I am often asked by friends from the U.S. and Europe what types of businesses, especially foreign companies, succeed in China. After spending years in China and observing consumer behavior in the country, here are a few thoughts on what types of businesses tend to succeed in China:
1) Businesses that understand their local market
As the most populous country in the world, China is a collection of different regional markets, each with its own consumer habits, finances and preferences. Businesses that understand this can profit from it. For instance, the most profitable store for privately held Italian fashion house Giorgio Armani in China is in the city of Taiyuan, a third-tier city and major coal-mining center in northern China.
Often rated one of the most polluted cities in the world, Taiyuan is as far from being a center of high fashion, as one can imagine. However, Taiyuan has a large concentration of multimillionaire coal-mine bosses who lack convenient access to duty-free shopping in Hong Kong because there is no direct flight between the two cities.
After Armani’s success in Taiyuan, other European luxury houses such as LVMH Group’s Louis Vuitton (PINK:LMVU) also set up large flagship stores in the grimy, highly polluted city.
2) Businesses that offer status and/or value
Chinese consumers tend to be both extremely value-conscious and extremely status-conscious. They usually would not pay extra for something unless it has added value. Most Chinese are only willing to pay very little for basic every-day items, but are willing to pay more for items or experiences that enhance their social status.
This is especially true for personal items such as clothing. A middle class Chinese consumer would tend to avoid mid-priced stores such as Gap (NYSE:GPS) altogether. They would shop at Wal-Mart (NYSE:WMT) for underwear and everyday basics, then buy a few show-off items at Louis Vuitton. In the U.S., most people who shop at Louis Vuitton regularly do not also shop at Walmart.
The Chinese are usually not willing to pay extra for items or services with no status value. That is why Mindray Medical (NYSE:MR), which sells its medical devices at a 30% discount to foreign competitors, was able to surpass GE (NYSE:GE) and Siemens (NYSE:SI) in the Chinese market—Mindray products offer good value.
3) Brands that the Chinese trust
Because of the large variety and complexity of Chinese food, most Chinese have highly sophisticated taste for food. Consumers in China are rightfully very proud of their culinary heritage. Most Chinese consumers, rich and not-so-rich alike, prefer Chinese food over Western food.
U.S. based fast-food chains such as McDonald’s (NYSE:MCD) and Yum! Brands’ (NYSE:YUM) KFC have done well in China NOT because their food tastes better. These Western chains succeeded because they are clean, convenient, cheap, consistent and safe. In a country where food safety is a major issue, consumers trust foreign companies like McDonald’s and KFC more than low-priced local restaurant operators.
Other restaurant chains in China have succeeded because they offer atmosphere and décor not found in Chinese restaurants. In China, Yum! successfully branded their Pizza Hut restaurant as a mid-priced sit-down Italian restaurant. As a result, Pizza Hut has become the go-to restaurant for many middle-class Chinese families to celebrate Western holidays such as Christmas and Valentine’s Day in China.
The Chinese marketplace has become increasingly complex and challenging. It is not easy to succeed in China, but for those who do, the potential rewards are huge.