Article

China: Turning Your Toehold into a Forward March

Many multinationals have struggled to make headway in China. The problem isn't a Chinese aversion to foreign brands.

By Ann Chen

First published on Μαΐου 04, 2005
min read


You'd think that Danone, one of the biggest makers of milk products, should have had an easy time entering the world's fastest-growing dairy market. But the French conglomerate, which has been successfully selling biscuits and mineral water in China, flopped with its dairy offerings. In 2002, after a $10-million-plus investment, it withdrew its dairy products from the Chinese market and sold its facilities there. Other multinationals have also struggled to make headway in China. The problem isn't a Chinese aversion to foreign brands. Nor is it the brands' starting point: Almost all aim first at the premium segment. Rather, it's their approach to broadening market share. A handful of multinationals point to a better path. Through a careful combination of pricing, cost reduction, distribution and acquisitions, they've turned a toehold in China's premium segments into a rapidly expanding market. They use three key strategies: Closing the price gap. Chinese consumers won't shell out 70% to 100% premiums for foreign products, as Parmalat discovered when it introduced fruit yogurt there for 24 cents a cup. Chinese consumers stuck with local brands at half the price. As a rule of thumb, they may pay 20% to 30% more for world-class brands. Companies using local suppliers can close the price gap, however. After Colgate began sourcing ingredients and manufacturing in China, the price of its 65-gram tube of toothpaste dropped almost 63%, and the price differential between Colgate and local brands fell sharply. Cutting production costs and passing the savings on to consumers helped Colgate become China's top oral-care company. Adding 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. Back in 1979, when Coca-Cola began offering its pricey soft drink, it captured a sliver of the market. But Coca-Cola reduced expenses by manufacturing locally, setting up 34 bottling plants and partnering with three bottling groups. Harnessing system economics, the company cut production, marketing and distribution costs; it then added products, such as herbal tea drinks and Coke Light. Now it sells more than 20 drinks for about 25 cents a can, only slightly more than local brands, and claims more than half the market for soft drinks in China. Bringing local brands on board. Perhaps the biggest barrier for multinationals is entrenched local competition. The most successful firms tackle China through a mix of global and local brands. Anheuser-Busch, which leads the premium beer market with Budweiser, recently purchased a controlling stake in Harbin Brewery, China's fourth-largest brewer. The acquisition allowed Anheuser-Busch to reach the masses and, along with Anheuser-Busch's minority position in Tsingtao, China's number one brewery, consolidated AB's position in the market. Even Danone is now taking a cue from Anheuser-Busch. It recently purchased a stake in Bright Dairy & Food, one of China's largest dairies. The move should improve Danone's cost structure and competitive position, giving it yet another chance to milk the world's fastest-growing dairy market. Ann Chen, a Bain partner in Hong Kong, leads the firm's Consumer Products practice in greater China. Vijay Vishwanath, a Boston-based partner, leads Bain's Global Consumer Products practice.

You'd think that Danone, one of the biggest makers of milk products, should have had an easy time entering the world's fastest-growing dairy market. But the French conglomerate, which has been successfully selling biscuits and mineral water in China, flopped with its dairy offerings. In 2002, after a $10-million-plus investment, it withdrew its dairy products from the Chinese market and sold its facilities there.

Other multinationals have also struggled to make headway in China. The problem isn't a Chinese aversion to foreign brands. Nor is it the brands' starting point: Almost all aim first at the premium segment. Rather, it's their approach to broadening market share.

A handful of multinationals point to a better path. Through a careful combination of pricing, cost reduction, distribution and acquisitions, they've turned a toehold in China's premium segments into a rapidly expanding market. They use three key strategies:

Closing the price gap. Chinese consumers won't shell out 70% to 100% premiums for foreign products, as Parmalat discovered when it introduced fruit yogurt there for 24 cents a cup. Chinese consumers stuck with local brands at half the price. As a rule of thumb, they may pay 20% to 30% more for world-class brands.

Companies using local suppliers can close the price gap, however. After Colgate began sourcing ingredients and manufacturing in China, the price of its 65-gram tube of toothpaste dropped almost 63%, and the price differential between Colgate and local brands fell sharply. Cutting production costs and passing the savings on to consumers helped Colgate become China's top oral-care company.

Adding 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. Back in 1979, when Coca-Cola began offering its pricey soft drink, it captured a sliver of the market. But Coca-Cola reduced expenses by manufacturing locally, setting up 34 bottling plants and partnering with three bottling groups. Harnessing system economics, the company cut production, marketing and distribution costs; it then added products, such as herbal tea drinks and Coke Light. Now it sells more than 20 drinks for about 25 cents a can, only slightly more than local brands, and claims more than half the market for soft drinks in China.

Bringing local brands on board. Perhaps the biggest barrier for multinationals is entrenched local competition. The most successful firms tackle China through a mix of global and local brands. Anheuser-Busch, which leads the premium beer market with Budweiser, recently purchased a controlling stake in Harbin Brewery, China's fourth-largest brewer. The acquisition allowed Anheuser-Busch to reach the masses and, along with Anheuser-Busch's minority position in Tsingtao, China's number one brewery, consolidated AB's position in the market.

Even Danone is now taking a cue from Anheuser-Busch. It recently purchased a stake in Bright Dairy & Food, one of China's largest dairies. The move should improve Danone's cost structure and competitive position, giving it yet another chance to milk the world's fastest-growing dairy market.

Ann Chen, a Bain partner in Hong Kong, leads the firm's Consumer Products practice in greater China. Vijay Vishwanath, a Boston-based partner, leads Bain's Global Consumer Products practice.