Why Do Luxury Businesses Fail in China? Study the Data
Based on data analytics, Dr. Daniel Langer identified three reasons why some luxury brands' businesses have not yet taken off in China.
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Published May 06, 2019
It’s amazing to me how much the sophistication and complexity of the Asian market continues to be underestimated today. Many companies still apply a one-size-fits-all approach to their marketing content in China and then wonder why the results are underwhelming there. Luxury brands — including some of the most successful in the world — have yet to exploit their potential in China and in the rest of the Asian region. Recently, Prada blamed the slowing Chinese economy for their malaise, but to me, it sounds like an excuse to mask weaknesses in brand execution. The real reasons for poor performance in the China market are usually a lack of precise and timely consumer insights and the willingness to translate those insights into approaches that express the global brand positioning in an authentic and relevant way to Chinese consumers.
Let’s start with insights, something most companies just haven’t gathered before starting to do business in China. As an example, a famous European luxury fashion house wanted to analyze why some of their results in Asia were less than satisfying. How were they underwhelming? It turns outs, in a surprising amount of ways.
First of all, the majority of this luxury brand’s consumers were still 45 years old and up, meaning they were unable, for some reason, to reach the huge Chinese Millennial and Gen Z markets. Secondly, the customers who purchased the brand’s most iconic and traditional product lines were even older, while their younger customers were buying less branded, entry-level products and showed a lot less brand loyalty. In other words: The brand’s top customers were very old and slowly dying out! Another important observation: Consumers with the highest spends (over 10k per purchase) were leaving the brand, while newly acquired consumers were spending below 3k on average. Therefore, some basic math can show us that as older customers die, the brand is becoming less profitable. And lastly, many store locations were losing money due to high operational costs in China.
Oddly, these trends were a big contrast to what the brand was experiencing in their European and American markets. To get real answers, the brand needed to use real-time consumer data to figure out exactly what was going on. Make no mistake, this is a challenging task in China since local online networks are firewalled. But after applying and analyzing data using advanced social media listening engines on all relevant brand conversations, on Chinese social media networks and blogs, we were quickly able to identify important ways in which the brand was being negatively impacted:
1. Brand positioning was not relevant for Asian consumers #
It became quickly apparent that brand messaging was not resonating with Chinese consumers. First of all, while the brand’s positioning existed in brand manuals and in the heads of the brand’s leadership team, consumers didn’t understand it properly and described the brand differently. This is one of the most typical findings in our work: a mismatch between what management teams believe and what consumer perception is.
This is even more prevalent in China. I can’t state enough that Chinese consumers perceive brands differently to western consumers: They buy into brands first and then buy their products. But if the brand is not defined sharply enough or understood in an intended way, then they see no reason to buy. Another way to put it is that the brand has to come first, and in the luxury fashion case I described, the positioning was too vague — we could precisely identify through AI-powered social media measurement. Sometimes it’s very simple to see: If nothing specific shows up, then there are no particular conversations about the brand. Having hard data helped management understand this and made it easier for them to change the strategic approach.
2. Communication content was irrelevant #
Using digital data querying tools, we could also identify that most of the brand’s marketing efforts in the region did not yield results. Their message was not relevant, the content did not resonate, consumers never became engaged, and no communities were built around the brand. We recommended a radically different communication approach, but we did not recommend changing the brand positioning — simply to make it clearer, close positioning gaps, and communicate the brand in a more understandable and authentic way for local consumers.
One of the most significant misconceptions for brands wanting to do business in China is explaining to them that they don’t need a different brand, but a different expression of the original brand position. If it’s more of a global positioning problem, we work with headquarters to strengthen the global brand first before adopting a regional approach. If the company’s content is irrelevant in China, then communicating it means wasting money while watering down the brand, not strengthening it. This is why clear content — in every market — is so important.
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3. Competitors were communicating with the target consumers in a better way #
Many brands simply focus on their own story and don’t bother to see where their brand fits amongst the competition. In a time when campaigns are increasingly digital, it can be difficult for companies to ascertain when and how competitors are “highjacking” their consumers. The only way to know is to use AI-powered consumer analysis with machine learning capabilities that will alert your company when triggers occur. And the competition should always be monitored in real time so that a company can recognize exactly when consumers gravitate towards or away from the brand.
In the case of our top luxury fashion brand, it was these types of competitor actions that had the most substantial impact on their poor regional results. This came at a major surprise to the top management team and triggered the largest strategy shift after our analysis was presented.
If there’s one major takeaway these findings point toward, it’s that taking action before understanding the root cause of a problem won’t solve anything. It will simply consume time and money, while discouraging your team and giving an edge to the competition. In the worst-case scenario, brand equity will erode so sharply that the company could cease to function in a certain market. But gathering all relevant information with AI can help brands form precise and effective luxury strategies for the China market or any other new market.
Daniel Langer is CEO of the luxury, lifestyle and consumer brand strategy firm Équité. He consults some of the leading luxury brands in the world, is the author of several luxury management books, a regular keynote speaker, and holds management seminars in Europe, the USA, and Asia. Follow @drlanger