What is IKEA doing in China?

On Thursday, 6 December Swedish furniture and home retailer IKEA Group announced that it will invest more than RMB 8 billion to build a large complex in Shanghai. The complex includes a shopping mall and five office buildings. It will measure over 430,000 m2 and is IKEA’s first project of this kind worldwide.

According to Chinese media reports, the shopping centre is scheduled to open in 2022. IKEA Shanghai will operate the shopping centre. DING Hui, President of the IKEA Shopping Centre in Shanghai, expressed in an interview his believe that China might become the testing ground for new IKEA business strategies before they are exported to other parts of the world.

The five office buildings IKEA plans to build in the Shanghai project will cover an area of 60,000 m2, 3 will be used for IKEA’s 3,000 employees in China, the other two will be leased to large and medium-sized enterprises.

This is part of IKEA’s attempt to strategically transform itself. “We are currently have several strategic transformation projects ongoing in various markets around the world. We want to pay more attention to digitalisation, online and offline integration,” said Anna Ku, President of IKEA Retail China in an interview with the Chinese online magazine the entrepreneur.

Is IKEA forced to transform?

Earlier in November this year, IKEA announced “the biggest strategic transformation in the company’s history” within two years the group aims to lay off 7,500 employees while hiring 11,500 new e-commerce staff.

CAO Lei, director of the China E-Commerce Research Center, said that IKEA’s transformation is tied to e-commerce and the Internet. If IKEA wants to further sustain growth the group has no choice but to embrace the internet.

However, YANG Fan, Public Relations Manager at IKEA China, the lay-offs earlier this year were not connected to IKEA’s push to transform itself. “E-commerce is part of IKEA’s future and an important milestone in IKEA’s development. IKEA’s transformation is focused on providing a more efficient and customer-focused shopping experience.

Taking the E-Commerce Road

According to data released by IKEA, IKEA’s sales exceeded RMB 14.7 billion in August 2018, an increase of 9.3%. In China IKEA sustained a growth of 19.4%. In October this year, IKEA opened an online shopping mall in 149 cities across China, providing online shopping services and launching a WeChat App. Even though IKEA is currently focused on building their own e-commerce platform, Anna Ku does not rule out cooperation with other third-party e-commerce platforms.

“IKEA is late to the e-commerce business, especially in China,” said Anna Ku. This causes difficulties for IKEA as Chinese consumers have high standards for e-commerce experiences. IKEA has to build both the IT and distribution infrastructure to cater to Chinese standards, which is time consuming.

In addition, IKEA has also started to cooperate with other Chinese technology companies. Xiao Dian, General Manager of Xiaomi’s IoT platform, announced in November that it will work with IKEA to build integrated home furnishing. IKEA has scheduled the release of a full range of intelligent lighting products which will be connected to Xiaomi’s IoT platform, marking not only the first cooperation with a Chinese technology company but also IKEA’s first smart home furnishing.

IKEA has become a staple for affordable, modern furnishing and as the group continues its strategic transformation, not only European analysts will be closely watching but also their Chinese counterparts.

How China is changing the global wine market

On average, Chinese drink very little wine. But for a bottle, connoisseurs pay up to 22,000 pounds.

Shanghai The small booklet has over 125 pages. Listed inside are over 865 wines, ranging from 40 to almost 22,000 pounds. This is not the sales list of a medium-sized wine producer; it is the wine list or rather wine menu of Napa Wine Bar & Kitchen in Shanghai, one of the hip gourmet restaurants in the Chinese metropolis.

Its lower floor resembles more a museum than a restaurant, with around 14,000 bottles on display. Expensive bottles are stored in temperature-controlled wooden containers, which are opened and closed with large turnstiles like a bank vault.

However the true size of the restaurant is signaled by a 15-liter wine bottle, also known as a Nebuchadnezzar. The bottle was imported from the French Bordeaux winery Cos d’Estournel and is a 2016 vintage. It can be uncorked for approximately 10,000 pounds. Customers can even rent a small lockable mini cellar for around 27,000 pounds. Of course, only for bottles that were previously purchased in the restaurant.

No other country in the world currently has more influence over the wine industry than China – although there is currently little wine consumption per capita. However, China’s influence has become clear at the Prowine Expo in Shanghai.

“China is at the forefront of new developing wine markets” says Robert Joseph, a British wine consultant with tremendous international experience.

Sales in China are rapidly growing, as can be seen by the Chinese branch of “1919” sales. Founded in 2010, “1919” now sells wine and spirits in over 1200 branches worldwide. In 2017, “1919” revenue reached 420 million pounds. The company reached a net profit of over 45 million pounds. However a different figure is far more interesting. While in Europe same day delivery is celebrated as a miraculous achievement of modern technology, in China the company’s name is understood literally: A bottle of wine is delivered within 19 minutes.

