Foreign companies in China typically position their brands higher than back home. Does the strategy work?

2012/08/23

Foreign companies in China typically position their brands higher than back home. Does the strategy work?

When Harry Tan bought the Asia-Pacific management rights for Days Inn in 2003, the US-based hotel chain was hardly known in China, save for a token budget hotel that had limited occupancy and a 2.5 stars rating.

Nine years later, the hotel chain is bursting at the seams in China with more than 100 properties in various cities and regions, 30 of them having come up in 2011, and still more in the works. Operating under various names like Days Inn, Days Hotel or Days Hotel and Suites, and providing a wide range of amenities, the chain is no longer synonymous with budget hotels, but rather represents higher-end comfort.

Tan says the makeover was necessary to succeed in China as the changing economic conditions had brought about a sea change in the perceptions of Chinese consumers.

"When people move up the economic ladder, they often aspire for high-value products and services. For Chinese people, the foreign brands were always the symbols of high-end luxury and quality," Tan says.

Realizing that the challenge before him was formidable, Tan decided that the chain needed a major re-branding in China, one that would propel it into the upper echelons with ratings of four stars and above, unlike the three-star budget hotel rating it enjoyed in the US.

Like Days Inn, other global brands have also encountered similar problems in China. Though the market challenges were varied, the underlying motive was always the need to cater to the Chinese consumer with products of higher value and better brand positioning.

Such opportunities abound in many sectors like hotels, food and beverages, textiles and automobiles. Though positioned as a street-corner cafe in the US and Europe, Starbucks is perceived as a high-end meeting place in China. Similarly, the mass market and affordable furniture provider from Sweden, Ikea, is considered a fashion icon in China. Levis, the affordable jeans brand from the US, is a status symbol among Chinese youngsters. The list of products that enjoy higher social status in China is endless.

Moving up

"It is normal to position a Western brand a little bit higher in China, as 'foreign' stands for good quality in people's stereotype," says Tan, chairman and chief executive of Days Inn China.

"The higher positioning gives us more flexibility in the hotel industry. When the economy is good, those who usually stay in three-star hotels will reward themselves by moving up to four-stars. But if the market goes down, five-star people will also come to us."

Tan says that when he made the decision to move up the ladder, there were several other motivating factors. "I realized that if I continued to position Days Inn as a budget hotel, it would be harder and harder to do business in China. Property prices were also soaring, along with higher labor and utility costs. If we remained as a budget hotel, we would have to keep our prices low, thereby leaving hardly any room for profits."

Dale Preston, managing director of retail measurement at Nielsen, Greater China, says: "There is no doubt that other developing countries are also going through the same process, which we call 'premiumization'."

Preston says that while it is normal for people who are getting wealthy to have higher aspirations, they also need to back it up with good market research.

Chinese consumers are not at all savvy when it comes to the branding strategies of the Western brands, says Preston, adding that they often get carried away by the name.

"When the brand drops to the next tier down, a lot of people cannot really tell their status unless they go online and do thorough research. But unfortunately, they are not doing the research yet," Preston says.

Jeff Gong, director of Beijing Vogue Glamour Brand Marketing Inc, a brand consultancy, says many foreign brands have taken advantage of this mindset among Chinese consumers. Gong's agency has helped introduce many European brands, especially clothing majors, to set up shop in China.

"There are several stages in consumer behavior like following, self-experiencing and cultural identity," Gong says. "Due to the lack of information on luxury goods and the relatively late development of the consumer market, Chinese customers are still in the 'following' stage," he says.

Gong says that the best example of the blind trend can be found in the Chinese obsession for luxury products sporting big logos. "Most of the affluent people tend to buy what looks good and expensive, especially in the case of imported products."

While positioning for higher sales numbers is the most common strategy adopted by companies, in some instances the higher re-branding is necessary for companies to make up for the higher market entry costs.

"I don't think they do it intentionally, but the Chinese market is the most fragmented in the world. With such a big size and population, marketing in China is like marketing in the whole of Europe, and one has to take into account the different preferences across different regions."

In addition, running a national advertisement campaign can also be prohibitively expensive, he says.

Preston says it is possible for most of the foreign brands to go in for the higher positioning, as there are still a lot of misconceptions among Chinese consumers.

"It is also more of a cultural thing. In India and Brazil, customers don't buy the product to show off their wealth. But in China, using expensive products is considered a status symbol.

