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Potential & Pitfalls Prevail in China



By Suzanne and Bob Grayson



Published January 3, 2007
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Every marketer is salivating at the bonanza of opportunities within the Asian market, especially China. After all, where in the world—only in fast-developing countries—might you ever see high double digit gains plus, again? But as many of our ancestors discovered when they came to our shores, the streets are not paved with gold. So while we all dream of China’s “good snow” (even novice  skiers can handle the hills when they’re topped with fresh, deep snow), there will be plenty of falls along the way. And what about the pros? Their falls can be incredible lessons for those following in their tracks. We’ll pick that up in a few paragraphs.

First some background. We recently traveled through several major cities in the Eastern part of China, including Beijing and Shanghai. We met marketers and “old China hands,” avidly watched consumers in the stores and on the streets, and looked at the magazines that are educating and framing Chinese consumers’ beauty practices. We were particularly privileged to have a personal tour of the Estée Lauder offices and impressive new Innovation Center (Laboratory #7) in Shanghai.
   
Here are some general observations:
    • Plenty of 5-star hotels but you have to use bottled water to brush your teeth!
    • Fast-growing economy, but 200-300 are million people are below the poverty level!
    • An “average” large city has four  million people and there are plenty of them! Some cities have more than 30 million and are larger than the state of California.
    • China boasts the largest man-made project in the  world—3 Gorges Dam—but 1.3 million people were displaced to build it. (Only in a dictatorship!) Also, it’s about one year ahead of schedule and under budget! When was a construction project ever under budget, and even on time? (Only in  a dictatorship where you can “report” at will!).
    • The one-child law enforced to reduce the growth in population is working, but there are too few youngsters to replace a  rapidly aging population. Parents and grandparents put everything into that  one child. (You know what that means).
    • China holds $1 trillion in reserve, but the national banking system has untold billions in bad debts due to “mention loans” to failing business. (We suspect that the government has decided that it’s cheaper to keep people employed by providing funds to failing businesses than to handle the political fallout from unemployment. (Only in a dictatorship!)
    • Many 10-year old “modern” apartment buildings already look like tenements, with exterior signs of acid rain running down the walls—visible, living pollution.
    • Spectacular architecture—great buildings galore, but  Shanghai has the edge, by far. Buildings light up the night sky with sparkling graphic designs. Tremendous use of energy? Yes, but, it sure is impressive and  exciting.

What’s Happening in Beauty?


Now for the beauty market highlights:
    • Spotty in-store traffic in the beauty departments. Other departments jammed! Considerably more women in the beauty departments of “moderate” department stores, far less in the more upscale stores.

    • Retailer product line offering approach is more “democratic” than the European style. Whereas many of the latter’s department stores do stock some mass lines, they do not butt them up against the upscale lines. In many stores, you’ll find a L’Oréal counter right next to Shiseido for example, and equal in size. Then too, it’s really odd to go into a department store and see eight feet of Olay and Definity counters. But that’s fairly typical. Olay is everywhere, with major space and incredible presence in mass and moderate-priced department stores. Strange to see it sold from behind a counter, with white-smocked sales women. (Ironically, now that Olay is so hot worldwide, it seems that P&G may have jettisoned its cosmetic line too soon. It was a case of “Didn’t make the share numbers” —but that was the short view, whereas P&G is generally respected for its long view. Oh well, that was pre-Lafley—might have been different today. Olay cosmetics would be a powerful global brand, especially since Neutrogena hasn’t  achieved much with its cosmetics in the U.S. and Revlon–well, you know  that story. However, Revlon does look very good in this market, with good space and a classy presence. Same for Maybelline with great distribution. We saw Max Factor but no Cover Girl, which is testing in several locations in northern China, but word is that the results are so-so.
 
  • Department store discount is 25%  and sales commission is 2-4% of retail. The business is profitable, once it gets going. But, would you believe, GWP is alive and well? You’d have thought Lancôme (18 piece gift set), Lauder, et.al., would have learned their lesson from the U.S. But the Chinese (and maybe everyone else in the world) love a  bargain so who can resist? Hmm, maybe the government could see its way clear to ban the practice. Why not? That’s what dictatorships do!

    • Boots has a line, here and there, pushing  botanicals, naturals, and Mediterranean positioning.

