China is an extremely challenging market for most multinationals. The key success measurement for any business, even new entrants, should be profit. For sure, setting up in China is a strategic investment but this cannot be an excuse for not making money. In such a rapidly changing environment, a business plan that promises returns in five years time is not good enough. When you cannot make money next year (at the latest), you really should consider whether you are doing the right thing. Do you really have the right business model?
Wall's has been struggling for a long time to find the business model. We are not alone, though. PepsiCo didn't make money in the beginning and after 20 years is still not making money. McDonald's has a huge operation on the border of profitability and loss. There is something about this market that makes it difficult, but what exactly'?
Market diversity
For me there are two elements that make China more complex than most other world markets. First, it is a huge and extremely diverse country. There is not 'one China,' but a number of different markets. The differences between the north and south are as large as those between, say, Norway and Greece. There is local competition, local government, local trade structures, local consumers with local preferences, all of which need to be analysed and understood, territory by territory. How can a European who does not speak Mandarin expect to acquire intimate knowledge of such a country?
In the food industry, there can be huge regional differences in what people prefer in terms of taste and flavour. Some years ago, we introduced a tarn-flavoured product in Shanghai that was received very enthusiastically. We brought it to Guangzhou, where people thought it tasted awful and nothing like tarn, which is a sort of Chinese sweet potato. Apparently the tarn in Guangzhou is completely different from the tarn in Shanghai. These are the type of small things that make all the difference in the consumer business, and particularly the food sector.
On top of all this, business structures need to be organised over a very large territory in terms of supply lines, cost structures, manufacturing, buying and so on. Especially when starting out, you will have to manage a relatively small business that is spread out over a continent larger than Europe. And to cover this territory, you have to find, attract and retain high quality staff.
The second element is that China is such a rapidly changing environment, especially to Europeans who come from a very stable society. Ten years ago there were no brands, supermarkets or hypermarkets in China. Now, hypermarkets constitute more than 30 percent of the retail scene in Shanghai after just three years.
In Europe you work with innovation cycles of one to two years. In China, they last between three and six months. If you come to China with European systems and processes, you are heading for trouble because your mechanisms are simply not fast enough. This pace of change makes China very challenging. It can be handled, but you have to adapt, to build understanding and capabilities.
These two elements of size and speed make China particularly interesting. While there is plenty of competition, it is somewhat easier to handle because most industries are young and have not yet consolidated. On the other hand, the size of the market means that you don't know much about this competition. That's where the challenge lies. It is not like in Europe where I would have a profile on each one of my competitors.
Brand positioning is Critical
Positioning a brand in China has to be done very carefully, especially if you claim that the brand is about understanding local culture and local food habits. One of the limitations will be whether you have the research capabilities and knowledge to support your claim. For example if your food brand is positioned as 'I'm the expert, I help the Chinese house-wife create fantastic dishes', you will face an enormous challenge because you have to develop this expertise for at least 70 distinct regions. If you possess knowledge of Shanghai cooking, this cannot be applied to helping someone in Changsha. They have different needs and a different food culture.
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Wall's learned this lesson the hard way. There was a period when the local competition started imitating our flavours and mixes and selling their ice creams at one-third of our prices. We responded by making our brand more Chinese and saying that we knew local flavours and culture. We also made the mistake of lowering our prices. Consequently, our differentiation from the competition disappeared. We ultimately realised that we didn't have the depth to really be local and close to the consumer.
Now, we choose not to position ourselves that way because we know it is not credible. Our present positioning strategy is as an international premium brand with a focus on innovative, higher-quality products. Wall's is an international brand – that is one of our great assets. Modern Chinese people are proud to by Chinese, but they want to be connected to the rest of the world in areas like music and film, and global brands give them an opportunity to connect at low cost. In fact some of our larger local competitors now put their brand names in English on their packaging to create a fake international image.
There is no one governing principle to positioning your brand successfully in China. Let's consider some examples. In your industry, you are able to position yourself as the fashion forefront of Chinese youth culture, it helps to be Shanghai-based, since what is cool there will definitely be cool in Changsha. This is supported by the reality that Shanghai is a national centre for a range of cultural areas, such as advertising fashion and night clubs. Products may initially come from Japan, Korea or Taipei, but Shanghai is where they start to become popular in China. When you approach positioning in this way, you can create strength from your weakness.
Take Shiseido as an example: Japan's leading cosmetics company doesn't pretend to be local in China. Adopting a positioning that says 'the best of Japan now also available in China' is perfectly valid for the company and is credible throughout China.
The people who are responsible for the President brand in China will tell you something completely different. The Thailand-based food company started its China business in Shenyang and it was only after it became very knowledgeable about the city that it moved to Beijing and only then, after becoming very intimate with that market, did it enter Shanghai. President has a very modular approach. It does not pretend to understand Chinese food culture but it does claim to understand food culture in Shanghai, Beijing and so on.
