How Kraft Foods, Oreos, and Starbucks Coffee Have Taken Off in China
In early January, President Hu published a forceful article criticizing the unmitigated flood of Western culture rushing into China, taking particular aim at America. His claim is valid, as American music and movies are omnipresent here due to their easy access via the Internet and black-market. Compounded with the fact that export sales to China rose 32.1% in 2010, American products are ubiquitous.
But despite these facts, when American companies try to establish franchises in China they often encounter crippling problems. Yet, the Chinese government’s protestations have little to do with this. Rather, an American company’s success, and the subsequent level of American influence, hinges almost entirely on the responsiveness of the Chinese market.
As Tim Clissold notes in his memoir Mr. China, as far back as the 1800s, Western manufacturers, “dreamed of the fortune to be made if every Chinese would add an inch to his shirttails.” With this same frame of mind, many companies have recently trampled headlong into China using the same business plan they used in the West, which has proven to be their Waterloo. But a few U.S. corporations have demonstrated their ability to better adapt to the Chinese market.
Kraft Foods, Inc. provides an interesting case study in both the initial failures and eventual successes of an American company expanding East. The U.S. food behemoth dove into China over 20 years ago, believing that the sheer size of the Chinese market coupled with Kraft’s internationally recognized brand name spelled easy profits. But Kraft executives quickly found that Chinese were not responding to their products, specifically the Oreo. In order to increase sales of their bestselling cookie, Kraft Foods’ pursued a multifaceted strategy.
First, the company initiated an intense R&D campaign to elicit consumer preferences. They stepped back and began to ask the right questions in order to establish a better foundation on which to build. Next, they “deconstructed” the Oreo in an attempt to find what made the Oreo such a success in America. Researchers believed that the Oreo was an experience — twisting it open, eating the filling, and dunking the rest in milk. The question then was how to translate it into a Chinese experience. This answer lay in the final step of the process, which called on local managers to develop and implement marketing strategies that domestic consumers would respond to. This meticulous method rewarded the food giant with a 22.4% market share in 2009 — almost triple that of its largest competitor, a Taiwanese company.
Starbucks is another American company that has found success in China though it focused on different aspects of its business: service and image. Coffee was not a popular drink with Chinese consumers when it was first introduced. Therefore, in order to sell it, the company emphasized both the leisure and social aspects of drinking at Starbucks. This proved effective in gaining customer loyalty as Chinese patrons valued the high quality of service and the atmosphere in the cafés. With increased traffic, executives hoped a taste for coffee might develop.
In addition, Starbucks leveraged its status as a luxury brand. This was a necessary strategy as Starbucks charges relatively similar prices in China despite average per capita income being approximately 17% of that in the U.S. However, image conscious consumers were not only buying coffee, but also a brand name cup. This allows the company to justify higher prices, leading to increased profit margins. With this success, Starbucks opened up its 500th store in China in October of last year and plans to triple this number in the near future.
What do these examples demonstrate? They show the inherent difficulty of entering the Chinese market but, at the same time, reveal that many strategies exist that lead to successful expansion in China. For some companies it often takes a complete reassessment of a product (or service) in order to make it work in China. For others, it takes less of a degree of assimilation. These examples do not provide a perfect blueprint for all to follow but do show the willingness of the Chinese market to react positively.
Though the Chinese government may not like seeing its citizens washing down Oreos with Starbucks, ultimately the market demand will dictate which American products and influence are here to stay.
Photo Credit: dunhilaryu