October 12, 2005

TPM in China

I recently had the fascinating experience of visiting China, where I presented a seminar on trade promotion management (apparently the first ever) in Shanghai. My thanks to the good folks at Lnoppen, the seminar sponsors, and to the attendees at the seminar, for their warm welcome.

As is often the case, the instructor learned at least as much as the attendees. Herewith some observations:

The rural-urban split: If you think it is tough coming up with separate promos for different regions of the US, consider the differences between Chinese regions. According to marketers I met there, average income in Shanghai is 10x or more the income in rural areas of China. By comparison, America's richest state, New Jersey, has income only about 80% higher than the poorest, West Virginia.

This disparity makes it very difficult to market in the rural areas, and should make western marketers think twice about their dreams of a billion-person market. China for most western products offers little opportunity for now outside Shanghai, Nanjing, Beijing, Guangzhou, and a few other major cities - simply because the western products are too expensive. This is not to say that the market isn't big - the urban population of China is itself huge - simply that the rural population is (at present) not a good target.

Little Retail Concentration - Yet: Just a few days before the seminar, Asia Pulse reported a new study of the Chinese retail market. Retail sales total about $667 billion, up 4x over the past twelve years (a very substantial and incredibly fast-growing market, obviously).

But this isn't what struck me most strongly. The report stated that there were 100 chains of 100 or more stores, and that they totaled about 10% of the market. This means that the vast bulk of the market is still in the almost 10 million (!) other retail outlets - unlike in the US, Europe, and other developed markets where the major players total 80% or more of many categories.

The attendees at the seminar, almost all of whom represented subsidiaries of western companies who market more to the big stores (they use the terms "modern trade" and "general trade" to differentiate), indicated that the modern trade constitutes about 30%-40% of their business - still far below western levels.

This means that Chinese marketers have the opportunity, for now, to exert more control over their spend - although their future is no doubt similar to ours as the market develops.

Deductions? No problem!: Perhaps as a result of the lack of concentration, the people I spoke with indicated that deductions were not a major issue for them. Retailers take few unauthorized deductions, apparently, and most are clearly identified. I warned everyone who would listen that this is likely to change and that they need to create systems and processes to handle it before the situation gets out of hand.

The Wal-Mart Non-Effect : For an American marketer, used to hearing Wal-Mart's name spoken with fear and/or reverence, it was shocking to listen to the Chinese referring to them in terms that came near contempt. On my first day in Shanghai, I noted to a marketing exec of a major firm that Wal-Mart had just announced plans to open fifty new stores n China. He almost sneered as he said, "Yeah, that's what they say." A further comment that they intend to catch up to Carrefour elicited a laughing, "Not anytime soon." Carrefour is thought of much more highly, as is Metro.

Wal-Mart's problem - and this is not unique to their China operation - is that they don't seem to know how to compete if they aren't the low-price leader. In the US, they have the advantage of selling Chinese imports - in China, needless to say, that's not an advantage. It's interesting to note that Wal-Mart is also struggling in markets, such as Germany, where there are legal restrictions preventing them from cutting prices.

By coincidence, I received a newsletter from AMR Research this week that was summarized as: "Competing on price in China is a fruitless task. Product innovation, quality, and customer service should be the battlegrounds."

Random Notes: The language barrier created a problem I didn't expect: the translators had a terrible time finding a way to translate "accrual" - a word that is pretty much essential to any discussion of trade promotion.

And one off-topic note: A bit of nostalgia. If you're middle-aged, you may remember the predecessor to pop-top cans - ring-top pull-tabs. They are still the norm in China. Okay, one more: Yes, the DVDs are incredibly cheap - street vendors near my hotel were offering them for less than a buck, including DVDs of movies that were still in theatres in the US.

Return to News & Events

E-mail: info@houktpm.com