Having contributed articles about sight and vision to EyeWorld magazine since 2003, I understand how much more informative the trade press can be for industry practitioners than what you pick up on the newsstand.

But even the industry magazines have gotten the China picture very very wrong.

Back in 2004, Nation’s Restaurant News – “the news leader of the foodservice industry” – bought into the idea that 1.3 billion Chinese consumers were ready to gobble up their fast food products:

BEIJING — From Starbucks Coffee and McDonald’s to Hooters and Dairy Queen, U.S. restaurant brands are colonizing culinary territory all across the People’s Republic of China.

China, with its booming economy, 1.3 billion consumers and growing acceptance of business investment from abroad, has become a top global destination for U.S.-based chains. Quick-service brands are especially intent on expanding their presence in China.

Yum! Brands, parent of KFC, Pizza Hut and Taco Bell, forecasts that fully 30 percent of its planned 1,000-unit international growth next year will be in China. McDonald’s expects to grow from nearly 600 units in China currently to 1,000 by 2008.

There’s just one big problem with this article. It’s misleading.

Taco Bell, for instance, has done poorly in China. You can forget about drive-thru gorditas – and even Margaritas in its sit-down establishments didn’t take. According to Wikipedia:

The chain had operated three restaurants in China, two in Shenzhen and one in Shanghai. However, the Shanghai location closed at the end of January 2008. One location in Shenzhen closed on February 20, 2008; the second location followed shortly after, closing on March 5, 2008.

Taco Bell has hardly capitalized on 1.3 billion customers. Based on the Wikipedia article, it doesn’t serve even 1 now.

Caught up in the China hype, countless investors have swarmed the mainland, and are only finding out now that the emperor has no clothes, and isn’t willing to pay for them either – at least not for the finest silk.

A while back, China Law Blog (CLB) and China Vortex did an effective job at debunking the 1.3 billion consumer myth:

China Vortex first cited some figures U.S. businesspeople use to justify their China business:

The number of mobile phone subscribers in China is now greater than the US; China is now the world’s second largest auto market, trailing only the US; China’s demand for oil imports has far-reaching influence far outside its borders.

CLB then comments:

The post sees danger in relying on these numbers because they make no allowance for the fact that the “Chinese market is complicated” and “filled with traps to capture uninformed executives who fail to grasp the difficult realities of China’s markets.”

The post goes on say that though China’s consumer market is huge, there really is no single national market deals need to be negotiated city by city. The main problem with this city by city distribution is not so much the high costs, but the time it takes to roll out.

Unfortunately, more foreign businessmen have relied on lies, damned lies, and statistics, as Mark Twain would say, rather than advice from the pundits.

Only today, when China’s economy is looking forward to doldrums, may the froth of China business expectations be swept aside to view the true potential of the China consumer market.

Tom Doctoroff, Greater China CEO of JWT, a marketing firm, explained what that consumer market really looks like for the near-to-mid term in China in the latest issue of China Economic Review. He begins with what we already knew in the boom times, but finally, what we can start to believe in these bubble-popping times:

• It is important to understand that, even in boom times, China’s middle class - approximately 125 million strong - has never been spendthrift.
• Savings rates are high, around 25%, and consumers rely on cash rather than credit.
• Newly wealthy individuals do not assume their money is safe: They have limited experience managing investments.

With your new superior fundamental understanding – that many Chinese really are tightwads – reflect on some new China characteristics, courtesy of the global economic meltdown and Mr. Doctoroff’s insights into their local implications:

• Auto sales have already driven off a cliff.
• Real estate purchases are sliding for the simple reason that it is not the right time to buy.
• Foreign travel destinations will be hard hit as well.

Rather than waiting for China’s vast market to bounce back, Mr. Doctoroff’s analysis suggests there are business opportunities in China so long as your psychological profile of the Chinese consumer is correct. He outlines how the Chinese will look to save in hard times while also saving face (which means spending):

• To the Chinese, homes and Audis are prized markers of success. They qualify as entry into the ranks of the economically - and, therefore, socially - empowered. Therefore, we expect to see an equally-dramatic spike in sales some time down the road as the country’s economic stimulus package kicks in and the waves settle.
• Although consumers will still buy publicly-consumed “show-off” items, they will limit risk exposure by “trading down” to lower-price tiers. In fashion, a man on his way up will buy Hugo Boss rather than Gucci. Or he might opt for lower-priced sub-brands, shifting from Armani to Emporio Armani.
• There will be only modest switching between multinational, high-priced brands and cheaper local options. As discussed above, premium priced items tend to be bought as status symbols. This means consumers will be less apt to scale back within categories that allow status projection. In China, the golden rule of marketing is that buyers will pay a high price for goods used in public but save ruthlessly in privately-consumed categories.

As always in China, do your homework. Do it over in another province. And keep your ear to the correct ground (preferably not one by the name of Wall Street).

    Channel: Local Wisdom     |