Although China has relaxed its regulatory restraints and opened up to direct foreign investment without restriction, gone are the days when a foreign company could bring its global brand to that country, tweak the packaging, adjust the sizing, and then expect to build sales.
There has been a paradigm shift in the Chinese marketplace in regards to competing for the consumer. This is happening across all categories. Satisfying the needs of consumers is not enough anymore; now there is a need to stimulate and excite them. Those who think that what works at home will work in China will likely be disappointed.
In the last decade, Chinese tastes have evolved exponentially in experience and sophistication, and foreign companies have had to change their tactics in order to claim a piece of this vast market. Foreign companies that establish consumer trust and create an image of quality and authenticity have the upper hand. The bad news is Chinese brands have been getting better, and these brand owners are expanding their distribution access. As a result, foreign companies need to intensify their product development efforts and become more innovative.
Innovation is Key
Innovation is becoming the key focus rather than expansion. Foreign companies can no longer win over Chinese consumers purely with overseas concepts. And innovation is not defined as merely an alteration to the current product offering. True innovation for the Chinese market will define the next frontier in product development, which in turn will become the key competitive factor in building and retaining market share in this highly competitive marketplace. Those that fail to pay sufficient attention to this will suffer. Product development must move at a very fast pace and employ creative thinking.
In addition, foreign companies must understand the inherent cultural characteristics of the Chinese consumer. They have become conditioned to change and expect it. The new Chinese consumer wants the best possible experience every time, and if the retailer fails to offer this, they will move on to the next retailer. Chinese consumers are now pickier, and are more often than not, unwilling to pay for better quality. They want products that speak to their specific aspirations, interests, and needs. They are easily dissuaded by old product offerings and frequently try new ones. This was not the case ten years ago, and that is why it is critically important to examine the trajectory of future consumer behaviors within the context of social and political trends. In addition, foreign companies need to understand the reality of China’s dual social structure — the significant divide between urban and rural areas. While the rural population accounts for nearly half of China’s population, their consumption is on only one-third that of their urban counterpart. In addition, one should not underestimate the importance of regional cultural differences when forming corporate strategies.
Rising Costs
Costs in China are rising, which is putting foreign companies under intense pressure. Innovation of products is needed to stimulate consumers to trade up. At the same time, companies need to explore opportunities to achieve better margins.
The challenge is that new product development requires substantial financial investments and is risky. But companies that innovate also create opportunities to become leaders in their markets. Adapting to the changing times is essential. In order to compete, foreign companies must explore opportunities to reshape entire product categories based on deep consumer insights.
The companies that best predict the market and adapt to consumer needs will stay ahead.
That is why foreign companies need local team players with decision-making power on the ground. When approval needs to flow up to head office, competitiveness is often lost. The reason is that there are many fast-growing Chinese players that are benefiting from hands-on owners that drive decision making. In addition to their strong sense of Chinese consumer needs and interests, they have supreme agility in meeting those needs. That is why foreign companies must take steps to encourage innovation to make up for some of the disadvantages they face in the Chinese market.
Regardless of the type of business operation, the foreign company needs to hire competent managers who exhibit long-term loyalty to the company, and this must be at the forefront. This will require human resources to develop strong succession planning strategies and policies to better retain their employees. The trend we see today is local managers being trained by an international company, only to pursue other opportunities after the training is complete.
China is rapidly expanding and is about to explode now that the government has changed from a one child family policy to a two child family. This in itself will significantly influence spending patterns. That is why it is important to thoroughly understand the needs and the culture of the Chinese consumer today and understand the trajectory of consumer spending over the next ten years to better leverage one’s market position.
Olga Koel, Contributor
Olga Koel is a proven executive with progressive successful experience in the manufacturing and retail sector. Olga recently held the position of EVP & Chief Merchandising Officer at Danier Leather where she was accountable for the strategic leadership and operational management of design and merchandising, to the overall business in delivering profit contribution and revenue targets. She was responsible for executing successful, vertically-integrated solutions for all aspects of creative vision, product development, to global sourcing, inventory management, and marketing strategies in a fashion retail environment. She has proven herself to be an authentic and respected leader, who has been particularly successful in identifying trends, to building and leading effective teams towards driving results.
