China’s consumer society and how to reach it

Three Reasons Alibaba Wins

Someone asked me the other day why I thought Alibaba was such a huge winner in the China e-Commerce game. I see three reasons.

  1. Trust. For a long time, people in China were wary of e-commerce in China because they were simply afraid of getting ripped off when buying goods sight unseen. We didn’t really face that issue in the US to the same extent, because Sears, Wards, and JC Penney had been selling goods to Americans sight-unseen for over a century. Over that time, we had not only discovered which mail-order brands we could trust to “deliver the goods,” we also compelled the creation of terms, conditions, and practices that formed an (often unspoken) contract between retailer and buyer. When it created Taobao, Alibaba put together a series of terms and conditions that allowed both early adopters and the mass market to trust them enough to send their money into the ether. That trust went deep enough that, with Alipay, Chinese now trust Alibaba with their money.
  2. Experience. Alibaba understood from the outset that it needed to offer a an efficient and enjoyble buying experience, but that it did not need to go crazy. The company understood that it had a low bar. The Chinese retail experience was always miserable, and has improved only a little over the past two decades. Simply by making the experience a bit better than what you get at a typical Chinese retail store, and spending the rest of their effort on reliability and trust, Alibaba won.
  3. Scope. As Jeff Bezos understood, the key to winning in electronic commerce was not to focus on being the best bookstore, or grocery store, or anything store. The key was becoming the go-to place to shop, regardless of what you want to buy. Alibaba used Taobao to build unmatchable scope in a very short period of time. Now the default choices are traditional retail and Taobao, and everyone else has to fight harder for consideration, even as a specialized niche site.

It is difficult to see how anyone might knock that wall down.

Still, Alibaba faces two challenges. First, it has to figure out how it can continue to sustain high growth once it has secured its role of China’s national online department store. That market does not continue growing at double-digits forever, and Alibaba is already hunting for how to grab the next large chunk of users’ wallets – or extend its strengths abroad.

The second challenge is that as e-commerce matures, more companies will figure out how to build their own retail empires, much like Xiaomi – and, to a lesser extent, Apple –  has done. Once Taobao and TMall have accustomed people to buying big brand merchandise online, the value for brands of building their own sites begins to grow. Alibaba will be challenged to address the defection danger in the coming 2-3 years.

For now, though, Alibaba sits pretty, all based on an unimpeded view and unmatched understanding of the Chinese consumer.

When Lux and Tech Collide

However, the cost of providing customers with devices and gadgets to gain access to new tech and maintaining them is not a small expenditure for most luxury fashion businesses. What’s more, when a customer is enthusiastic about testing a hi-tech headset in a store, it does not necessarily guarantee that he or she has the desire to purchase a $1,500 handbag.

Source: Village: How to Combine Tech and Luxury Fashion in China the Smart Way | Jing Daily

I confess that when I began my career thirty-odd years ago, I saw the luxury fashion industry as an easy target for ridicule: alien rituals and strange affectations aside, I found it hard to give credence to a group so focused on the capricious whims of the planet’s most pampered posteriors. That perception was both short-sighted and immature.

The opportunity I had to watch China’s luxury market sprout and blossom has given me a different perspective. Luxury consumers are an informal yet exacting standards body. I have found that the more that we can conduct any consumer-oriented business or marketing activity in accordance with the standards of this rarified niche, the better we can serve all consumers.

That’s why I was fascinated by this London panel talking about the use of technology (specifically augmented reality (AR) and virtual reality (VR)) to sell more luxury fashion.

One truism I’ve never forgotten about luxury customers: they all want the most fulfilling possible experience delivered with the least possible friction. The gratuitous application of kludgy technology (and, let’s face it, while AR and VR are getting better, neither are ready to fulfill their promise) seems to be a guaranteed way to chase luxury buyers out of your store.

Which leads to a second truism: The well-to-do are not early adopters. They’re the demanding knife-edge of the mainstream user, the guardians of the far side of the chasm twixt “niche product” and “widespread adoption” into which so many promising inventions fall.

If you can tweak a technology or product to the point wherein you can match the exacting standards of the luxury consumer, the big-time awaits. Smartphones went mainstream when the iPhone passed the lux test; satellite radio went wide after Damlier, Toyota, Nissan and BMW were able to make them accessible to finicky upscale buyers; and electronic cars went mainstream when Tesla introduced its luxury roadster and Toyota made the Prius hip with the well-to-do.

China is no exception to this rule. The Chinese luxury consumer often shares as much of her psychographic profile with her counterparts in Europe and North America as she does with her home-girls in Shanghai or Bengbu. Until you can offer her a great experience with the minimum of friction, forget about being first-to-market: go back to the lab.

Flavor Fail

It's the picture of Italian ice-cream in a sho...
It’s the picture of Italian ice-cream in a shop of Rome, Italy (Photo credit: Wikipedia)

The lobby of my hotel in Beijing had a happy hour ice cream special: a scoop of Movenpick ice cream for RMB 25 ($4). Intrigued, my family ordered a few scoops.

I ordered Cappucino, and watched the server mark from the bin clearly marked as such. It was with great surprise, then that when I put the first dainty taste of ice cream into my mouth I tasted not the expected creamy espresso, but the cloying super-sweetness of butterscotch.

The staff could not figure out the problem, but to someone who has managed companies in China, the issue seems as clear as day: somebody got it mixed up in the kitchen, and figured “hey, what the hell, who is going to notice?”

Sophisticated Chongqing

Hutong Forward
LAX bound for Bangkok and Shanghai
1215 hrs.

