Selling to the Chinese Consumers

Franklin Yao, CEOOctober 13, 2010

Selling to the Chinese Consumer

As Presented to:

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Thanks Self introduction Company introduction

Agenda

1. China: Land of Opportunities

2. The China Market is Different, Differentiated, and Complex

3. Form an Effective Insight‐Driven Strategy

4. Overall Thoughts / Q&A

1

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Go through agenda You need insights into China market. With this, you will have an advantage

China versus Denmark

By 2025, China will have 219 cities with more than one million inhabitants – 219 Copenhagens!

and 24 cities with more than five million people – 24 Denmarks!

Copenhagen

ShanghaiChina Denmark

2Source: McKinsey Global Institute: Preparing for China’s urban billion

8.3%

6.3%

3.8%

2.3% 2.2% 1.9%1.5% 1.5% 1.3% 1.2%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

China India Brazil Mexico US Canada UK France Japan Germany

CAGR of Domestic Consumption per Person%, 2007‐2020

China will be Consuming More and More

Source: Global Insight, February 2009; McKinsey Global Institute China model, in February 2009; McKinsey Global Institute analysis

3

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China is a very large market and will work well as a stepping stone to increase your market share.

4

Chinese Consumer Prefer Global Brands

Source: 2009 Report on China Consumer Goods Markets Monitoring and Analysis; Sinomonitor.com1Definition of brand loyalty: (# of consumers who will choose Brand X next time / # of current Brand X users) * 100%

Chinese Cosmetics Market Share By Sales2008

Foreign & Joint Venture Brands

80%

Chinese Brands20%

20.27

8.04

7.93

6.94

4.46

3.02

2.70

2.47

77.63

64.22

64.23

51.77

62.08

47.6

57.95

48.85

Maybelline

Avon

Shiseido

MaryKay

L’Oreal

Olay

Aupres

Yuesai

Top Cosmetics Brands in China2008

Brand Loyalty1 Market Share%

All foreign brands!

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1. While 90% of cosmetics brands in China are local brands, foreign and joint venture brands took 80% of the market share in 2008. 2. Yuesai was original from China, was bought by Loreal in 2004.

You Can Influence Chinese Consumers

5

1980 1987

Whisky was imported to China.

The first KFC restaurant opened

The first PizzaHutrestaurant opened

1990 1999

The first Starbucks opened

Danoneintroduced yogurt

• China is becoming the biggest Whisky import country.

• KFC opened 3,000 restaurants and created a huge western fast foodmarket in China.

• Pizza Hut is one of the most common dating restaurant in China.

• Starbucks has successfully helped increase the consumption of coffee among Chinese consumers.

• Yogurt accounted for 11.7% of China’s dairy industry in 2008.

2010

Source: SmithStreet Research

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1. During the past 20 years, foreign companies have brought new concepts and products to China, and developed markets in different industries. You can add your influence while the Chinese consumer market is still shaping. 2. Chinese people wouldn’t consider spending 30RMB to buy a cup of coffee before 2000.

Agenda





6

Chinese Consumers Like White Skin

7

Asian Models Western Models

Source: SmithStreet Research

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1. Corporations can not assume that marketing campaigns that work for Western consumers will automatically work for Chinese consumers. 2. Revlon models have dark skin and has <1% market share in China. Dark skin seen as rural and only on farmhands.� -Chinese prefer white skin. Seen as pure and clean.

Breakfast in South China

China is not one Market

8

Common Breakfasts

Porridge(Zhou/Congee)

Ingredients: Rice, meats, preserved eggs and vegetablesThe northeast prefers adding salted vegetables whereas the south prefers have preserved eggs. The southern version also has more water in it.

Fried dough& soy milk

Ingredients: Wheat flour, soybeans

Some Chinese like to dip the fried bread sticks into soy milk.

Steamed bun (Baozi)Ingredients: Wheat flour, meat (pork) , vegetables, bean paste, mushroom, are all common fillings

Steamed buns (Mantou)Ingredients: Wheat flourNortherners prefer a steamed bun without any filling while the south prefers minced pork or vegetables fillings.

Chinese pancakesIngredients: Wheat flour, and variations of egg, green onion, sweet/spicy sauce, fried bread.

Guilin’s rice noodlesIngredients: Rice noodles, green onion, meat (pork, beef, or lamb)

Breakfast in North China

Starchy rice dumpling wrapped in reed leavesIngredients: Sticky rice, meat (pork or beef), egg and/or bean paste

Source: SmithStreet Interview and Analysis, photo (bbs.tom.com; China Commercial Online Tourism Services; www.hljcyw.com, mm616.com)

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In addition to food, different regions in China vary in culture, religions, dialect and appearance.

9

Shanghai in itself also can not be treated as a single market. There are many different classes of Shanghai residents. These include local Shanghainese, immigrants from other cities in China, migrant workers and expats.

Shanghai is more Diverse than Most Countries

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Shanghai itself is divided: Gubei(Taiwanese, Japanese) vs French Concession (westerners) vs Huangpu (local Chinese)�-Putonghua vs Pudonghua vs Puxihua

The Chinese Consumer is Changing Rapidly

10Source: SmithStreet Research

Fashion & StylePriorities

Life

Maintain Family

Apartment & Car Loan

Material Goods

Running out of Time

Lost at the Crossroads

Internet Dominated

Dolled UpDon’t Care Much

Natural Beauty

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Post-70s were born during culture revolutionary. Post-80s were born at the beginning of the Reform, they material was still not enough when they were kids. Post-90s were born when China’s economy has already grown for 10 years, and they grew up in relatively open environment and can accept new things.

