Retail Insights. Entering China Still a big opportunity when doing it right!

Transcription

1 Retail sights Entering Still a big opportunity when doing it right!

2 Entering Still a big opportunity when doing it right! The increasing market saturation and economic uncertainty in the Western World have made internationalisation a key topic for European and US retailers and consumer goods brands. For many of them, is on top of the list of potential market entry candidates. There are good reasons for it, but some key aspects need to be considered for being successful in this country. 1 in the Spotlight of ternationalisation Globalisation has reached a new dimension: developing countries around the world are transforming from pure sourcing destinations into markets with a fast growing demand. At the same time, sales in developed countries are stagnating or even declining due to a higher degree of saturation and an uncertain economic environment. As a result, internationalisation efforts of consumer goods companies change in two ways: western world anymore, but massively shift to emerging markets anymore, but also become a key initiative for growth is a key target for internationalisation: For many western consumer goods brands, and increasingly also retailers, is the driver of their overall growth (Reference Figure 1). has not lost any of its attractiveness in the last years. The opposite is true: as early entrants tell success stories, others want to follow and existing players want to expand. 2 Factors Driving s Appeal 2.1 Attractive Economic Environment With a GDP of ~ 5,000 bn in 2011 and a projected real growth rate of 8% per year, will be the world s biggest economy by the end of this decade. Although growth rates are expected to slightly cool down, they will still be considerably above levels of the western world. The Chinese government is stabilising the GDP growth through supporting measures for growing domestic consumption, e.g. by increasing minimum wages. The positive development is also reflected in the and growth of the apparel market which exceeds by far the development in the western markets (e.g. Germany), but also in other bigger emerging countries (e.g. Russia Reference: Figure 2). Figure 1: Presence of European Fashion Companies in Sales > 2,000 mn Sales > 750 mn Sales < 750 mn Fashion Brands 29% 71% 39% 61% 35% 65% Sales > 1,000 mn Sales > 750 mn Sales < 750 mn Fashion Retail 20% 80% 14% 86% 10% 90% 2 ENTERING CHINA STILL A BIG OPPORTUNITY WHEN DOING IT RIGHT! KURT SALMON GERMANY

3 CAGR* : % % Germany Clothing market, bn 75.6 CAGR* % Cities with > 1mn inhabitants 4 Russia Clothing market, bn 53.4 CAGR* % Cities with > 1mn inhabitants 11 Clothing market, bn CAGR* % Cities with > 1mn inhabitants > % % % % N ot illustrated * CAGR = compound annual growth rate 2.2 Favourable Demographic Development Two demographic developments set the economic growth into a compelling perspective. Firstly, the population growth is low in. Hence, the GDP growth closely translates into a higher per capita GDP, favouring higher consumer spending. Secondly, the middle class segment will grow considerably by a half to almost 60% until The purchasing power of this segment is expected to grow above average over the next years. 2.3 Affinity to Western Brands For most of the Chinese population, consumption beyond the pure necessities is a relatively new concept. Consumption is still more homogeneous and to show that one has made it. Strong brand names can grow quickly into the hearts of the Chinese. More Chinese people migrate to urban areas where they start to follow a more western way of life: while in % of the Chinese lived in cities, 59% will do so in Chinese people are familiar with and well informed about western consumer trends, e.g. in fashion and electronics. A growing internet penetration rate of 38% further accelerates this development. 2.4 High Willingness to Pay a market flooded with products of low quality and low priced local imitations, higher priced western brands become desired status symbols. As a result, retail prices of western brands in are often more than double those in their home markets, depending on the brand and category. Those price differences have been sufficiently high to compensate for high tariffs when importing branded goods from Europe or the US. Figure 3: Market Entry Year of Selected Consumer Goods Companies Before ENTERING CHINA STILL A BIG OPPORTUNITY WHEN DOING IT RIGHT! 3

