China: To Adapt or Not to Adapt?

In early 2013, ten Kellogg School faculty members visited China, meeting with executives from local and multinational companies. In the following roundtable discussion—part two in a series of four (read part one)—our faculty discusses the Chinese obsession with luxury brands, how multinational corporations are adapting their products to Chinese customers, and how companies are attempting to influence Chinese consumer preferences.

Alexander Chernev, Professor of Marketing: I think that many people are unaware of the degree to which many luxury companies are successful in China, where all large cities are lined with multiple luxury retail shops including Louis Vuitton, Bottega Veneta, Hermes, and Chanel. Not only are all of these stores present in each major city, each of them has multiple locations in the same city. And they’re not cheap—the prices for branded luxury items average 50 to 100 percent higher than in the United States. It’s worth noting, however, that many Chinese prefer shopping for luxury brands outside of mainland China, where the prices are lower and products are believed to be more authentic.

It is somewhat ironic that so many stores sell authentic luxury brands in a country that many consider to be the largest manufacturer of knockoffs of those same luxury brands. Yet the obsession with luxury brands is real; in fact, China is the driver of growth for many global luxury brands. The reason that the Chinese have become one of the largest consumers of luxury products is the emergence of the upper middle class, whose members aim to signal their newly acquired social status by flaunting their wealth. This trend (often referred to as the Veblen effect) is particularly prominent in China, where social status is predetermined and important, and society doesn’t expect that status to change. These social structures, however, are rapidly giving way to new ones driven by wealth. This conspicuous consumption drives many Chinese consumers to buy luxury goods—whether or not they can actually afford them.

Craig Garthwaite, Assistant Professor of Management & Strategy: One example of a multinational corporation that has successfully repositioned its brand for the Chinese luxury market is General Mills’s Haagen-Dazs, which, unlike in the United States, is sold in upscale cafés and marketed as an exceptionally high-quality, gourmet dessert experience.

One of our faculty members snapped this photo of an advertisement for Haagen-Dazs.

One of the difficulties in this approach is that General Mills must always be concerned—perhaps more concerned than other ice cream manufacturers in China—about any customer experiences that don’t offer the ice cream in its optimal state. This inherently limits growth, since General Mills cannot enter markets where the supply chain and retail setting is not well suited for the delivery and storage of ice cream at negative 25 degrees Celsius. As Marty Lariviere noted in part one of this series this involves ruthless prioritization of markets and discipline that is difficult for many companies to execute.

Thomas Hubbard, Senior Associate Dean, Strategic Initiatives and Professor of Management & Strategy: General Mills executives also offered a great example of how they’ve adapted their product offerings to the Chinese market. Mooncakes are traditional gifts during the moon holiday, and much like fruitcakes in the United States, they’re obligatory―though it’s not clear that many people actually like them. Their Haagen-Dazs business recognized an opportunity and created an ice cream mooncake, which has become a huge hit. The mooncake success was made possible in part by the decentralized structure of General Mills. The head of its China business had considerable freedom to capitalize on this opportunity and created a new product uniquely suited to Chinese tastes and culture.

Like Haagen-Dazs, McDonald’s has taken its positioning more upscale in the Chinese market. More stylish design and higher-end furnishings create a classier dining experience and command higher prices. McCafe shops, an extension of this more refined dining experience, are set off from the main restaurant, with separate cashiers and seating sections. Bakery cases filled with elegant pastries, high-quality coffee drinks and ice cream treats, and free Wi-Fi add to the Starbucks–like ambiance.

While McDonald’s maintains a more standardized menu, its main competitor, Kentucky Fried Chicken, drastically tailors its menus not just to China but to individual parts of the Chinese market. Menus in some provinces feature more sweet dishes, while in other areas spicy chicken dominates sales. The more standardized McDonald’s model is ultimately more scalable. Although the company could probably grow faster by catering more to local tastes, doing so would complicate its supply chains and make achieving economies of scale more difficult. McDonald’s has made a strategic choice to stick with a general menu and, over time, work to influence Chinese tastes.

Dylan Minor, Assistant Professor of Managerial Economics & Decision Sciences: Nike China is another good example of the extent to which manufacturers have adapted their products and strategies for the Chinese market. In sharp contrast to its engagement in the United States, Nike has needed to affect consumer preferences in China. In particular, they are attempting to persuade the Chinese to view sport as recreation rather than a means to fulfill one’s school duties. In its advertising, Nike argues that sport can be used for personal satisfaction and gain. The company mounts massive public sporting events to further its campaign in China.

Kellogg faculty members meet with Nike executives in China.

These sporting events have brought about an unusual challenge in the form of an ethical dilemma: Should Nike call off a sporting event if the air quality happens to be at dangerous levels? Nike might invest millions in one of these events, culminating on a predefined day with sporting activities that mix sporting celebrities with masses of people to generate excitement for sport and the Nike brand. It is impossible to predict months ahead what the air quality will be on a given day. And if Nike decides to call off an event, what should be the air-quality threshold? Should it be based on the U.S. consulate’s measure or the official government figure, which often shows the air is cleaner? To add to the complexity of the challenge, it is essential for Nike to maintain excellent relations with the government to sustain its advertising campaigns and business strategy.

Editor’s Note: Visit our site next Thursday, June 20 to read part three in our series, China: A Matter of Trust. You can read part one, China: The Siren Song of Rapid Growth, here.