Conventional wisdom seems to indicate that premium brands—brands that command a higher price because of their superior quality—don't do very well in China. For example, while over 30 per cent of all food and beverage consumption in China is attributed to premium brands marketed by foreign players, only half of those companies can claim profitability.

Oodles of noodles: Ting Yi shot out of the dead-end instant noodles category by pursuing an aggressive strategy of product innovation, market research and product development.  But wait: conventional wisdom can be misleading. Although the data suggests that the majority of premium brands in the China market are unlikely to be profitable, the reality is that marketers can significantly better the odds of success by tailoring their strategies to focus on the critical drivers of brand profitability.

Bain research has found that the rules governing success of premium brands that apply in other markets are also by and large applicable in China.

The key to profitability is not whether any given brand itself is 'premium'; it is driven by both market share and the nature of the product category.

If a category is composed largely of premium brands, then most of the brands in the category are—or should be—profitable. If, on the other hand, the category is composed largely of value or private label brands, then returns for premium brands will be lower across the board.

Premium versus value

Managers should therefore think about their brand strategies along two dimensions. First, is the category 'premium' or 'value'? Second, is the brand's relative market share low or high? Hence, for any given brand there are four possible situations, each having a different implication for the brand's profit potential and each requiring a different strategy.

Bain investigated a number of consumer product categories in China; our findings indicate that premium brands, both foreign and local, can succeed if they follow strategies outlined by the 'high road-low road' matrix.

Consider the following examples. Out of the almost five billion litres of carbonated beverages consumed in China every year, over half are sold by Coca-Cola. When it entered in 1979, the carbonated drinks market was small and dominated by local brands. Coca-Cola's strategy of partnering with and acquiring local bottling companies played an important role in its ascendancy to leadership. However, since then, Coca-Cola has sustained its leadership by pursuing a strategy ideally suited to a market leader in a premium category (the 'high-road' brand position).

As a high-road player, innovation is key to keeping customers coming back for more. While the carbonated beverages category existed in China before Coca-Cola, the market was small and consisted of a few low-end carbonated fruit drinks, which were sold mainly to tourists. Coca-Cola created the carbonated drinks category as it exists today by introducing products new to the Chinese beverage market, starting with its flagship Coke.

Soon after followed Fanta and Smart, which were developed exclusively for the Chinese market. Both became top five sellers. Coca-Cola has continued to introduce new products and currently sells almost 25 different brands in

China, entering adjacent categories such as tea, water and fruit juice.

The strategy of new product introduction was heavily supported by aggressive marketing activities. Coca-Cola has consistently outspent its competitors on advertising. To make its brand more acceptable to Chinese consumers, Coca-Cola also developed a Chinese version of its famed logo.

Coca-Cola uses celebrity endorsements to great effect, an example being a high-profile campaign featuring diver Fu Mingxia shortly after her Olympic triumph in 2000.

Coke's strategy is clearly bearing fruit: over the past decade, its sales have grown at over 20 per cent in a category growing at only half that rate.

While Coca-Cola is a good example of a high-road brand, Ting Yi, a local instant noodle manufacturer, provides a look at a brand that was once in the dead-end quadrant of the matrix, but has trumped the category by introducing a super premium brand priced at 100 per cent over other local brands and resetting customer expectations in the process.

Building on opportunity

The Chinese instant noodle industry in the early 1990s was a typical 'value' category dominated by low-end local brands and products of low quality, poor packaging and a limited number of flavours. At this time the Wei family from Taiwan decided that the mainland instant noodle market represented a huge opportunity and launched the original Ting Yi brand, Master Kang.

The company was founded on three core values: honesty, practicality, and innovation. Putting these core values into practice, Ting Yi pursued an aggressive strategy of product innovation right from the outset, investing heavily in market research and new product development.

Since 1996, the company has launched a steady stream of new soups, flavours and packaging, introducing more than 100 products across different segments.

New product launches have been supported by slick advertising to reinforce Ting Yi's 'great taste' message and build strong brand equity. In 2002, the company spent as much as 10 per cent of its revenues on advertising.

The Weis' efforts have been rewarded; Ting Yi finished last year with a market share of 40 per cent, double the size of its nearest competitor. Its return on sales is 15 per cent versus 6 per cent for the second largest player. What's more, the instant noodle category as a whole is more premium now, and is increasingly attracting the lucrative youth segment.

Colgate's approach in China is a great example of how to compete effectively in a low-road category. In the early 1990s, the China toothpaste market was dominated by low-priced local brands with little brand differentiation.

Foreign brands were priced at 200 to 500 per cent above local brands and had less than 5 per cent of the market.

At that stage Colgate's managers in China did something that would be considered unusual for a premium brand. They radically cut costs by replacing imported raw material with material of acceptable quality from local suppliers. This enabled Colgate to price 'only' 50 per cent above local brands, thereby positioning itself as an attractive alternative for discerning customers seeking to trade up.

Colgate also channelled cost savings into marketing and launching new product variations in the Chinese market, such as Colgate Herbal or Colgate Total. The company today offers 12 product variations that have enabled it to take up two-thirds of toothpaste shelf space in a typical retail outlet.

Through this strategy Colgate has been able to steadily increase its market share from 10 per cent in 1996 to over 30 per cent in 2002.

Finally, Crest is an example of a brand that deployed a strategy ideally suited for a 'hitch hiker' brand.

Crest entered the toothpaste market in 1997, when Colgate was driving prices down. And from the start, Crest chose not to compete with Colgate on price, but aimed instead for the top end of the market, pricing 20 per cent above Colgate.

Crest managed to create a strong premium image by outspending category leader, Colgate, in advertising. In 2002 Crest overtook McDonalds to become the most heavily advertised foreign brand in China. It has also tried to match Colgate step for step in product innovation. For example, Crest quickly countered Colgate's introduction of Simply White in 2003, with its own Whitestrips. It has also pioneered interesting product variants, such as tea-flavoured toothpaste. The company has thus become the No 2 player with a market share of 22 per cent within six years of its launch in China.

What is more impressive is that it is actually making a profit despite significant investments in advertising and distribution.

From the above examples it is clear that while China poses unique challenges on many fronts (including high consumer price sensitivity and a daunting distribution landscape), brand managers can significantly improve their chances of success by going back to the basics of good premium brand management.

Ann Chen is a vice-president with Bain & Company in Beijing. Boston-based Vijay Vishwanath directs Bain's global consumer products practice.