China 2015: CATEGORY UPDATES
AIRLINES IMPROVE SERVICE AS TOURISM DRIVES GROWTH
Airlines enjoyed healthy growth, driven by leisure travel demand, particularly to overseas destinations, and government investment in airport construction. Carriers continued to add international routes, expand service to lower tier cities and focus more attention on understanding consumer needs to improve service and differentiate.
The three major national brands – Air China, China Southern Airlines, and China Eastern Airlines – continued to dominate the market. As they improved the customer experience for premium passengers, low cost carriers built their businesses by making air travel more affordable for a greater number of people.
Air China added a budget brand as part of the government’s initiative to increase service to lower tier cities. Hainan Airlines added international flights from regional cities. And online sales, a relatively new trend in the airline industry, increased. Factors including government austerity measures and competition from rapid rail impacted category sales.
BAIJIU BRANDS PURSUE NEW STRATEGIES TO STIMULATE DEMAND
Demand for baijiu continued to weaken and makers of the traditional white alcohol experienced profit pressure as price premiums eroded because of government policies that discourage extravagant official gift giving and entertaining.
Baijiu brands responded with various strategies, including: lowering prices, repositioning from premium to mid-market, seeking overseas markets and selling the bi-products of brewing grain as animal feed. Baijiu brands also expanded both online and physical distribution channels
Chinese wine brands also experienced a decline in demand for premium products, because of China’s slower economic growth rate, government austerity measures and the entrance of more foreign competition. Wine brands attempted to control costs, but also invested to improve grape cultivation and harvest.
Beer brands experienced stronger results. Several are owned by the major global brewers and benefited from resources and marketing expertise. Promotion around beer festivals and sponsorship of the FIFA World Cup helped drive consumption.
FOREIGN COMPETITORS ADD TO PROBLEMS OF SLOWER GROWTH
Many Chinese sportswear brands continued to suffer from lower demand, excess inventory and overstoring. In response, brands continued to close physical stores while proactively increasing their online presence and executing brand extension strategies.
Anta, an adult sportswear brand, entered the growing children’s wear business. Semir initiated a strategic shift to broaden from being a marketer of children’s wear to becoming a one-stop provider of children’s clothing, education, entertainment and other services.
For the marketers of business casual apparel, the problems of a slower economy and reduced demand were compounded by competitive pressure from international fast fashion brands, which offered a combination of high style and a low price that appealed to Chinese consumers.
Apparel brands continued to expand into lower tier markets. Some created flagship stores where customers could experience the brand in a physical location in an O2O attempt to match the offline and online brand presence.
Ecommerce increased, but shopping in physical stores remained the primary way Chinese purchased apparel. And online shopping was especially unlikely for certain items, like shoes.
BANKS FOCUS ON NEW BUSINESS DEVELOPMENT
The banks category adjusted to a combination of pressures that negatively impacted results, including slower economic growth, poorly performing loans and market reforms that lifted the interest rate ceiling on certain products making them less profitable.
Although most banks remained at least partially controlled by the government, reforms opened the way for more market-driven banks to enter the category. In addition, banks faced competition from non-banking entities introducing financial products. Ecommerce giant Alibaba offered micro loans, for example.
Banks responded with multiple strategies, including: expanding the focus on wealth management for private banking clients and developing online banking presence, often with mobile apps made available though partner Internet brands.
The banks category, which includes nine brands, comprises one-fifth of the total brand value of the BrandZTM China Top 100. The category was surpassed in total brand value for the first time this year, by technology.
STEADY SALES GROWTH CONTINUES DESPITE PURCHASING QUOTAS
China’s car industry continued steady growth. Passenger car sales rose 10.2 percent year-on- year during the first nine months of 2014, according to the China Association of Automobile Manufacturers (CAAM).
Local government quotas on car purchases, in an effort to control air pollution, impacted sales in some cities. But incentives for buying environmentally friendly vehicles drove sales of hybrids by brands like BYD. Although a relatively small part of the market, CAAM statistics indicate that production of clean energy cars almost tripled during the first nine months of 2014.
Carmakers focused on sales opportunities in lower tier cities without car sales quotas. Brands also cultivated ecommerce channel with sales on Tmall and other shopping websites. And they sold cars abroad, mostly to other Asian countries, although exports softened, according to CAAM. Chinese consumers continued to favor foreign brands. GM sold more cars in China than in the US during the first half of 2014.
The Chinese brand Great Wall experienced strong sales, particularly for its SUVs. Industry sales of SUVs rose by a third year-on-year, CAAM reported. Great Wall’s entrance into the BrandZTM China Top 100 doubled the car brands represented in the ranking from one to two, which accounts for the sharp rise in category brand value.
INDUSTRY INCREASES RAPIDLY AS PEOPLE ENJOY DINING OUT
More consumers are dining in restaurants as part of the Chinese middle class experience. Because of increased affluence, accelerated urbanization and changing household consumption habits, dining out has become a more frequent indulgence and social occasion.
China’s catering industry is expanding rapidly because of this phenomenon, but it faces a number of challenges, including: food safety issues, a labor shortage, inadequate customer service and rising operation costs.
