Despite coverage regarding the rise of Chinese brands, few are actively preferred to Western ones. Brand equity – the difference between a mouse and Mickey Mouse – is easily measured. The strength of a trademark is tantamount to the premium it charges relative to competitors and, to date, no Chinese brand is more expensive than its foreign counterparts. American and European logos, from Adidas to iPod, are still not only more trusted but also "cooler" than their mainland brethren.
That said, multinational brands have a problem. While they are aspirational, their market share in China, as a rule, is frustratingly low as many remain out of reach to all but the wealthiest Chinese shoppers. For a company to achieve Middle Kingdom success, it must leverage high margins and scale, the latter providing oomph to dominate the sales force, distributors and retail channels.
Until recently, multinational corporations (MNCs) have struggled to achieve this balance. As P&G learned when it launched a low-end cotton sanitary napkin under its Whisper brand, lowering price by cheapening quality is risky and can dilute intangible assets. Disappointing returns hammer home a basic truth: international and local corporate cultures are difficult to integrate. Furthermore, a MNC’s cachet is not elastic enough to provide a halo for shoddy "mass mass" products. Synergies between the two tiers – very high and very low – are elusive.
Happily, far-sighted marketers have begun to implement a variety of strategies to broaden penetration, extending their brands down and out to cover a new "mass premium" segment, an affordable yet aspirational plane that still charges a premium vis-?-vis local competitors. These include:
Lowering the cost of goods sold while addressing premium versus mass benefits. Colgate entered the market on a lofty level. Colgate Total retailed for more than RMB16 (US$2) and, not surprisingly, achieved only a 3% share. It later reduced cost of goods by launching two cheaper "basic" variants, Colgate Strong and Colgate Herbal. The company invested in advertising behind image-leader Total and simultaneously: a) avoided cannibalization of the gold-standard variant and b) achieved a market share of approximately 25%. Importantly, Colgate Strong and Herbal still charge a premium relative to local brands. P&G’s Rejoice ("confidence from softness" versus "anti-grease") and Nokia ("high-tech toy" versus "stylishly thin") have employed similar strategies.
Perceived value can be further enhanced by dramatizing sensorial satisfaction. Nestl?’s RMB1 (US$0.12) wafer is tailored specifically for the China market, where chocolate is perceived as causing too much internal heat. By increasing the wafer-to-cocoa ratio (and, again, lowering the cost of goods), the wafer is sold as an every day chocolate snack, not an occasional indulgence. Distribution points are now everywhere and sales have gone through the roof.
Developing sub-brands. This is another way to lower the risk of adulterating a premium image while expanding scale, as Nestl? has proved with coffee. Nestl? Gold, for example, emphasizes bean quality while mass-market Nestl? Three-in-One delivers sweetness and affordability. The C-class Buick Regal targets an older, wealthier man with its "conquering spirit" message; the B-class Buick Excel sports a young turk spirit ("I can fly!"). IPod’s high-capacity model is individualistic ("my musical world") and expensive; the low-memory iPod Shuffle is functional ("anytime, anywhere") and cheap.
Expanding the portfolio. Chinese are drawn to "big" brands because they signal reliability; therefore, the link between brand name and category is rather weak. Given the high cost of launching new brands, foreign companies wield "extendability" as a platform to achieve scale by competing in a broad swath of "accessible" categories. P&G’s Olay, for example, sells everything from unaffordable regenerative anti-aging skin care (RMB200, US$25) to body wash (RMB14, US$1.75). The high-end, value-added products are image leaders; inexpensive, "me too" items generate scale. (Here, too, ad dollars support the former and provide a halo for the latter.)
Maximizing public consumption. Chinese are willing to pay a premium if a brand enhances status in public. Pizza Hut has been a huge success in China, not just in coastal cities but also throughout the hinterland. Few eat pizza at home, but they will in one of the chain’s 100-plus restaurants, which are in effect gathering spots for families who want to project modernity. Similarly, Starbucks’ success has nothing to do with the aroma of its RMB28 (US$3.50) Java blend. But its stores – larger than in the US and offering a broader lunch menu – have become centers of New Generation buzz, places for hipsters to see and be seen.
In conclusion, through a variety of strategies – price tiers, sub-brands, portfolio management and public display – MNCs have made significant progress in targeting the "mass premium" segment, achieving both profit and scale. Next time we will discuss the steps local brands are taking to fight back.
Tom Doctoroff returns in November