Affluent Chinese are traveling abroad in record numbers to purchase luxury goods. They are willing to pay for flights to Hong Kong, the US and Europe because the price of luxury goods is typically one third higher in mainland China due to exorbitant tariffs. During this year’s Spring Festival, Chinese travelers spent $7.2 billion abroad on luxury goods (according to the World Luxury Association) – an increase of 29% from $5.6 billion the previous year. What reasons do Chinese luxury shoppers have to offer for why they travel abroad to purchase watches, handbags, perfume and cosmetics?

• 72% “Luxury goods overseas are cheaper than at home”
• 69% “There is more variety overseas”
• 45% “The service and shopping experience is better overseas”

The China Observer View:

As the number of middle-class and affluent Chinese increase, outbound travel will continue to surge. This travel will be for vacations in addition to immigration. What this means for marketers isa: your China strategy should not solely be limited to the mainland – look for opportunities to target Chinese consumers in overseas markets as well.

Nike’s “Fuel for Dreams” campaign and Johnnie Walker’s “Yulu Project” demonstrate that online video is an extremely compelling channel to engage Chinese consumers, especially the young adult demographic. According to the 2011 Chinese Market and Media Survey (CMMS), individuals between the ages of 15 and 34 spend an average of 2.06 hours watching online video every day. Recent data from iResearch suggests online video market size will grow from 6.27 billion yuan in 2011 to as much as 22.5 billion yuan by 2014 – this same figure increased by nearly 100% YOY from 2010 to 2011.

The China Observer View

Marketers seeking to reach the teen to young adult demographic in China should seriously consider incorporating online video on websites like Youku, Sina, Tudou and iQIYI. Online video is gaining popularity at a rapid pace, and will only continue to grow in importance for marketers in the years to come.

*Pepsi recently ran a successful ‘Bring Happiness Home’ campaign for Chinese New Year attracting over 100 million views within two weeks becoming China’s No. 1 online video (see below):

Click here to view the embedded video.

Diageo is a UK-based alcoholic beverages company with a collection of brands ranging from Smirnoff vodka to Johnnie Walker whiskey to Guinness beer. Diageo entered China in 1995 and established its official Greater China Hub (Mainland China, Taiwan, Hong Kong and Macau) in Shanghai by 2002. The whiskey market in particular is an area of focus for Diageo given the high rate of growth in this segment (from 2005 to 2010 whiskey sales in China grew by 125% – reaching 17.5 billion yuan in 2010 according to Euromonitor). Diageo aims to shape Johnnie Walker into a premier brand for Chinese consumers ages 25-35; however, it faces fierce competition from Pernod Ricard’s Chivas brand. To compete with Pernod Ricard and other foreign players Diageo has gone to such extremes as to open the “House of Johnnie Walker” in Shanghai – a four-story retail and entertainment outlet to expose wealthy consumers to the Johnnie Walker lifestyle.

Challenge:

Pernod Ricard already established itself in China by promoting “Chivas-and-Green-Tea” as a drink of choice for patrons at Chinese bars and karaoke clubs.  In order to win more of China’s emerging whiskey drinkers, Diageo had to display Johnnie Walker as more than a beverage, it had to create an experience.

Solution:

Johnnie Walker partnered with acclaimed Chinese director Jia Zhangke to produce a series of brief documentaries titled the “Yulu Project”. The documentaries feature 12 individuals from different backgrounds, who all share one thing in common – they are willing to do whatever it takes to achieve their dream. One example is Zhou Yunpeng, a blind folk singer and poet who recounts the challenges he faces on his path to performing professionally. Xiao Peng (see video below) has a different dream, he seeks to create a successful company after returning to China from his studies overseas. Excluding a brief opening and ending scene of each documentary, there is no mention of drinking whiskey or of the Johnnie Walker brand. At the end of the video segment a Johnnie Walker logo appears followed by a link to the official campaign blog on Sina.com.

Click here to view the embedded video.

Result:

Through its “Yulu Project,” Johnnie Walker offered potential consumers an experience rather than an advertisement.  Johnnie Walker marketers engaged Chinese netizens through inspirational documentaries that prompted their active participation on a branded Sina blog, microblog and over 40 other digital platforms in China. “We are excited about this campaign as it allows us to communicate with Chinese consumers in a heart to heart way and co-opt them into our brand values,” said Johnnie Walker’s Regional Brand Director. According to Diageo, the campaign generated 20 million video views over the course of eight weeks.  Given the success of its first campaign, Diageo plans to run a second “Yulu” campaign later in 2012.

