef Zotter’s gut feeling about the location, the acquaintance’s local relationships, and assurances by the Shanghai Fashion Center that the region at the outskirts of Shanghai would soon have better connections to the city, and around 2013 Zotter started to build out the location anyway. In 2014, the first difficulties arose when it became clear that the necessary machinery that waited to be shipped from Austria to China lacked the necessary specifications and certifications. At the same time, there were delays and problems on the construction site as well. Some of the workmanship was shoddy and when payment was delayed because of quality issues, some of the workers from the flooring company even threatened to damage refurbished building.

Similarly, plans to have all chocolate manufactured in Austria and exported to China, only looked good on paper. They proved more exhaustive and cumbersome and as difficulties mounted, Zotter and the local acquaintance who was supposed to call in favors from his contacts (but never did) separated, and a partnership with an Austrian expatriate and his Chinese business associate emerged. Unfortunately, things didn’t really turn around for Zotter quite yet. The new business partners had to address the next hurdle, clearing import procedures for the chocolates. In order to import the products from Austria, product documentation consisting of multiple pages had to be translated into Chinese – not once, but for each flavor of chocolate separately. An agency that had been retained for taking care of import procedures proved to be less than competent. When the first few batches of chocolates finally cleared, they had already expired. The hand-scooped chocolates, in particular, had a short shelf life because of the use of fresh ingredients and the lack of artificial stabilizers, which later on has led to modifications to the recipes for the chocolates. Local manufacturing, as an alternative to circumvent import procedures, was never a real option. Although early on, a few Zotter employees spent several weeks in Shanghai to train staff on site so that they could produce small quantities of chocolates from large blocks of imported chocolate for demonstration and decoration purposes, but neither the skilled manpower nor the equipment were available for local production.

Despite all difficulties, on May 31, 2014, the Chocolate Theatre finally opened its doors, and things started to improve. Machinery had been delivered and installed and import procedures were largely on track. Occasionally, however, Mr. Zotter’s proclivity to innovate with new flavors and recipes got in the way of Chinese bureaucracy.

Needless to say, other problems were lurking around each corner. Getting customers to the far-away location continued to be difficult, Zotter’s own online shop did not work properly, and no distribution agreements with major retailers had been closed yet. The strategy that had worked so well for Zotter in its home market of Austria, did not bear fruit in China. To begin with, chocolate is not as well established in the market for candies and sweets in China as it is elsewhere. Chocolate had been introduced to the Chinese market by multinational companies such as Mars in the 1980s, and they continued to dominate the market with big marketing spend. A more recent entrant, for instance, the Belgian company Guylian, had run an intensive marketing campaign for a full year before the products became available in the Chinese market.

Furthermore, Zotter’s home market strategy – a combination of word-of-mouth with flavors that appeal to Austrian consumers and the use of brand assets such as the Fair Trade label or the use of organic products – was not a good fit for China. There was virtually no marketing spend, Zotter never attempted to adapt its chocolates to local tastes, and despite early recommendations by a Chinese colleague, the company missed a chance to get listed by online platforms such as Taobao or JD.com in their early days as a way to increase visibility and awareness. And then there was the pricing strategy. Zotter chocolates were already sold at a premium in its home market of Austria and other European key markets, but in China, the addition of the high cost for transportation and importation resulted in a retail price of 68 RMB (approximately US$10) for a 70g bar (about 2.5 ounces) – unaffordable for large segments of the Chinese population. Interestingly enough, the only product adaptation Zotter ever made for the Chinese market was to let most prices end in “8”, an auspicious number in Chinese culture. Make no mistake, Zotter is still present in China. The Chocolate Theatre still operates, chocolates are available via its web shop, Zotter has a presence on the Chinese social media platform WeChat, and it is now available in a Chinese supermarket chain that specializes in imported goods. Its success, however, is certainly not what Josef Zotter might have imagined from a market with a population of 1.3 billion. But as he himself often says, chocolate is not to be eaten like bread; it is best enjoyed in small quantities at a time.

(Post co-written with Cornelia Oswald)

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