Recently, Jing Daily looked at the growing ubiquity of "fast fashion" retailers throughout China, noting that some home-grown Chinese companies (particularly ME&CITY) are taking advantage of a lack of clarity among consumers in smaller third-tier markets and marketing themselves as "foreign" brands. This, in turn, will likely make it harder for "real" foreign brands, like Zara and H&M, to gain footholds in these relatively underdeveloped markets in the long term. (Though, realistically, they seem to be in no rush to expand into third-tier markets, keeping mostly to top-tier cities like Shanghai at the moment.)
A new McKinsey study on the confusion that reigns among Chinese consumers as to brand origin confirms our observations on the way Chinese companies -- many of which try to pass themselves off as imported brands -- are using low levels of consumer education to crowd out (or at least make business harder for) foreign competitors. As Max Magni and Yuval Atsmon of McKinsey wrote for the Harvard Business Review this week, not only are do widespread misunderstandings about product and brand origin abound in China, but brands that actually are foreign often ignore or misinterpret consumer demand.
This is something we've heard before from China-based firms, who are often the most responsive to consumer demand and quick to localize designs. Earlier this month, Sunny Wong of high-end retail group Trinity Ltd. told Bloomberg that his company employs Hong Kong designers to localize many products with the "pot bellies" and "shorter arms" of key Chinese consumer demographics in mind.
Although many would see the phenomenon of home-grown Chinese brands passing themselves off as foreign as outrageously ingenuous, it's not terribly surprising that they continue to do so. According to McKinsey, an increasing number of Chinese consumers say they actively prefer to buy foreign goods, with 52% of people with an annual income of over RMB 250,000 ($36,675) saying they "trust" imported brands more than domestic brands. While much of this perception among comparatively wealthy Chinese consumers likely owes itself to the food safety scandals of recent years -- which have led to a massive increase in imports of things like baby formula -- it's even spreading among the mainstream lower- and lower-middle class consumer. As Warc points out, the proportion of these consumers that generally prefers local products has fallen from 57% in 2007 to just 45% this year.
What all of this amounts to is an increasingly crowded market that makes it difficult for brands to differentiate their identities and products, which of course makes it harder for consumers to tell companies apart. Though this hasn't been much of an obstacle for brands like Zara or H&M in more sophisticated and developed consumer markets like Shanghai or Beijing, in the second-tier cities that most retailers are currently targeting for expansion -- places like Xi'an, Chengdu, and Qingdao -- more brands are starting to realize that they'll either have to rely on huge brand recognition (something that is actually only possible for the highest-end brands, like Chanel or Louis Vuitton) or active and responsive localization. We've seen a lot of this recently, from the newly launched Shang Xia by Hermès to the more affordable sub-brand dENIZEN by Levi's to elongated sedans by BMW and Mercedes-Benz. As Magni and Atsmon of McKinsey conclude:
Many executives don't realize that developing local products and brands lets newcomers bypass the long and cumbersome process of introducing existing products from home markets and then, incrementally tailoring them to the needs of Chinese consumers. It also has a positive rub-off on a foreign brand, signaling to the Chinese the multinational company's commitment to serving their needs. Indeed, that's what localization must be if foreign companies are to succeed in China.