China is quickly becoming a playground where global branding success is being determined. Companies entering or building out their presence in China need to create competitive advantages different from those they hold in their home base. Those that fail will increasingly become vulnerable in their home market— not only to threats by other multinationals that have captured huge Chinese audiences, but to the threat of ambitious Chinese companies that are now returning the favor by expanding beyond their borders.
About The Playground
China is so vast and its regions so diverse that it can effectively be thought of as a collective of “mini-countries,” divided more by cities than regions, determining the market segments. Cultural and ethnic balances are different per city, as is the wealth of the province the city is in. What works in Beijing may not apply in Shanghai, resonate in Nanjing, or be relevant for Chengdu.
For foreign brands, the way into China is usually via the Tier 1 city. Local upstart brands rule low-value markets, while upstart companies from second and third-tier cities are taking control of local markets. In Chongqing, a Chinese fast-food chain called CCSC dominates McDonald’s and KFC. Gome and Suning, companies that share a monopoly within the first-tier cities, are outcompeted by local Huiyin Household Appliances as they try to penetrate smaller markets in east China. Nanjing is where the maternity and children consumer goods chain Haiziwang was founded. Haiziwang achieved profitability 10 months after launch.
Today’s Landscape: The Reality of Branding in China
There is no such thing as a single “Chinese consumer.” One size does not fit all. According to McKinsey’s Meet the Chinese Consumer of 2020 report, the majority are “value” consumers, with limited spending and low income. This growing mainstream segment will create a consumer market of largely first-time buyers, with different cultural and ethnic values influencing how they spend money.
Consumer spending is not only increasing, it is evolving. As income levels rise among the Chinese middle class, the mainstream segment is growing. The majority of these new spenders are first-time buyers, keen on partaking in the Chinese dream. In the Tier 1 cities, however, the major growth driver is no longer the first-time buyer, but rather an increasingly well-informed and insightful one. Spending is no longer just on big-ticket items, such as a car, but more and more on leisure spending in categories like alcohol, herbal remedies, and appliances, as reflected in Millward Brown’s Top 50 China Brands 2012 ranking. Still, there is an awareness of quality across price-points.
Although brand awareness is on the rise, brand loyalty is not. Chinese consumers, as we have found in original interviews and as reflected in numerous media reports in Chinese publications, believe value is associated more with brands than with price, largely because consumers believe branded products are safe, of higher quality, and more reliable. But that faith does not translate into brand loyalty. The fact that the market is opening up to new brands makes the consumer more experimental and not ready to stay with one brand. Comparing data from McKinsey’s online Benchmark Survey and China Consumer Spending Surveys from 2009–2011, it’s clear that the average Chinese consumer consistently chooses from among three to five brands in any given category.
What follows is a set of observations frog has garnered from extensive design research with consumers across China.
Chinese consumers highly respect Chinese brands
Chinese are fiercely nationalistic. They demand that Chinese brands, such as Li Ning, Haier, Oppo, Huawei, Baidu, Yili, Mengniu, and Tsingtao, succeed nationally and globally. Each of these brands is a representation of the country’s values and pride. It is recognized that local brands follow a Western branding model. But for a Chinese, this represents more of a leadership aspiration for the brands to earn support from consumers. This is not seen as a weakness, but as an ambition.
No tolerance is offered for mistakes by foreign brands
From the Chinese consumer’s perspective, Western brands arrive as leaders. Some consumers are more extreme and cynical in their views in that they believe foreign brands are there to take their money. Chinese consumers accept that local brands might make mistakes or find themselves dealing with scandals, but they won’t accept it from foreign brands. Five years after the SK-II scandal, which occurred when a Chinese consumer performed a product analysis of SK-II skin cream, found traces of toxins and heavymetal compounds, and then shared her findings through social media, P&G has still not recovered from its failed relaunch of the SK-II brand in China in 2011. An online survey conducted by Sina of approximately 20,000 people showed over 80% of respondents said they felt P&G was “lying” in its public apology for the SK-II debacle. Most importantly, nearly 96% said they would never purchase another SK-II product.
Preference for internationally well-known brands is still rising
Not just as a reaction against counterfeit goods, but also as a quality assurance, the Chinese consumer is buying more big-name international brands. frog’s survey of Chinese consumers found that 63.5% of participants prefer foreign brands.
