Cracking the China Market:   Successful Marketing   Strategies     Prepared for: US Conference Board     Global Marketing ...
China’s Beer Industry: A Case study       Foreign brewers like Interbrew, Heineken and Carlsberg entered the China market ...
China’s Beer Industry: A Case study       The beer industry structure in China in the early 1990s was complex            I...
China’s Beer Industry: A Case study       The outcome of the foreign breweries’ market entry:            Most plants ran a...
China’s Beer Industry: A Case study       Explaining the failure of foreign breweries in the early 1990s            The de...
China’s Beer Industry: A Case study       A Failure of Consumer Advertising and Promotions            Foreign brewers empl...
China’s Beer Industry: A Case study       In short: the 1990s saw a failure to understand the size and dynamics of the dem...
Why a China challenge?         China’s position in some product markets out-ranks its 6th place in global GDP       China ...
Hyper-competition       Chinese customers are exposed to a dazzling array of brands and (falling) prices       Hyper-compe...
Hyper-competition                 Brands are especially important in China given the array of choices       Hyper-competit...
Hyper-competition and Over capacity                                In the mass market, price competition is intense       ...
Consumer demand growth potential               Penetration of consumer products lags behind the West & Japan, BUT…       C...
China still has an emerging market income profile                                    …China still has emerging economy inc...
The Demand Pyramid in China                   Realistic sizing of the premium and mass market spaces is vital…       For s...
The Demand Pyramid in China                   Realistic sizing of the premium and mass market spaces is vital…       Maste...
Regional disparities                     …and grasping regional disparities is crucial to any market sizing       A recent...
Regional disparities & Southern Affluence                        It is a common mistake to under-invest in Southern market...
A Marketing strategy to fit the Pyramid model           The mass market & premium market present different marketing chall...
Go-to-market challenges                                        Invest in winning access to channels       The battle for d...
Trends to watch going forward       Travel and tourism is changing China – creating more “high-end” and “international”   ...
Trends to watch going forward (cont’d)       Huge IPR issues remain – high penetration of counterfeits, export of counterf...
Trends to watch going forward (cont’d)       China’s population is aging faster than any major economy in modern history –...
Conclusion: Why is China different from other emerging markets?       In some ways China presents the same challenges as o...
Tel: (65) 6838 5355                                                                             Fax: (65) 6838 5855       ...
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050615_US Conference Board Global Marketing and Communications Conference 2005_Cracking the China Market Successful Marketing Strategies

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050615_US Conference Board Global Marketing and Communications Conference 2005_Cracking the China Market Successful Marketing Strategies

  1. 1. Cracking the China Market: Successful Marketing Strategies Prepared for: US Conference Board Global Marketing and Communications Conference 2005 Prepared by: Spire Research & Consulting Date: 15 June 2005Prepared for: Global Marketing and Communications Conference 2005 Date: 15 June 2005 Page 1
  2. 2. China’s Beer Industry: A Case study Foreign brewers like Interbrew, Heineken and Carlsberg entered the China market in a major way in the 1990s, only to suffer major losses and sell off their operations. Chinese consumers did not take well to, and could not afford, premium foreign brands, opting to stick with Chinese provincial or regional favorites which were priced much more cheaply (sometimes 20-25% of premium beer prices) and had lower alcohol content. The premium market was estimated at 5% of total volume and did not grow substantially in spite of the foreign presencePrepared for: Global Marketing and Communications Conference 2005 Date: 15 June 2005 Page 2
