6 Priorities for Successfully Entering Chinese Retail Market

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China has become a destination where companies come with hopes to strike gold in one of the world’s largest and fastest growing markets. But successful expansion into Chinese retail market presents some serious challenges for foreign brands, and establishing a Chinese presence can be a big undertaking. So who will succeed? There is, of course, no easy answer to that question. However, based on our extensive experience from helping leading international retailers enter and expand in the Chinese market, Jingle Office would like to share some of the guidelines with you to help successfully enter Chinese retail market.

1. Understand “one country, multiple markets”

In order to understand Chinese retail market, you first need to be aware that this vast country, in size similar to the USA or Europe, has a high level of diversity despite sharing a common language and culture. There is a saying “one country, multiple markets”, which refers to the wealth gaps between the highly developed mega cities, the moderately wealthy provincial cities, the poorer country-level cities and the poor countryside. You have to understand the differences between these markets to make your Chinese retail market entry to the point.

China has, over the last decades, experienced rapid urbanization, especially along the east coast, and today the country has well over 100 cities with a population of one million people or more. A tier system is used to rank the many cities in a scale 1 to 5. Tier 1 includes the four mega cities Beijing, Shanghai, Shenzhen and Guangzhou, each one with a population of approximately 20 million people. Understanding the differences in consumer behaviour by city tier, and also by geography will allow you to develop effective entry/expansion plans, marketing campaigns and brand strategies.

2. Build strong brand awareness for Chinese retail market

Looking out into the world today, it’s easy to see why brands are more important now than at any time in the past 100 years. Brands are psychology and science brought together as a promise mark as opposed to a trademark. It not only increases the voice and consumer awareness of a brand, but it also gives it an identity and worth. Building strong brand awareness in Chinese retail market can be the key to long term performance by providing the retailer with considerable advantages:

• An existing retail brand strengthens brand awareness and differentiation from the competition in Chinese retail market, because it can serve as an anchor for associations with the brand.
• From the consumer perspective, strong retail brands simplify the purchasing process because there is already some knowledge about the retailer and buyers do not have to search for additional information about as sortments, prices, service etc. Strong retail brands also reduce perceived purchasing risk.
• Strong brands exert halo effects. A positive general attitude towards the brand in total positively influences the perception of all specific brand at tributes. Considering the impact of these evaluations on the general attitude, a virtuous cycle can develop.
• Strong brands not only represent functional benefits, they can also serve as symbolic devices. They represent different values, traits, and characteristics. Shopping at a certain retailer might, therefore, allow consumers to project a certain self image to themselves and others.
• A strong brand can be used as a platform for expansion. This already occurs when retailers open new outlets, which, from the very start, are loaded with a certain image. Franchising concepts, in which the retail brand is transferred to independent shop owners, clearly illustrate this advantage. A strong retail brand can also facilitate diversification into new product ranges. This type of brand extension occurs when retailers use their image in one merchandise category to expand into additional categories.

There are many examples showing the importance of the brand. Retailers with a strong brand, and using single-brand stores, have been the most successful in increasing their presence in the market. In China, there are approximately 70,000 single brand sport stores, for example. On the famous shopping street, Nanjing Road in Shanghai, you can find almost 40 single-brand Nike stores on the same street! Apple, H&M and Louis Vuitton are other good examples that have succeeded through building a strong brand in China.

3. Attract and retain Chinese customers

The arrival of the Chinese consumer is widely acknowledged around the world. The remaining skeptics are increasingly hard-pressed to deny the incredible spending power of Chinese shoppers who come knocking at their doorstep.

The unprecedented rise in disposable income has largely been responsible for China’s increasing consumption. Chengdu, for example, has seen the average disposable incomes, or the amount of money residents have to spend on non- essentials, increase by double digits annually for the past five years. Retailers now exert massive efforts into attracting and retaining Chinese customers.

Chinese consumers in general are very open to trying out new brands. The problem is that they are just as open to trying the next brand or trend that comes along. This creates an ever-changing dynamic in which consumers chase the next new thing. Brands need to prepare for the end of the honeymoon period, when previous customers will demand more attention for each subsequent purchase.

4. Correct pricing is important for Chinese retail market

Your pricing strategy and the price of your product is one of the most important factors influencing decision making. This can be explained with a suitable example. You enter a branded showroom and you find a shirt or a dress to your liking. You immediately check the price tag, and if the price is right, you will buy the product. If however, the price is too high, then you are likely to avoid the purchase. And if the price is too low, then the store you have entered, loses a part of its image, because it has such low priced products. What this tells you is that your pricing strategy needs to be laser sharp. Pricing plays a role in decision making as well as building an image for the company.

Understanding the value of a product is correlated to the sophistication of the consumer. Twenty years ago, China had very little foreign influence. Since then, the speed of change has gradually increased and many new products and categories have been introduced. Still, there are many products to which many Chinese consumer have had no or limited exposure to, especially in lower tier cities. For those products, of which they have limited knowledge, consumers often make a direct connection between price and quality. A low price is associated with low quality or fake products, which are abundant in China.

