China Second Home - Strategic Management

Industry Opportunities and Threats

Currently, China’s consumption story is one of the key drivers of growth for multinationals (MNCs) in China as shown through a study^[1] by Economist Intelligence Unit. The Chinese government through its economic policies is raising incomes and shifting economic growth towards domestic consumption. This is an opportunity and at the same time a threat, as MNCs would have to compete with fiercely competitive local players.

As Chinese consumers spend more, there is a growing portion of incomes being spent on retail ‘experiences’. The key lies in pursuing the right strategy to approach the China’s retail market. Starbucks rode this trend quite well. The proof is in their explosive growth metric of almost one store opening every 15 hours in China. The article “Managing Differences - The central challenge of global strategy” talks about exceling at one of the 3 As, namely adaptation, aggregation and arbitrage. Starbucks has accomplished this by exceling at “Adaptation” in China. In China, Starbucks has laid emphasis on the concepts of ‘family’ and ‘community’. Unlike the United States, where the retail spaces are quiet, and customers generally sit solitarily with their laptops, in China, Starbucks was adapted to welcome crowds and lounging. The areas have open format seating and function as public living room^[2]. The chairs almost open out into the nearby spaces that include the walkways – that has encouraged customers thronging Starbucks spaces to exchange news, have lively conversations and discussions with friends, family or co-workers. Starbucks’ adaptation strategy has worked very well in fueling China’s nascent consumption trend. There are several other brands such as IKEA that have also used an adaptation strategy effectively to focus on the retail experience space as an opportunity.

        There is also a growing opportunity in China in offering products or services that elevate status and uphold reputation for the customer, without being too flashy or boisterous (as there is a government crackdown on corruption, opulence and wealth sources, impacting luxury brands). If done wrongly, luxury segment would be more of a threat than an opportunity. Foreign MNCs, that particularly operate in the premium brands space would do well to capture this opportunity, should they make use of social media in an effective manner. Tag Heuer, luxury watch maker, is one of the foreign MNCs that has gotten the formula on social media right. While it has 150K fans on Weibo, much lower than do other brands such as Tiffany (490K) or Raymond Weil (198K), it has one of the highest engagement rates. For instance, its average per-post engagement notches up 3.5K versus the luxury brand benchmark of less than 500^[3]. The success is driven by creating content that engages the young audience at a deeper level than just garnering “views”. The brand has the fans co-running contests at times – making the platform much more vibrant and encompassing. This concept comes through quite clearly in the article “Fan-centric social media: The Xiaomi phenomenon in China” that mentions about channeling fans through deeper stages of participation, beyond viewing and forwarding to commenting, creating moderation and arbitrating.