Expanding in China

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You’d think that Danone, one of the globe’s biggest makers of milk products, should have had an easy time entering the world’s fastestgrowing dairy market. But the French food conglomerate, which has been successfully selling biscuits and mineral water in China, flopped with its dairy offerings. In 2002, after a decade of effort and an investment of more than $10 million, it withdrew its dairy products from the Chinese market and sold its facilities to domestic competitors.

Danone is not the only foreign company whose efforts have gone sour in China.

Major multinationals—from Unilever to Carlsberg to Quaker Oats—have also struggled to make headway there. The problem isn’t their products. Nor is it a Chinese aversion to foreign brands. And it’s certainly not the companies’ starting point; almost all foreign brands aim first at the premium segment. Rather, it’s their approach to broadening market share.

A handful of multinationals—Colgate, Coca- Cola, and Anheuser-Busch among them—point to a better path. Through a careful combination of pricing, positioning, distribution, and acquisition, they’ve managed to turn a toehold in China’s premium segments into a rapidly expanding market. They use three key strategies.

Close the cost gap. The first step is to manage costs. Chinese consumers no longer will shell out 70% to 100% premiums for foreign products. At most, they may pay 20% to 30% more for world-class brands. Parmalat (which has been in the news for other reasons) discovered this when it tried to sell fruit-flavored yogurt for 24 cents a cup; consumers stuck with local brands at half the price.

But companies using local suppliers can close the cost gap. Colgate became China’s top oral care company, in large part by cutting production costs and passing those savings on to consumers. After arriving in 1991, it began manufacturing its toothpaste in China, eventually sourcing the ingredients locally. The result: The price of a 65-gram tube of toothpaste dropped almost 63% from 4.8 renminbi in 1996 to 1.8 renminbi in 2003 (or from about 59 cents to 22 cents). The price differential between Colgate and local brands fell even more dramatically— from 270% to just 44%.

Add products and channels. It makes sense for most foreign brands, because of their cost structures, to start at the top, as Colgate did. But it’s crucial to break into the mass market quickly. Quaker Oats learned this the hard way when, before it became part of PepsiCo, it introduced Gatorade to China in 1995. The sports drink didn’t catch on. Though Quaker Oats lowered the price by 10% to 15% in the late 1990s, Gatorade was still expensive by local standards. Worse, it was sold in only a few large cities.

Read the full article on Harvard Business Online.