localisation in China

While the rapidly-evolving China market never fails to keep foreign new entrants up on their toes, thorough consideration of important lessons could translate into a successful entry into the world’s second-largest economy.

After a slew of pre-opening campaigns for more than half a year, Loft, one of Japan’s most popular lifestyle specialty retailers, officially unveiled its first store in China at Shanghai Metro City. This new spot on the map was expected to become another popular location for Chinese consumers to ‘check-in’ to.

Unfortunately, among the cacophony of high expectations surfaced customer feedback that told a different story. Offering unlocalised products at non-competitive price points, Loft received critical responses on social media, leaving it at risk of brand damage in a market where reviews are integral to purchase decisions.

The story of Loft is not an isolated case. The Japanese household and consumer goods giant, MUJI, offers another case in point with its inability to adapt fast enough to the China market.

“MUJI”, as a concept, coincides with the demand of Japanese consumers in the 1980s for high-quality products sold at reasonable prices, available everywhere – convenience stores, shops at subway stations, and even vending machines.

As MUJI expanded into China, the core concept that propelled it into a Japanese household brand was lost in translation. It morphed into a premium brand that only appeared in high-end shopping malls in first-tier cities.

Consumers were turned away by its non-competitive prices and headed for prominent local competitions with the likes of MINISO, Taobao Xinxuan and Xiaomi YOUPIN. Beyond challenges in localisation, further brand damage caused by inconsistent product qualities and an episode of food safety in early 2019 paved a rocky road ahead for the Japanese retailer.

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Unable to compete and survive in China’s unforgiving business environment due to policy barriers, rapidly-changing consumer behaviour, and fierce local competition, many other foreign entrants have failed to find their foothold.

However, challenges to localisation do not throttle the influx of new entrants as the reasons why China should be the next market to expand to far outweighs the risks.

Why localisation succeeds

Having recounted some localisation pitfalls, there is also merit in celebrating successes, from which three key success factors were identified. They revolve around a paradigm shift – that translation alone is not enough and we need to adopt an MVP mindset and assume that product-market fit needs to be re-established.

Thorough understanding of Chinese consumers
Besides standard market segmentation and targeting activities, cultural differences is another dimension that needs to be considered. With a plethora of ethnic groups, mainland China’s complex cultural landscape proved to be a challenge for foreign entrants. Different cities need to be treated differently, by starting afresh with new paradigm shifts.

KFC, the American fast-food restaurant chain, proved that it was not easy navigating the cultural differences even between major Chinese cities. Following the opening of its first outlet in Beijing in 1987, KFC went on to establish over 5,000 more outlets across 1,100 cities by 2019.

Having only minimally-differentiated offerings across the country, KFC soon received feedback from customers in Shanghai that its food was too spicy. Conversely, reports that KFC’s food was bland came in from southwestern provinces such as Sichuan.

This highlights that the cultural nuances across Chinese cities have to be studied thoroughly. Luckily for KFC, fast adaptations of recipes, menus and even the toys that accompanied kids’ meals helped maintain its foothold.

Strategic partnerships with the right local partners

The adage “If you want to walk fast, walk alone. If you want to walk far, walk together” perfectly describes how foreign entrants should consider localisation. Finding partners for entry into the China market helps circumvent common pitfalls and accelerates localisation by tapping into local networks and knowledge. Since a popular mode of market entry into China is through joint ventures, finding the right type of partners becomes the main point of focus.

Starbucks, the Seattle-based coffee chain, is a good example of a successful foreign entrant that worked with strategic local partners. Following the opening of its first outlet in Beijing in early 1999, Starbucks went on to establish 4,400 across 180 Chinese cities.

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To increase operational efficiencies and accelerate its expansion across China, Starbucks worked with joint venture partners Beijing Mei Da Coffee in the north, Shanghai Uni-President in the east and Maxim’s Caterers in the south. The cooperation with partners avoided missteps along the expansion journey and Starbucks would later acquire controlling stakes in all three joint ventures.

In order to avoid possible legal disputes between foreign entrants and their local partners, it is crucial to clearly outline the legal structure of the collaboration. A mitigation strategy around the sensitive issue of intellectual property is to ensure multiple levels of precautionary measures are in place to prevent possible technology leaks.

The first is to make sure that an ample amount of time is spent building trusted business relationships with local partners. The second is to select and work with reputable legal service providers and ensure that protection is maximised. Finally, care has to be taken when granting local partners access to core intellectual property.

Short-cycle pivots and iteration to maintain product-market fit

Chinese companies are nimble, masters at innovation through commercialisation and would constantly challenge the ability of foreign entrants to go through pivots and iterations. Besides competition, the ever-evolving Chinese consumer landscape will also keep everyone on their toes to retain product-market fit.

Rapid retail innovations and strong synergies between online and offline channels are the drivers behind such evolutions in consumer behaviours. This highlights the importance of staying agile and preparing for short-cycle pivots and iterations, which will help retain existing foothold and further expansions.

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An example would be IKEA, the renowned Swedish furniture and home accessories giant that has taken a leap of faith with its expansion into Jing’an district in Shanghai with a “city store”. The first of its kind, the opening of this outlet was highly anticipated due to its close proximity to the city centre. The conventional offline shopping experience was also switched up by integrating an online mall through a WeChat mini-programme. Fast adaptations like the setting up of its “city store” have been well received and contributed to IKEA’s success in China.

The pivots or iteration process is also where innovation and management principles come in handy. Lean Startup’s Build-Measure-Learn Feedback Loop and 500 Startups’ Pivot Pyramid are effective tools to be implemented and customised to different developmental stages of different ventures.

China is and will remain a worthwhile market to venture into. Market entries, successful or otherwise, by foreign brands, ushered in key lessons to be learned and considerations to be made by successors. There will certainly still be risks but, as the mantra of Heinrich von Pierer (CEO of Siemens AG from 1995 to 2005) goes, “the risk not to be in China is bigger than the risk to be in China”.

Venturing into China: The Challenges and Key Success Factors of Localisation was originally written by the XNode Team (Emily Xu) and adapted for e27

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