4 2.5 Easier Market Access for ternationals Doing business in has become easier over the years for international companies. Before 2005, joint ventures were the only way for foreign direct investment in. Since then, fully foreign owned enterprises have been allowed in the retail sector. As a result, operating own retail stores and foreign owned enterprises (WFOE) have become more common. Given this attractive environment, a number of companies have already entered the Chinese known brands like Levi s, Esprit and Bestseller (Jack&Jones, Vero Moda) started in more than 10 years ago. Others like Zara, H&M, US shoe retailer Aldo and European sportswear retailer INTERSPORT started their Chinese operations more recently or are doing so right now. Overall, it is still a good starting point for entering, although companies should not wait too long as the market will get more saturated and competitive. 3 Key Questions to Answer before Entering the Chinese Market From multiple Chinese market entry projects, Kurt Salmon has identified the following key critical questions that need to be answered (Reference Table 1): For those questions, strategic options exist, with pros and cons for each alternative. The preferred factors that need to be considered, such as: Table 1: Typical Key Questions for Market Entry operations 4 Success Factors Entering the Chinese Market Despite s strong appeal, entering the Chinese marketplace is a complex task. Only brands that are aware of s unique characteristics and requirements will be successful. While each entry strategy clearly depends on a company s individual situation, some generally accepted key success factors can be identified. 4.1 Having a Winning Value Proposition Entrants need to know their target customers to create and communicate proper USPs and reasons to believe in the brand. The value proposition in can differ from a company s home market for a number of reasons: for example, the Chinese buy more for friends, partners and parents, due to a strong tradition in gift making and care taking the Chinese consumers prior to the company s market entry but have a different image than in their home market relevance to the Chinese. For example, brand heritage and craftsmanship can be important for a higher positioning Key Area Value Proposition Assortment Strategy Distribution Channels Operating Model Plan Global tegration Key Questions 4 ENTERING CHINA STILL A BIG OPPORTUNITY WHEN DOING IT RIGHT! KURT SALMON GERMANY

5 Once the value proposition is defined, companies need to adequately communicate it to the target customers. Given the importance of branding, this generally results in high marketing efforts over a 4.2 Having the Right Assortment Although Chinese consumers follow western trends, they can have distinctive taste and product preferences that need to be understood. Brands need to do profound market research to determine consumer needs before deciding on whether to offer the full global line, pick a selected range from merchandise (Reference Figure 4). The merchandise and assortment planning process and organisation need to adequately reflect those differences. a large country like, consumer tastes and purchasing power differ widely by region. It therefore needs to be carefully analysed whether a one assortment fits all strategy works or regional/ local adjustments need to be made, and if so, at which time in the market lifecycle. addition, differences in climate and human physique need to be considered, Average temperatures and humidity differ widely, which can impact assortments and delivery dates. The Chinese from the South are smaller and slimmer The competitive environment can also be very heterogeneous at different retail locations. A retailer might find himself in one city next to a Gucci store and in another city next to a C&A store clearly impacting localisation of assortments. 4.3 Choosing the Right Distribution Channel to the Consumer stores account for more than 95% of retail sales. corners and are operated by partners and/ or are predominantly in shopping malls of higher tier apparel, but are expected to have significant growth potential (Reference Figure 5). remarkable growth rate of 33% per year and is expected to outpace the US as the largest online in, relative to their store market entry. Market entrants need to critically review those developments and the underlying economics understand implications for business case and overall profitability. 4.4 Identifying a Suitable Operating Model Today, brands can enter and penetrate the market on their own, and a number of global players mostly already with a proven track record in have recently followed this avenue. For brands that lack sufficient market knowledge or retail expertise, entering the Chinese marketplace with the help of one or more partners can still be advantageous (Reference Figure 6). Figure 4: Range Standardisation vs. Differentiation Figure 5: Greater Apparel Channel Split (Value) 1 2 range = Global range range = Portion of global range 40% 10% 35% 39% 2% 44% 34% 1% 48% 3 4 range = Partly countryspecific Further differentiation of range within 7% 8% 10% 11% 1% 4% 1% 5% Department s Factory Outlets Hyper-/ Supermarkets E-Commerce Specialty s (Mall, Freestand.) Others ENTERING CHINA STILL A BIG OPPORTUNITY WHEN DOING IT RIGHT! 5

