The urban population concentrated in China's coastal provinces totals about 343 million, earning an annual average income of some US$516 a year, more than twice the national average. Shanghai has the highest annual per capita income of nearly US$2,000, followed by Guangzhou and Beijing, both registering a little more than US$1,000.
Approximately nine million consumers in China's coastal provinces earn a monthly income exceeding Yn3,000, permitting moderate-to-high consumption of high value goods such as imported and joint venture-produced consumer goods.
While average per capita income is higher in Shanghai than in Guangzhou, a greater
proportion of families in Guangzhou have achieved this level of income: Guangzhou 61 per cent; Shanghai 45 per cent; and Beijing 19 per cent.
The top tier of consumers is concentrated in Shenzhen, Shanghai and Beijing, where about two million people have monthly household incomes in excess of Yn5,000 or about US$7,000 a year.
China's second-tier mass consumer market (those with monthly household incomes of about Yn2,000) is concentrated in Beijing, Guangzhou and the Yangtze River delta region. PRR estimates that there are at least 40 million households with incomes at or slightly above Yn2,000 a year in these three regions.
In addition, there are 100 million consumers earning more than US$1,000 a year ?the point at which consumer spending takes off. A recent World Bank study predicted that the number of such individuals would reach 270 million by the year 2000.
the store, which keeps a commission of 20-30 per cent. In addition, the store may collect a small, monthly `management fee'. Department stores, particularly the foreign-invested ones, tend to be quite selective about renting space to vendors. Foreign goods are preferred but, whatever the source, considerable time and money needs to be spent on establishing brand reputation in China before successfully entering into a counter-rental contract with a department store.
Manufacturers which rely on consignment sales enter into contracts with department stores to sell a foreign or domestic company's products in return for a percent-age of sales.
Both counter and consignment sales in the Chinese retail environment require a great deal of work on the part of the suppliers of consumer products. Companies inter-viewed by PRR stated that both methods leave them with limited management control. To ensure the quality of displays, companies say they must hire full-time staff to manage in-store inventory. In addition they have to make frequent visits to the store, take inventory, maintain stocks, ensure that service is courteous and consistent, and con-duct in-store demonstrations.
Foreign suppliers report that they must play a much more active role in sales and distribution, in-store sales and promotion than they are accustomed to in more developed markets. For instance, a focus on marketing to stores and overall brand management no longer suffice in China. To survive in today's retail environment, retailers andtheir suppliers must focus on pulling product through to the individual consumer.
Despite the unprecedented growth in retail sales, an increasingly crowded supply base means a more competitive environment, even for the most established retailers in China. The current retail market is said to be not big enough to absorb the huge influx of new shopping centres and retail outlets.
Rising costs of entry
The imbalance is likely' to be offset in future by growing levels of wealth and disposable income among the Chinese consumer base. It is estimated that by 2000, some 260 mil-lion people in China will be able to afford packaged consumer products. However, for the time being retailers are forced to use a number of different measures to remain competitive and position themselves for future growth. Most, listed below, have a direct impact on manufacturers and other suppliers selling goods through Chinese retail outlets.
Moving product mix downward and cutting the proportion of `high-value' stock and luxury imported items.
Targeting China's growing middle class in light of a widespread belief that, at present, the market for luxury goods is largely' saturated. Carrefour Shanghai told PRR that its strategy involves reducing margins to gain market share and attract a wider customer base. While most retail outlets mark up goods by at least 40 per cent, Carrefour's policy is to limit mark-ups to 20 per cent, with average mark-ups of 15 per cent.
Sourcing a greater proportion of goods from local manufacturers which have learned sales and marketing techniques from their foreign rivals and are improving the quality' of packaging.
Several foreign-invested department stores are integrating vertically. This means investing in production facilities in China from which to source goods and importing directly from offshore sources (as opposed to consolidating through Hong Kong agents) to circumvent distribution lavers and margins.
Reducing costs and prices by lowering the costs of getting goods to market. Some foreign-invested retailers in China have begun to form collective buying groups in order to share, streamline and facilitate purchasing and distribution functions.
