5 Myths About Retailing In China
By George Minakakis
You really don’t know China unless you have worked and lived there. And while I appreciate the cultural and academic perspectives that get published once in a while just passing through China or attending a seminar isn’t enough! It will take more than just someone’s short trip to understand the nuances of building a successful business model in this emerging (or should we say emerged) economy.
This perspective is more about the consumer sector and I can share with you that it isn’t for every retailer and restaurant chain. Sure there are plenty of retailers and restaurants that have made a great success of China. We read a great deal about the number of stores a brand has opened and the awareness that a brand is developing. In most cases this is all true however not for everyone.
In this article I want to dismiss some myths and bring reality to you about the challenges of launching a retail business in China.
Five Common Myths
Myth #1 The Chinese consumer has the financial means to buy western brands at western prices.
Nothing can be further from the truth. The stark reality that western brands have luxury (value added) taxes added to them increases prices beyond exchange rates by 15-30%. Most premium and luxury brands are already out of reach and it certainly makes it a challenge for consumers who want to buy these products. The second and more important aspect that dismisses this myth is that consumers have the money to spend. Here is the unvarnished truth. The average income in first tier cities like Shanghai is around $10,000 a year and in second tier cities it is $5,000 a year. These are hardly income levels that will send huge profits back home.
Myth #2 The Wealthy Chinese are driving the Luxury market.
Certainly with over 1 Million Chinese millionaires the illusion of people buying luxury every day can certainly make you believe that. The truth about the wealthy is that they travel and will spend what it costs them in value added taxes to fly to Rome, Paris and New York to buy these luxury brands. Why? Because they can and would much rather have had the experience of the brand outside their own home country. Most Luxury stores in China have a lot of browsers and few buyers.
Myth #3 The Malls in China Are Filled with Buyers
No not really! There are 100’s of shopping centers being built and many with the exception of those on high streets are void of traffic and recognizable retailers. I have reviewed many development plans for shopping centers that are in trade areas that will not be ready for another 10 years. The primary shopping centers have lots of traffic but the customers who frequent these centers are buying within their means and do a lot of window-shopping.
Myth #4: Developers Will Open Their Doors To Your Brand
This is the biggest myth. With leases being as short as 1-3 years and few if any developers providing automatic renewals it is an open door only for change.
What you must keep in mind is that developers and high street owners want Premium and Luxury brands. I have seen well established, retailers not have their leases renewed and replaced by Luxury watch stores. There are good opportunities for expansion but it is important to keep in mind that you must have someone reputable represent your brand and above all have dynamic story to sell your brand to developers. Otherwise you will be one of many trying to break into a tough consumer market.
Myth #5: Retail Is Growing Everywhere!
“Everything in China is Aspirational”, everyone has an ambition to own a car a home and higher end clothing, watches and electronics. There is a question of when they will be able to afford all of those other aspirational products. If you start with a home the rest will take a little longer. And as for the growth, it will come down to how much you are willing to invest and bet that China is right for your brand.
After leading a retail brand, in China for over three years, I understood that the secret to growth were to avoid getting wrapped up in the myths and focus on understanding first how to launch brand in China. And then ensure that you are always in the face of the consumer with a value proposition that is appealing and affordable.