My first trip to Chongqing summarily destroyed all of my preconceptions of the central Chinese river terminus.

Instead of an immense but slightly provincial city, I came away after three days with the impression that Chongqing is about as provincial as Hong Kong, and is in many ways a lot more livable than its coastal cousin.

People were fashionable and stylish, at least as much as Beijing. The streets along the river were lined with remarkable restaurants and shopping districts that made Shanghai’s Xintiandi look both quiet and unsophisticated by comparison. The Pedestrian Street between Minzu Road and the Liberation Monument bisected the central business district with a sophistication that rivals Nanjing Road and Wangfujing. And the people have that warmth that seems to come so readily to the people of Sichuan.

I berate myself now for delaying my visit for so long. There really is more to Chongqing than a foggy, overgrown river port, and I suspect that I will be going back again soon.

Luxury Cars: The Non-China Chinese Market

Lamborghini & Ferraris
Lamborghini & Ferraris (Photo credit: Axion23)

In the Hutong
Work Break
1945 hrs.

On Valentine’s Day, the always excellent Jing Daily published an article (“Ultra-Luxury Auto Sales In China Surprisingly Robust, But Are They Sustainable?“) that calls into question whether those stunning new Lotus, Maserati, Bentley, and Ferrari dealerships that are sprouting up around China are in for some hard times. Economic uncertainty and the potential that Xi Jinping‘s administration might discourage conspicuous consumption apparently has many buyers holding off on purchases. The spectacular Beijing accident a year ago that claimed the son of a powerful Party official and one of his passengers has made ultra-luxury cars an unintentional symbol of cosseted elites and official malfeasance. Markers of success are becoming stigmata of excess.

But the Chinese party is not over for the luxury car-makers, although a change in strategy may be in the offing. It may be time for the Ferraris and Bugattis of the world to learn from the purveyors of less expensive luxury goods, because the real market may not be in China: there is a fair chance that the majority of Chinese who will be buying ultra-luxury cars in the future will be buying them overseas.

Naturally they won’t be doing so in order to ship the cars back to the PRC (with the exception of the occasional gray-market beast that cannot be found in China or Hong Kong). Instead, they will be buying their high-speed bling to park them in the garages and and driveways of the homes they are buying in North America, Europe, and Australia.

Adjusting to this shift will mean changes in the way these cars are sold outside of China. Dealerships will need Chinese speakers on the showroom floor and in the service bays. Sales literature and owners manuals will need to be available in Chinese as well as the local language. Manufacturers will need to create Chinese websites for markets where Chinese isn’t usually spoken. And that is just a starter list.

The really smart manufacturers will set up Chinese-language customer service hotlines and owners clubs that cater to Chinese speakers in North America and Europe at least. They will advertise online in Chinese and in the mass media of the Chinese diaspora. And if they’re really smart, they’ll offer those special models and features that are designed to cater to the tastes of the new global Chinese elite.

None of this is mandatory, of course. For some brands, the snob appeal is derived in part by the derision with which it treats even its best-heeled customers. But the wiser luxury car manufacturers will realize that the Chinese are coming to the world: best to reach out and meet them before they decamp to the competition – or decide to spend their money on something else.

Luxury Goods: Meet the Experience Hunters

Rodeo Drive in Beverly Hills
Rodeo Drive in Beverly Hills (Photo credit: Wikipedia)

In the Hutong
Warming-up a little
1453 hrs.

The Chinese New Year holiday is a period where many of China’s well-heeled consumers travel abroad, so it was no surprise that CCTV ran a story on how many Chinese consumers use their trips not just for sightseeing and relaxation, but for buying luxury goods. The national broadcaster took China’s 80 million international travelers to task for spending $30 billion abroad last year buying luxury goods, and criticizing them for not spending that money at home.

Laurie Burkitt at The Wall Street Journal picked up the story, noting that Chinese duties raise the price of Rolex watches, Gucci shoes and Louis Vuitton purses between 30% and 50%. One can see why the government is concerned: that’s somewhere between $9 billion and $15 billion in lost import duties, plus the lost value of rents, income taxes for shop workers, etc. The brands are starting to realize where the bread is landing: Gucci is apparently halting all domestic Chinese expansion plans.

Luxury is an Experience, not a Purse

The media coverage of this transnational luxury buying spree implies that a hunt for bargains is all that sends these buyers abroad. Yet while price is doubtless an important motivator, there is more to it. What most analysts – and probably a few brands – are missing is the unarticulated value luxury consumers place on the experience, those intangible factors that makes buying the purse, the shoes, the watch, the dress so deeply satisfying.

One factor for Chinese in particular is mental comfort. It is not much fun consuming conspicuously in an environment that heaps growing opprobrium on bling buyers. Better to go somewhere where your purchase is at least taken in stride, if not celebrated. These days, that means buying in Hong Kong, Tokyo, Singapore, New York, Beverly Hills, London, Paris, or Milan – not Beijing or Shanghai.

But there are other factors that make up the luxury buying experience, factors captured in such post-buying questions as:

  • Where did I buy this?
  • What was the service like?
  • Did the salespeople make me feel at home?
  • Why was the experience special?
  • What was different  about buying there than in China?
  • What was I able to get there that I couldn’t in China…or anywhere else?

Any and all of these factors have the potential add greater meaning to the purchase, make its acquisition more gratifying, and deepen the relationship with the brand. Equally important, they add to the “show-off” or “shai” value of the item. The new owner not only gets to show-off the bauble to her friends, she also gets an excuse to relate the trip, the circumstances, and the feelings she took from the purchase process itself, all to the admiration (or envy) of the people whose respect is important to her.