"There are lots of opportunities for foreign companies to further upgrade their image in China. With more than 500 million Chinese people still living in villages, it will take decades for many of them to urbanize and accept the new concepts."

But that does not mean that the road ahead is a smooth one. There are potholes ahead, Preston says, adding that "competition will be fierce as more second-tier brands are now moving to China".

Foreign card

While the higher positioning has been advantageous for brands like Days Inn, in the case of many others like the Swedish furniture maker Ikea, it has more been a case of passive re-branding. Yvonne Yin, public relations manager of Ikea Retail China, says that the company adopts the same kind of positioning everywhere in the world and its products are targeted at mass consumers.

But in China, the company is still considered a novelty by most of the consumers.

Such has been the draw of the brand that it is not uncommon to see people speaking various dialects thronging the company stores in China. Most of the visitors to the store are women aged between 20 and 50, including a large portion of white-collar workers.

In the traditional Chinese home decoration concept, tidiness and order are highly appreciated - walls are often snow white and furniture is placed along the wall. But in the Ikea outlets, Chinese customers can often be found making a beeline for the living room couches, book shelves that can be nailed onto the wall, and flowers hanging from the window.

"Most customers treat Ikea as a symbol of Western way of life," Yin says. "That's why we are considered a 'petit bourgeoisie' brand, maybe because of our display, but not because of our intention to do so."

Preston at Nielsen says that he can understand the kind of "passive upgrading" that is happening to companies like Ikea.

"When a brand of a particular category enters China, it's a novelty at first, and people want to try it. Later on it becomes a premium brand as it's different, much like what McDonald's did some 20 years ago," Preston says.

But when the overall wealth of the society grows further and people get used to the novelty, the brand will revert to its original status, he says.

Ikea is not the only foreign brand that has captivated Chinese customers with its strong "foreign" aura. Clothing brands like Zara, H&M and even Forever 21 have gained better recognition in China for their authentic American or European designs.

"Western clothing brands like Zara and H&M are targeting younger customers who want to feel and dress like Americans, but cannot afford to spend a lot of money to do so," says Mike Bastin, researcher at the School of Contemporary Chinese Studies at Nottingham University. "The Zara and H&M stores are seen as outlets that are affordable, have good music and sport Western designs."

Lex Keijser, general manager of H&M Greater China and Singapore Region, is well aware of such a trend and has more than capitalized on the concept to boost sales.

"We release all our collections worldwide. Most of the products in the outlets, be it in Hangzhou, Shanghai, London, New York, or Paris, will be the same everywhere in the world."

To cater to customers' different needs, H&M offers various style design concepts. "We have eight to 10 campaigns every season worldwide. Basically there are always new products coming into H&M stores every day," Keijser says.

"We decide on the different markets and the products in our stores based on the customer demand and location," he says.

Early education

For some product categories that barely existed in China, the knowledge gap between the Chinese customers and their foreign manufacturers are so huge that brands often have to play the role of "early educators".

Although several Chinese wineries claim to have a history of almost a century, the concept of wine is actually one that is imported from Europe. Compared with the traditional white spirit baijiu, the market for European wines is still in its infancy in China.

Frederique de Lamothe, director of Alliance des Crus Bourgeois du Medoc in France, an association of 250 French chateaux, says that he feels more of an educator than of an entrepreneur.

Unlike the high-profile French wine Lafite, which is considered a symbol of wealth and big-ticket investment in China, many of the chateaux "present high-quality wines that are affordable and good to share", de Lamothe says.

"We are not in the same position as that of the factory-produced Chinese wine brands like Great Wall and Changyu," de Lamothe says. "Wines from these manufacturers are mass produced wines of the same taste. Our wines come from over 250 family-owned chateaux with a rich legacy in wine -making and a wider selection of products.

"The Chinese market has grown from virtually nothing six years ago. It has developed much faster than we thought," she says.

Though most of the wines from the chateaux are sold to high-end Chinese consumers, there are still some wines in the 10 to 25 euros ($12-30) range that are affordable for working people and ideally suited for special occasions like weddings and birthday parties, de Lamothe says.

Affordable price does not necessarily mean lesser profit for the chateaux. Last year de Lamothe held a wine tasting event in Beijing, and sold nearly 500,000 bottles of wines in less than a week, and more than 1 million bottles in a month.

As early educators, de Lamothe often has to convey the basic knowledge of wines to Chinese consumers, so that they are ready to spend money.