  3. 3. China’s Beer Industry: A Case study The beer industry structure in China in the early 1990s was complex In most provinces and regions, beer production had created national oligopolies controlled by local companies – resulting in severe distribution barriers to entry In China there were over 800 local beer producers in the late 1990s Global foreign brewers started to enter China: 4 foreign brewers entered China in 1992: San Miguel, Asia Pacific Breweries, Pabst, and Becks. There were 16 in 1995. By 2001, most major foreign brewers were in China, including: Annheuser-Busch, Heineken, South African Breweries, Carlsberg, Kirin, Interbrew, San Miguel, Lion Nathan, and Foster’s. Most of the companies built state-of-the-art breweries and promoted their global brands. Their global brands were positioned as premium beer.Prepared for: Global Marketing and Communications Conference 2005 Date: 15 June 2005 Page 3
  4. 4. China’s Beer Industry: A Case study The outcome of the foreign breweries’ market entry: Most plants ran at a loss due to low capacity utilization. Low selling prices depressed margins. Foster’s had to sell two of its three Chinese breweries in August 1998, following heavy losses. Carlsberg and Lion Nathan also sold off their operations eventually. By the end of 1990s, the foreign brewers had made little impact. The market remained fragmented - all top ten brewers in China, representing around 21% of the market share, were local companies.Prepared for: Global Marketing and Communications Conference 2005 Date: 15 June 2005 Page 4
  5. 5. China’s Beer Industry: A Case study Explaining the failure of foreign breweries in the early 1990s The demand pyramid meant a small market size for premium beer. Hyper-competition and over-capacity took a toll There were 800+ breweries. Foreign brands were priced at 400 – 500 % the price of local brands. The market for premium beer was only 5 % at the most (of total beer consumption market), compared to roughly 15% in Australia, for example – foreign brands failed to stimulate radical growth in this category. Consumer sentiment towards local brands As in the rest of the world, beer drinking followed an intensely local pattern, with “patriotic” associations. “Chinese have a very strong sense of “home place”… If I live in a place, I want to drink my local brand… I don’t go into a place and say, ‘My Tsingtao beer is better than your beer. My quality is better than yours. So why don’t you drink mine?’” (a comment by a local beer industry executive in the 1990s)Prepared for: Global Marketing and Communications Conference 2005 Date: 15 June 2005 Page 5
  6. 6. China’s Beer Industry: A Case study A Failure of Consumer Advertising and Promotions Foreign brewers employed competitive weapons that worked well in the West. They tried to build global brands through expensive advertising campaigns aimed at differentiating premium beer in the eyes of consumers. These campaigns merely created awareness, but not the desire for, nor the ability to pay for the premium price of the beer. Consumer sentiment towards local brandsPrepared for: Global Marketing and Communications Conference 2005 Date: 15 June 2005 Page 6
  7. 7. China’s Beer Industry: A Case study In short: the 1990s saw a failure to understand the size and dynamics of the demand pyramid for beer in China. In the past 3 years, many of the foreign companies who failed in the 1990s are re-entering the market by buying stakes in large Chinese breweries. Most are pursuing a strategy of buying over successful Chinese brewers which have a dominant position in one or more provincial/regional markets. They would then use that brewers distribution network, production capacity and expertise to gradually build the market for their premium international brands while maintaining the local brands they now own. Anheuser Busch is pursing this strategy with its acquisition of Harbin Brewery (China’s 4th largest), as is Heineken with Guangdong Brewery Holdings and Scottish & Newcastle with Chongqing Brewery.Prepared for: Global Marketing and Communications Conference 2005 Date: 15 June 2005 Page 7
  8. 8. Why a China challenge? China’s position in some product markets out-ranks its 6th place in global GDP China is among the world’s biggest markets for industrial products and intermediates, like concrete, steel & coal… …but is also among the world’s biggest volume markets for consumer products, outpacing its 6th position in world GDP: Beer (No. 1 – 30m barrels) Mobile phones (No. 1) Cigarettes (No. 1 – 35% of global demand) Cars (No. 3 – 5m units in 04) Platinum (No. 1) Advertising (No. 3 – est. USD10b) Gold (No. 4 – 235 tons) Real GDP has grown 700% since 1978. Growth in consumer spending has been stunning, even if there are signs of slowdown from the government’s credit tightening measures in 2004Prepared for: Global Marketing and Communications Conference 2005 Date: 15 June 2005 Page 8
