IN THE BLACK: In the trenches
Cool customers: the growing Chinese consumer goods market may give us the greatest lessons about understanding the customer. By Ed Charles
Knowing your customer is essential to the success of any business enterprise. China is the market that many multinationals are concentrating on. So how does one begin to understand this rapidly expanding and complex market?
The scale and the nuances of China are bewildering. Nearly 80 per cent of the country’s people are classified as poor, earning less than 25,000RMB a year, about A$3800. Yet the country has gone from having no billionaires in 2002 to 15 in 2006 and 106 in 2007. The Hurun Rich List, published by accountant Rupert Hoogewerf, shows that only the US, with 410 billionaires, has more. According to Boston Consulting, China had 250,000 millionaire households in 2005, accounting for 0.4 per cent of the population but 70 per cent of wealth.
The key to selling in China is to find where the money is, and to understand the local nuances of customers. Marketing consultant Susan Ellis, who is associate dean – China programs at the Melbourne Business School, says that many consumer brands have another big issue in the nuances of their names and brands. ‘And a lot of that is language which is, for example, how they are going to translate their brand name or their company name. Quite often they will select a translation that sounds very similar to their English name not realising that if they changed it up a little bit they could get a huge amount more power in the marketplace.’
In China the symbolism behind the sounds of words is very important. Ellis points to a brand of facial tissues roughly called ‘Stay healthy and safe’. Sales jumped after the outbreaks of SARS.
‘It made people feel quite comforted, which meant that sales of major international brands such as Kleenex had great difficulty as a result,’ she says. ‘I think people realise they can do a lot more local fine tuning without bringing down your core values. I think that is something every organisation wrestles with when they decide to leave their own culture and go to another one.
Out of a population of over 1.3 billion, the truth is that the real number of consumers is much fewer than that, although there is a massive emerging lower and upper middle class who in the next 10 to 20 years will come to be the dominant economic force in the economy.
Martin Sorrell, the chief of the marketing behemoth WPP, knows all too well the differences of marketing to the East and West. In the industry journal Admap he recently said: ‘It is extremely hard to read the mindset of 1.3 billion potential consumers. The cultural differences are as great as those between Westerners and Muslims, but because China and its people have long been associated with the West, it is assumed they think like us.
‘Some Western companies go in confident that their cultural norms will work in the Chinese market. They assume the way they sell their oil, drinks and cars in the US and Europe will work equally well in the Middle Kingdom. Such an attitude is suicidal. The Chinese are different.’
It is this cultural difference that companies have to nail. MBS’s Ellis recently interviewed CEOs and marketing chiefs in China and found that they didn’t have the quality or quantities of customer research available in the West. ‘Multinational companies going into China are finding they are not getting a lot of information,’ she says. ‘It doesn’t matter what kind of segmentation that you are going to do, you are not going to get the quality or even quantity of information that you are used to in your home country. You may as well keep it simple right now.’
That simplicity is a four-part breakdown of the population in first, second and third-tier cities and rural areas. ‘That makes a massive difference in terms of lifestyle and average income and average education and types of profession,’ Ellis says.
Lawrence Lau CPA, management controlling director, L’Oreal China was formerly launch manager of Cadillac (General Motors’ luxury brand) in China, where he oversaw customer relationship marketing and precision marketing until March 2007. He is also vice president of the CPA Australia Shanghai committee.
Lau says that in emerging markets, the biggest challenge is always to know who exactly a brand’s customers are, where they are, their profiles and most importantly, their buying behaviours. ‘Hence how to position your brand and product appropriately to gain market share and profitability to defend against competition becomes very difficult simply because you do not have enough understanding of your customers,’ he says.
One of the big issues is customer behaviour with the Chinese having a well-known obsession with high-profile western brands. For example, China just about leads the world in sales of genuine Louis Vuitton handbags.
Ellis says: ‘The Chinese will spend much more than their proportion of income would lead you to believe on items where they think it is important to buy. That’s not because there is a huge number of people who can afford it. It is because there are a large number of people who are willing to spend up to one year’s salary on a single Louis Vuitton handbag. So it is not always about average income.’
Lau says that in the luxury market customers are not necessarily poorer than the West. ‘They indeed spend more disposable income than you’d imagine and most importantly, they are ready to spend,’ he says. ‘You will find that the pricing policy in China for luxury imported goods is higher than the West. Partly due to imported tax but also the price position itself.’
‘In China, the notion of ‘the bigger, the better and the more expensive the better’ is not far from reality. When your customers accept your brand and product and if they believe that additional values are there they are willing to pay a premium. In many cases, pricing your product cheaper to gain market share has ended up in a disaster.’
On the other hand, selling mass market goods is a completely different story. There is greater price sensitivity.
A Coca-Cola or a Big Mac will cost less than in the West but it will take a greater proportion of an individual’s disposable income.
Lau says: ‘My experience in China is that most brands are launched at a slightly higher position in terms of price and brand position as compared to overseas [mature] markets. Having said that, the position may be adjusted over time due to increasing competition entering the market. At that juncture you need to make a decision on whether you want to compete in price or in brand.’