"Branding in China involves more explanation," she says. "In traditional markets like the US, they already know about wines; but in China we need to tell our history and basic things like how to match wines with different dishes."

Localization mantra

Although being European or American is often welcomed and respected by most Chinese consumers, it does not necessarily mean that the brand is in a safe harbor. Whether intentionally or forced to upgrade in China, these brands face a common task: to localize, so that they can keep in line with Chinese culture that won't easily change.

Bastin admits that some brands are not successful in China because they are too reticent to change.

For instance, he says, Oreo cookies were considered too sweet in China when they were launched in 1996, and consequently saw flagging sales. But fortunately, the company is developing local flavors like lemon that are being welcomed by Chinese customers.

"Some European home appliances brands have also not been too successful, as they are not delivering the quality and service that they are supposed to. Most of these brands cannot compete with Chinese brands on the pricing front, and often beat a hasty retreat."

Although 95 percent of the products in Ikea are from global purchase, Yin says the brand is trying to expand its influence by customizing homes across different regions in China. It has set up a research team to study and understand the nuances of the Chinese market.

In Beijing where the property prices are high, the prototype rooms in Ikea are small - usually 30 square meters to 50 square meters. However, in Chengdu where the average living space is much bigger, Ikea has the largest prototype rooms among all its stores in China. Other adjustments include adding a balcony outside the kitchen in the prototypes for Tianjin.

While appreciating the localization efforts, Gong says foreign brands also have to find a subtle balance between localization and their originality.

"For example, suits are from the West, so we have to maintain their Western look. However, suit brands have to be redesigned to fit Chinese customers' figure. Many clothing brands are not doing well in this segment and that's why you also see most of them selling only belts and bags in China."

Some of the brands that have a higher positioning in China fail because they do not do the necessary market research.

"For instance, the clothing brand Gap prints skull patterns on children's clothing, which goes against the traditional Chinese culture of peace and love."

Preston says the adjustments really vary across the brands. "If I'm doing supermarkets, it is easy to localize; but if I'm doing Ralph Lauren, I cannot be too local as it is more of an inspirational product. For some brands, retaining their originality is very important and changing that too often becomes counter-productive. "

However, there are some components that are necessary to add more leverage to the brand, he says. "Some elements can be simple, maybe just the way you design the stores, and the way you serve people, which can help you to localize without changing the brand too much."

But he admits that besides proper branding, there are many factors that can affect brand performance in China, such as management skills, and the proper connections with partners and other allied services.

"There might be a lot of reasons for the failures," he says.

Flat world challenge

The "flat world effect" described by well-known author, Thomas Friedman in his best-seller The world is Flat to describe the global market where historical and geographical divisions are becoming increasingly irrelevant, has also begun to undermine Western brands' dreams to become high-end brands in China.

"It is getting harder to position higher than the original positioning, because customers are getting more and more informed," says Tan from Days Inn.

"Twenty years ago, Western brands could position themselves at whatever level they wanted in China, since there was not too much of competition. Customers now know what brands mean and hence we cannot deviate too much from the original positioning. To gain their confidence we have to provide better quality and service," he says.

Jean-Michel Dumont, chairman of Ruder Finn Public Relations also has a similar viewpoint.

"As companies mature and invest in R&D, it is a logical step for them to target the more affluent segments and raise the brand awareness," says Dumont, adding that launching this repositioning in a buoyant market such as the Chinese one makes absolute sense.

"However, as this market also strongly recognizes brand value, unless the rest of the world eventually follows, the brand repositioning is doomed to long-term failure," he says.

According to Dumont, Chinese consumers, who often blend travel and shopping as they plan a trip abroad, are especially astute at researching in advance.

"As consumers get more exposed to global markets, either through international travel or the Internet, brands have to be consistent globally in both their positioning and pricing. Gaps in either one of these fields will destroy the credibility of the brand."

Unlike the Western society that relies largely on branding and other business skills, China began to build its brands just 15 years ago, and not many of them have adopted professional management, says Bastin.

"But Chinese brands are fast catching up," he says. "Once they gain trust from Chinese customers and start delivering the same quality of services provided by the foreign brands, they will become a force to reckon with in China."

Chinese consumers will mature much faster than what the Western people imagine, he says. "By that time successful people will seek their exclusivity by buying private services, rather big logos."

Preston estimates that an area that is highly underdeveloped is probably the service segment. "So a lot of services can still come to China and do well, like finance, after-sales and travel services."

Source: China Daily