When L'Oreal, the world's largest cosmetics company, joined Revlon by pulling its Garnier brand out of the Chinese market, it took some by surprise. But there are some clear reasons why these two brands won't be last to bow out.
Looking at the market dynamics in China from a distance, this kind of "dramatic departure" by foreign brands might come as a surprise.
However, when you look at it more closely, there are clear shifts in the market that explain why some brands are leaving, and are expected to continue to leave going forward.
Consumers save, not spend
China’s relentless economic growth has been driven by an export boom and government investment. Persuading the Chinese consumer to part with their money is not as easy as many Western brand owners have anticipated.
Chinese people typically save more than a third of their disposable income, and household spending accounts for only about a third of GDP - half that of the US. What this means is that the headline growth rate of the Chinese economy does not directly translate into an opportunity for Western companies hoping to drive growth.
While the Chinese government sees increasing consumption (particularly among the middle classes) as the way to create sustainable growth, old habits die hard, and significant structural reforms are required to alter a culturally ingrained attitude to spending, especially as Chinese consumers are becoming more sophisticated.
Consumers in China are no longer willing to blindly embrace brands simply "because they are foreign and therefore better". A long period of product trial and error has resulted in a stronger sense of identity, and consumers are actively seeking (and are increasingly loyal to) brands that not only provide good functionality but also offer a better fit to their personality and preferences.
Product and price investment on the up
Several key factors combine to mean that the cost of doing business in China is increasing for Western companies. Social insurance and tax laws have become more restrictive in the past few years, with tax incentives for foreign companies being eroded by policy changes.
Fear of intellectual property theft, lack of transparency in local accounting practices and Chinese legislation across a number of industry sectors also make the business landscape more difficult and costly for Western firms than they had originally anticipated.
It’s simply not the case that what works elsewhere can be duplicated in China. And as the macro economic conditions are changing, ecommerce is rapidly becoming a viable alternative for traditional retail.
Cosmetic brands need to compete on price and product selection with multi-brand online platforms. Jumei.com, for example, discounts upscale cosmetics brands including Dior and Lancôme by as much as 15%.
On the flip side, fixed retail infrastructure costs, like distribution, salaries and real estate prices are rising, as inflation and living costs in China surge. Combined, this makes for tremendous pressure on brands to invest heavily in a multi-channel strategy while trying to minimise costs.
Market structure is barrier to progress
Finally the structure of the consumer market can present a significant barrier to progress – the tier one cities (including Shanghai, Beijing, Shenzhen and Guangzhou) offer the best infrastructure, the highest population densities and the greatest cultural and economic influence, with income levels well above the national average.
As the most developed markets, brands seeking to establish themselves here face the highest operational costs and levels of competition, as even smaller firms see them as a low-risk entry point.
Over the past few years rapid economic growth in the tier-two cities has appeared to make them attractive for foreign brands. Rapid growth means demand for Western goods is increasing, the markets are less competitive and labour costs are lower.
However, disposable income is reported to be as little as half that in the tier-one cities and this combined with the increased competition from local Chinese firms, a relative lack of qualified people and a less mature marketing environment can make them extremely challenging for Western companies.
More brands will exit China
To keep up with the fast evolution of the Chinese market and macro dynamics I’ve touched on, brands cannot see China as an opportunity for guaranteed growth. They need to invest heavily in market understanding, NPD and marketing execution.
I believe we will see more brands not truly committed to a long term investment in China (China represents only 2% of Revlon’s global sales). And those who may have entered the market opportunistically, will continue to exit the global superpower.
The author is a former marketer with Gillette and Diageo, and director of strategic marketing consultancy Added Value, UK.
This article first appeared on http://www.marketingmagazine.co.uk
Top news, insights and analysis every weekday
Sign up for Campaign Bulletins
9 hours ago
Watch the film conceptualised jointly by FCB Interface and PivotRoots along with Club Mahindra's in-house team