Some Brands Get It

On a vacation trip in 2008, my wife bought a limited-edition LeSportsac Tokidoki handbag designed by Simone Legno at the LeSportsac store on Waikiki. The store was a delight, the location superb, the service was so good that even my son and I felt good about coming into the store, and that is saying something. My wife had never heard of Tokidoki  before, but the whole experience of buying the bag was such a delight that she came back the next day to buy one for her mom. To this day, five years later, she still talks about the bag, and has a deep affinity for LeSportsac.

Christine Lu of Affinity China is out ahead of the industry. She has begun leading luxury shopping tours of the U.S. for Chinese ladies that go beyond high-end store-hopping. Shops on Rodeo Drive, Park Avenue, and Waikiki are prepared in advance, provide engraved invitations, put on private fashion shows with Chinese narration, serve champagne and chocolates, and arrange to have purchases taken back to hotels while the ladies continue their day. As a bonus, Christine will bring along a Chinese celebrity or two, and tweet/blog/weibo aggressively, raising the profile of the trip and making mere attendance prestigious. The stores who work with her get it: the experience is every bit as important as the quality or design of the items that go in the bag. Expect these kinds of events to grow into a trend, traveling trunk shows where the groups come to the stores.

So all of this is interesting to be sure. Here is why it is important.

Today, it’s Price, but Tomorrow it Won’t Be

Understanding the non-price factors that drive Chinese to buy abroad is going to grow in importance. At some point the Chinese government will figure out that it needs to take steps to keep the luxury dollar at home beyond lame propaganda campaigns to shame buyers as unpatriotic. That will mean eliminating the price difference for buying at home. Either the government will have to start levying duties at airports and ports of entry (insanely hard to do and guaranteed to cause congestion at China’s overwhelmed airports and borders,) or they will need to eliminate duties altogether.

It is anyone’s guess on which course Beijing chooses, economic logic notwithstanding. When that happens, luxury brands will have their own choice to make: they can either play the zero-sum game, doing nothing and watching overseas purchases slowly leech back into China; or they can play the growth gambit, sustaining patronage overseas while building sales in China.

I’m betting the brands will want to do the latter, so I expect to see them taking steps to improve and even differentiate the buying experience for Chinese luxury consumers. At the very least, we will see more luxury stores with Chinese speakers and creating the kind of buying experiences that Affinity China is teaching them to offer.

I expect it will (or should) go beyond that. The brands will realize that simply offering a cookie-cutter experience in every store worldwide misses the point for their clientele. Each city, each store has to offer a different but equally compelling experience that reflects the brand in a unique way. This starts with store layout, but also speaks to decor, merchandise, and layout that reflects the location, and even offering items that are exclusive to that store. Let’s face it: even Disneyland has learned to differentiate its parks worldwide. Can luxury brands be far behind?

It is a truism (or should be one) that long after the price of an item is forgotten, the experience is remembered. Price will bring China’s increasingly sophisticated luxury customers in your door, but the experience will form the basis of a lasting relationship.

Branding from the Ground Up

In the Hutong
Surrounded by snow
1721 hrs.

I am usually suspicious about “thought leadership” pieces on marketing that come out of the major management consultancies. These firms have proven strengths in organizational design, operations, production, logistics, and strategy, but when they venture into marketing they tend to stumble for a range of reasons that would fill a book.

I was doubly suspicious of the McKinsey Quarterly article “Building Brands in Emerging Markets” by Yuval Atsmon, Jean-Frederic Kuentz, and Jeongmin Seong because their approach lumps all emerging markets together.  But while the article has its shortcomings, there are nuggets of critical insights in the paper for businesses operating in China.

China is Different…

The authors correctly note that Chinese consumers generally rely more on word-of-mouth to guide their purchasing decisions than do their counterparts in most other countries, especially the U.S. The in-store experience is also more important here. Chinese are more accustomed to changing their decisions at the point-of-purchase rather than leave a store if they can’t get what they came in to buy. Indeed, many consumer marketers find that point-of-sale is the second largest chunk of their budgets (next to advertising) because they will lose at retail what they won in advertising.

Finally, it is increasingly important in China to eschew a purely national approach to marketing and target consumers with a more local approach. China is a patchwork of local habits, climates, dialects, diets, and sub-cultures, and we are reaching the stage in the nation’s development where marketers can no longer afford to ignore that.

…But the Difference is Changing…

Aside from its geographic overreach (“emerging markets” are not all the same) and its broad-brush approach to consumer goods, I have two major quibbles with the article. First, the authors offer a snapshot of consumer behavior but ignore trends that might undermine their points; and second, apart from geography they treat all Chinese consumers as an undifferentiated mass.

First, where people get their advice is changing. While the authors state that only 53% of China’s consumers find online recommendations credible, they leave out the fact that well over half of China’s consumers don’t have access to the Internet.  If you are a company (like, say, Coca-Cola) who needs to reach most or all of China’s 1.2 billion consumers, the Internet is about half as important as friends and family. Conversely if, like a growing number of companies, your target consumer is likely to be online – that is, if she is young, urban, educated, and has money to spend – the importance of the internet is sorely understated.

What is more, as credible online resources emerge, there is mounting evidence that the 560 million Chinese who can get online are giving outside sources greater credibility. As early as 2009, Sam Flemming’s CIC Data noted that over half of online consumers actively sought online feedback on a product prior to purchase, and that nearly 90% paid attention to online buzz on a product whether they sought it out or not. In that case, the Internet runs a close second to friends and family in the purchasing decision.

