“If I could sell just one [insert product here] to every person in China . . .”
So begins the “China dream” of many a marketing executive. And there’s good reason to pursue this vision: China’s “consumer class” of 100 million is expected to grow to over 700 million by 2020. So winning in China today is more of a strategic imperative than a distant dream. But in reality only three multinational companies (MNCs) have literally fulfilled the China dream: Coca-Cola, PepsiCo, and Wahaha (Groupe Danone SA).
This paper is a synopsis of research conducted as part of Kellogg’s Global Initiatives in Management program into the current state of China’s consumer goods market. The research focused specifically on the best practices of two US-based MNCs that have successfully entered and grown in this dream market: Johnson & Johnson and Yum! Brands.
At an estimated $480 billion, with 8% real annual GDP growth and a skyrocketing consumer base, the attractive China market has become easier to enter since China joined the World Trade Organization. On top of this, the government’s increasing liberalization of credit and younger Chinese segments’ willingness to spend has created a retail free-for-all, with countless Western brands scrambling for market position despite challenges such as an unskilled labor force and ambiguous legal environment.
But China is even more fragmented than many marketers realize, with dozens of disparate cultures and over 100 dialects in a geographic space covering the distance between Oslo and Rome. Thus MNCs aspiring to enter this market must understand and respond to the preferences of many different segments and the challenge of fragmented distribution. For example, China’s top five grocery retailers represent only 21% of total retail sales. That means using large sales forces to reach across a geographically expansive area and face rapidly emerging local competitors with local knowledge and relationships.
The government and legal environment pose additional challenges, with the former often intervening on seemingly small issues related to cultural norms. For example Yum! Brands was blocked from importing the classic Kentucky Fried Chicken (KFC) tagline “Finger lickin’ good” on the grounds that it represented inappropriate eating manners. Intellectual property infringement, with imitation of items from luxury brands (e.g., Coach) to consumer packaged goods (e.g., Band-Aids), remains a major problem, as well.
Not surprisingly, firms with smart and extensive market research on Chinese consumers have realized greater success. Yum! Brands conducts a minimum of 18 months of research before launching products in China. Procter and Gamble (P&G) sends teams of researchers to observe consumer behavior in villages. Such research, in combination with MNCs’ greater trust of the insights and opinions of their Chinese counterparts (e.g., Johnson and Johnson China), improves the odds of success.
Many marketers limit their geographic reach to major cities such as Beijing and Shanghai. However, only about a third of retail sales is generated by China’s largest 24 cities. Many foreign executives haven’t heard of most—if not all—of the 100 Chinese cities the size of Seattle. Beyond urban areas, winning over rural China, where the majority of the 700 million citizens are first-time buyers who make under $500 annually and buy mostly from local stores, is a challenge. Many rural dwellers are expected to migrate to urban areas in the next decade, so establishing relationships with them now will become a critical component of future success.
Successfully facing distribution challenges is only part of the solution to winning in China: pricing and product size must match consumer incomes, and the fragmented market makes traditional advertising less effective. The Internet is an important source of product information, as 58% of Chinese consumers report being swayed by user-generated content, versus 19% of US respondents.
Johnson and Johnson China Ltd
Operating in China since 1985, Johnson and Johnson (J&J) now has over 6000 employees in the country, with offerings ranging across consumer products, pharmaceuticals, and medical devices. This analysis focuses on the women’s health segment, whose products fall into the categories of women’s health supplies (e.g., Stayfree sanitary napkins), skin care products (e.g., Clean & Clear), and wound care (e.g., Band-Aid).
Industry and Competitive Landscape. The sanitary protection market in China, RMB34.8 billion in 2006, is expected to grow 5% annually until 2011. The category is highly fragmented, with “other” brands accounting for over 70% of share from 2001 to 2006, due largely to numerous local brands in Tier 1 and 2 locales. P&G’s Whisper brand led this market in 2006, driven partly by the Mianrou brand, a low-end sub-line of products. Alternatively, Kimberly-Clark won high-end consumers with its Kotex flagship brand and university-focused promotions.
Product extensions (e.g. ultra-thin towels) and gift promotions (e.g., free green tea panty liners with purchase of ultra-thin towels) also helped players gain share, as did marketing high-quality products at attractive prices to rural segments. Manufacturers are expected to place even more emphasis on rural expansion in the next several years, with pricing levels expected to decline in this period, in part to gain share from local competitors.
Marketing Strategy. Despite a virtual monopoly on tampons in China, J&J China ranked third among major players for 2006 sales of panty liners (a 6% share) and fourth for towels (a 2% share). As part of its general strategy of developing and distributing scientifically based, professionally endorsed products, J&J has introduced natural fibers and technological advances into its Carefree brand of towels. Additionally, the MNC launched the Stayfree brand in China in early 2006, featuring the country’s National Rhythmic Gymnastics Team in promotional activities. J&J has been an official partner of the 2008 Beijing Olympics since mid-2005, which is expected to help drive near-term sales.
Marketing Mix. According to Jia Tan, Assistant Marketing Director of J&J China, the firm segments the sanitary napkin business into premium, low/middle, and value tiers, seeing the first two as profitable. For the premium tier, J&J focuses on Tier-1 cities with high-quality products and strong local R&D. Low and medium tiers are targeted with “de-engineered,” lower-cost products that compete with local or non-branded offerings.
