By Liana Hill, firstname.lastname@example.org
Ever heard of KFG? Though it may not initially ring any bells, someone visiting China would immediately recognize the iconic red and white stripes, accompanied by a bucket featuring a Colonel Sanders look-alike. These differences can be partially attributed to KFC’s success in the region, as well as an updated menu that includes regional favorites.
Recently, business has not been all chicken and gravy for a number of other U.S. retailers trying to make it or break it in the country’s retail segment. But it’s not that the market isn’t growing; retail sales increased by 18.4% last year compared to the year-ago period. Rather, U.S. retailers entering a different region, especially a market as competitive as China, can face a variety of challenges, including, among many other things, a risk of counterfeiting and significant differences in the country’s infrastructure, culture and consumer preferences.
Over the past several months, there has been a significant amount of news surrounding the proliferation of copycat Apple stores in China, especially in the Kunming area. This should be an automatic tip-off since Apple operates only four legitimate stores in the country: two in Shanghai and two in Beijing, and sells products through a handful of authorized resellers. Authorities in the area have begun investigating the authenticity of the pop-up shops and the legitimacy of their products. Interestingly, many of the items found in knockoff stores were actually genuine products somehow acquired from an authorized reseller.
While some stores had mirrored the genuine Apple stores down to the last detail, like the polished wood benches, winding staircase and blue-shirted employees (though some of which knew nothing about the products), other brick-and-mortars were not quite so discreet, bearing store names such as “Apple Stoer,” “AppleStore” (legitimate stores feature only the famous Apple logo), and a personal favorite of mine, the Apple logo without the bite taken out of it (though not related to China, one store in New York tried to get away with the name “Apple Story”…hmmm).
Apple very recently brought a patent infringement suit against three lookalike stores and over 50 individuals, to include a restraining order and permanent injunction, to protect its iconic trademark and reputation. These knockoff stores hurt the company’s genuine retailers and overall are likely to discourage organizations from setting up shop in the region for fear of getting their products ripped off. Apple, however, continues to thrive despite the somewhat lax enforcement of pursuing copycats. The iPhone-maker’s sales from Greater China this year increased by 600% to $3.8 billion compared to last year.
Second, most U.S. business models just don’t thrive in China. Retailers that U.S. consumers consider to be discount retailers actually turn out to be relatively high compared to street vendors and mom-and-pop establishments that can survive on paper-thin margins just to offer the lowest possible price. Though Walmart has a significant presence in the region with over 300 stores, the company’s market share has fallen by roughly 3%, from 8% to 5% of megastore sales over the last three years, compared with the 73% of regional chains and mom-and-pop stores. Last year, the company’s $7.5 billion in sales in China comprised only 2% of its global revenue. Further, China’s consumers are used to shopping malls jammed with stalls rented by a variety of different vendors selling products for only slightly more than what it cost to make them. Not exactly big-box style.
The region also lacks the free parking infrastructure to host a retailer as large as Walmart and the country’s ban on free bags doesn’t do much to help either. However, online sales are up in China and the discount retailer may yet be able to rebound from its sales decline with its recent agreement to establish an e-commerce headquarters in Shanghai. Though online shopping is booming in China with its 158 million internet shoppers in 2010 increasing retail sales by 22%, internet shopping returns consumers to an even greater risk of counterfeiting than shopping on the street.
Similar to Walmart, big box retailer Best Buy changed very little about its establishment and business practices when it set up shop in China. As most of us have heard, the U.S. electronics giant closed its doors in the country earlier this year. In the U.S., consumers immediately recognize and trust the Best Buy brand, whereas in China, few consumers know the electronics haven that is symbolized by that big yellow price tag. The chain failed to rebrand itself and did not adopt traditional supplier interactions and business practices. Overall, the CE giant is suited to more mature commercial markets. Upon announcing its closures, the chain instead decided to turn its attention to the more established and easily recognized Five Star stores, which it acquired roughly five years ago.
Lastly, one of the largest challenges faced by U.S. retailers is meeting cultural preferences in China. An unfortunate example: Home Depot. The “You can do it. We can help.” motto unfortunately, was not able to align with consumers’ lack of DIY motivation, and coupled with higher prices than comparable, well-established stores, resulted in failure in most major areas.
Conversely, office supply retailers such as Staples and Office Depot have fared quite well in the region, with Staples reporting strong international sales in the beginning of the year. Comparing the two sites with their U.S. counterparts, you can clearly see they did their homework. Both Chinese sites, for example, feature brightly colored promotional banners, while the U.S. sites are more toned down and neutral. Specifically, at Staples China, the array of hardware is much wider, ranging from your standard coffee machines and water dispensers to refrigerators and washing machines. Similarly, the site has a section devoted to items that consumers in the United States would not think of buying at an office supply shop, including car floor mats, shampoo and mosquito repellant. But that’s the point, it works for China.
In the end, while the country may pose many challenges to businesses in terms of becoming successful, a little research and rebranding can go a long way. Oh, and maybe stay away from selling products like “Sumsang”, “Nokla”, and “iPheme” phones.
Liana Hill is a market analyst for Gap Intelligence, a San Diego-based independent technology research firm with emphasis in helping product manufacturers and resellers understand current market trends in order to respond to customer demands as they occur. She can be reached at email@example.com.