Foreign brands: Shop till you drop!

Despite local demand, Chinese and other emerging market firms have not established their own brands. Instead they have often tried a short cut, purchasing western brands. The main problem for the emerging markets is learning the art of protecting their local brands
 

The growth of emerging markets is having an enormous impact on everything. However, marketing and brand management in these markets can be a bit of a challenge. This is true for both multinational companies attempting to sell into these markets as well as for emerging market companies competing with them and attempting to expand internationally.

One of the most interesting examples are brand named luxury goods. The sales of these products grew 13% in 2010 to $228 billion and another 10% in 2011 to $252 billion, renewing the growth trajectory that started in 2007 when sales hit a previous record of $224 billion. As with all things concerning emerging markets, sales in China have led the way. Sales of branded personal luxury items purchased by Chinese globally add up to a whopping $52 billion. This is 80% of the $63 billion in sales of the largest market, the United States.

But China is not alone in its tastes for brand names. Latin Americans led by Mexicans and Brazilians are raiding the posh stores of New York, Milan and Paris with reckless abandon. Local markets are growing, as well. Sales in Brazil grew 50% from $2 billion in 2009 to $3 billion in 2011. Sales grew in the same period by 12% in the Middle East and by 25% in Korea.

But catering to these markets often means adapting to local tastes, which are often quite different than in Europe or the US. For example Chinese women’s taste for whisky and sports cars is higher. In China, Maserati sells 30% of its cars to women, while in the west women buy only 2% to 5%. In contrast, Chinese men purchase more far more grooming products including face creams than in older markets. They also are large consumers of luxury bags. Coach sells $1.7 billion worth of leather bags in China, 45% to men compared with 15% globally.

Despite the local demand, Chinese and other emerging market firms have not, with a few exceptions, established their own brands. Instead they have often tried a short cut, purchasing western brands. This process has even been sanctioned by the Chinese government.

But government encouragement does not necessarily mean success for the Chinese any more than it did for their Japanese predecessors who did the same thing 30 years ago. The computer firm, Lenovo Group, purchased IBM’s personal computer business in 2004. Lenovo now sells computers under its own brand and the only thing left of the IBM brand is the name ThinkPad.  The problems with the IBM brand have not stopped the Chinese from buying others. The Chinese car company Geely bought Volvo last year and a Chinese bulldozer manufacturer bought the Italian luxury yacht maker Ferretti, owner of the legendary Riva boat brand. Not to be outdone, one of India’s largest industrial group, Tata, purchased the famous British tea company Tetley and more recently Jaguar Land Rover.

Still marketing success has proven elusive even on their home turf. Chinese car companies have been unable to pry the more lucrative parts of their own market away from VW and General Motors. The foreign-branded cars are seen as more reliable, stylish and a better value than their Chinese competitors. This leaves the Chinese car makers with the low end of the markets where competition is only on price and margins are razor thin.

Emerging market governments are all ambitious to make their mark in the world and have no problem supporting their locals. In China this means reviving a bit of socialist history with the Mao era Red Flag limousine. Like its Soviet counterpart the Zil, it was originally produced for the communist leadership in 1958. But it fell out of favour with the Chinese leadership who preferred the more polished Audi, which dominates 30% of the market. Discontinued in 2010, it is now back as the first choice of the upper echelons of the party.

But the main problem for China and other emerging markets in learning the art of marketing is the protection of the brands themselves. The Chinese governments, usually local governments in trying to protect home grown industries, have been ruthless in slandering foreign brands. Luxury brands including Hermès, Hugo Boss and Tommy Hilfiger Chanel, Armani, Christian Dior, Zara and Burberry have been attacked as substandard. Wal-Mart in Chongqing found itself the scapegoat for high pork prices, while Coke, Heinz, Procter & Gamble General Mills, Lipton Teas, Colgate-Palmolive all have been accused of selling adulterated products.

Besides slander, the Chinese are notorious for intellectual property violations and trademark infringement. This consistent disregard for property rights was supposed to damage multinational firms, but the real losers are in China, for without these basic protections, the locals can only hope to produce basic commodities and leave the more profitable higher end to foreigners.

(William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and has spoken four languages. Mr Gamble can be contacted at [email protected] or [email protected]).

 

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