Tesco in China: Failing brand loyalties
Geoff Tink looks at the precarious balance for foreign businesses building brand loyalty in China.
In August this year, the British supermarket giant, Tesco, announced plans for a joint-venture agreement with Vanguard, part of the state-controlled China Resources Enterprise, for the operation of all 131 Tesco stores around China. With Tesco likely to take a 20 percent share of the new venture and still having to pay Vanguard hundreds of millions of pounds, the end result was clear – Tesco was being forced into a retreat from the Chinese market.
While this was part of a worldwide scaling back of a bullish global expansion programme, there are specific elements of the Tesco failure in China that many people familiar with the market would recognise.
One of these elements was a failure to build brand loyalty. Brand loyalty can be roughly defined as the commitment of a consumer to either repurchase a branded product or service, continue to use a brands product or service, or engage in positive behaviour such as word of mouth advocacy.
There is a very clear link between enhanced brand loyalty and increased profitability. But the benefits don’t end there. Brand loyalty also ensures that consumers remain customers for longer and display a lower sensitivity to price.
Any visitor to China will notice the vast proliferation of global brands attempting to make inroads in this massive market, but many of these iconic names have consistently struggled to convert brand awareness into brand loyalty. Any marketer in China can tell stories of huge advertising investments attempting to stand out amongst the clutter, wasted when a brand was trumped by a competitor with a marginally cheaper price or the appearance of a trendier celebrity.
Chinese consumers have proven to be notoriously fickle. In 2009, the head of China operations at Tesco referred to the previously successful ‘clubcard’ loyalty programme as the “secret weapon” in their bid to conquer the country. But Tesco discovered that compared to western consumers, Asian consumers are variety seekers.
A study by the Warwick Business School early this year, noted that almost all respondents already participated in at least one loyalty programme and 63 percent of respondents had loyalty cards from four or more retailers. Research concluded that these Chinese consumers “believed larger choices gave them more power of control, more motivation to make decisions, more chances to have programmes which suit their needs and a more satisfying shopping experience.” Tesco found out the hard way that Chinese consumers are inclined to offer the least brand loyalty to consumables, even though they buy these goods the most frequently.
This does not mean that Chinese consumers do not appreciate brands. According to another recent study by McKinsey & Company, 45 percent of Chinese respondents believed that well-known brands stand for better quality and safety, significantly higher than the 31 percent and 27 percent of American and French consumers who responded similarly.
The simple fact is that consumers in China have a vast number of brands from which to choose – those in their repertoire – but within this repertoire, there remains great fluidity. Many Chinese consumers are buying a product or service for the first time and are willing (and increasingly able) to consider between three to five brands in any given category compared with two or three brands a couple of years ago. In categories such as apparel, where the number of brands is large, the consumer is clouded with so many choices it is little wonder that loyalty is hard to come by.
Furthermore, with an increasing number of Chinese consumers travelling abroad, the exposure to the variety of brands gets larger still. The rise of internet usage with vast proliferation of social media, including greater access to online content on smart phones, now allows instantaneous research and comparison of products, brands and prices. This just serves to make it even harder to build brand identity and brand loyalty.
The findings of the report released by McKinsey in 2012, summarised the market situation by noting that “a majority of the urban population are those exhibiting spending behaviours that have long been characteristic of Chinese consumers – that is, they are basic value seekers; they tend to take their purchasing cues from others; and although brand-conscious they lack sufficient sophistication about brands to become loyal to a particular one.”
Fortunately, the same report did indicate light at the end of the tunnel. It noted that in the ever-growing demographic of the affluent Chinese consumer, people are becoming “more self-indulgent in purchasing activity, more individualistic in wants and needs, and more loyal to favourite brands – even while maintaining some of the traits for which Chinese consumers are renowned, such as spending lots of time in stores comparing products.”
The emotional considerations of the product purchasing decision are more and more relevant in China. With greater income, consumers are making fewer choices based on a brand’s functional aspects and more on what makes them feel good or stand out in the crowd. Perceived brand value is overpowering perceived value for money, particularly in young consumers seeking an outlet to give and maintain face within their social group.
There are other positives too, namely that Chinese consumers are quick to adopt the unfamiliar. Chocolate serves as a good example. Chocolate is a food product which does not have a traditional place on the Chinese palate, but now exists prominently on highly competitive store shelves.
In 2009, a study revealed that 46 percent of respondents had purchased chocolate in the previous year. Two years later, that figure had increased to 66 percent. McKinsey showed that emotional considerations also increased proportionally, with 8 percent citing this as a purchase motive in 2009, growing to 19 percent in 2011.
These are fertile grounds for the growth of brand loyalty. Dove chocolate is one brand that has built a successful identity in China by positioning their product as an indulgence for women and now boast market share of over 50 percent. So what must other brands in China do to taste success?
*Pictured: Western chocolate brands have had some success in building brand loyalty in China – noteably Dove which has enacted an aggressive advertising campaign depicting the brand as an indulgence for women.
The first step is acknowledging that they must build brand identity slowly and carefully. The Chinese consumer has been exposed to a dizzying galaxy of brand messages in the last 30 years and marketers must acknowledge that sometimes the brand communication strategy must start again from the beginning. The second step is to identify the key value attributes of target customers then communicate value-added products and services through an integrated customer relationship management strategy that covers the short, medium and long-term with astute use of a variety of marketing channels.
Using a variety of communication channels is important. The channels for building brand awareness are not necessarily the same channels to continue the conversation with consumers. A study by marketing consultancy firm, Epsilon, found that amongst high-income and middle-class consumers in China – the demographic displaying the greatest propensity to brand loyalty – 74 percent of respondents preferred email as the best channel to receive brand marketing messages. The next best methods of communication were Weibo (55 percent) and SMS (54 percent).
It is a well known fact that the Chinese consumer is highly-engaged in social media, as a method of maintaining contact with everyone from friends and family, to co-workers and business contacts.
This makes social media a priceless form of word of mouth advocacy, the best way to create trust and loyalty. When Epsilon asked which word of mouth recommendations were most valued, the answers were friends (59 percent), family (56 percent), co-workers (56 percent), and spouses (47 percent). Some people will not be surprised that spousal opinion is held in lowest regard!
There is no doubt that the China market is more competitive than ever before. Reasons for failure can be complex. Returning to Tesco, their arrival in China in 2004 left them a long way behind other international competitors such as Walmart which entered China in 1996. Walmart’s early advantages included choice of store locations, lower cost of land, premium market positioning and greater opportunity to acquire local stores. But this does not make the success of new brands impossible. The US clothing chain GAP entered the highly-competitive Chinese apparel market in only 2010, but is now already approaching profitability with almost 60 stores across the country.
Marketers should never overlook the essential brand promise: features, quality and service must still be as advertised. However, in a highly competitive market like China, consumers are increasingly looking for that little bit extra – an emotional connection with their purchase. Consumers want to see themselves reflected in the brand they choose. And the brands that best harness these less rational purchase motives are the brands that will build the strongest long-term future in China. ■
*Geoff Tink has lived, worked and travelled in China for over eight years. Originally from Sydney, Geoff previously worked with the Australia China Business Council and now manages marketing events and communications for international brands in China. He speaks mandarin fluently and can be found on weibo at @T_丁先生.