The importance of the retail shop in the purchase process is changing as well. I spoke with a senior marketing executive for a consumer electronics brand last week who told me that online sales – e-commerce – had suddenly become more important than in-store sales. A growing number of consumers was apparently hearing about the product from advertising, checking with family, checking online, going to the store to look and feel, and then going home and buying the product online. China’s online retail business has now passed an average of $40,000 per second and continues to grow. If the final point of sale is online, how does that change McKinsey’s equation? We don’t know: McKinsey ignores the internet.

…So let’s not Whitewash the Nuances

Finally, the authors ignore the importance of several demographic factors, most specifically age. Although it should be axiomatic, a growing body of research in China delves into how differently the increasingly prosperous older (55+) consumers behave than their under-30 counterparts. Friends and family are essential to the elderly, but for most purchasing decisions the youngsters are relying on peers and the Internet. Older consumers are more likely to purchase in a store, younger consumers are more likely than the grandparents to buy online.

Perhaps I’m being overly critical of the authors: these are, after all, nuances that would not fit into a 3,000 word article. But these oversights point to the problem with taking the management consulting approach to marketing. Grand strategies and broad generalizations may make for mind-tickling patter with clients, but as Ludwig Mies van der Rohe said, “God is in the details.” The day is long past when marketers can view Chinese consumers as an amorphous mass with uniform habits, and I would wager that applies in Brazil, India, and South Africa just as well.

SPAMming China Old-School

Spam 2
Image via Wikipedia

In the Hutong
Settling back in
0916 hrs.

The San Francisco Chronicle is running a short, amusing piece by Bloomberg‘s Matt Boyle on how Hormel is planning on bringing SPAM, it’s canned pork product, to China. The twist: because of all of the other low-cost meat-product alternatives available in the market, they want to hawk SPAM as a “premium product.”

This is not as impossible as it sounds, but it will demand that Hormel completely rethink the way the product is packaged, priced, distributed, and marketed. To the company’s credit, they appear to understand that, having ostensibly changed the formulation of the product to “match Chinese tastes” and conducting a marketing program focused on in-store promotion and making SPAM part of a dining experience.

(I say “ostensibly” because I have worked with Western food companies in the past who had claimed to have reformulated their product for Chinese tastes, while in fact they did nothing of the kind, unless you count reducing portion size and substituting local ingredients as “reformulation.”)

There are a lot of reasons this might fail, starting with whether Hormel is ready to spend several years in the effort. The article mentioned that Hormel was driven to China by the drop in Japanese demand after the Tohuku earthquake, suggesting something less than the commitment to a long-term effort that this will require. Chinese might also shy from a canned product pitched as a premium, and local competitors could jump into the fray with more credible premium products. Worse, the article noted that marketing funds were limited, never a good sign when you are introducing a product that requires a change in habits if not a change in tastes.

If there is one reason to be optimistic about SPAM in China, however, it is China’s own issues with tainted food. If Hormel can explain to Chinese consumers why SPAM is not only of meaningfully higher quality but is also a safer product less prone to tainting or other issues, it will have a winner. Food safety is the real hot button in the industry today, and if Hormel can prove SPAM’s safety while selling the product experience, it can not only build a market for SPAM, it will also expand the market for its other products.

Otherwise, SPAM will follow a long procession of food brands that never quite made it here.

Handicapping Little Sheep

little (fat) sheep
Image by conbon33 via Flickr

In the Hutong
I hate writing about food before dinner
1721 hrs

Tom Orlick, who does the Heard on the Street pieces for China at the Wall Street Journal, did a short but excellent rundown of some of the commercial challenges Chinese hot-pot chain Little Sheep faces as global fast-food monster YUM (owner of KFC, Pizza Hut, and Taco Bell) sets out to acquire the company. There are other bogeymen in the basement of this deal, however, and the largest of those is the Chinese government.

The government has regularly demonstrated (but not often communicated) its policy on foreign companies buying local firms, a topic I last covered in the wake of Coca-Cola’s failure to acquire Chinese juice giant Huiyuan. Put simply, while the government is comfortable allowing foreigners to acquire struggling or failing Chinese companies, they object to healthy, growing local companies winding up in foreign portfolios.

Regulators especially object to budding local brands like Little Sheep falling into non-Chinese hands. Chinese regulators may see Little Sheep c. 2011 as McDonalds c. 1960, and would be in no hurry to see that brand captured so young and turned into an American global franchise operation.

Worse, regulators get very squeamish when a local brand is being acquired by a foreign company already dominant in the sectors. The PRC restaurant industry is incredibly fragmented, but there is arguably no company with a wider collective brand presence in mainland eateries than YUM.

There are enough parallels between the YUM/Little Sheep deal and the Coke/Huiyuan deal, then, to suggest that regulatory review is going to be a major hurdle, if not a deal killer.

YUM has one hope for success, and that is an astute and persuasive communications full-court press to build local support for the purchase among both regulators and the public at large. That campaign needs to start yesterday.

If, however, YUM skimps on the effort to build support for its efforts among any and all groups in China that could raise reasonable objections (and there are plenty of those, beginning with Little Sheep’s competition), this will turn out to be a long, expensive, and ultimately fruitless effort.

In the west, we are used to using acquisitions as a tool. Deciding to buy a company is a straightforward mathematical exercise: would it be cheaper to replicate what you want to build in a given market, or to simply go out and buy it? In China, though, the analysis is undermined by the calculus of a Party bent on nurturing and building its own global brands. Just ask Coke. Or Carlyle.

