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China: Destiny or Disappointment ?

By: Greg Seminara, Export Solutions
Topics: Walmart,Carrefour,Auchan,Tesco

China surpassed the USA to rank as the world's largest grocery market.
Retail sales growth averaged 14 % since 2011, including + 13 % in 2013, according to China's National Bureau of Statistics. I recently visited Shanghai and Beijing and observed a global bazaar, with sporadic availability of most of Europe's and the Americas favorite brands. Global brands are not new to the market, as many have been sold in China for 10 years or more. Coca Cola reentered China in 1979 and maintains 43 bottling facilities. Other international brands demonstrating success include Oreo, Pantene, Maybelline, and Pampers. However, the truth is that the vast majority of food and beverage brands are exporting modest quantities to China, with many registering greater product sales to Hong Kong. Destiny or Disappointment depends on your company's investment in China as a future "top 5" market or as just "another export market".

Consumer Habits - Low Brand Loyalty
Chinese meals reflect different eating habits versus the west. Consumers have been slow to adopt global practices such as Coffee and Cereal for breakfast or our favorite Italian cuisine. Personal care manufacturers achieve better results, as Chinese are anxious to invest their paychecks on the world's famous cosmetics and hair care products. In many categories, Chinese display little brand loyalty. A Bain - Kantar Worldpanel study revealed that in Tier 1 Chinese cities, consumers purchased biscuits (cookies) an average of 21 times per year, but spreading their dollars across 8.5 brands. The research demonstrated the same lack of loyalty applied to other categories such as candy, toothpaste, and facial tissue. Foreign marketers face the dual challenge of creating category usage and brand loyalty.

Who's Winning ? Chinese vs. Foreign Brands
The Bain- Kantar Worldpanel research covered 26 supermarket categories.
Their data projected that Chinese brands accounted for about 70 % of sales, with foreign brands at 30 %. Chinese brands dominated most food and non-alcoholic beverage categories. Foreign brands did well in categories like biscuits and candy , cosmetics, and sectors requiring a high level of consumer trust, like milk powder.Local brands gained market share in 15 of 26 categories tracked. No surprise that foreign brands performed best in Tier 1 cities of Beijing, Shanghai , and Guangzhou.

Retailer Dynamics
China's market is highly fragmented. Sun Art, (Ruentex /Auchan), is the leading supermarket group, with a market share of only 14 %.Walmart is the number three player, opening 30 stores in 2013 to reach 407 outlets. Carrefour operates 236 stores in 73 Chinese cities supporting the trend to expand to the 228 "Tier 3 "cities in Central and Western China. Tesco has not succeeded and signed an agreement to fold their 131 stores into a joint venture with CRE, the #2 retailer.International hypermarket chains serve as excellent showcases for export brands. Strategic retail development focuses on a multi-format approach, with leading groups offering hypermarkets, supermarkets, and in some cases department store and convenience formats. China serves as the world's largest internet market, with more than 500 million people online. Sales via the internet spiked by 55 % in 2012, exceeding more than 2 percent of total retail sales.

Phase I - Getting Started
Initial efforts in China should include partnering with a Shanghai ( or Beijing) based distributor. Export Solutions tracks 100 in our distributor database. This phase should focus on gaining consumer insights and trial through chains like Jenny's,Ole, and City Shop that cater to wealthy Chinese and expatriates. Next retail targets would include sales to large format stores like Auchan, Walmart,Carrefour , and Metro located in the Tier 1 cities. Investment in market research is mandatory.Many exporters appear to be stalled in Phase I. Companies serious about China must advance to Phase 2.

Phase II - Next Level
A second step is to create a Chinese subsidiary, headquartered in Shanghai . Your team should consist of a mix of local sales staff plus loyal missionaries from your headquarters who know how to "get things done" at corporate. Critical hires include dedicated marketing and research managers. Your market structure should expand to focus on Tier 2 cities and create a network of regional wholesale distributors. Pursue establishment of production in China. Adapt products, packages, and marketing specifically for the Chinese market.

Phase III - Category Leadership
Winners in China are brands that are building total category usage and competing effectively with Chinese owned competitors. Key ingredients include multiple factories in China, sales forces with national distribution, and market research labs creating new product ideas tailored to the Chinese consumer. Reaching category leadership may require an acquisition or joint venture with a local partner. Hershey expects China to be their second largest market by 2017, with sales likely exceeding $500 million. Hershey's activities include creation of a sizable Market Research center and  launching of Lancaster, a brand developed initially for China. This year, Hershey expects to complete the purchase of Shanghai Golden Monkey(sales: $225 million), a five manufacturing facilities and a strong national footprint.

Destiny or Disappointment -Lessons Learned
Few exporters have access to the massive resources of companies like P & G,Coca Cola, or Hershey that are winning in the market. However, virtually all brands should be achieving better results in China ! A first step is to evaluate your market research regarding consumer usage and acceptance of your product. The second step is convince management that treating China as "just another export market" will generate mediocre results and that you are missing out on a significant window of opportunity. The objective would be to transition to Phase II type activities such as your own employees on the ground in Shanghai ( not Hong Kong or Singapore !). China represents a significant growth engine, with almost 1.4 increasingly affluent citziens. A legitimate question for exporters is whether you are willing to invest to create a Top 5 market for the future or content with a low complexity, low risk, niche business in China ?