RETAIL LOYALTY IN CHINA (OR NOT)

A research paper published this month by Kantar has highlighted that grocery shoppers in China are some of the least loyal in the world.

Whilst the research explores deep analysis to try to explain the reasons why, I believe there are three key things that modern trade retailers in China could do to improve the loyalty of their shoppers:


1. STOP FOCUSSING ON PRICE ALONE
Yes, the Chinese are incredibly value conscious. But this is culturally ingrained and so is simply a hygiene factor for success in this market. The major grocery retailers, however, appear to only focus/ communicate this aspect of their proposition. But low prices alone cannot drive loyalty if everyone is following the same strategy.


2. ENHANCE THE SHOPPING EXPERIENCE
Very little attention is paid to the shopping environment and the training of store staff in China. But low prices result in low margins making it very difficult for retailers to invest in the soft stuff that can enhance the shopping experience and so make someone leave the store having enjoyed a positive experience and with the intention of returning again. Whilst the International brands have the best global credentials to be able to own this space, they are also faced with shareholder pressure for profitability that may reduce their ability to implement these initiatives. Best Buy is a clear example of an international retailer who tried, and ultimately failed, to sustain an enhanced customer shopping experience in China for these reasons. Unfortunately, it appears that it may not yet be economically viable to "Surprise and Delight" shoppers in China.


3. STAND FOR SOMETHING THAT PEOPLE CARE ABOUT
The retailers need to become more shopper-centric, and this could be achieved by simply listening to their shoppers. If they were to ask shoppers in China what the single most important factor was in their choice of groceries, the answer would almost certainly be food safety/quality. However, no retailer has yet been brave enough to make this their stated mission.

With China's ineffective quality standards enforcement, a "food quality" brand positioning would certainly be very difficult to deliver. But maybe Private Label could become this differentiator?

Currently, Private Label is virtually non-existent in China, arguably because no retailer has sufficiently invested in their brand to make any product bearing that brand name credible. But perhaps the answer in China is to approach Private Label not as a low cost option, but as a premium option. Tesco Finest in the UK is an example of how high levels of consumer trust in the Tesco brand name enabled the creation of a super-premium range of products selling at prices higher than the established brands. A secondary benefit of the Tesco Finest launch was a halo effect, further enhancing the consumer perception of the Tesco brand.

If Tesco (or any other retailer in China) was able to launch a marketing-supported premium private label brand that guaranteed 100% control of the supply chain from farm to shelf, and therefore of the quality of the product, they would most likely kill three birds with one stone:
• They would credibly be able to position themselves as China's highest quality grocery retailer
• They would secure a meaningful differentiation that would be very difficult for competitors to quickly copy
• They would enhance their profitablity through the sale of higher margin goods, enabling them to invest in the previously unaffordable soft stuff


I don't mean to take anything away from the obvious rigour that has gone into Kantar's (very interesting) research paper. But like many things in China, the answer to the issue may not be that complex. But, as with almost everything in China, actually taking the necessary steps to address and resolve the issue may prove very difficult.

SNAKES & LADDERS

I have come to the conclusion that the main issue with doing business in China is that there are too many Snakes, and not enough Ladders.

A friend of mine has been negotiating for weeks for a deal, and at every step of the way the Chinese buyer has thrown up another "Snake" which could potentially kill the deal. Every Snake brings with it additional costs, additional process and additional time to renegotiate the deal price. All the while, the deal becomes more and more marginal for the seller until such point that one of two things happen:

(a) The seller gives up, and walks away vowing never to trade with the Chinese again

(b) The deal happens, but the seller is so frustrated with the outcome that he vows never to trade with the Chinese again

So if you are seriously contemplating selling something in China that is not luxury goods or exclusive cars, be prepared to lose your sanity, your temper, your patience and your hair.

Only the lucky few find the Ladders.

Five things you need to know about China's inflation

1. It will not go away quickly. China has maintained a relaxed fiscal policy for a number of years with lax lending criteria combined with massive state investment in infrastructure. China's 12th five year plan announced in March shows little sign of any change, with seven strategic emerging industries identified to receive an incredible US$2.1 trillion of investment over the next few years. With this much money in the system, combined with a stated intent to dramatically raise the minimum wage every year, Chinese inflation is here to stay.

2. China's 'Big stick' approach to the problem will not work. As was witnessed by Unilever's about turn last week on planned price rises following their "little chat" with the Chinese National Development and Reform Commission, China is trying to artificially hold down prices. But this control mechanism will only work in the short term before the growing pressure it creates builds to a critical point.

3. It will affect marketing budgets. In the meantime, international companies that market price-sensitive or consumer commodity goods will be forced to look for savings elsewhere to maintain their profitability in China. Marketing budgets are likely to be the first to be reviewed, and so we should all be braced for some belt-tightening in the next few months as the effects feed through to agency and media partners.

4. It will affect product quality. Ultimately, everyone in business needs to make money, and if profits cannot be made at one end of the supply chain, the pressure for cost savings will be pushed down to the suppliers. We know from the Melamine milk scandal in 2008 that raw material suppliers in China can find ways to enhance their profits through the supply of substandard goods - no matter the consequences. It is an economic reality that manufacturers will not continue making unprofitable goods indefinitely and so something will have to give.