Having spent a quarter century building two successful businesses in China (KFC and Pizza Hut) and having failed in China with two others (Taco Bell and A&W), YUM can be forgiven for wanting to take a shortcut to its next success in the PRC. Unless it undertakes a brilliant charm offensive, YUM may wind up wondering if it wouldn’t have been easier to cook its own mutton.

Harmonious Luxury Marketing

In the Hutong
In the groove
2059 hrs.

On Monday I explained why I felt that the restrictions placed on luxury outdoor advertising in Beijing are aimed not at the goods themselves, but at ending ostentation. While it is too early to say whether the restrictions will be broadened to other cities or other media, there are several reasons that the measures should give pause to all of us in the business of marketing luxury items, whether they be gadgets, gold, leather goods, or private aircraft.

First, the measures are a reminder that advertising luxury goods in China’s mass media is wasteful. Too many of the “impressions” in outdoor advertising are people who not only have no intention or ability to buy the product advertised, they will likely never have the ability to do so. Media companies may argue that those impressions that are not wasted are worth all of the waste, but let us not forget that the waste factor is immense.

Second, the measures are a signal that there may be such a thing as “negative effectiveness” when making desirable the unaffordable and unreachable. We assume there is spillover, but we never actually track the effects those spillover impressions have on the “wasted” audience. Are the messages and ads simply ignored? Or do they engender a negative reaction? Are we, as the Beijing Administration of Industry and Commerce apparently fears, seeding resentment that undermines social harmony? How do we know?

Third, the measures are a reminder that the end (selling more baubles) does not always justify the means (any creative that gets the buyer to pay attention). There are ways to create mystique and value with an advertising campaign that are more imaginative than pairing a luxury good with panorama of a luxurious lifestyle or with a half-naked supermodel. Are there ways to ensure that the results of the spillover are positive? And if so, shouldn’t we be pursuing such a course?

Why Should We Care?

All of those questions can be dismissed by marketers as “not our problem,” and a fair case could be made that we would be technically correct in doing so. After all, we are paid to deliver sales, not worry about people who are angry at being unable to buy our product. In fact, when you think about it (we tell ourselves), such frustration might actually be a good thing.

Such rationalization is perfectly true, right up to the point where the government decides that your ad pisses off too many migrant workers. At that point, you may lose the ad, or you may lose access to a channel completely. The smart move is to think ahead, and that begins by buying into some basic principles.

Four Principles

Principle I:  There are more effective ways to market luxury goods in China than mass media. A corollary: there are now more ways than ever to conduct effective luxury goods marketing. Even if you have a fixation with paid media, you are better off using direct mail, flagship stores, relationship marketing, and carefully selected online media and, when it comes, mobile media. In fact, luxury brands should be driving the push to online marketing that individually targets a user, rather than just takes space on a page.

In luxury goods more than any other industry, it is even possible to lead with below-the-line approaches like tightly targeted public relations, trunk shows, store openings, and other tactics that take a personalized, bespoke approach to marketing and eschew writing advertising checks altogether. The options continue to grow, and they keep getting more tightly targeted. A close friend of mine gets a birthday card every year from Cartier on the basis of a single small purchase she made on the basis of word-of-mouth.

Principle II:  We need to learn to understand, measure, and avoid “negative effectiveness” in marketing in a country with deep and active social fault lines, regardless of what we are selling. This does not apply only to China, but to any country in which a luxury brand sells. We are very good at understanding the positive consequences of our communications, even if we do a mediocre job of measuring them. But we ignore the negative consequences until they blow up in our – or somebody else’s – face.

But for every Groupon/Tim Hutton Superbowl gaffe, there may be two – or dozens – of campaigns, ads, or messages that don’t just fall flat with our non-targets, they get people to actually hate us. Until we learn to measure how many people our marketing pisses off, why it does so, and understand what that means for the brand, we may well be doing more net damage than good.

On the other hand, if we create campaigns that get our target audience to buy and engender goodwill from people who will never buy our products, we will have lifted our brand and our products to an entirely new level. See Principle IV.

Principle III: In our own enlightened self-interest, all of us in the marketing profession need to behave with greater sensitivity to the people at the bottom of China’s pyramid. This requires no great explanation, just a thought. After nearly 34 years of reforming and opening, China is still home to hundreds of millions of people who live on less than $1 a day. Before you submit that ad for approval (or before you approve it), picture in your mind a photograph: your ad, on a bus shelter, with a poor Chinese farmer in a threadbare blue Mao suit walking past. If that image looks wrong, rethink the ad, if not the campaign.

Alternately, imagine your copy or your messages being read aloud to a meeting of senior Party ideologues. Does it still sound okay? If not, rewrite.

Principle IV: Great luxury marketing goes for the organ between the ears. It is a huge temptation to conduct marketing that appeals to our baser instincts. It’s easy, it gets attention, and it sells. Leaving aside any moral issues, using such an approach to sell luxury goods is probably what got us to the current situation with the outdoor advertising restrictions. And it is just unnecessary.

Take, for example, Rolex, a great luxury brand. For decades, the company has been running a campaign celebrating explorers, pioneers, and other people of noted excellence in their fields of endeavor. These are not people getting out of Bentleys or fondling the latest Victoria’s Secret model. The ads have a distinct aura of class, style, and excellence, and have helped establish Rolex at the top of the luxury timepiece market, all without sex or decadence.

Not every luxury company can use the same strategy as Rolex, but marketers are paid for creativity. Any half-wit can conjure (or approve) an ad campaign that speaks to greed or the gonads. Good marketers – and wise clients – know that they don’t have to. That applies triple when selling high-margin merchandise like luxury goods.