6 border franchise) or by a WFOE. A master franchisee can help manage multiple smaller franchisee also acts as a distributor who imports the products. Combinations of those models are possible: for example, a brand operates flagship stores in tier 1 cities by itself, whereas stores in lower tiered cities are operated by franchisees. For international brands, having the right operating model and the right partner(s) to optimally align their own and the partner s capabilities is crucial for entry and also one of the key reasons for failure. strategy: large, often countrywide active partners provide deeper retail expertise but will have their own view on how to run the business. Small and mostly local partners allow for a higher degree of control on operations but also need more guidance Nowadays, an international brand or retailer is mostly not the only one approaching an attractive potential Chinese partner. Rather, there is increasing competition for the best partners. As a result, the partners have growing partnership expectations, which make the partner search more challenging: brands should commit sufficient time and resources to find the right match. 4.5 Defining the Right Roll-out Path the past, most international brands entered the Chinese market via tier 1 cities such as Shanghai, development and their higher income. As a result of this development tier 1 cities have become highly competitive. At the same time, tier 2 cities such as Chengdu, Wuhan and Tianjin, as well as lower tiers, have become more attractive due to higher growth rates and increasing purchasing power. Western brands need to think more critically about their business in is considerably high. Brands that grow their POS base as they used to in their western home markets risk losing market share growth of sales and number of POS is common. For example, Bestseller s brands Jack&Jones and Vero Moda entered in 2000 and 2001, and today are sold at more than 3,000 POS. 4.6 Having a Clear Vision on Global Business Alignment Already when entering, a company should have a clear vision on how to evolve the business model from a global point of view. Many companies have already operated in for years without having critically reviewed and sufficiently adjusted their business model over time. Key points that need to be reviewed are: and assortment planning development and buying calendar product flow 4.7 Having Enough Patience Once Entered companies generally break even at a later stage, but then become exceptionally profitable. The Figure 6: Common Operating Models for ternational Apparel Companies in Own Retail WFOE Franchising Cross-border Franchising Overseas Foreign Company/ Brand Wholly Foreign Owned Enterprise (WFOE) (Master-)Franchisee Sub-Franchisee 6 ENTERING CHINA STILL A BIG OPPORTUNITY WHEN DOING IT RIGHT! KURT SALMON GERMANY

7 main reasons for this are higher initial investments for marketing and fast POS growth (either own stores or contribution to partners stores). Moreover, competition is getting tougher: companies from the US, Europe and Japan which may have not entered. Additionally, local Chinese companies learn fast from their international competition. market allow for accelerated sales growth and solid profits. Brands that look for returns without investments into gaining market share will be less successful. But a growing market share alone does not automatically translate into profits anymore. It from planning to sourcing and supply chain. 5 Chinese Market Entry Approach Made to Measure Secondary and Primary Research Strategic Value Proposition Operating Model Business Case and Roadmap Implementation 1 Market research provides a deep understanding of the market, target consumer and brand 1 positioning through 2 different methods, e.g.: Secondary and Primary operating models, competitive landscape Research Seconard Strategic Value and Primary shopping behaviour and competitors perception Proposition Research Strategic Value Proposition Operating Model 2 Operating Model 3 Leveraging the research insights to define strategic value proposition: Business Case and Implementation Roadmap Defining the operating model based on research insights and value propositions: depth), operational and financial KPIs responsibilities, commercial framework) Business Case and Roadmap 4 Business case and roadmap providing a rationale and an implementation framework for the market entry: potential partners, considering volume and POS growth Implementation 5 Detailing out the defined concepts and implementation (pilot, rollout): ENTERING CHINA STILL A BIG OPPORTUNITY WHEN DOING IT RIGHT! 7

8 Copyright Note: 2012 Kurt Salmon Kurt Salmon Germany GmbH Königsallee Düsseldorf T: +49 (0) F: +49 (0) infodus@kurtsalmon.com The authors: Managing Director, Kurt Salmon Germany Dorothea.ern@kurtsalmon.com Dr. Sven Kromer Partner, Kurt Salmon Germany Sven.kromer@kurtsalmon.com OUR SERVICES Strategy and Transformation Strategy Acquisition tegration Operations Implementation Support Kurt Salmon is the leading global management consulting firm specialising in the retail and consumer products industry of more than 1,400 consultants in 13 countries across four continents. Today s increasingly complex environment demands more than just a consultant as a trusted advisor, Kurt Salmon works with industry leaders to design and then drive strategies and solutions that make a lasting and meaningful impact. Kurt Salmon is committed to delivering measurable results for its clients through executional excellence.