China is currently the world’s largest auto market with Chinese consumers purchasing more cars than their counterparts in the United States. It is estimated that 70% of these consumers are first-time car buyers which presents a tremendous opportunity for car companies like Ford. To gain an insider perspective of how Western automobile companies market their cars to Chinese consumers I interviewed Chantel Lenard, Vice President of Marketing for Ford Asia Pacific and Africa:

(Backaler) In your current role, what countries are you most focused on globally? Based on your experience working in China, what do you feel makes Chinese consumers unique in comparison to consumers in other developing countries?

(Lenard) Globally, the entire Asia Pacific and Africa (APA) region is very important to Ford’s growth.  Within this decade, we expect 70% of our global growth to come from APA, with a large percentage of that to come from China.  To achieve this growth, we will be introducing 15 new vehicles to Chinese consumers by 2015, each with class-leading quality, safety, fuel economy and smart technologies.  At the same time, we are accelerating our investments to expand our manufacturing and distribution capability in the world’s largest auto market – we are building four new plants in China currently, two new assembly plants (in Chongqing and Nanchang respectively), one engine plant and one transmission plant, both located in Chongqing; we are also doubling the number of our dealers by 2015 from 340 in 2010.

China is an evolving auto market with many diverse regional markets at different stages of development. 70% of these customers are first-time buyers who did not grow up knowing a lot about cars and yet they are becoming increasingly discerning and demanding customers given the explosive growth of the industry in the past 30 years.  This makes a marketer’s job both exciting and challenging!

(Backaler) Ford is both an early mover and a late entrant in China. It was an early mover in the sense that its history in the Middle Kingdom dates back to the early 1900’s when the Model T first arrived, followed by another push through a series of auto-part joint-ventures in the late 70’s – early 80’s. Yet, it wasn’t until 1995 when Ford formed a joint-venture with Jiangling Motor Corp that it actually began producing automobiles in China. How has Ford been able to manage how its brand is perceived by Chinese consumers? What impact does its history in China have on its reputation?

(Lenard)Ford indeed has a long history with China and it’s something we are very proud of. In our Shanghai office there is a letter from 1924 written by Dr. Sun Yat-Sen to Henry Ford inviting him to help build an auto industry in China. Dr. Sun wasn’t the only Chinese leader to engage with Ford. In 1978, Henry Ford II met with Deng Xiao Ping to discuss cooperation to grow China’s auto industry after China’s “Reform and Opening.”

Ford has a long history with China and a high level of brand awareness among Chinese consumers—and we look forward to a long and bright future here as well.  Now we have a partnership with Changan (Changan Ford Mazda Automobile) to produce Ford brand passenger vehicles and a strategic investment in JMC to produce commercial vehicles in China.  The Ford brand will continue to define itself through the brand-new vehicles we are launching by 2015 and beyond – these vehicles represent the modern-day version of Henry Ford’s original vision for Opening the Highways to All Mankind – great vehicles which are fun to drive but attainable to the ordinary consumers in China, just like the Model T which put the world on wheels over a century ago.

(Backaler) How is Ford able to manage the balance between maintaining its image as a global company, while adapting its products and business practices for local consumers? Is there a specific example from your time in China in which you successfully launched a localized product for the first time? What challenges did you face in the process?

(Lenard) Starting in 2009, China became the world’s largest auto market and today, every global competitor in the auto industry is actively courting the Chinese customer. What this means is that the Chinese consumer is highly discerning as they face a wide range of options when it comes to choosing an automobile.

At Ford, we have found that Chinese customers want and value the very same things that our customers globally are asking for: high quality, fuel-efficient, safe, well-designed cars with smart technologies that create a fun, connected driving experience. With every new “global vehicle” we design, we take into account the needs of Chinese consumers. The new Ford Focus, which will come to China in early 2012, has been designed with the Chinese customer in mind. This means that our China designers, engineers, product planners, and a whole host of other team members have an active role in making sure all the new vehicles in our product pipeline meet the needs of Chinese drivers.

(Backaler) For China in particular, given the size of the market, how do you segment Chinese consumers. Does Ford classify Chinese consumers based on city-tiers, regional clusters or by other means?