Selling Baubles Better

There is a business case behind each of the principles above, either maximizing efficiency, minimizing the chances of blowback, or creating more memorable and meaningful campaigns. But there is a moral point to be made, and with your permission I will finish on this note.

When we market luxury products, we create desire for the unnecessary. That is the hard truth. Doing so is defensible, though perhaps not a virtue, when we create that desire in people who have more money than they can spend. But it is indefensible when we do so in people who have less money than they need, and it is reprehensible to say that such accidents are not our problem.

Great companies, great brands, and great executives do not shy from that quandary. Instead, they let that struggle be a part of what defines them, not just because doing so offers great commercial rewards (it does), but because it is the right thing to do. That essence should be a part of every brand, but the obligation rests heavier on those who create and sell “the finer things in life.”

Beijing’s Outdoor Advertising Restrictions: It’s Not About the Goods

In the Hutong
Peking Spring
0928 hrs.

In a loosely worded statement released March 20, the Beijing Administration for Industry and Commerce announced a ban on outdoor advertising in the capital that “promotes hedonistic or high-end lifestyles.” The statement was specific on three counts: a list of words that were banned from usage (“royal,” “luxury,” “supreme,” etc), a 30,000 RMB fine for violating the edict, and a deadline of April 15 to comply.

My first concern was that this was part of a move against luxury goods generally, and one reporter I spoke to even suggested that this was a veiled form of protectionism to speed the emergence of Chinese luxury brands. But after spending much of the last few weeks digging into this issue, I think something different and more fundamental is at work here.

All Luxury, No Class

What the Party is concerned about is not luxury, but class. Whatever compromises have been made with Marxist-Leninist-Maoist doctrine over the past 34 years, the nation’s leaders are not prepared to allow China to become – or, more important, appear to become – a society divided by class as it was before the revolution. Allowing people to get rich is acceptable, as long as the Party can cling credibly to a claim that New China is fundamentally an egalitarian society.

The problems begin when people start believing, to paraphrase Orwell, that some pigs are more equal than others. When a poor farmer walks through the nation’s capital and finds himself surrounded by advertisements for goods and homes he will never be able to afford, or when he sees the owner of the Ferrari parking illegally and getting away with it, the farmer is going to start feeling excluded and resentful. Marx called this “alienation,” and alienation fuels resentment, frustration, anger, a jump in property crime, and even unrest.

Dump Your Billboards, Keep Your Stores

What the policy does not appear to be is a move against luxury goods or their manufacturers. In fact, the day after BAIC released its statement, Minister of Commerce Chen Daming told attendees at the 12th China Development Forum that China will resolve the price discrepancies between high-end goods in China and the same items sold overseas. Far from seeking to inhibit the sales of luxury goods, Chen’s ministry is looking for ways to make them cheaper for Chinese to buy here at home.

This is a smart move. A recent report from CLSA Asia-Pacific projected that by 2020 Chinese consumers will snap up over 44% of the world’s luxury goods. As more Chinese who can afford luxury products are able to travel abroad, the government has a choice: keep taxes high on luxury goods and force prosperous consumers to buy knockoffs or, more likely, go abroad; or cut the luxury taxes and take the increased VAT revenues and the increased employment in retail and distribution. If 44% of the world’s luxury goods are coming here, the latter move sounds like the right one.

“A Man’s Home is his…” Oh, Wait…

Casual research suggests that local real estate barons will be more hurt by these restrictions than foreign luxury brands. First competing with each other to see how many Chinese McPenthouses and McMansions they can squeeze onto a hectare of land, developers then battle to see who can best liken his cookie-cutter rabbit warrens to Buckingham Palace in a hyperbolic war of words played out on billboards and glossy handbills. Indeed, while all types of luxury products seem to use outdoor, high-end real estate appears to take up the plurality of luxury outdoor ads in Beijing.

Contrast this seeming oversupply of high-end (and to most Beijingers and migrant workers, unaffordable) Sino-chateaux with the government’s growing concern about a shortage of affordable housing in the capital, and the specific move against outdoor seems more understandable. Indeed, one could argue that the Party is more concerned about the housing issue, but again, the question appears to be much larger.

The Problem is the Sizzle, Not the Steak

It is likely, then, that we are watching the early salvoes in a long-term Party campaign not against luxury goods, but against overt privilege and ostentation. In addition to the new strictures on advertising luxury goods, Beijing’s traffic police have been ordered to start getting tough on drivers of luxury vehicles who are traffic and parking scofflaws. The messages are clear: go ahead and sell luxury goods, but do not do so in a way that reminds China’s masses that many of their comrades live lifestyles they can never hope to afford. You are free to buy and drive a Mercedes S600, but you are not entitled to any special consideration as a result.

Given the political climate, the campaign is probably just building steam. Wen Jiabao’s public comments in March regarding the 12th Five Year Plan’s focus on “resolving unfair income distribution” suggest policies that will be as much about addressing appearances of inequality as about redistributing wealth. Three matters will be important to watch in the coming months:

  • The extent to which the BAIC enforces its own edict, something we will know based on what is showing up on billboards in the capital;
  • Whether this effort will end with Beijing, or whether the State Administration for Industry and Commerce starts encouraging other cities to take similar measures (I’m thinking Shanghai, Guangzhou, and the other coastal metropolises);
  • Whether the strictures on outdoor ads are then extended to television, print, radio, or other media.

Movement in any of these directions will signal a widening of the campaign, so luxury marketers and media companies would be wise to keep a careful watch over how this evolves. This is may turn out to be one of those years in China when flexibility will be a marketer’s most treasured virtue.