Numerous other sources have shown that this is apparent mostly in the luxury goods sector, but in major cities is manifested across other industries, such as ready-to-wear, nutrition, and household goods.
Participation in social media is growing at a staggering rate
Chinese consumers feel it is their moral obligation to share with others their experiences with a product, purchase, or service. They are very actively involved in online community forums and discussions, and in return, use these sources to inform their decisions and brand preferences. Currently, more than 40% of Chinese online shoppers read and post product reviews online, according to a 2012 Boston Consulting Group study. The number of Chinese consumers contributing their opinions via social media is likely to grow and offer much more consumer insight than in other areas of the world over the next couple of years. Boston Consulting Group found that by 2015 there will be 700 million Chinese citizens with Internet access—more than in India, Japan, Russia, the United States, and Indonesia combined.
The internet has not completely replaced other media channels
Despite its reach and usage, the Internet is not the dominant media channel. In addition to television, other media channels have become fertile playgrounds in China: point of sale, event marketing, and below the-line advertising are still welcome and effective outlets for brand communications. McKinsey found that 91% of Chinese consumers have been exposed to TV ads; 37% had been exposed to newspaper and magazine ads; 36% to in-store ads and displays; yet only 28% had been exposed to Internet ads.
Local companies create brands through commercialization
“Perfect is simply not fast enough” seems to be the general sentiment among Chinese companies when it comes to branding—including those with large global audiences (such as Lenovo, Huaiwei, and Haier). Branding strategy is generally performed less scientifically and more intuitively than in the United States. Decisions are made authoritatively, and are not always based on research findings. Methodologies are largely ignored and/or undervalued; local brands want to move fast and implement just enough to move forward. In contrast, multi-national companies traditionally invest in time-heavy processes, methodologies, and value-offer strategies, trying to get all the answers before going to market.
Aspirational trading up is just getting started
Many Chinese judge themselves and others by what they buy. As the market matures, growth will come from consumers who buy more goods and services, do so more frequently, and purchase items that are pricier than the items they already own. This new mainstream consumer will have a major influence on how products will be branded throughout China. In general, frog has found that 80% of those surveyed like to buy products that are easy to use and are of high quality, even if they are more expensive.
Brands focused on mass-market consumers will need to reposition themselves to match their consumers’ rising aspirations, while newer, younger, and local brands may be able to leapfrog more established competitors by offering premium products with the right brand image.
Changing priorities for China brands: frog’s recommendations
Based on our design research and quantitative survey of Chinese consumers, with additional thirdparty data considered, it is likely that the next decade will see the weak brands be weeded out of the marketplace and the stronger brands flourish, based on their sales performance and investment politics. But a new generation, with very different goals, is joining the mix. World-savvy Chinese entrepreneurs are prioritizing long-term brand building over the race to profitability. According to Millward Brown’s Top 50 China Brands 2012 study, privately owned Chinese brands make up two-thirds of the Top 50. They focus on front-loaded investments to establish a differentiating brand value that is deeply rooted in Chinese cultures and values. These young brands—which include Greenbox, Belle International, Chow Tai Fook, Herborist, and Anta Sports—have the potential to create new brand experiences in China, and still be relevant to a global audience.
Brand strategies need to be planned, taking in account that some consumer segments will mature rapidly, especially in the biggest cities, and that shoppers can quickly become loyal to certain brands. As income levels rise across China, a bulk of new consumers will still be first-time buyers of many products and services, all eager to try new brands.
The nuances will become more subtle, yet even more crucial. As Chinese consumers come to better understand the product categories and brands they buy, they will expect better. No longer will they be content with a brand simply because it is big, foreign, or expensive. They will expect their brands to understand and meet their needs, both rationally and emotionally.
This branding story will change in future years, because in China, change is—and will continue to be—the only certainty.
The Insights series from frog consists of a bi-annual print publication, related online content, and global events and conferences. Insights offers direct, in-the-field discoveries of consumers’ habits and aspirations, combined with deep, data-driven analyses of contemporary trends. To create these analyses, frog deploys a combination of in-depth interviews, design research, and an original quantitative survey.