  9. 9. Hyper-competition Chinese customers are exposed to a dazzling array of brands and (falling) prices Hyper-competition in China is all about: Presence of huge number of brands, both foreign and local Over-capacity and intense price competition in the mass marketPrepared for: Global Marketing and Communications Conference 2005 Date: 15 June 2005 Page 9
  10. 10. Hyper-competition Brands are especially important in China given the array of choices Hyper-competition means that customers are faced with a huge range of products, brands and prices, both local and foreign - more so than in other emerging countries: Example: in low to mid-range diesel power generators, Spire found at least 28 brands in just three of the four major regions of China, including all the ten or so leading international brands, compared with just 13 brands in all of Malaysia This helps explain the great importance of brands as differentiators. In most cases, brands are more important in China than other emerging markets. Foreign brands like Nike, Adidas & Sony score highly in brand preference surveys… ….but local brands are still strong in some sectors, leveraging price and local brand familiarity: Examples: PCs (Lenovo, Founder), TVs (Changhong, Konka), beer (numerous local brands peculiar to provinces or counties) A recent study published in Harvard Business Review advised that foreign brands will find it hard to command premiums of over 30% in China.Prepared for: Global Marketing and Communications Conference 2005 Date: 15 June 2005 Page 10
  11. 11. Hyper-competition and Over capacity In the mass market, price competition is intense The traditional SOE and bank loan system has led to over-capacity in markets like TVs, cement, steel and motorcycles – sparking vicious price competition that sometimes prompts Government intervention (as with the TV industry in 1999). Motorcycles: 300 manufacturers; Cement: >1,000 plants; Breweries: >400 Car prices have been falling by 7%-10% per year since 2002 In the consumer electronics and office products sector, our research has shown steeper price drops at the low-end of the market compared to other countries in Asia, but a roughly similar price trend in the high-end of the market. Over-capacity and price sensitivity are a major threat at the low-end, while absolute market size is the issue for high-end products Marketers need accurate competitor analysis to keep price premiums at an acceptable level Enter at the early stage of the PLC curve wherever possible – launch new products and be a pioneer in new categories; intense competition will arrive very fast.Prepared for: Global Marketing and Communications Conference 2005 Date: 15 June 2005 Page 11
  12. 12. Consumer demand growth potential Penetration of consumer products lags behind the West & Japan, BUT… China’s per capita consumption is: 22 litres of beer a year, compared to over 80 for the USA 8 cars per 1,000 people compared to over 600 in the USA 0.5 litres of wine a year, compared to over 7 litres for developed economies Products per 100 urban households 2002 2004 Colour Television 126.4 - Mobile phone 63 - Air-Conditioner 51.1 - Camera 44 Oven 30.9 - Personal Computer 20 - Video Recorder 18.4 - Credit card* 18 (2003)* 22* Internet users** 6.1 (2003)** 9.2** Automobile 0.9 - * Per hundred of urban population ** Per hundred of total population Source: China Statistical Yearbook 2004 and Spire analysis of published data from various Government and private sourcesPrepared for: Global Marketing and Communications Conference 2005 Date: 15 June 2005 Page 12
  13. 13. China still has an emerging market income profile …China still has emerging economy income profile China’s national income differs widely between the PPP figure and hard currency market exchange rates The shows the limits to the market size for (consumer) products which are expensive in international currency terms – markets in China are often much bigger in global volume (unit) than global value (hard currency) share GDP (at market exchange rates; US$ Bn) US Japan Germany China India Taiwan Indonesia 0 3000 6000 9000 12000 2003 2004 GDP (PPP; US$ Bn) GDP per capita (at market exchange rates; US$) US US China Japan Japan Germany India Taiwan Germany Italy China Indonesia Indonesia Taiwan India 0 3000 6000 9000 12000 0 5000 10000 15000 20000 25000 30000 35000 40000 2003 2004 2003 2004Prepared for: Global Marketing and Communications Conference 2005 Date: 15 June 2005 Page 13