In the longer term, though, this may mark the beginning of a larger change that may force everyone selling expensive baubles in China to reconsider the way those goods are marketed.

China’s Global Luxury Consumer

In the Hutong
Polishing my apologetics
1711 hrs.

In an excellent article about luxury retailers going online in China, Laurie Burkitt at The Wall Street Journal drops an interesting little insight halfway through the piece:

China is the world’s second-largest market for luxury brands when counting purchases by Chinese consumers world-wide and is set to overtake Japan for No. 1 in a few years, according to consulting firm Bain & Co. Chinese sales of luxury products surged 20% to €9.2 billion ($12.1 billion) last year, Bain said. [italics mine]

Counting purchases worldwide vs. locally is no small distinction. China’s consumers know they pay a steep duty on the price of the baubles they buy in China, and those with the means (and the patience) often shop locally but put off their purchases for when they go abroad. That’s important for a couple of reasons.

First, it is impossible to judge the real return-on-investment of a store inside of China based solely on how much product that store sells, because that store is probably winning sales for stores elsewhere in Asia, in Europe, and in the Americas. By extension, it is impossible to judge the profitability of China luxury operations based on retail sales in China. To some degree, the China operations of luxury lines are subsidizing global sales.

That arithmetic is going to get increasingly critical as the cost of labor and prime retail space rises in China’s second, third, and fourth tier cities, and as more Chinese get comfortable buying their luxury goods direct from the labels online. Put another way, retail in China is not just a sales expense, it is a marketing expense as well. The companies that learn how much of those costs to allocate to sales and how much to marketing (and then plan and behave accordingly) will be the long-term winners in this market.

Second, as home-grown luxury brands emerge, they will have to do so knowing that high-end shoppers are used to making purchases at overseas destinations. Those brands will thus need to begin their development with global expansion in mind so as to catch shoppers while they are overseas and in a buying mood. That is not to say their first stores need to be overseas, but that depending on the product, luxury brands will want to address their competition globally so as to capture their local market globally as well.

Thus I am betting that some of China’s early home-grown luxury brands will find themselves compelled to ally with – or be bought by – one of the major global luxury houses, much as Shanghai Tang went to Richemont. Retail presence in China is important marketing, but having global retail presence will be an important part of placing Chinese luxury brands on an even par with the global majors in the eyes of locals, once those locals are even amenable to a local luxury marque.

E-tailing: Report on E-Commerce in China

Starbucks Guomao 1

Deleting Spam. Again

1034 hrs.

Paul Denlinger over at China Vortex points us to a new report from the Research Institute Data Center of China Internet, which claims that online spending in China passed US$37.5 billion in the first six months of the year, representing a 58.2% jump over the same period in 2007. The report goes on to predict that overall spending online in China will surpass $86 billion for all of 2008.

Given that the report supports my belief that electronic retailing in China is on the verge of really taking off, I was pleased to see it. But I have reservations about the report nonetheless.

The first is a small thing. There appears to be no distinction made between “electronic commerce,” which can cover business-to-business transactions along with business-to-consumer and consumer-to-consumer, and “electronic retailing,” which is primarily business-to-consumer but also includes a large chunk of consumer-to-consumer.

This is important because business-to-business commerce in China is huge (remember the Alibaba IPO?), and could well be skewing the numbers. Let’s set that caveat aside for the sake of argument.

The second concern the research itself. I used to conduct market research seminars for foreign students coming to China, and I noted that, with apologies to Mark Twain, there are lies, damned lies, and statistics, and that this holds trebly true in a country where there is a long history of massaging numbers to serve political, economic, and commercial purposes. I am concerned this might be the case here.

I didn’t manage to find the organization that produced the report online, nor have I actually seen the report and reviewed its methodology, so I it is hard to judge the veracity of the numbers. What is more, AFP notes that the Data Center of China Internet is an industry group, so I worry that the report may have been influenced by its sponsor.

If you can get your hands on the report, give it a read, but have a full salt shaker close at hand.

The way I normally handle reports of this nature is to give more credibility to the overall trend than the actual numbers. The real takeaway from this is that e-commerce in China is – as Paul Denlinger says – hitting the bend in the hockey stick.

China’s Coming E-tail Renaissance: The Payment Myth

In the Hutong
Oh, look, the sky is leaking

One of the most persistent myths about the slow growth of electronic retail in China has been that the scarcity of credit cards have held the business back. There are still less than
70 million credit cards in circulation, one for every 20 or so adults in the country, and, more to the point, one credit card for every 3.5 internet users.

No credit card, goes the thinking, no electronic retail. The ubiquitous Shaun Rein, CEO of Shanghai-based China Market Research Group, echoes this sentiment in an otherwise excellent editorial in Forbes magazine:

“Our findings suggest it is a lack of credit cards and other payment options, rather than a cultural aversion to buying online, that has curtailed the growth of e-commerce in China.”

About half-right, I would say. The cultural aversion issue is a canard, and we will take that up in another post.

Yet elsewhere in his article, Shaun notes that 70% of the 500 18-to-32 year-olds he had interviewed had already purchased online, but “would use a credit card for purchases if they had one.” In other words, all of these folks were already buying online without credit cards.


I don’t mean to pick on either Shaun or CMR, but the implicit truth coming from their research supports a somewhat different conclusion. Coming from a research organization of bright and talented people, this illustrates a larger point: despite what very intelligent analysts are telling the world, electronic retail is growing in China in spite of the low numbers of credit cards in circulation, and it will continue to do so whether there are credit cards in China or not.