    • H20 does not have a free-standing store, but is relatively strong in department stores. The brand is led by a star product (you know how we feel about stars), based on a simple positioning story:  “eight glasses of water in a jar.” It is formulated as a cream for winter and a gel for summer. Which makes for an interesting problem facing all cosmetic  marketers. North-to-south, China goes from arctic to sub-tropical and from  dry to humid. Plenty of mountains and deserts in between. Does one formula fit all? L’Oréal is reportedly working on different versions based upon climate needs and preferences. Hope it works out. Mass marketers certainly haven’t worked it out in the U.S. Same stuff goes to all markets and stores, especially in the new product promotional displays. Valuable space is taken up by slow moving products. The traditional lines in mass can’t even handle the ethnic shade issues on a store-by-store basis within the same chain or city.

    • Avon is coming back. Essentially,  it was out of the real action for six years by government decree. An  interesting sidelight is how a dictatorship handles problems. With the entry of Avon and Amway, a number of sleazy operators came in and established multi-level marketing companies. But their interest was in selling  “distributorships,” not products. The pyramids got out of hand so the government shut down all person-to-person selling until it could figure it out. Avon then proceeded to open about 6,000 retail stores while Amway  “skirted” the law by having its sales people get their own business licenses. One remaining bureaucratic stumbling block for direct sellers is that only 25% commission can be paid—effectively stifling multi-level selling.


 A European heritage and a good product story has helped Christian Dior build a strong position in the Chinese cosmetics market.
Marketing Challenges


The two biggest issues within marketing are finding and retaining talent and stifling regulation.

Regarding the former, there is plenty of job hopping among all packaged goods and beauty marketers, at all levels. Each jump raises the salary bar.

Government interference has pushed import duties in the 30-40% range. Actually, import duties are  about 12-16%, but VAT is another 17%. The government’s mantra is “You don’t like the duty? Manufacture here.”

So how you do that and maintain the  cache of being a European/foreign line? A question, unanswered. Also, each SKU requires registration. Pity the poor imported color line with  its usual staggering number of SKUs. Sort of forces a brand to cut to the best  selling shades, but how do you know that going in? Research. Research. Research. Time. Time. Time.

Consumer Challenges


Although the consumer is growing savvier by the minute, the Chinese still have a long way to go. Here are some things to consider when trying to sell to the Chinese consumer:

    • Not at all trendy or fashionable, unless you are in the very upscale areas. Even then it’s on the conservative side. The young haven’t caught the Japanese cachet. Whereas we saw high-heeled, over-the-knee boots or hose all over Japan, accompanied by short shorts and loads of cabled knitwear and trendy hair styles, there was hardly any of it in China, where they are most likely made. The observation even holds true in Shanghai, which was once known as the “Paris of the East.”

    • Not much face makeup, even lipstick has far to go. We learned that high school girls cannot wear makeup/lipstick to school! From a psychological point of view, they’ll love it more on the weekends.

"How-to" demos are typical in consumer magazine editorial pages.
    • The cosmetic/personal care business is skin care, skin care, skin care, with whitening the key driver. That’s the leader in every line. Chinese women have been using “pearl creams” for many years, a social/status issue rather than a skin care issue. It’s not that Chinese women want to be Caucasian—no, they just want porcelain skin—like the pictures of the empresses of yore. Only farm workers (low status) have darker skin. Virtually all of the models in magazines and ads have very fair skin, whether they are Asian or foreign. The sun is the enemy. Strange to see umbrellas attached to the handle bars of bicycles, with glove-like covers for the hands.

    • Whitening and moisturizing are focal points for all ages, with smooth, even skin as the key aspirations. The skin care market skews much younger than in developed nations. SPF is not viewed as much as for anti-aging as non-darkening of the skin. Anti-aging products per se are perceived as more preventive than corrective.
   
    • Chinese women like excitement at retail (U.S. retailers take note). They are turned on by clutter, promotional atmosphere, theater, glamour (even though they are conservative), bargains (reinforces how smart they are) and a “buy me” atmosphere. Sterile and  pristine doesn’t work for them.

Lauder’s Chinese Plan


A key reason for Estée Lauder’s establishment of the new laboratory  facility in China a year ago, (has been well-established in Japan for years), is to understand the special needs of the Chinese consumer. Named the Innovation Center, its key charge is to develop products more suited to their needs, and with a global vision. Its mandate is to provide consumer research, product guidance, sourcing and testing. Interestingly, packaging and raw materials that Estée Lauder gets from China are now tested there. Makes sense.

There’s heavy duty collaboration with universities, especially as it regards Traditional Chinese Medicine. There’s a strong need to differentiate Chinese products from Japanese. Products must be in tune with the Chinese needs and  preferences, but some breakthroughs for the rest of the world are expected. Lauder is committed to a 360° effort in China, from packaging to product and marketing. Already, some exciting new products have come from this research and development center. And you know what that power can do. For now and the near future, The Estée Lauder brand maintains a very tight  distribution strategy. It operates 50+ outlets in the very high-end department  stores and selected Sephoras.