5. It will force China to allow the RMB to rise against the US$. For every dollar of trade that China does with the rest of the world, it has to print a corresponding amount of RMB. This ever-increasing liquidity in the system stokes the inflationary fires that can only be reduced by allowing the RMB to rise. While China has resisted the pressure over the last few years due to concerns about exports, increasing domestic demand and a stated intention to focus future investment into higher value-add industries will diminish this argument. It is therefore likely that inflation reduction will become a higher priority for the Chinese government economists rather than export growth, with a resulting assent of the RMB.

Copyright © Campaign Asia-Pacific 2011

Big Stick Update: Unilever postpones price rises

The Chinese National Development and Reform Commission of the Chinese Government has "had a word" with Unilever who have announced the postponement of their price rises.

Now, there's a surprise...

How to Resolve China's Inflation? A Big Stick.

On the radio news this morning in Shanghai was a discussion that Unilever & P&G were to increase their prices in China next month by up to 15%. This reminds me of a news item 2 months ago when Carrefour was blamed by the Chinese Government for contributing to food inflation by over-charging for certain goods. In the Carrefour case, Carrefour was subsequently found "guilty" and fined. I wonder if the Chinese Government are again using their (controlled) media to heighten consumer anger prior to "resolving" this issue with Unilever and P&G through force?

China's rampant inflation is largely of its own making, with loose financial policies stoking an already burning fire. And recent announcements about dramatically increasing the minimum wage over the next 5 years will only make the situation worse. However, expecting manufacturers and retailers to take up the slack is naive, especially the foreign-owned companies who do not have the Chinese financial safety net of being state-owned.

For many years, making a profit was an optional component in the land-grab of building a foreign-owned business in China. But not anymore. With developed economies still underperforming, the China honeymoon period is well and truly over and Global HQs are expecting their Chinese businesses to break even at the very least.

But with margins being squeezed from all sides, FMCG and consumer goods businesses in China are in for a rough ride, and it would not surprise me if we see one or two more big names pack their bags and leave.

Brand Value?

Below is a picture I took this morning of a valuable McLaren Formula 1 display car which has been the victim of China's continued lack of appreciation of brand value.















Clearly, the people who were responsible for creating/constructing this display stand outside one of Shanghai's busiest KTV outlets were focussing on how to make it as cheaply as possible rather than considering:

1. The value of the display car (and the duty of care that should go with that)















2. The value of the Johnnie Walker brand (and the duty of care that should go with that)

3. Optimising the media value of the premium outdoor display area negotiated with this leading Johnnie Walker outlet (which would have cost a LOT more than the display stand)














As I have written on these posts previously, China is reactive, not proactive. So it is likely that this stand will now be rebuilt in a few hours, and the car will be patched up/subsequently repaired. The cost of this remedial work will far exceed what doing it right in the first place would have cost. But that is a very familiar story in China and it shows no sign of changing.


Keep Walking.

Trained Dogs

I have always believed that life is a journey, not a destination. But no one seems to have told the Chinese. In their rush to achieve the various symbols of wealth, prestige and an international lifestyle, many of the pleasures that go with new acquisitions are lost.

One example is dog training. In the last ten years, owning a dog in China has gone from something highly unusual to something common place. But training the animals is still a relatively new idea. The solution, in time-poor, cash-rich China? Boot Camp for dogs. Yep - the Chinese send their dogs away for a few weeks to special doggy schools where they are trained in the art of sitting, not pulling on their leads and generally making their owner look good.


But I still have very fond memories of the amazing bonding time that training my first dog provided, and the personal satisfaction of seeing my efforts being rewarded. That is all sadly lost if you delegate this task to others and take no interest in the process.


Regrettably, many Chinese middle-class parents may, in time, find they are doing exactly the same with their single child:

• From the moment the child is born, the parents are hands off.
• For the first few months, the Grandmother stays with the new mother and takes total charge. Additional help comes in the form of a dedicated live-in Ayi (maid) who will take full responsibility for feeding, bathing and putting the child to sleep.
• As the kid grows older, the Ayi and Grandparent relationship is retained as the mother quickly goes back to full time work - essential to maintain the higher income levels that the family require to sustain their (misguided?) material aspirations.
• With the start of school comes relentless homework, but this valuable bonding opportunity is lost as the support/assistance of the child is often delegated to group-run homework clubs, whilst the weekends are childless as the kid is off attending morning to evening extra schooling and music classes.
• Finally there is university (hopefully in the UK or USA , if the kid has good grades and the family bank balance can afford it)

Throughout this whole "journey", the parents seem to only have their eyes on the destination. But by then it is too late. I have a Chinese friend who has realised their mistake and is now frantically trying to bond with their teenage kid before he grows up. But the boy just thinks it is weird and does not understand why they are now being followed everywhere and hugged by a father who has taken little interest in them for the past 13 years.

Historically, the Chinese had children primarily to ensure their retirement security. Those days may have passed, but some of the attitudes have unfortunately remained.