Unlike in Europe the division between the production and sale of wine is not as prominent in China. For example, the Great Wall Group, who claims to be Chinese market leader, has opened 400 stores within four years while also maintaining various wineries. In the wine cellar of the Chateau Huaxia of the Great Wall alone over 20,000 oak barrels are stored.

Based on this strong domestic market presence, an obvious question arises for foreign wine producers: Is it still worthwhile to enter the market?

Experts say yes. Because even small players can receive great attention in China.

How much wine do Chinese consume on average?

On average Chinese drink 1.3 liters of wine a year, of which almost 90 percent is red wine. While compared with European countries this is a relatively low consumption, given China’s population of over 1.3 billion people the overall consumption rate is enormous. With an overall consumption of 1.86 billion bottles, China became the world’s largest market for red wine in 2013.

The industry’s enthusiasm for the China is greater than ever. “China is currently and for the next three years, the most attractive market,” says Professor Simone Loosen of the University of Geisenheim, the central training for wine in Germany. Other new markets include South Korea and Poland, followed by Russia, Hong Kong, Japan and Australia.

What are Europe’s biggest challenges in the Chinese market?

In the opinion of Simone Loosen, the biggest challenge European wine producers are facing over the next few years will be to overcome geographical and cultural differences with the Asian markets. His findings are based on an international survey commissioned by the Prowein expo, surveying 2,300 experts from 46 countries on international wine markets, marketing trends, the development of online sales of wine and the economic situation. It is considered one of the most authoritative sources on the international wine market.

Messe Düsseldorf, which hosts the world’s leading trade fair Prowein, is also represented in Asia and reports significantly higher numbers of exhibitors and visitors. In addition to the Prowein Shanghai, the company now also alternately organises a trade fair in Hong Kong and Singapore. Exhibition Director Marius Berlemann toured for a year in China’s different regions to promote the fair.

The European industry’s hope for increasing sales in China is based on two main aspects: One of them is the younger generation. “We see an increasing demand from younger wine lovers,” confirms Castle Li of Great Wall. “More women than men want to drink wine and they especially demand premium wines.”

Chinese wine consumers have different preferences for premium products compared to their European counterparts. While in Europe mostly older wine lovers consume these wines, in China 20- to 30-year-olds order bottles of wine or champagne, which also cost well over 100 pounds. Chinese consumers primarily order European wine, with French wines topping the list. At Ruby Red, one of China’s leading premium wine merchants, French wines have a market share of 40 percent.

The second aspect: the growing European influence on China. “This gives European producers great market opportunities,” says Giorgio Vinciguerra, CEO of Beijing Guala Closures. The Italian lives in China and sells bottle caps.

How can European companies advertise their products in China effectively?

Wine sales in China rely on a different communication strategy: independent reporting, an essential feature of press coverage in Europe, is less important in China. XU Wei is one of China’s most important wine influencers. On his WeChat account “Xiapi” he keeps his 1.5 million followers updated about the latest wine trends.

Many of Xu’s videos feature products from manufacturers such as the US group Mondavi or Bordeaux icon Rothschild Lafite. Xu has marketing agreements with them. Xu also retails the wines of his sponsors. “But I do not earn as much with selling wine,” says the influencers. He earns significantly more through his sponsorship agreements. Recently Xu won the award for the best online story of the Australian Winery Association.

If you are interested in exploring opportunities in the Chinese wine market, get in touch with us today.

5 lessons in marketing to Chinese consumers

China’s growing middle-class has become an important consumer base for Western companies. However, Chinese culture, trends and opinions can be difficult to keep up with for multinationals. In addition, Chinese consumer behaviour is changing at a rapid pace. This has prompted Chinese companies to connect with consumers in new ways. But how exactly do successful Chinese brands connect with consumers?

1. Brands must understand modern day Chinese consumers

Brands must follow modern Chinese cultural trends and must continue doing so once successfully marketing products. This means keeping up with the rapidly evolving consumer patterns.

Cultural trends are created by consumers and are the voice of consumers. Successful brands in China are built in the hearts of customers. Only companies that listen to the voices of customers, can become successful brands.

In a guest article in the Chinese online publication the CY Zone, Chinese marketing expert Shen Haitao highlights that Chinese consumers are looking for increasingly comfortable lives and products which will simplify their everyday business.