Above all, Ellis says the thing to remember is that the Chinese won’t appreciate failure. She has had talks with most of her clients about whether they are prepared to invest in China for the long term. About 40 per cent have decided to wait rather than charge in. ‘There are companies that have gone into China and failed,’ Ellis explains.
She says one major shoe company entered the market and picked the wrong person as a partner. He didn’t run the business well and there were quality, design and supply problems. The company wanted to replace him, but he was so well connected that to do this would have created a backlash against the brand.
‘The Chinese have very long memories, not just for the fact that you come into the country, but the way you come into the country and with whom you come into the country. Once you withdraw you are out for a good 10 years before you can go back in to the same cities. That is a major, major financial issue and a major marketing issue when it comes to China.’
Customer lessons from China
If you build and build well, others will come
The Chinese market is one of world’s fastest growing consumer goods markets. Even if the market for your goods now looks small, in the next five to 10 years it will probably be massive. Twenty years ago most Chinese would have been classified as poor, earning less than 25,000RMB, or about A$3800. By 1995 a middle class was emerging, and the lower middle class made up near 6 per cent of the population. By 2005, according to figures from the McKinsey Global Institute, 12.6 per cent of the population were lower middle class, earning 25,000 to 40,000RMB. The upper middle class, people earning 40,000 to 100,000RMB, had increased from 1.3 per cent to 9.4 per cent of the population and accounted for almost 25 per cent of urban disposable income. By 2015 nearly half the country will be classed as lower middle class, accounting for over 38 per cent of its income. The middle class by then will account for 21 per cent of the population but nearly 28 per cent of disposable urban income. The affluent will represent almost 6 per cent of the population and 1 per cent of disposable income. By 2025 the upper middle class will represent nearly 60 per cent of the population and over 50 per cent of disposable income.
No two customers are alike
Don’t assume that what works well in one market will work well in another. This is the major mistake companies make entering the China market. They assume similarities with the West or they assume that the China market is homogenous.
The best way to break into the market is to understand demographics. Consider a four-part breakdown of the population on first, second and third-tier cities and rural areas.
Don’t judge customers by their income
The Chinese love luxury brands and will pay a year’s salary for an item they really want. For luxury brands the only issue on pricing is whether you should increase it. For FMCG goods pricing is an issue and you will be asking consumers to spend a larger portion of their income than the West.
An auspicious name can make a brand overnight
There are no hard and fast rules in picking a good brand name for China, according to Jonathan Reuvid and Yong Li Key in their book Doing business with China.
Basically the words should be short and be within the vocabulary of its consumers. The brand should not carry any negative associations such as the beer brand Yunhu, which means cloud lake but sounds like ‘dizzy’ or ‘muddle headed’ in Chinese.
Learn what your customers read and watch
Newspapers are much more powerful in China than in Australia, the US or Europe. In 1968 there were just 42 across the country but now there are over 2200 papers. With 98.6 million copies sold daily, China is the largest newspaper market in the world.
But even that figure underestimates their readership and power. They are even pulled apart and posted on boards across the country attracting crowds of readers throughout the day.
The government found television a great way to disseminate information. Consequently 98 per cent of the population have a TV in China. There is a trend towards owning second and third TV sets. But there are more radios than TV sets in China. And with rising car ownership there are more car radios. With more traffic, there are more traffic jams and more people listening to car radios, according to the Melbourne Business School’s Susan Ellis. ‘You have a lot more traffic jams and slower traffic because the roads aren’t built for [the traffic levels experienced]. So you have people listening to radio longer in the car every day. As a result the radio stations that do traffic reports do massively well.’
The number of internet users and internet cafes is growing daily. In 2000 there were more internet users than the population of Australia: 22.5 million. Internet penetration
has since grown to over 162 million people according to figures from June 2007. Although this is a massive 620 per cent leap, it still represents a penetration of only 12.3 per cent on the country’s population of over 1.3 billion.
It’s all in a name
When companies choose a Chinese name each individual character is chosen to represent the sound of the syllable in the English name. Companies also make sure the characters have no negative connotations. Not every Chinese character by itself, or paired with other characters, has any actual meaning to locals, which can make the English translation even more difficult.
The Mozilla foundation, behind the Firefox web browser, is called Mou-Zhi in Chinese or ‘strategy and wisdom’.
Coca-Cola, after prolonged research, chose Mandarin characters that sound similar to ‘palatable and joyous’.
Volkswagen, the people’s car is translated to Dà Zhòng or ‘the public’.
Nike becomes Nài Kè, which can mean durable, can stand wear and tear and overcome defeat.
Subway becomes Sài Bai Wèi or ‘be better than many flavours’.
Tylenol’s Chinese name – tai nuo – means ‘safe and peaceful promise’.
Signal toothpaste, jie nuc, means ‘clean promise’.
Reference: February 2008, volume 78:01, p. 26 – 29