China has its own Forms of Creativity


“This bag is pretty!”Post on online forums

“This bag is not sold in China.”

Get responses

User Responses

“I know a factory that can make it. Who wants to buy it?”

Reply

“Count me in!”

Contact the factory

Factory makes a sampleFactory sends

sample

Send sample back for improvements

Deliver bags to users

Pay deposit

Users check and critique sample quality

Product delivery

Users receive product

Comment online

“Great bag!”

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Chinese are creative in their own way through their online interactivity.

Social Media has a Huge Influence on Brand

P&G’s “Homework” for Primary School Students

2008.12.28

2008.12.29

2008.12.30

P&G distributed a market research questionnaire disguised as homework assignment to Hangzhou primary school students which required them to use P&G tooth paste.

The education department of Zhejiang Province announced that it would cease cooperation with P&G effective immediately.

A parent’s blog + a local community forum

600 comments within 3 hours

Journalists conduct interviews

P&G denies involvment

Chinese netizens showed strong disapproval

12Source: q.sohu.com

演示者

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Social media exerts a tremendous influence on corporations and help to increase transparency and initiate dialogue between businesses and the public. P&G example shows how interactive and powerful and Chinese online community can be.

Agenda





13

Define your Brand or the Market will do it for You

Brand AMillions

There is a lack of understanding of the fashion company’s brands and the differences between product

lines

Differentiation between the first line and the second line is very low

Most people search only for the name of the first line

However, search items skew heavily towards Chinese Name F. 7 out of every 10 results are Chinese Name F related products or news.

1,686,805

559,403

129,446 40,356 22,7800.0

0.5

1.0

1.5

2.0 Google sina blog BaiduTaobao Total

Brand B

Chinese Name A Chinese Name B Chinese Name C Chinese name D Chinese Name E

172,852

7,261 1,369 614 210

50,000

100,000

150,000

200,000 Google sina blog Baidu

Most people will search for Chinese Name A for both the first and second

line of products

Search results for Brand B in Chinese on major search engines and portals is only 9.3% of total searches for

the brand in China.

Source: Google; Baidu; Sina; Taobao; SmithStreet Primary Research 14

Chinese Name F Chinese Name G Chinese Name H Chinese name I Chinese Name J

Brand A and Brand B are the first line and second line brands of a global fashion company, respectively.

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MJ does not have an official Chinese name and thus, the Chinese consumer has flocked around 5 variations of Chinese made-up names – no focus. �-Industries need to know how Chinese people view your brand and how to react to it�-Viagra example. Chinese company trademark commonly used name and stealing Viagra’s market

18

5

3

7

15

Overall quality

Colleagues’ recommendations

Relationship with supplier

After‐sale service

Price

328

2,246

474 722

3,662

2,610

‐

1,000

2,000

3,000

4,000

5,000

6,000

7,000

Grade III Grade II Grade I

1st Class

2nd Class

3rd Class

Rated China Hospital System

15Source: China Ministry of Health

Understand the Market at a Deep Level

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0 1 2 3 4 5 6 7

Mar

ket S

hare

of F

orei

gn B

rand

Price Multiple (Price of Foreign Brand/Price of Local Brand)

Device ADevice B

Device C

Device D Device E

Price Multiple (Price of Foreign Brand/Price of Local Brand)

Market S

hare of F

oreign Brand

Pricing Analysis

Purchasing Decisions Nominated by Doctors

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According to China Ministry of Health, Chinese hospitals are divided into three rated levels, Grade III (the highest level), Grade II and Grade I (the lowest level) and a fourth, unrated, category Each level is divided into three classes, 1st Class (the highest class), 2nd Class, and 3rd Class (the lowest) Hospitals in each level mainly break down into 7 types Most types of hospitals have histology labs except some of the minority hospitals, specialized disease prevention & treatment institute and specialized hospitals

• More Channels• More Aged Care• More Professionals

Governments often Determine the Size of the Market

Market of Disease X in

China

Rising Governmental Awareness at National

and Local LevelsOriginal Market of Disease X in

China

• Public Education• Professional Education

New Market of

Disease X in China

Beijing, Shanghai and the Chinese Government all pay attention to nursing care and disease control for Disease X.


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SmithStreet did a research in the Disease X market in China for a global pharmaceutical company, and we found out that Chinese government’s attention to Disease X can make the market much bigger.

The Story of 85°C

17

Franchise or

Owned?

Agenda





18

Sun Tzu Said:

19

zhī jǐ zhī bǐ bǎi zhàn bú dài

Carl von Clausewitz Said:

20

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This quote means you need to have a good team in China and trust your team. Empower your local Chinese team.

21

China is a Freeway…

New York, USA521 Fifth Avenue, 17th Floor

New York, NY 10175+1 (212) 292 4420

www.smithstreetsolutions.com

Shanghai, China20 Jinchuang Road, 10th Floor

Yangpu, Shanghai 200433+86 (21) 6565 6533

Selling to the Chinese Consumers

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