(Lenard) There are many different ways of segmenting the market, especially an evolving market as big and diverse as China.   At Ford, product type, customer type, and city-tiers are just a few of the ways we look at the market.  By product type, the small car, or C segment is the largest segment in China today, representing approximately 40% of passenger car sales.  The Ford Focus is a strong player in the C-segment today, and we look forward to growing our share of this large segment with the launch of the all-new Ford Focus this year.  When we look at consumer types, a very high opportunity group is first-time buyers — representing nearly 70% of new car buyers.  With these consumers, we have an opportunity to establish a relationship with them with their first Ford purchase, to hopefully keep them as Ford buyers for life.  City-tiering is an important way in which we plan our distribution network strategy.  As vehicle purchases increase in second, third, and fourth-tier cities, we are investing significantly to expand our dealer network in these cities to capture these growing opportunities as well.

The graphic above summarizes key findings from a recent report conducted by CIC and GroupM about marketing to Chinese youth. For those of you interested in learning more about marketing to Chinese youth in particular, I recommend checking out insights from ChinaYouthology and the GenYChina blog.

While the graphic is a generalization it does; however, highlight key differences between Chinese born in the 1970’s compared to their counterparts born in the 1980’s and 1990’s.

Chinese born in the 1980’s grew up in the wake of the ‘reform and opening’ – a period of tremendous change and economic growth. They spent their entire lives witnessing the world around them transform and modernize. Compared to those born in the 1970’s they tend to prefer more ‘work-life balance’ and have a greater desire to break apart the rungs of the corporate latter. In regards to managing their money, Chinese born in the 1980’s are more willing to use credit cards and take out loans to finance their lifestyles. This is in stark contrast to their peers born in the 1970’s who are still heavy savers.

Chinese born in the 1990’s seemingly grew up plugged into the Internet. They tend to have a disregard for authority, crave self-expression, and blur the distinction between their online and offline worlds. They use the Internet primarily for entertainment purposes. The Chinese web is filled with images of headshots taken with their mobile phones to display their unique personalities for the world to see.

Nike entered China in the early 1980s by relocating its manufacturing facilities from South Korea and Taiwan. However, Nike was not content solely producing its goods in the Middle Kingdom. The company set out to sell to China’s “2 billion feet” as Nike founder Phil Knight put it. Unfortunately, Nike experienced challenging times trying to convince Chinese consumers to purchase its premium athletic shoes in a culture where historically education is number one, and not much emphasis is placed on athletics. To create a market, Nike partnered with local schools, funded Shanghai’s first high school basketball league called the Nike League, and sponsored basketball tournaments in cities across the country. After 26 years operating in China, Nike finally recorded $1 billion in revenue, and by 2010 this figure had doubled to 2.06 billion. Now with over 30 years of operating experience on the ground, the Nike marketing machine continues to thrive in China where it plans to double its sales by 2015.

Challenge:

Through successful sponsorship of prominent athletes in China, like Olympic gold-medalist Liu Xiang and famous NBA stars, the Nike brand appealed to the male demographic in China. However, Nike aimed to further open the market for women’s athletic shoes and apparel.

Solution:

Nike created a commercial featuring tennis stars Maria Sharapova and Li Na. During the commercial Nike had the two professional female athletes share their dreams, and what they were willing to do to achieve them. Nike then partnered with Chinese online video portal Tudou to create a specialized campaign bringing together 50 female college students to create original video segments to share their own dreams. During the video segments the young women shared their goals of becoming professional basketball stars, yoga instructors, dancers – all while wearing the latest Nike sneakers and athletic apparel.

Result:

The “Fuel for Dreams” campaign successfully raised Nike’s profile among the young female demographic. The Nike Women page on Tudou received over two million page views from over one million unique visitors. More importantly the page received nearly 700,000 comments full of valuable consumer insights. The partnership with Tudou enabled Nike to reach its target demographic by hosting its content in an online environment where they were already comfortable.

The China Observer View:

Companies expanding into China for the first time (or entering third and fourth tier cities for the first time) often find themselves creating markets for products that never before existed.  In such situations education is essential to create a need in the marketplace. China has a vibrant online community where netizens engage in rich dialogue on message boards, micro-blogs and on social platforms like Tudou. This presents a unique opportunity for marketers to take part in a two-way exchange about the wants and needs of their customers. Structuring a campaign like Nike’s will not only lead to increased brand recognition in the short-term, but allow companies an additional channel to collect valuable product feedback to fuel innovation over the long-term.