  14. 14. The Demand Pyramid in China Realistic sizing of the premium and mass market spaces is vital… For short-term results, marketers need to be realistic about the size of the premium market and the costs of competing in the mass market Most consumers cannot (yet) afford to buy large quantities of high-end products, even if product penetration shows huge room for growth Premium market (OECD prices) Mass market (local prices, price-sensitive, high distribution cost)Prepared for: Global Marketing and Communications Conference 2005 Date: 15 June 2005 Page 14
  15. 15. The Demand Pyramid in China Realistic sizing of the premium and mass market spaces is vital… MasterCard International estimated Chinas middle class (those earning US$5,000 per year and above) to 160 million by 2010. Increasing access to credit may expand purchasing power – but this may lead to phenomena like heavy default rates for car loans in 2004 Marketers need accurate & timely market sizing research based on current sales measurement and not only projections based on “per capita consumption gaps.” Premium market (OECD prices) Mass market (local prices, price-sensitive, high distribution cost)Prepared for: Global Marketing and Communications Conference 2005 Date: 15 June 2005 Page 15
  16. 16. Regional disparities …and grasping regional disparities is crucial to any market sizing A recent paper reviewing data from 200 cities for a 10-year period, reveals that the richest city had a per capita income 50 times greater than the poorest. Many regions may not have the critical mass for a premium market, but have the population to drive a sizeable mass market Region Population (millions) GDP per capita in RMB*, top provinces ranked in descending order Shanghai Yangtze delta 16. 25 40,646 Beijing North 14. 23 28,449 Tianjin North 10. 07 22,380 Zhejiang Yangtze delta 46. 47 16,838 Guangdong South 78. 59 15,030 Jiangsu Yangtze delta 73. 81 14,391 Fujian South 34. 66 13,497 Liaoning North-east 42. 03 12,986 Shandong North 90. 82 11,646 Heilongjiang North-east 38. 13 10,184 Hebei North 67. 35 9,115 * RMB 8.28 = USD 1 Source: National Bureau of Statistics of China, 2003Prepared for: Global Marketing and Communications Conference 2005 Date: 15 June 2005 Page 16
  17. 17. Regional disparities & Southern Affluence It is a common mistake to under-invest in Southern marketing China has 16 cities with per capita income of over USD 3,000 (RMB 25,000) Shanghai (RMB 37,380) ranked 6th in terms of GDP per GDP (RMB billion) Capita by city. GDP per capita (RMB) 4,951 50,000 5,000 43,926 43,355 41,111 4,000 37,777 38,007 37,380 40,000 31,330 3,000 2,846 30,000 25,520 2,000 1,760 20,000 1,492 14,680 1,000 10,000 558 N.A. N.A. N.A. 168 0 0 Beijing Chengdu Doungguan Guangzhou Karamai Shanghai Shenzen Suzhou Xiamen Southern cities Total GDP GDP per capita RMB 8.28 = 1 US dollar Source: China Statistical Almanac, 2003, TDCPrepared for: Global Marketing and Communications Conference 2005 Date: 15 June 2005 Page 17
  18. 18. A Marketing strategy to fit the Pyramid model The mass market & premium market present different marketing challenges The China market requires a marketing strategy to address the premium and mass market Dell’s cheap, fixed configuration Smart PC is a response to the mass market challenge Two tier branding is a solution that some firms have tried:- In the beer industry, many major international brewers have acquired local Chinese brands for the mass market, while introducing their international brands for the much smaller premium market Automotive and engineering firms like Honda, Caterpillar and Yamaha Motor have developed second brands for aftermarket parts in some emerging markets, offering mid-range quality and prices, while positioning their original brand products as premium Marketers need a clear strategy that addresses both premium and mass market opportunities – where either one cannot be ignored.Prepared for: Global Marketing and Communications Conference 2005 Date: 15 June 2005 Page 18