Lancôme and Dior have much broader distribution. Chanel is somewhere in between. Estée Lauder’s strategy is to secure the dominant role in the luxury market.

Interestingly, the luxury  consumer in China has a different profile than in other markets. She’s younger, (under 40), working and with plenty of disposable income. 
 
Magazines help to build business—at least some of them do. The usual suspects, Vogue, Elle, etc., are in China, but local magazines really fit the Chinese consumer’s psyche—busy, exciting and educational. Rayli magazine does a great job for consumers and marketers. Note a typical editorial page, not just product credit lines to accompany the photograph, but  photos, tips and an in-use shot. U. S. magazines take note, this issue was loaded with how-to excitement. 

Christian Dior fits right in with a spread of strong product stories plus makeup artist authority. (By the way, Christian Dior looks very powerful in this market.) We’ll show you some other  advertising in the next column so that you can see how marketers are doing it  in China.

Big surprise! Retail prices of products are noted, some more discretely  than others, but they are definitely there. What a concept! That goes for prestige and mass brands. Wonder how that came about. Really neat for the consumer and would be a major upheaval if it comes to the U. S. What do you think?

When Giants Fall


Although the opportunities abound, succeeding in China isn’t easy. The hard lessons learned by major retailers can provide some valuable insights for all of us.
 
  • Wal-Mart’s big miss. Here’s the scenario. It came in arrogantly with the mantra that “what works globally,  will work in China.” But management has subsequently discovered that strong local customs do not bend to strong will. Wal-Mart built stores that were too large with vast selling areas that were too neat and too open. Product sizes were too large for small families and small apartments. With produce, the Chinese like a feeling of abundance, lots of touchable,  unwrapped fresh produce and live fish, and a very busy atmosphere—see any Chinatown in the U.S. There’s lots of pushing and shoving. The antithesis of what they got with Wal-Mart, which is now mending its ways.
 
   • Sephora’s experience in Japan is also rooted in arrogance. The retailer barrelled into Japan with the same format of stores that are found in the U. S. There was an overwhelming fragrance presence (low use in Japan) and lots of color, with lines not noted for skin care, the key beauty item, there. Many of the independent lines which were key to its success in the U. S., were unknown in Japan, where the prestige of European and upscale  U.S. lines really count. Now Sephora has entered China and is doing it right. The store we visited was on the main floor of the Carrefour building —a great traffic spot. It still has a strong fragrance presence, about half of the right wall as you come in, approximately 60 feet. We saw lots of fragrance space and promotion in the department stores. Building for the future, we assume. But look! Full lines of...Estée Lauder, Clinique, Christian Dior, Clarins,  Guerlain, Lancôme and a bunch of the other prestige lines, plus Sephora  Professional skin care. Sephora has its act together in China. Look for a  Japan re-entry soon. Too good a market to miss.

Chinese beauty magazines include a wealth of beauty tips in their coverage.

    • Carrefour did it right. The personal care/cosmetic area feels like a store-within-a-store. Carrefour’s operation resembles an upscale drug store. Revlon looked terrific. Carrefour’s clean, bright and the abundance of merchandise is appealing. For toiletries, hair care, skin care and color, Carrefour uses company-supplied demos in the aisles as well as the wall area. Each “demo” is there to sell/educate her line against all others. Lots of consumer competition here.  Add demo cost to import duties and slotting allowances and the margins on U.S. brands begin to shrink. The rest of the store is great, and the produce area  is fabulous. High-piled gondolas, fish tanks, lots of buy-me buzz.  

Starting Out in China


How does a late-comer get into the act? After discussion with several marketers, it seems to us that the ideal way to enter this market would be to buy a small company with solid distribution, manufacturing facilities, infrastructure and market know-how. But beware the arrogance. When L’Oréal renamed the Mininurse brand to Garnier-Mininurse, consumers were so confused that L’Oréal switched back to Mininurse. Obviously, L’Oreal  didn’t read enough tea leaves. Interestingly, there are probably opportunities to buy some local lines and pick up instant expertise. Chinese companies sell all the time and for the usual reasons: no heirs, retirement, other interests, and an  opportunity to emigrate to Canada. That goes for packaging companies, too. If you have interest in this market, we can put you in touch with some people on the ground in Shanghai. Just drop us an e-mail, suzanne@graysonassociates.com.


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