Money, like love, finds a way

Electronic commerce has grown in China over the past ten years because companies and consumers have found other ways to complete transactions that don’t require a numbered sheet of plastic.

A number of methods have been used over time. Postal money orders, prepays, local counter pickup, and company credit have all been tried. Most have been discarded because they required the consumer to physically go someplace to place an order.

To date, the most successful has been that old reliable method, cash on delivery, or COD.

COD is superb because it allows the company to ship a product from their warehouse, via either express mail service (EMS) or regular post, to almost any city in China. Back when I developed this system for electronic retailers with the China Post’s EMS division in 1996, they originally promised to deliver any package to 100 cities within 72 hours. The number of cities grew to 500 within 18 months, and the delivery times – while 72 hours was always the promise – dropped near to 24 hours.

Consumers love COD in China because it allows them the assurance of actually seeing a product before they pay for it. That’s not such a big deal when you are selling small things or your company is well known. But if you are a new company, or you are selling RMB 10,000 digital camcorders, COD offers everyone one more level of assurance.

Is it a pain to have to be somewhere to wait for something? It can be. But that can be an issue no matter how you are paying – delivery services are rightfully reluctant to leave packages unattended on door stoops.

COD is extremely popular among electronic retailers in China, but frankly few do much to promote it. The biggest culprits in this regard are the EMS and postal services, both of whom should be heavily promoting COD to consumers. They aren’t, and in the face of the widespread myth about “no credit cards,” a perfectly workable solution has to spread by word-of-mouth.

Why do I need that funny little plastic thing?

But COD is by no means alone. Online payment systems are growing with incredible speed in China. Take Alibaba’s Alipay system for example. As of March of this year, there are more registered Alipay members in China – 80 million – than there are credit card holders, and the number continues to grow. Annualized transaction volumes are in the tens of billions of US dollars per year.

And there are other means of payment on the way. We haven’t even entered the discussion of the mobile phone as a payment device yet, but that is a business that China’s carriers are studying with special interest. The cool thing about using mobile phones for payment is that apart from paying via your phone bill or a prepaid card, the phone becomes a credit card with a direct internet connection. No need to type anything in. Just push the button.

Porter Erisman at Alibaba suggested to me that payment systems in China are evolving beyond credit cards. I’m not any more ready to consign credit cards to the dustbin of China’s development than I am COD.

Alipay and COD alone, however, underscore that regardless of how the credit card industry evolves in China, electronic retailing will boom. To what I am sure is the chagrin of both analysts and credit-card companies, the electronic commerce industry is not waiting for the day when your average Chinese has a credit card or three in his or her wallet.

And a good thing, too.

Serving the customer – and the merchant

There are actually problems using credit cards in China for electronic payments. First, many banks, fearing fraud, remain hesitant to allow purchases using their credit cards or debit cards unless the cardholder is present and signs a receipt. While this is improving, it is still a challenge.

Second, and perhaps most important, is that credit card companies are hard on merchants in China. Apart from having to bear onerous transaction fees, electronic retailers can often wait for weeks or even months to get payment, and disputes are almost uniformly settled on behalf of the consumer.

COD isn’t perfect. All of my experience with COD using the EMS service was superb – we were paid within a few days, a week or two at most. Unfortunately, I’m starting to hear that some payments are dragged out for as long as six months. That’s not acceptable, and the postal folks need to get their collective stuff together or they are going to lose the opportunity.

Services like Alipay need to become more ubiquitous and flexible over the long term. Dominating payments on your own site is fine, but the real promise is being able to take payments from as wide a range of services and sites as possible.

When organizations dominate a niche, they tend to get exploitative. China is no different. The good news about payments for both merchants and consumers is that there is competition among the different methods. The wise e-tailer would do well to enlist as many as possible.

Welcome to Planet Plastic

Among the many things Shaun and I agree on – and I’ll be coming back to his article in future posts – is that the business of consumer credit in China is going to continue to grow, and that banks will find ways to put more plastic into wallets in the same way they have popularized home and auto loans.

What will be different in China, however, is that even when credit cards manage to reach a sizable portion of China’s population, they will face competition from a far wider range of payment options than they do elsewhere.

In the meantime, electronic retailing is on a roll.

China Retail 101

Investing in China’s Retail Industry, PriceWaterhouse Coopers, New York, April 2006, pdf, 12 pages

PWC’s report on investing in the retail industry in China is, as you would expect from a free 12-page report, a bit of a 50,000 foot overview of the industry, and as an introduction to the business for someone who knows little about retail in the PRC I suppose it’s adequate. It focuses on the regulatory and structural nature of retail, both of which are critical.

But an overemphasis on scale as a determinant of success over other factors suggests a very narrow analytical framework. Yes, retail in China is still in its early stages of modernization, but there is more to success than the number of stores or square feet you are managing. There are a range of factors that could produce success that the report all but ignores.

For example:

• Chinese retailers are not merchandisers, they are real estate companies. Simply introducing strong merchandising skills, from product selection and price balance to display and promotion, can give a store a leg up on its competition. Simply having relationships with suppliers is not enough.

• While the country is moving in the direction of massive chains designed to serve broad swaths of the population, there are also emerging niche opportunities to service different parts of the market.

• The experience of buying stuff in China still, well, sucks, and is largely undifferentiated from place to place. Simply having more bigger stores that feel like, say, Jingkelong, is not going to prove an advantage in the long term. Chinese are looking for a better experience than they have been getting for the last several decades.

So use the PWC report as a starting point, but move quickly to more in-depth analysis.