  19. 19. Go-to-market challenges Invest in winning access to channels The battle for distribution access will be critical in the next few years, as the channel environment changes The retail sector is “modernizing” and becoming more organized – which will increase competition by manufacturers for access Big chains in the future are likely to include foreign players like Carrefour, Walmart, Tesco and Metro, as well as local chains like Shanghai Bailian Group, Lianhua Supermarket, Wumart, GOME, YOLO and Lenovo 1+1 franchise Where channels are not accessible to foreign firms, they can be “acquired” – foreign brewers have acquired competing local brewers, gaining access to their captive distribution channels Outstanding processes in distribution channel management can win the loyalty of existing channels. Example: rules to police price competition among channelsPrepared for: Global Marketing and Communications Conference 2005 Date: 15 June 2005 Page 19
  20. 20. Trends to watch going forward Travel and tourism is changing China – creating more “high-end” and “international” tastes 20 million Chinese traveled abroad in 2003 – placing China among the world’s top 10 outbound tourist nations In 2004, the average Chinese tourist who visited Europe – China’s favorite overseas destination – spent between US$2,000 and US$3,000. Many middle-class Chinese buy luxury products abroad Expatriate numbers are on the rise: a survey conducted in 2003 by HRBS reflected that 35% of managers at foreign-owned companies in China were expatriates, a very high percentage compared to 10% in Thailand, 19% in Singapore and 7% in South Korea Some 500,000 Taiwanese are estimated to be living in and around Shanghai Weak information infrastructure for marketers – quality of data locally available from Government, think tanks and academia is uneven Huge IPR issues remain – high penetration of counterfeits, export of counterfeits Strongly patriotic and anti-Japanese feelings are pervasive: Less than 2% of Chinese surveyed use positive adjectives to describe Japan; 33% place Japanese at the bottom of their hiring list: Anholt-GMI Nations Brands Index Q105Prepared for: Global Marketing and Communications Conference 2005 Date: 15 June 2005 Page 20
  21. 21. Trends to watch going forward (cont’d) Huge IPR issues remain – high penetration of counterfeits, export of counterfeits Strongly patriotic and anti-Japanese feelings are pervasive: Less than 2% of Chinese surveyed use positive adjectives to describe Japan; 33% place Japanese at the bottom of their hiring list: Anholt-GMI Nations Brands Index Q105Prepared for: Global Marketing and Communications Conference 2005 Date: 15 June 2005 Page 21
  22. 22. Trends to watch going forward (cont’d) China’s population is aging faster than any major economy in modern history – and unlike many other emerging market economies The World Bank forecasts that by the year 2030, 22% of China’s population will be over 65 years of age Country Population Size Population Age Structure (%) Median Growth rate Age (yrs) 0-14 yrs 15-64 65 yrs (%) yrs and above Australia (AU) 19,913,144 0.90 20.1 67.2 12.8 36.3 China (CN) 1,298,847,624 0.57 22.3 70.3 7.5 31.8 Hong Kong (HK) 6,855,125 0.65 14.2 73.3 12.5 39.4 India (IN) 1,065,070,607 1.44 31.7 63.5 4.8 24.4 Indonesia (ID) 238,452,952 1.49 29.4 65.5 5.1 26.1 Japan (JP) 127,333,002 0.08 14.3 66.7 19.0 42.3 South Korea (KR) 48,598,175 0.62 20.4 71.4 8.2 33.7 New Zealand (NZ) 3,993,817 1.05 21.7 66.7 11.6 33.4 Taiwan (TW) 22,749,838 0.64 19.9 70.7 9.4 33.7 Thailand (TH) 64,865,523 0.91 24.1 68.7 7.3 30.5Prepared for: Global Marketing and Communications Conference 2005 Date: 15 June 2005 Page 22
  23. 23. Conclusion: Why is China different from other emerging markets? In some ways China presents the same challenges as other emerging markets – the pyramid structure of demand is not unique to China. Challenges & opportunities that may be unique to China include: Hyper-competition creates unique branding challenges & intense price competition in the mass market Consumer tastes are fairly dynamic, creating many new opportunities for “international products” which very quickly become hyper-competitive… …while an aging society creates challenges and opportunities There is a greater need to protect intellectual property The distribution channel environment is in flux World-class levels of export-oriented manufacturing create huge opportunities for B2B sales of materials, components and services like logistics & constructionPrepared for: Global Marketing and Communications Conference 2005 Date: 15 June 2005 Page 23
  24. 24. Tel: (65) 6838 5355 Fax: (65) 6838 5855 78 Shenton Way #20-01 Singapore 079120 sg.info@spireresearch.com www.spireresearch.comPrepared for: Global Marketing and Communications Conference 2005 Date: 15 June 2005 Page 24

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