Affärsinsikt: How to Successfully Enter the Chinese Retail Market

Anna Falconer Insikter

Like California during the gold rush in the 1850’s, modern day China has become a destination where companies come with hopes to strike gold in one of the world’s largest and fastest growing markets. Here, fortunes can be won, but also lost. So who will succeed? There is, of course, no easy answer to that question. Centigo has been in China since 2012 and together with our Joint-Venture partner SXL Group we have helped several leading international retailers to enter and expand in China. During this time we have gained several important insights that we would like to share with you here. 

 One China – Four Worlds

In order to understand the Chinese market, you first need to be aware that this vast country, in size similar to the USA or Europe, has a high level of diversity despite sharing a common language and cultural heritage. There is a saying “one China, four worlds”, which refers to the wealth gaps between the highly developed mega cities, the moderately wealthy provincial cities, the poorer country-level cities and the extremely poor countryside.

China has, over the last decades, experienced a rapid urbanization, especially along the east coast, and today the country has well over 100 cities with a population of one million people or more. A tier system is used to rank the many cities based on financial and administrative status. Tier 1 includes the four mega cities Beijing, Shanghai, Shenzhen and Guangzhou, each one with a population of approximately 20 million people. Understanding the differences in consumer behavior by city tier, and also by geography will allow you to develop effective entry/expansion plans, marketing campaigns and brand strategies.

It is All About the Brand

From our research, we have many examples showing the importance of the brand. Retailers with a strong brand, preferably promoted in single-brand stores, have been the most successful. On the famous shopping street, Nanjing Road in Shanghai, you can find almost 40 single-brand Nike stores on the same street! Apple, IKEA, Louis Vuitton and MUJI are other good examples that have succeeded in building a strong brand in China.

Less Successful Retailers in China

The last years have seen several large international brands leaving China, most of them multi-brand retailers. We are not claiming that multi-brand retailers can’t be successful in China, but we have found that they face a tough challenge. There are plenty of great retailers in China, so you do need an edge. Success with a multi-brand strategy is built on economies of scale, so you want to grow fast to a sustainable size. When entering China you also need to build your supply chain, acquire local knowledge and adapt the product assortment to local taste, which all adds to the start-up cost. Home Depot, Media Markt, Wal-Mart, Best Buy and Valentino are all examples of retailers that have not been able live up to the expectations after entering China.

Deciding your Pricing Strategy

What Media Markt, Home Depot and Best Buy all have in common is that they failed in their pricing strategy. In China there are many low-cost options, which makes it very difficult to compete on price alone, especially for a foreign brands.

Understanding the value of a product is correlated to the sophistication of the consumer. Twenty years ago, China had very little foreign influence. Since then, the speed of change has gradually increased and many new products and categories have been introduced. Still, there are many products to which many Chinese consumer have had no or limited exposure to, especially in lower tier cities. For those products consumers often make a direct connection between price and quality. A low price is associated with low quality or fake products, which are abundant in China.

International brands are normally considered high-end and a low-price strategy can result in mistrust towards the brand. Danish shoe retailer Ecco is one example of a retailer who raised their prices when entering China and successfully managed a more premium position in the Chinese market than back home.

Chinese consumers also love to make a good deal. They have grown up bargaining and this can’t be ignored by you as a retailer. Design your offers with this in mind and empower your store associates to allow them to reward a good and loyal customer. A loyalty program is also good, but don’t let your Chinese customers wait too long for a reward.

Where Should You Start?

We believe that most retailers aiming to establish themselves in China will need a strong physical presence, including physical stores. An online business will likely be an important factor to maintain long term profitability, but the optimal balance between online and offline will vary between different brands and segments. So where should you establish the operations and open your first stores?

Tier 1 consumers are often more sophisticated buyers who have a larger income combined with a more modern metropolitan lifestyle and higher fashion consciousness compared to those in lower tiers. They have access to a wide selection of international brands and the retail competition in these cities is fierce. In contrast, many lower tier consumers are only just starting to experience new brands and products. They are aspiring consumers who are dreaming and hoping for what many tier 1 consumers take for granted. They are still engaged in consumption, but less so with brands. They recognize brands but have a weak association between brands and products. Fake and imitative branded products are abundant and they tend to put more trust in the retailer, and peer recommendations, than the brand.

So you should skip the tier 1 cities and go directly for the lower tiers where there is less competition and more unrealized potential? Our experience shows that an international retailer who sets out to succeed in China should start by establishing their brand in Shanghai, or potentially one of other top tier cities. Here you will have the best platform to build the brand, including premium locations for your flagship stores, well-educated and multi-lingual co-workers and the most sophisticated consumers. It is no coincidence 90% of all the luxury brands in China have their headquarters and flagship stores in Shanghai, despite skyrocketing rental costs. Once your platform is established the expansion of your business into the lower tier cities can begin.

Follow the Millennials to Build Your Online Strategy

New statistics show that China recently surpassed USA and now are the largest online shopping market in the world and it is predicted to have a continued high growth. Marketplaces dominates the market with over 90% of total sales. Around 20% of China’s urban population said they shopped online in 2010 and it is estimated that this number will be close to 50% in 2015.

In order to understand the online shopping behavior in China, we recommend that you follow the Millennials. This group, also frequently referred to as Generation Y or The Post 80’s, has grown up with the Internet, mobile communication and social media as a natural part of their lives. They are probably the most important group for retailers to understand today as their buying power is growing rapidly and they are also shopping on behalf of family members. They use the Internet on a daily basis and are influencing older generations in a way no other generation has done before.

Of course, this group and its impact is not specific to China – Millennials are becoming an important consumer segment all over the world but here they are unique as the first Chinese generation to grow up in a globalized world. Our experience and research show that social media plays a more important role in China than any other major market. Chinese Millennials connects to foreign brands online, but not on Facebook or Twitter since they are blocked in China. Instead, they use local equivalents such as Renren and Weibo to discuss the latest trends and share reviews with their peers. There is unquestionably much to be gained for those companies who learn about the Chinese online landscape and understand the importance of targeting the Millennials.

Our Conclusions

When entering China your need to establish both brand and local organization. We believe that Shanghai, or another top tier city, is the best stepping stone for retailers entering the Chinese market and we don’t see this changing in the near future. There you can find both skilled co-workers and sophisticated consumers who are open to foreign brands. When you have created a platform for your business it is time to move on to the lower tier cities where the future growth is forecasted to be.

Online shopping is very important in China. To become successful online, we suggest that you follow the Millennials. They are leading the change in online behavior, they have high expectations on you as a retailer and they influence many other consumers. Make your brand visible in the online channels they use, and know that in China those channels are different to the ones you are familiar with from home. The retailers who understand how to please the Millennials will be well-positioned for the future.

Contact the author: Magnus Adler,, is Vice President at Centigo China and has over ten years of experience from project management and business development.