Because sanitary protection was a nonexistent category in China prior to J&J’s entry, early promotion tactics focused on (1) brand awareness, especially in Tier 1 cities, and (2) consumer education and behavioral change, which remains relevant for the whole market today, but especially for lower-tier cities and rural areas. Word-of-mouth advertising is generally more effective in China than in any other major market, especially for younger segments, so J&J’s tactics include leveraging internet-based social networks.
Finally, due to China’s fragmented nature, J&J has invested in building and managing a very large sales force, with a special emphasis placed on reaching under-penetrated lower-tier cities. Nonetheless, many local competitors’ sales teams are 20 times larger than J&J’s, and P&G’s is 10 times larger.
Yum! Brands China Ltd
Yum! Brands began in 1997 as Tricon Global Restaurants, a spin-off from PepsiCo, representing the KFC, Pizza Hut, and Taco Bell brands. With increasing saturation of the U.S. market, Yum! Brands’ growth strategy targets large foreign markets such as China. In fact, in 1987 Yum!’s KFC brand became China’s first quick-serve restaurant chain with the opening of the world’s largest KFC restaurant in Beijing. In 2002, Yum! also opened China’s first drive-thru. Today, with more than 2100 restaurants in mainland China, KFC is the leading quick-serve brand, while Pizza Hut is the leader in casual dining. Yum! Brands China is currently testing East Dawning, a Chinese-food-based quick-serve brand, as part of its effort to remain the parent firm’s fastest-growing division.
Industry and Competitive Landscape. In the late 1990s, the rise of dual-income households in China stimulated demand for dining-out options, and fast-food chains grew 28% annually from 2001 to 2006, reaching sales of RMB318.0 billion. Small competitors, while widespread, have encountered difficulty growing the big cities of China. The rising costs of opening an outlet in these prime locations are difficult for small competitors to afford, and consumers find an established chained brand to be more reliable than an independent fast food outlet in terms of food quality and flavor.
Yum! competes with major players such as McDonald’s and Burger King to capture share in China’s Western-style fast food market, which represents one third of the country’s total quick-service industry. McDonald’s, KFC’s main competitor, actually entered Hong Kong in 1975, well before its rival, but ultimately lost its competitive edge because Hong Kong was British-controlled at the time and McDonald’s hired mostly expatriates rather than local Chinese. Today KFC maintains a consistent brand perception advantage over McDonald’s in China.
Casual dining in China grew at 9% annually from 2001 to 2006. In this market, Yum!’s Pizza Hut faces competitors including Papa Johns, Dominos, and the Thai player TPC. In 2001 Yum! spun off Pizza Hut Home Service (PHHS), which provides home deliveries of food unavailable in the restaurant (e.g., spaghetti, salads, chicken wings).
Marketing Strategy. The keys to Yum!’s success in China have been localization and flexibility, as represented by KFC China’s early leadership team, which featured ethnic Chinese with eight to ten years of fast-food experience in geographies where American fast-food was already maturing. All Yum! China meetings are conducted in Mandarin, to avoid the loss of local insights in translation. Unlike traditional quick-serve strategies, Yum!’s include a focus on offering a variety of product offerings (versus limited menus) and providing great taste (versus an emphasis on consistency). Yum! has also benefited from building guanxi, or a positive relationship, with China’s government and developing strong local talent.
Marketing Mix. KFC built on China’s preference for chicken over beef by using local insights to shape product development, offering for example a Beijing Duck Wrap. Similarly, Pizza Hut offers multiple cheese-less pizzas and even an afternoon tea to cater to local tastes. Yum! has gained awareness through high ad spending, typically with TV advertising, making KFC the most recognized global brand among urban Chinese consumers. Beyond advertising, KFC’s Chicky program hosts an average of two birthday parties daily per store, and Pizza Hut’s hostess theme program has been very popular, helping to offset the effects of the high prices of both brands’ offerings in a country where the average lunch costs approximately one dollar. Yum!’s massive, self-owned distribution system has allowed KFC to expand into over 400 Chinese cities, far outpacing competitors. The restaurants’ interiors also drive revenues, with KFC featuring children’s play areas and Pizza Hut offering a smart, trendy décor superior to that of its Western stores.
Marketers looking to enter and/or sustain growth in China should pay attention to several issues that have been integral to the success of J&J China and Yum! Brands:
- There are several Chinas within China. Sweeping generalizations are of little value, given China’s numerous and complex segments. For example, many MNCs are “de-engineering”, making them cheaper and less technically sophisticated to serve lower-tier markets.
- Localize management structure, not just products. This practice results in greater insights into local needs—and it’s less expensive than sending foreign teams into China.
- Your home market is just one market. Foreign companies are much more likely to fail if they attempt to implement China strategies based on those used in their home markets. For this reason, J&J’s global brand team now consults with China-based teams on key aspects of product development.
- Apply lessons from mature markets. Despite the point above, firms should leverage relevant lessons from their home markets when entering China, as KFC did by emphasizing health and wellness in China, based on its knowledge of Chinese consumers in the US.
- Preserve key brand equities, but not much else. Many brand elements are open to reinterpretation in China, as evidenced by KFC’s reputation as a “healthy choice” and Pizza Hut’s provision of an “exotic dining experience” in that country.
Keeping these lessons in mind will help many more MNCs make the “China dream” a reality.