With the rapid economic development, China’s middle class has grown significantly in the past years. According to a study by consulting firm McKinsey & Company, China’s middle class has reached 200 million and by 2022 76% of China’s urban population will be considered middle class. This economic shift directly influences Chinese consumer behaviour.

Consumers’ demand for high-quality products and services is increasing. This demand is fuelling competition between Chinese brands. The pressure forces continuous developments in brand marketing but also creates new business opportunities for brands.

2. Chinese consumers are looking for reassurance and quality

China’s economic reform significantly impacted Chinese consumers. With the rapid economic development, consumption grew and improved production methods, resulted in higher quality of many goods. Thus, consumers are now looking for products which benefit their lives.

Shen Haitao points out that Chinese consumers live increasingly fast paced lives and scandals, for example in the food industry, have shaken consumers’ trust. Therefore building a brand which establishes trust with consumer has become a key to success.

These days, Chinese consumers are looking for reassurance when purchasing a branded item.

Therefore brands have to not only create high-quality goods but also build an emotional connection with consumers when marketing the brand. Trust is a key element in the way Chinese consumers make purchasing decisions. This means that only those brands that can establish this bond with their customers can achieve long-term sustainable growth.

3. Build close relationships between consumers and customers

Unlike European consumers, Chinese consumers are not brand loyal. Regardless which brand, service or product, if it does not continuously bring value to Chinese customers, they will find a better alternative.

While Apple has successfully established themselves in the Chinese market, domestic technology companies are now starting to outcompete the iPhone producer. Many consumers who previously purchased iPhones have now started to purchase domestic brands such as Huawei instead. On Chinese social media platform WeChat, consumers explained that this trend was caused by Apple’s inability to innovate their product. “Although I don’t enjoy adapting to new mobile phones, I still decided to switch to Huawei. I don’t like how Apple’s phones are getting slower and slower. This is how they make you continuously buy their newest iPhone mode. I hate it” commented a user named Xiao A.

In this particular case, Apple capitalised on the common believe that old technology inevitably slows down. Apple intentionally slowed down old devices in order to incentivise consumers to upgrade to newer iPhone models. Previously Chinese consumers had only few high-end smartphone brands available to them. Therefore they had little choice but to continue purchasing Apple iPhones. However, the Chinese market these days produces an oversupply of high-quality, high-end smartphones. This has made consumers more likely to purchase brands which give them independence over when to upgrade their technology devices.

Brands must not just improve consumers’ lives but must build an emotional connection with them. Any brand which only markets a set of product will be eventually lose Chinese consumers. This is the resurgence of an ancient Chinese philosophical concept in modern day brand marketing. Over 500 years ago, ancient Chinese philosopher Wang Yangming argued that knowledge and action must be integrated. The idea that brands must be integrated in their environment in order to stay relevant is modelled after Wang Yangming’s philosophical thought and has become the core idea of modern Chinese marketing. In modern day China enterprises have become a social instrument with the fundamental purpose of solving people’s problems and improving customers’ lives.

4. The quality of the product is key to brand success

The internet and social media have completely transformed what Chinese consumers value in a brand. While previously it was important for a brand to be widely known. In the era of global connectivity, brand marketing is focusing on the essence of a brand. The essence of the brand is the relationship it is able to build between the owner of the brand and its users. The most important link between owners and users is the product itself.

In the past Chinese consumers were primarily focused on the values and the connotations a brand communicated. If this social contract was nott fulfilled, the product did not match customers’ expectations. In that case customers likely decided to purchase a different brand.

Because nowadays competition between brands has become so fierce, it has become too easy to find a substitute for any product. As a result, products themselves have once again become a key aspect of a brand’s success. Brands which want to be successful in China must create products that exceed customers’ expectations.

5. Connecting to consumers

Promoting a product has always been an important way to target new consumer. However, in the era of internet and social media, the purpose of promoting an item has changed fundamentally. Chinese consumers want promotions to connect with them, not to tell them why they should purchase the item. Integrating consumers in the brand has become a key aspect of a brands success.

In China’s competitive consumer market it has become important to continuously establish connections with consumers, to listen to consumers’ voices and to help consumers solve their problems.

Next Steps

Today China’s consumer market is rapidly changing. It is important for brands to gain an accurate understanding of the underlying cultural trends that inform Chinese consumers, to establish an emotional bond between the brand and the consumer, and to continuously deliver high-quality products and services. While the Chinese consumer goods market is highly competitive, it offers many opportunities and will continue to grow at a rapid pace. At Hampton Group we focus on providing accurate insights into China. If you are interested in successfully entering into the Chinese market with your brand, contact us at office@hamptonholding.com.