China is a red-hot market for consumer products but this is not a blanket, indiscriminate opportunity. The quick expansion of international retail chains simplifies distribution, but it also brings margin pressure for branded product makers, especially local ones with limited portfolios.
As the hypermarket chains grow, control over distribution in tertiary cities and beyond is becoming the key differentiating factor. Accessing those consumers requires products positioned at the lower end of the spectrum-a challenge for multinationals.
Most of the big international retail chains are already in China. Those that haven't arrived yet are making efforts to come in. Acquisition is the preferred route.
Tesco, for example, recently announced it was buying 50 per cent of Hymall, a 25-store hypermarket chain set up by the Taiwanese food and retail group Ting Hsin.
But Tesco will have a hard time catching up with Carrefour and Wal-Mart: Carrefour already has 49 stores, while Wal-Mart a little more than half that number.
Their proposition to the Chinese consumer, as in other markets, is low price and convenience. In parallel with hypermarkets, convenience stores have also expanded in China. Local players dominate for now, but 7-Eleven and Lawson are making inroads.
For consumer product companies, the growth in hypermarkets is both a blessing and a bane. A blessing because their expansion unifies and systematises what is otherwise a messy and fragmented distribution system. Such a system imposes costs.
But channel consolidation means the new chain operators can also extract a price for the convenience, and volumes, they provide. And these chains, in China as elsewhere, have their own private-label products.
For the number one or two brands, shelf-space can be found, though at a cost. For the rest, presentation becomes impossible.
In particular, domestic Chinese companies have little leverage with giants like Carrefour, the toughest of all the hypermarket retail chains.
While a global giant like, say, Colgate may be able to protect its margins with Carrefour, a Chinese maker of toothpaste (not that there are not many left, one having been bought up by Colgate, another by Unilever) is likely to find doing business with Carrefour more difficult.
Navigating China's complex distribution system is something a local maker can do well. In contrast, there isn't much room for negotiation with Carrefour or Wal-Mart.
This stranglehold is, of course, not a Chinese phenomenon: Wal-Mart and Carrefour account for a significant portion of Procter & Gamble (P&G) and Unilever sales in North America and Europe.
Half of the Sony PlayStations sold in Europe reportedly go through Carrefour. Food service to restaurants, hotels, airlines, or caterers, is a much smaller portion of the Chinese market compared to retail, but it is growing fast and may come to the rescue.
Until that happens, being acquired by a multinational-becoming part of a larger family of products-is one way domestic Chinese brands can find some protection vis-à-vis the big retailers.
But the true key to success in China is distribution outside of the main retail channels. Getting your product into Wal-Mart or Carrefour is easy: pay and you're in.
Reaching people in China's tertiary cities where no Carrefour or Wal-Mart has yet set up shop is the means to achieve large-size sales.
How large can "large" be? The top foreign consumer multinational in China is P&G, with some $1 billion in sales. That's about half the size of Hindustan Lever in India.
But P&G has been in China only since 1988-i.e. P&G reached $1 billion in China in about 15 years. In Japan, it took P&G almost twice as long.
Below P&G, a number of other multinationals comprise a second tier, most with sales of a couple of hundred million US dollars. Unilever is in this position in China, similar to that of P&G's in India.
Other mid-tier brands are Taiwanese, developed by groups like Ting Hsin. Successful international names include Danone, which secured an early hold in the bottled water market through stakes in the two leading domestic names.
P&G's success in China is due to its coverage of 400-plus cities. This means penetrating well beyond the coastal region. It also means working with distributors, teaching them, strengthening them, creating win-win partnerships that take time, are painful, but yield great proprietary benefits.
P&G's feat has yet to be matched by another multinational. Local firms are better at distributor management than multinationals, and access to this skill base is one of the benefits of growing in China through acquisition.
Another challenge of selling consumer products in China is the development of a new category. Take wet shave, for example: it's tough to teach the Chinese consumer (who is not particularly hirsute to begin with) about a new product and make money at the same time, as Gillette has learned.
To balance this, through its Duracell unit, Gillette acquired a local battery maker, Nanfu, in an important transaction last year. This has improved its market position, but in a different product.
The Nanfu investment bespeaks of what foreign companies in China must do: they must have products that are priced low enough to appeal to the Chinese consumer.
If they want significant sales, they must also have products that Chinese users consume in volume: Mach3 likely doesn't provide adequate sales volume. Or take Nestle: its China business-ice-cream, instant coffee, seasonings-is good (Nescafe is way ahead of Kraft's Maxwell House, for example) but the products themselves are not staples of the Chinese diet.
Making them so requires time and money. But this is a good problem to have. Look, for a different example, at Kraft, which is particularly weak in China.
Its Tang orange drink mix was ubiquitous in China in the 1980s but the company is one of the few global majors to have exited a joint venture in China. The current absence is untenable, and acquisition a likely response.
When pursuing an acquisition strategy, multinationals have been helped by the fact that the consumer product segment is not capital-intensive. Sure, marketing costs money, but making and selling soap, food, or cosmetics isn't quite the same as making and selling semiconductors. Because of this, the consumer sector in China has many good private companies.
Like China's private sector overall, they have not been adequately capitalised (given only limited access to bank lending), but this is a shortcoming a deep-pocketed multinational can readily address. There are also, as we have seen, many well-run Taiwanese companies active in the consumer business in China. This means a multinational can find and buy an attractive Chinese company relatively easily.
To a great extent, for a multinational, success in China means becoming different. This may mean introducing new products altogether. It may mean introducing new packaging.
It may mean shifting a brand upwards or, more likely, downwards. It may mean positioning it differently. It may mean accepting setbacks and trying again-and again, and again.
It may mean abandoning control and taking a leap of faith-putting the future of your firm's China business into the hands of a local, or Taiwanese, manager, who may not always be able to communicate in MNC-speak.
It may mean acquiring a local company, with all the valuation, due diligence, or approval challenges that it entails. At the end of it all, your actions may pay off, or they may not. It all depends, as it always does, on the people involved and the decisions they make.Powered by 
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