The positioning of a brand that fits your overall business system and strategy is the key to its success in China. There is a role for both global and local brands. Wall's business is firmly rooted in China and will be run eventually by Chinese management, but our brand positioning will stay international. Why would we want to be a local hero? There are already so many of them.
In the ice cream industry, local companies are still fixated on cost, price and brand awareness. What they understand and describe as marketing or branding is limited to building brand or product awareness through advertising. Very few local companies think seriously about brand positioning or about creating a more rounded 3600 brand experience in the way we do at Wall's. For instance, we have recently started to open our own branded ice cream shops in China, The objective is to develop a profitable sales channel and, even more important, to get closer to the consumer and create a more intense and rich brand experience for them.
Lack of consumer insight
But while international companies may understand branding theory, they have an enormous problem with implementation because of a lack of consumer understanding and insight. Most foreign companies are run by foreigners who, like me, don't have a clue how the Chinese think and act. And that is because they don't speak Mandarin and they don't always have quality marketing resources within their own businesses. Some advertising agencies are full of Hong Kongese and Taiwanese who often don't have a clue either about the hopes and aspirations of Mainland consumers.
Without decent market research and staff, international companies are handicapped. We try to limit this handicap by fully localising and empowering our marketing and sales staff. Additionally, we have based our marketing departments in the main cultural centers of the country: Shanghai, Beijing and Hong Kong. We could have saved money by basing them in Inner Mongolia or Yunnan, but we would have been further removed from the development curve of Chinese youth and urban culture.
Although local companies are not very refined or systematic in their thinking about marketing issues and brand positioning, they still have the advantage of better local insights over international companies. And they are often able to combine these good insights, even if crudely executed, with superior cost management. This, I think, explains why a huge number of local companies have emerged over the last couple of years in many FMCG categories.
The value of local insight should never be underestimated, even for internationally successful brands. When developing the advertising for Viennetta in China, we realised that our standard advertising approach would not work. Since the Chinese do not eat desserts, we positioned Viennetta as a snack, the kind of treat you might share with friends. We set the scene in an aspirational apartment, dressed with IKEA-style furniture and a more traditional Chinese-style round table with a lazy Susan. The cast is very aspirational – good-looking, successful, urban, white-collar Chinese. The drama is created around the question of which one of the friends seated round the table will get to eat that last slice of Viennetta.
The insight in this advertising that really enabled us to connect at a deeper level with our consumers in China and helped transform their perceptions of this brand was the idea of socialising with friends at home as the new expression of success in life.
It is in order to harness such local insights within Wall's that I hope my successor will be Chinese. I believe that one of the success factors for our business is having local leadership and a local management team. China is too culturally complex and diverse to be managed by foreigners.
I have already replaced every expatriate in my company with a local Chinese person. This means that there are young members of the company promoted to the board with seven or eight years' work experience instead of the normal 14-15 years. They may have skill gaps but what I get back in return is a reality check and those local insights. If it were a choice between insight and skill, I would, in the fast-moving consumer business, choose insight. Without insight on your target group you will never find the foundations on which to build your brands, and only a brand can help you differentiate and avoid the price wars that are prevalent in most product categories in China.
Wall's is a premium international brand whose core target group in China is the urban middle-class. When we need to develop sales strategies, advertising or new products, it needs to be done by people who have an intimate understanding of the target group. And what better way to make sure of this than to have these very same urban, middle-class Chinese creating your brand portfolio and business strategy?
And if we stretch this thinking a little, then it becomes obvious that we also need to recruit people who have the potential to live and breathe the brand. I think that is extremely important because, ultimately, the people within the business need to identify themselves with the brand in order to grow it successfully. And the outside world needs to identify these people with the brand in order to believe in the brand.
Two waves have so far hit the Chinese market. The initial surge comprised foreign EMCG companies, driven by the demands of curious Chinese consumers who wanted to find out what these companies offered. The second wave was the rise of local companies that copied most of the marketing approaches (packaging, reliable quality, advertising, distribution) of the international players at much lower cost structures and started selling at lower price levels.
This dealt a considerable blow to the international FMCG players but, in the end, the good ones adjusted to the new competitive environment and also adjusted their cost structures. What we will see now is the last wave of those who will survive the branding battle. This battlefield will be a huge challenge to local companies because they are used to selling products on the basis of price only. This is no longer going to be good enough.
We have made that mistake in the past, believing that the main drivers for success in China were distribution and price. But now we know that, in the end, all decent companies (whether foreign or local) are able to manage cost and build up distribution channels. In the real battle of branding, it will be about how you can sharply position your brand and build up enough magic around it to make it stand out. At Wall's, our brand determines where we are going to sell our products in terms of territories and channels. It drives our innovation and advertising-strategies. It steers our supply chain strategies and technologies.
Wall's exists and prospers in China because of its brand. When this is clear, it also becomes clear that every decision we make in our business is a question of whether we will ultimately create a richer and more satisfying brand experience for our customers.
