Market research in China has become a Yn1.7bn-a-year business, but consolidation over the coming years now looks inevitable in this highly fragmented industry.
As the China market gets bigger and more complex, so does the demand for research on its 1.3bn consumers. A decade ago, market research in China was an obscure business involving only a handful of foreign firms. Now, it is one of the fastest expanding industries, racking up doubledigit growth in annual revenue and with hundreds of different participants.
In recent months, the race to dominate this estimated Yn1.7bn-plus business has reached new heights, as industry leaders launched expansion plans in a particularly lucrative area: television rating.
In July this year TNS (previously called Taylor Nelson Sofres), the world's third largest market research firm, began to expand its survey of television viewership from mainland China to Hong Kong. This is carried out by its joint venture with Central Viewer Survey and Consulting Centre, an affiliate of the national broadcaster China Central Television Station. The joint venture, 46 per cent owned by TNS, has a plan to raise US$40m-50m through a listing in Hong Kong early next year. "We have 90 per cent of the China market for TV ratings," says Ashok Sethi, managing director of TNS in China.
In response Nielsen Media Research, the world's largest market research firm, unveiled plans this summer to expand its television rating service by mid-2005 to about 25,000 households in 100 Chinese cities, up from the current 3,300 households in 11 cities. It also plans to have a radio rating service in Guangzhou, its first in China, an outdoor advertising rating service and another system to track internet traffic. Nielsen has been slow with media rating in China, but its latest plan will bridge the gap with TNS, industry observers say. Much is at stake for these companies, as advertisers, the main users of such research, spend US$10bn on advertising in China each year.
Search for local partners
While the giants move deeper into the market, smaller players are busy grabbing territory as well. "Many second-tier market research firms in Europe and the US have recently arrived, looking for local partners to launch their business in China," says Gilbert Lee, a director of Research International China, a joint venture with Guangzhoubased South China Marketing Research and London-listed Research International.
Latecomers will find it a crowded market, with an estimated 1,500 firms calling themselves market researchers. The biggest firms, like Nielsen, Gallup, TNS and Research International, have an annual China revenue of more than US$10m, each with 200 to 500 staff members. TNS is said to be the biggest in China, with three ventures generating an annual revenue of US$30m. Each of the leaders has a different edge: Nielsen is said to be the leader in consumer product research, while TNS is strong in media rating and Research International claims to be the biggest in customised research, with a 15 per cent share of this market segment.
Then, there are the smaller outfits with yearly turnover of less than US$10m and which employ 50-100 people each. The rest comprise hundreds of small firms, often started by former employees of the bigger market research firms.
The fact that the market is highly frag- mented actually benefits the sector, according to industry executives. "It is good for business because research means products and services meet consumer needs. The more companies taking this message to the market, the better. We support the development of a large, professional research industry in the long run," says a spokesman for Nielsen in Shanghai.
Lee of Research International also welcomes the competition: "Such a large market like China should have five to six major market research firms doing, for example, the kind of customised research that we are doing now." Customised research, which is done on a case-by-case basis for specific clients, has lower entry costs than large-scale syndicated research.
TNS China, for example, conducts two large-scale, regular market research studies, one on advertising expenditure and the other a national readership study. The first involves the monitoring of advertising in major media outlets by thousands of researchers. The readership survey collects data on the profile and spending behaviour of the readers of 500 mainland publications. "We have sophisticated software to analyse the results and draw up specific media plans for our clients," says Sethi of TNS.
One impact of the increased competition is on the profitability of the business. Sethi of TNS says some smaller firms are offering their services at a fraction of what TNS charges. Lee of Research International says the average unit price for market surveys has gone down by about 30 per cent in the past few years. "I think the pendulum has swung too far and we will see prices swing back to a more reasonable level eventually," he says.
Looking ahead, Sethi believes industry consolidation will take many more years: "Smaller players can still carve out distinct niches, like specialising in sectors such as automobile, trade and medical services." Lee of Research International says that in three to five years, only 50 to 60 firms will be getting business directly from clients. Other smaller market researchers will operate like subcontractors, providing data collection and support services to their bigger counterparts.
Multinationals and FIEs continue to be the main clientele of market researchers. "Local firms, especially state-owned enterprises, believe they know their market better than outsiders and don't need our help. Famous local firms, like Legend and Haier, prefer to have management consultants rather than market researchers to advise them on marketing," says Lee. Still, the trend is towards using more market research by firms from all backgrounds, both local and foreign. Nielsen notes that there has been particularly strong demand in the services sector, especially retailing and banking.
As companies use market research more frequently, they are getting more demanding. "They are asking for in-depth understanding about specific segments in specific geographic regions," says the Nielsen spokesman. "They also want more sophisticated analysis and information of greater 'granularity', especially in the consumer packaged goods industry. For example we can produce monthly data now as opposed to only bimonthly data in the past, and we are aiming to produce provincial reports instead of just a national report or key city reports."
The challenge for market research firms, says Sethi of TNS, continues to be the huge size and fragmented nature of the market: "Take beer, for example. The leading brand in Beijing may not be well known in another Chinese city. Researchers therefore need to prepare different questionnaires and brand lists for different cities and regions."
Lee says it is now easier to carry out market research because Chinese people are more familiar with the nature of the work. To counter that, however, locals now lead busier lives than before and are less willing to spend their free time responding to questionnaires and surveys.
Another difficulty concerns the regulatory environment, administered by the National Bureau of Statistics (NBS). In theory, each research project needs to be pre-approved by the bureau before work can commence. In practice, industry executives say this rule has been waived for all but the most sensitive subjects, such as media research. Accordingly, market research firms know to exercise a certain degree of self-censorship by avoiding to ask questions on sensitive subjects, and they are resigned to accepting the bureau's assurances that it will keep their data confidential and not leak it to domestic rivals.
Despite this relaxation, foreign trade representatives, especially the American Chamber of Commerce in China, continue to raise the issues of client confidentiality, preapprovals and licensing matters to the Chinese government. They lobby for greater transparency of the work of the NBS and for a return to the pre-1999 situation when licensing and pre-approvals were not required for market research projects.