Barbie couldn't make it. Photo: CarrieBee

A couple days back, the Washington Post ran an article about how tough things can be for American retail stores trying to catch on in China. There are some great lessons in the article, which focuses on the demise of Shanghai’s Barbie Store and cutbacks in China plans by Home Depot and Best Buy. To be fair, the article also talks about what other retailers, such as KFC and Walmart, are doing right.

Even more interesting, however, are comments from my friend Mike Sacharski, CEO of Pacific Enterprise Capital. Mike spent 27 years living and working in China – and I am still indebted to him for the Sunday he sacrificed to give me an inside look at Beijing’s empty and not-so-empty shopping malls and then a taste of the overrun auto dealerships. Mike has an expert’s view of retailing in China and the hazards faced by newcomers. Here’s a selection of what he has to say:

“Localizing” American products for sale in China is obvious but a bit overblown in its value. (Is anyone in Honolulu looking for a Hawaiian version of Chinese food?)

Also, the remark in the article that US manufactures have “tried to ram their made-for-American products down Chinese throats” is “so 1980’s”.  Contemporary US product providers are very sensitive to addressing local tastes.  Having said this, the greatest appeal of American-made products for Chinese consumers is that it is indeed made in America for American consumers. Chinese want the same high performance and quality standards Americans enjoy – partly for functionality and partly for prestige.  I have not heard a single one of my Chinese friends say they want an iPad with Chinese characteristics. They want the same iPad one can purchase in Honolulu.

American product suppliers can be successful in China, but they must be aware:

1. Don’t target the “China market”. Target very narrow, precise market niches. Niches in China can number several tens of millions

2. China’s consumer market is still highly fragmented by geography and life-style tastes. Last year a foreign product supplier identified 110 separate and distinct markets in China for its product. Their next job was to narrow down to the top 10 markets to concentrate their resources, channel partners, marketing and advertising

3. Don’t try to compete on “cheap price”. You don’t want these customers, they are in crowded, highly competitive market segments. If a company successfully completes its niche marketing study, their customers will be willing to pay full-price for the value they perceive they are receiving. A Chinese friend was more than willing to pay full Honolulu retail price for his iPad before it was available in China. He thought it was a bargain because of his value perception of the benefits the iPad would deliver to him. I get requests to bring iPads from the US at full retail price since they can be authenticated as the “real thing”. There is suspicion that anything sold in China contains bogus parts somewhere in the device architecture (No, I do not plan to become an iPad runner).

4. The nature of retail sales in China is changing from the old store-centered model to a hybrid:  traditional store/shelf space, mobile showroom – sales vehicles and online sales. There simply is not enough store/shelf space available to accommodate the hundreds of millions who want to shop. The entire system for displaying, selling and delivering product is changing in China.

5. Distribution channels are not as sophisticated in China as in the US where a manufacturer can deliver product to a distributor who will take over shelf-stocking, promotion and marketing from there. US product providers in China have to proactively move further down the supply–retail chain to insure success. This requires a dedicated person or two and capital to cover the additional development and operations cost

6. Know China’s limitations. There is NO cold chain outside a few major cities. I know a famous American processed meat provider who will not fill requests for deliveries outside of Beijing or Shanghai because there is no cold chain. Retail stores in China’s interior want his product, but they also want him to pay for the cold lockers and display cases in their stores (not to mention transporting the product to these locations) His response?: ”We are in the meat-processing business, we are not in the refrigeration business”

7. Using the localization of US fast-food restaurants in China as an example of market sensitivity for manufacturers to follow, in my view, is not a valid comparison. The fast food providers have not changed their American menus. Chinese consumers still want that Big Mac or the Colonel’s great chicken. What fast-food providers have done is add local food items to their American menu for a combo menu. The added local items bring more customer traffic through the door. And as every fast-food owner knows, if you can maximize your floor space usage, maximize throughput capacity of your kitchen equipment system and top-out productivity of employees (by adding congee to the menu), you do it. A Big Mac, fries and a side of congee, umm, great combo. Fast-food in China is an entirely different proposition than selling ukuleles and iPads.

 

I posted last week about the City 600 and a new report by McKinsey Global Institute on the world’s 600 largest cities and their vital importance for international marketing. Today I would like to look at what those 600 cities are going to look like in the year 2025. McKinsey distinguishes between the whole City 600 group and a subset of the 100 largest, the City 100. Fifteen years from now, the City 100 will account for about 35% of the world’s GDP growth – while the City 600, as a whole, will boast 60%, leaving only 40% of GDP growth for the rest of us in “smaller” cities and rural areas. The next 400 cities after the City 600 will add about 6% of GDP growth, so it is pretty clear which city markets to focus on for most goods and services.

230 cities that are in the City 600 today will drop out by 2025, replaced by a burgeoning group of cities all from today’s emerging markets.  No new developed market cities will make it to the City 600 and many from the developed world will drop out. This means the entire center of gravity of global trade is about to shift to a greater extent than ever before seen in history. China will dominate the list, with 216 cities that will soak up 30% of world GDP growth. The developed world certainly won’t disappear (98 North American cities will account for close to 10% of GDP growth), but the world’s focus will be on developing markets.

The McKinsey report provides a fascinating table that shows the top 25 world cities in 2025 in various categories. Let me give you a taste. The top cities in raw population are not too surprising, led by Tokyo, Mumbai and Shanghai. New York, Tokyo and Shanghai will lead in GDP. But then it starts to get interesting. The table for the top cities in GDP growth is led by Shanghai, Beijing and New York, and contains sixteen Chinese cities in the top 25 (greater Chinese actually, since these include Taipei and Hong Kong).

Trondheim will have the 5th highest per capita GDP!

The table for the top cities in per capita GDP is where you will find the cities you would never have guessed would be there. Norway takes three out of the top five (Oslo, Bergen and Trondheim)! Doha is #2 and Macau is #4. Three South Korean cities (Hwasŏng, Asan and Yŏsu will be in the top ten for per capita GDP.

The implications of these changes for marketing and investment strategies are staggering. McKinsey points out that the present strategy of most multinationals to focus on developed countries and the megacities of the emerging markets will have to change to a global city-by-city approach, with more and more of their effort going to the emerging market cities where the highest growth will take place. That implies concentrating on today’s middlewieght cities that are growing faster than today’s megacities. McKinsey defines megacity as a metropolis with more than ten million people, and today there are only 23 of these behemoths. There will be 13 more by 2025, seven of them in China. The only new developed world city that will achieve megacity status by then will be Chicago. The action is in the emerging markets.

Next we will take a look at some marketing trends likely to appear in the cities of the future.