New foreign-invested entrants, particularly' those using the club-store concept, are forming collective buying groups, and in one retail outlet, providing a wide array of products or complete solutions to Chinese consumers. As Previously, China had resisted the entry of large discount chain or club stores seeking to build country-wide networks, fearing that its own retailers would not be able to compete with sophisticated Western-stele inventory and distribution management systems. How-ever, foreign retailers have prevailed; successful applicants include France's Carrefour, Wal-Mart and Makro, the Dutch discount club store chain.
Carrefour plans to set up 10 large-scale superstores each covering 8,000 sq metres in the cities of Beijing, Shanghai and Guangzhou and it already has two branches in Shanghai. It will expand to other Chinese cities as regulations permit, and long-term plans include setting up 30 outlets over the next 10 years. The store sells 6,000 items, mainly produced in China. Carrefour's strategy is to provide high quality goods at low prices, and to offer an extremely wide array of goods, or a 'one-stop shopping' option for Chinese consumers. Carrefour goods which do not meet quality requirements and are returned in original packaging, can be refunded in full.
A growing consumer base
The most commonly used methods to sell goods in Chinese retail stores include counter rentals and consignment sales.
Rather than opening a store in China, many foreign retailers opt to rent a counter in a department store or some other retail outlet. Under this type of arrangement, a Chinese or foreign vendor sets up its sales counter, supplies the product and provides staffing for the counter. Sales are made by in other markets, Ikea's China strategy is to tempt consumers with a store full of a dizzying array of furniture configurations and lifestyle options. An Ikea customer in Shanghai can purchase drinking glasses, a new door and hinges and a new sofa from one location. Ikea goods range in price from expensive household appliances costing Yn50,000 (about US$6,000) to Yn10 (US$1.20) for a shower curtain.
Positive perceptions
In addition to the above measures to reduce costs and bring to market a blend of products to attract Chinese consumers, retailers and their suppliers are spending more resources than ever on advertising and in-store promotion. Not surprisingly, sales and marketing costs are on the rise in China. To keep up with competitors, particularly in major cities, manufacturers need to supplement the distributors and the retail outlets which carry their goods, with the collateral required to maintain a direct-sales presence. This means providing budgets for print and television advertising campaigns, hiring dedicated staff, organising training programmes, and putting up signage and other materials needed to maintain a competitive kiosk or in-store display. In some cases, it even requires hiring an outside firm to manage and co-ordinate China-wide advertising and promotional efforts.
Retailers and suppliers which sell through retail outlets are starting to spend heavily on advertising. From a base of zero in 1979, the Chinese advertising industry clocked up billings of more than US$3.29bn in 1997, making China the world's 1 1 th largest market for advertising services. China is expected to become the third largest market for advertising services in the world by the year 2004.
Carrefour told PRR that it advertises heavily in Shanghai's print and television media, and carries out focused advertising campaigns in districts near to the store's Shanghai outlets. These campaigns include brightly coloured flyers or hand-outs which advertise sales, special discounts and gift-with-purchase options.
The Swedish furniture retailer Ikea, which operates wholesale-style retail furniture out-lets throughout Europe, the US and Asia, recently established a store in Shanghai. Ikea uses various promotional methods, including in-store promotions and advertisements. Rather than thinking about advertising after becoming established in China, Ikea began its advertising campaign before its Shanghai opening. It hired an outside advertising agency to design and execute the campaign and, similar to Carrefour, place advertisements in print and on television, and conduct focused community-oriented marketing to create awareness among consumers located near the store.
Free or discounted gifts are becoming popular in China. When Ikea opened its doors earlier this year, the store's first 100 customers received a free table, valued at Yn180 (US$22). Hundreds of people lined up the night before the store's grand opening. Kentucky Fried Chicken (KFC) offers a purchase of either a `Mr Cola' or `Ms Chick-en Leg' for only Yn5 (about US$0.60), with Yn20.50-worth of food purchases. KFC also gives away one free `spicy burger' for every four burgers purchased. McDonald's has a similar strategy in China ?gifts for Yn3 are offered to customers for every meal.