Linda Kozlowski heads marketing and customer experience globally for Alibaba.com the world’s leading business-to-business (B2B) e-commerce platform. Alibaba.com is headquartered in Hangzhou, China with operations in more than 240 countries and 23 million users worldwide. I asked Linda what are the top e-commerce trends we should watch in 2012. The following is her response:

“E-commerce is booming in China, but I believe we are about to see even more dramatic growth in the sector this year.  There are already about 500 million Internet users there, according to a 2011 CNNIC report, this represents about 37.7% of China’s population. Alibaba.com has been at the forefront of building trust in online commerce in China, through safe payment and shipping arrangements.  Now we are seeing real momentum building as online shopping is boosted by people’s use of social media and mobile phones. Chinese consumers are very keen to read and write online reviews of products and shopping experiences – much more keen than US consumers – and this encourages others to engage in online shopping. In the US, though, I do think we will increasingly see social media driving e-commerce acceptance and usage.

Globally, it will be interesting to see how traditional businesses can better leverage e-commerce.  For example, in the UK, Domino’s Pizza frequently takes online orders worth more than £1m during the course of a single day – with almost 13% of this coming from mobile devices.  As the penetration of mobile devices continues to accelerate, the time is now right for companies to really start using e-commerce to make life easier for consumers.

Finally I think we are entering an era of greater cooperation between companies, fueled by e-commerce.  Even small companies will increasingly be able to combine products, or products and services, and pool marketing resources to win more sales in a more competitive online world.  This is going to require a new level of trust and understanding between what may even be traditional competitors and so the right environment – the right marketplace – is crucial.”

Updated 1/11/2012

The Armani Group designs, manufactures, distributes and retails lifestyle and fashion products around the world. Armani first entered China with its 1,100 square meter Shanghai flagship store in 2004, and has since opened boutiques in more than 40 major Chinese cities. Like many western multinational companies, Armani plans to expand aggressively in China in the coming years where it aims to open at least 35 new sales outlets annually. Given that China should become the world’s largest luxury market by 2015, Armani seems to have picked the right country to place its international investments.

Challenge:

Armani’s China retail model combines third-party resellers with direct stores totaling over 180 points of sales nationwide. While there are high concentrations of luxury consumers in urban centers like Shanghai and Beijing, it takes time to build brick and mortar boutiques to meet the needs of China’s luxury consumers who reside in second and third tier cities. Given the limitations on expansion, Armani was missing out on an opportunity to reach potential customers beyond the scope of their existing operations.

Solution:

Chinese luxury consumers are, on average, relatively younger than their counterparts in developed countries. Forty-five percent of Chinese luxury consumers are between the ages of 18 and 34 years old. Additionally, China is home to the world’s largest Internet population with 200 million online shoppers who spent 750 billion RMB online in 2011. Armani found that opening an online store would tap into both of these trends and enable it to expand its reach into third and forth tier cities where it could connect with young technology savvy luxury consumers. Armani partnered with YOOX.com, a global operator of luxury e-commerce websites, to build an online storefront tailored specifically for Chinese consumers at Emporioarmani.cn.

Result:

Through Armani’s partnership with YOOX, the Italian luxury group expanded its reach in mainland China. Its online storefront provided an Armani retail experience to potential customers regardless of whether they were located in Beijing, Harbin or Urumqi. By understanding the dynamics of the Chinese market, Armani developed a solution that enabled it to effectively scale its operations online, while its brick and mortar operations caught up offline.

The China Observer View:

Building effective distribution networks and managing channel partners are top of mind issues for western multinational companies operating in China. As a result, partnering with third party distributors is almost unavoidable. However, progressive companies should consider e-commerce solutions to expand their reach and mitigate the risks associated with partnering with several different distributors across the country.

As a result, Chinese women help determine what products and services their family purchases with their discretionary income. According to Nielsen’s 2011 Global Women Consumer Study, Chinese women are more inclined to save for their children’s education relative to their counterparts in developed nations (48% versus 16%). Additionally, the top three categories women in China spend money on are ‘daily necessities,’ ‘clothing,’ and ‘health and beauty products’ while women in developed markets choose to spend their money on vacations and paying off debts and credit card bills.

For a complete breakdown of how Chinese women spend their discretionary income, please refer to the chart below:

Retailers Grow in Importance

The ranking below compares the top 10 Chinese online retailers in 2010 vs. 2011.  Over the course of one year Suning’s ranking increased from ninth to third place. In 2011, Gome entered the top 10 as well. It’s evident that traditional retailers like Suning and Gome are growing in importance as they build online channels to reach more consumers across the country.

Retailers Thrive Online in Mature Markets

The list below details the top 5 online retailers in the US according to Comscore’s latest data. Excluding Amazon, all of the top 5 companies are traditional retailers that have built successful online platforms. Given that the e-commerce environment is more developed in the US than China, this data helps illustrate the direction China’s market could be headed.