The last several years have seen massive growth across most consumer sectors in China. While the spotlight is often on Western companies’ expansion and success stories, many Chinese consumer goods businesses now have hundreds or even thousands of points-of-sale (POS), large organizations and multiple brands. For example, Longliqi, a leading beauty and personal care player, has over 3,000 distributors reaching to the county level, plus a direct-sales license. Lao Feng Xiang, one of the oldest jewelry brands in China, has over 600 independent stores and 1,000 POS through distributors, and Joeone, a leading men’s apparel player, has a portfolio of different brands targeting different segments of consumers.
A key question regularly discussed is how quickly these companies will be able to create their own premium or luxury brands. However, while many have this aspiration and some are actively working on it, this is not their most critical challenge. Much more importantly, many are now reaching a critical juncture where they need to transform their businesses across multiple dimensions, if they want their future to be as bright as their recent past. For some, this transformation may even be a question of survival.
Working with and talking to a broad range of executives at Chinese consumer goods companies, we see these five transformation challenges as the most critical:
1. Narrowing the focus—shifting from pursuing a broad range of opportunities across many segments, channels or brands to focusing on a select few. Given the increasingly contested market space, pursuing a broad range of opportunities requires significant financial resources and management skills and runs the risk of falling behind in core sectors. As the CEO of a leading Chinese apparel brand shared, “I now have six brands and they are all successful in their own right, but it is hard for any of them to become a real leader. They don’t just compete with other companies’ brands, but also with each other for resources.”
2. Adapting to changing consumer needs and behaviors. Hand-in-hand with the rapid development of the Chinese economy goes a significant change in attitudes, needs and behaviors of different generations of consumers. A key dilemma for many Chinese brands is whether to cater to their ‘original’ consumers and their evolving needs and ‘change with them,’ or to engage with the new generation of consumers who might have very different behaviors and brand perceptions. As the VP of Marketing for a large Chinese beauty company put it, “Women in their 30s in smaller cities used to be our core consumers, because we made them feel beautiful, but even they are now shifting to L’Oreal or other foreign brands. And younger consumers think we are too old-fashioned and not prestigious enough.”
3. Building brands instead of ‘labels.’ Many Chinese consumer-goods companies have expanded by offering ‘good-enough’ lower-priced products and advertising these heavily to gain credibility, while at the same time developing attractive value propositions for their channel partners to add points-of-sale. However, this model is no longer working: growth rates in some sectors are starting to slow, foreign competitors are expanding into areas traditionally dominated by local players, direct costs are surging, and Chinese consumers are evolving from buying labels that are ‘just famous’ to those with a clear, consistent and authentic identity. But building brands takes time and requires different capabilities. As a senior executive at a leading sportswear company pointed out, “Growing our footprint by adding new products and POS has become quite straightforward for us, and we certainly spend a lot of money on advertising, so our brand is quite famous. However, sometimes I feel that walking into our store is just like walking into one of our local competitors.”
4. Refocusing from top-line growth to sustainable bottom-line expansion. The fast growth of the Chinese market in the past ten years has made “land-grab” style expansion a top priority. As the COO of a Chinese woman’s wear business told us, “We have covered the whole country with outlets, but many of them have too high inventory levels and barely make money.”
5. Shifting from an owner-operated to a professionally managed business. Many of today’s successful consumer-goods businesses are run by their founders, smart and entrepreneurial leaders who intuitively understand their markets. However, as their business increases in complexity, building institutional capabilities several layers ‘down’ into the organization, and, throughput this process, managing the conflict between the ‘old’ and ‘new’ systems, becomes a challenge. The latter is particularly critical, as the founder of a large food and beverage business admits: ”I hired a lot of people from famous MNCs, because they can bring new skills to my business, but it is very hard to create a common culture and get them all to pull into one direction.”
While these challenges are not atypical for entrepreneurial businesses anywhere in the world, China’s rapid growth has created an entire generation of them across many consumer goods sectors. Only those that can navigate their own transformation will still be successful in five or ten years, and any investor in this area will be well advised to look at where a particular company stands with respect to these capabilities.
Torsten Stocker is a partner and co-head of the Asian Consumer Goods Practice at Monitor Group, the US strategy consulting firm. He is based in China.