Store membership is another increasingly popular promotional item. Although technically not allowed to be offered to the public, memberships are being sold to attract individual customers. Shanghai Mart, one of the first club stores to open in Shanghai, offers first-time visitors to the store a membership for Yn20. Membership is available for up to three years before it needs to be renewed, and entitles members to exclusive discounts.
Other stores offer credits. Mother Love, a children's clothing manufacturer, sells goods on consignment through department stores. Mother Love offers credits for purchases of over Yn200 and VIP cards to select customers. Both give consumers a 10-20 per cent discount for additional or future purchases. Another retailer in Shanghai offers the following
incentive: `buy Yn200-worth of goods and we will give you Yn30-worth of goods in return'.
Providing transportation to and from the store has been crucial to Shanghai
Mart's success in a city where less than 10 per cent of grocery sales are made through large-format stores, due primarily to poor public transportation and limited car ownership. Families simply do not have the means to travel to a large department or chain store located in a city suburb, or to haul goods purchased in bulk, back to small urban apartments. To attract customers to its store in the Pudong area of Shanghai, Shanghai Mart negotiated with the local transport authorities to establish new bus routes directly to and from the store. Other large format stores such as Ikea and Carrefour have established delivery services to assist customers haul goods to their homes.
And negative perceptions
Not all consumers have positive stories to tell. As local stores strive to compete with their foreign-invested competitors, and as the market for foreign branded and/or imported goods grows more competitive, many promotional programmes are designed to lure customers, but fail to take into account customer service or ensuring repeat customers.
One supplier of mobile phones in Beijing offers a free battery with the purchase of cell phones. Consumers taken in by this incentive reported that the free battery is typically of very poor quality and that they end up spending about Yn 1,000 (US$120) more than they had originally bargained for to purchase another battery just a few months after the original purchase.
Drink machines in large department stores provide tickets good for a discount on the next purchase. The more beverages a consumer purchases, the more tickets are dispensed. Consumers complain, however, that the discount tickets come with a major caveat. In one instance, the tickets were good for the water only, not the bottles to contain the water. The customer discovered that in order to get the discounted water, he would have to pay an additional Yn200 to purchase bottles from the water supplier.
Branding is a relatively new concept in China. Stories of usurious products abound as manufacturers attempt to sell products using the packaging and brand names of established foreign brands. They lure customers by offering a `branded' product at a
price slightly lower than that offered by the legitimate manufacturer. As consumers grow wise to these schemes, however, many will opt to pay a few yuan more for a product which they are confident is not only packaged under a brand name, but one which also contains a branded product.
Free gift strategies can backfire if not communicated properly. Haagen-Dazs, for instance, promoted its ice cream in Beijing with a `buy-one-get-one-free' promotion. Upon purchasing the first ice cream bar, consumers learned that the `free' bar was not in fact an ice cream bar, as promised in the pro-motion, but instead a magnet in the shape of a Haagen-Dazs ice cream bar. This failure to communicate on the part of Haagen-Dazs has resulted in nothing but negative advertising. Rather than promoting the product, it is now more common for a Haagen-Dazs ice cream bar magnet to solicit a disparaging remark from Chinese consumers.
One consumer reported that she was able to purchase a fan for Yn400 (US$48) because the sum total of her purchases at one large format store ?Yn4,000 ?hit the `gift point'. Upon discovering that the
fan did not work, this consumer tried to return it to the store. She was unable to return the fan or get her money back due to a store policy that once gift purchases are bought and taken out of the store, they are not returnable.
The key to success in China's retail environment likely lies in creating a balance between attracting and keeping customers. For China's retailers and their suppliers, this will increasingly mean higher entry costs and on-going efforts to introduce new, competitive promotional strategies. Successful retailers will be those which offer quality products, a wide range of products. incentives and discount programmes, and lower costs to consumers. ^
Pacific Rim Resources, Inc., headquartered in San Francisco with offices in Shanghai and Seattle, is a management consulting firm which specialises in market entry, investment and growth strategies in the Asia Pacific region. Tina Helsell is a Director in the Seattle office. For more information: telephone (1) 415 896 6715; fax (1) 415 495 1821; email (thelsell@prr.com).