What Media Markt, Home Depot and Best Buy all have in common is that they failed in their pricing strategy. In China, as there are many low-cost options, they could not compete on price and it seems they misjudged the value perceived by the consumers for the added services they offered.

International brands are normally considered high-end and a low-price strategy can result in mistrust towards the brand. Danish shoe retailer Ecco is one example of a retailer who raised their prices when entering China and successfully managed to positions themselves more high-end in the Chinese market than back home.

Chinese consumers also love to make a good deal. They have grown up bargaining and this can’t be ignored by you as a retailer. Design your offers and empower your store associates to allow them to reward a good and loyal customer (e.g. a discount voucher for the next purchase, buy two items and get one free offers etc.). You will also need a loyalty program, but don’t let your Chinese customers wait too long for a reward.

5. Look pretty in Tier 1 cities, make money in Tier 2 and 3

We believe that most retailers aiming to establish themselves in China will need a strong physical presence, including brick and mortar stores. An online business will likely be an important factor to maintain long term profitability, but the optimal balance between online and offline will vary between different brands and segments. So where should you establish the operations and open your first stores?

Retail rents in Shanghai and Beijing are expensive on a global scale, and climbing every day. Even staff and other costs, while lower than in most other global cities, are still on the rise. However, efficiency of stores in China is mostly lower on a per square meter basis than stores in other countries, thus making the economics very difficult in Tier 1 cities in China. Given the immaturity of the market and so many new malls coming on line, competition for the best retail spots in Tier 1 cities is steep. Since most operators in Chinese retail market come to shop in Tier 1 cities for brands to open in their home-towns, many brands use Tier 1 cities to create flagship or concept stores in high-street areas, which are a great brand showcase, but typically lose money. These brands treat these image stores as a type of “marketing” expense, and don’t mind losing money on them, as it helps them build brand awareness and open retail stores elsewhere in China where they do make money. Additionally, consumers in Tier 1 cities are spoiled for choice, and therefore not as hungry for new brands as customers in Tier 2 and 3 cities.

Despite the hassles and costs that come with operating in Tier 1 markets, opening stores there is necessary for your brand to expand. All retailers train their eyes on Beijing and Shanghai, so looking good in these markets is essential to your ability to sign up retail operators in Tier 2 and 3 cities. If you can break-even or make a small profit running your own retail in Tier 1 cities, you are doing well. For most brands in China, expansion in Tier 2 and Tier 3 cities is where brands really profit. Therefore, it is advised to use some of that patience to start by building the required knowledge in a tier 1 city, before setting out to conquer the lowers tiers.

6. Develop a robust online retail strategy

The flourish of ecommerce in China brought a massive wave of new competitors for traditional retailers. Offline retailers are taking different approaches to win the intersection between physical and digital retail. Online business can leverage existing offline resources and expands the business to city downtown and rural areas. Traditional retailers going online creates different approaches and opportunities for consumer packaged goods companies to work with retailers and early movers in this area will establish tough-to-trump positions and advantages in the long term. The following three key elements will also help you to develop a robust online retail strategy:

• Your brand’s position and online value proposition (OVP). Identify your online customer value proposition which defines where your business sits in the marketplace amongst the competitors. Determine what you offer that differs from that of your competition and identify how you might use these differences to your advantage.
• Customer segmentation and target marketing strategy. Analyse your existing customers to segment and target them into distinct customer groups with distinguishable wants and needs. Once you understand the principal needs of each group you may then set about defining a marketing strategy that targets each customer group with relevant material.
• Content strategy. Segmenting your existing customers helps you understand the type of visitor who is most likely to be interested in your business. Plan a content marketing strategy based on typical customer demographics you want to attract.

A combined strategy of on-site search engine optimisation (SEO), in-bound content marketing and off site content marketing can all focus on producing marketing content of interest to the key demographics you want to visit your website.

An e-commerce strategy should define the target audiences/customers and how they will be reached; marketing, social media and content strategies and tactics, sales targets and details of any plans to diversify into new product or target markets. Strategies which define how each objective will be achieved are crucial, as is splitting breaking down these strategies into tactics and actions assigned to individuals with set deadlines and specific responsibilities. The best way of ensuring you develop a comprehensive and robust strategy that not only identifies objectives but also precisely how you’re going to get there, is by using tried and tested planning frameworks.

Conclusion

When entering Chinese retail market, your first need is to localize your concept and create brand awareness. We believe that Shanghai, or another tier 1 city, is the best stepping stone for entering the Chinese retail market and this will not change in the near future. Here, you can build your brand, concept and operations with skilled co-workers and among consumers who are open to foreign brands. When you have created a platform for your business, it is time to move on to the lower tier cities where the future growth is forecasted to be.

Online shopping is growing rapidly in China and is predicted to continue to do so. To become successful online, an effective online retail strategy is essential. The young generation in China have high expectations on you as a retailer and they influence many other consumers. Make your brand visible in the online channels they use, and know that in China those channels are different to the ones you are familiar with. The retailers who understand how to please the young generation will be best positioned for the future in Chinese retail market.

Related reading: What You Need to Know about China Consumer Goods Market