Ernst and Young helping franchises do business in China

Foreign retailers that wish to penetrate Mainland China’s consumer market must first understand China’s complicated and changing economy, according to an Ernst & Young report, ‘The Path to Success for Retailers and Consumer Brands in China’.

“One of the most common mistakes is approaching China as a single, vast market,” says Conway Lee, a partner in Ernst & Young’s retail and consumer products practice. “In reality, China is a series of sub-markets that vary widely by location and demographics. Retailers would be prudent to consider strategies such as structuring outlets to local consumer preferences and allowing district managers more autonomy to tailor operations to local needs.”

China continues to be a hugely sought-after long-term business opportunity for global retailers, with a population of over 1.3 billion consumers keen to acquire a full range of goods and services. Significant increases in China’s domestic consumption have evidenced the transition from an investment-driven to consumption-led retail sector. Consumer-driven demand and growth potential will provide a range of opportunities for both market entrants and existing retailers. However, success in China will not come easily or quickly, as many examples of failure to date have shown.

‘The Path to Success’, which was released to mark the conclusion of Ernst & Young’s recent three day Global Retail and Consumer Products conference in Shanghai, highlights key issues retailers should grasp in order to operate successfully in China, among them:

· There are two distinct market segments in China; wealthier consumers in major cities demanding luxury, branded goods and those in smaller towns and rural markets with low incomes who are still focused on household necessities.

· China maintains a strong bureaucratic structure that may complicate business dealings. Partnering with local firms more familiar with this environment can help navigate the landscape.

· Retailers can consider tapping into ‘emerging’ provinces with growing economies and incomes as part of their market entry or expansion strategies.

· There may be limitations on overseas financing as China still maintains controls over its financial institutions.

“Branding remains a critical aspect for both domestic and foreign retailers in the Chinese market,” says Jay McIntosh, Americas director of the E&Y retail and consumer products group. “Retailers should be prepared to spend time, effort and considerable financial investment to establish their brands with consumers, as Chinese customers are appreciatively brand conscious and distinctly brand loyal.”

“Retailers, both domestic and foreign alike, will need to understand the unique characteristics of China’s consumer markets, the nuances of its retail market and the complexities of its ever-changing economy to more effectively conduct operations there,” Lee adds.

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