As suggested by the popularity of the TV program “A Bite of China,” the appreciation of food has cultural significance in China. Even during the global financial crisis, catering industry growth remained stable. This resistance to economic cycles attracted more and more investors to the category.
Two catering brands rank in the BrandZTM China 100: Quanjude, a chain of roast duck restaurants established in 1864; and Yonghe King, with a fast food menu specializing in soups and noodles.
SCHOOLS EXPAND O2O OPTIONS TO SERVE GROWING ENROLLMENT
The education category continued to benefit from a cultural commitment to learning, parents’ desire to prepare children for the growing economy and the need to excel on the Gaokao, the national college entrance exam.
Brands offered broad curricula for entrance exam preparation. They also provided after-school and weekend tutoring for young children as well as adult programs to enhance career advancement.
School locations were added, but generally at a slower pace as brands attempted to increase profitability and strengthen the integration of their online and offline offerings.
Factors influencing future growth include reform of the NMET (National Matriculation English Test), and the relaxation of the one child policy. Both factors could increase demand.
Food and Dairy (+14%)
FOOD SAFETY AND HEALTHINESS DRIVE PRODUCTS, PARTNERSHIPS
Food and dairy brands launched initiatives to address the category’s key issues: food quality and safety. To meet rising consumer health consciousness and demand for naturally healthy products, brands added healthier and more upmarket ingredients.
Meanwhile, food and dairy brands joined international testing organizations and formed alliances with overseas food leaders to improve production standards and overcome the trust issues that resulted from a series of food safety scandals several years ago.
To widen distribution, brands launched their own Internet stores or cooperated with leading Internet retailers. Some developed loyalty programs to retain customers and learn more about their food desires and habits.
In a category with a substantial number of SOEs (State Owned Enterprises), consolidation continued, motivated in part by the government’s desire to create brands with the scale necessary to successfully face foreign competition at home or abroad.
URBANIZATION, HOUSEHOLD FORMATION STIMULATE SALES
The furniture industry benefited from urbanization and household formation. The growing interest in home de?cor and remodeling, driven by rising prosperity, also helped sales.
Other than Ikea, the dominant foreign brand, the category remains fragmented with many Chinese brands. One of them, Suofeiya, linked with the French company SALM to extend the Suofeiya brand, known for bedroom wardrobes, into other kinds of storage cabinets.
As consumers prefer to physically see and touch furniture before purchasing, the furniture category was less impacted by ecommerce than many other retail segments. However, brands developed online shopping sites to heighten awareness.
In the near term, the recent slowdown in real estate development, because of higher interest rates, could impact furniture sales. But over time growth potential is enormous, particularly in lower tier cities. Suofeiya is the only furniture brand included in the BrandZTM China Top 100 because it’s the only brand in the category to meet all the ranking criteria.
Health Care (+1%)
BRANDS RESPOND TO COMPETITION WITH MORE ACQUISITIONS
Health care reform and heavy competition were among the factors that slowed value growth of the health care category and drove expansion into lower tier markets as well as increased merger and acquisition activity.
These corporate hook-ups often provided Chinese brands with resources and advanced technology, along with insight about the pharmaceutical business in developed markets. Brand extension opportunities also resulted.
Tong Ren Tang, a traditional Chinese medicine brand, purchased a major stake in Yaokang International, a medical center. Yunnan Baiyao, another traditional Chinese medicine brand, acquired Qingyitang, a feminine hygiene brand.
Both Yunnan Baiyao and Tong Ren Tang offered cosmeceuticals, cosmetics with pharmaceutical ingredients. CR Sanjiu, another traditional Chinese medicine brand, also continued to extend into new categories including over-the- counter remedies.
Home Appliances (+20%)
BRANDS DEVELOP SMART PRODUCTS
In an unfavorable climate of higher interest rates and slower real estate development, home appliances focused on producing innovative smart products in an effort to shift the consumer conversation from price to performance.
Along with producing smart features, like appliances that can be controlled from mobile devices, both the manufacturers of white goods and air conditioners improved the energy efficiency of their products. Letv continued to develop smart TVs, and also expanded into content creation.
Brands developed business in lower tier cities, facilitated by an increase in ecommerce and the expansion of distribution to those areas. Haier leveraged its distribution capability in a collaboration with Alibaba in which the appliance maker provides “last mile” delivery and installation support for the ecommerce giant.
Home appliance brands also continued to export products, both under their own brands and as OEMs (Original Equipment Manufacturers) for other brands. Six appliance brands rank in the BrandZTM China Top 20 brands with the greatest percent of revenue derived from overseas.
LEISURE TRAVEL DRIVES GROWTH
Although hampered by slower economic growth and reduced government business travel spending, the hotel category continued to expand and competitors broadened their offerings to gain share across market segments from budget to luxury.
China’s middle class, with its increased number of leisure travelers, drove the expansion of the budget and mid-price hotels. To win market share, brands opened new hotels rapidly, through organic growth, franchising and acquisition.
To assure consistent quality across their many locations and segmented offerings, brands managed locations with combinations of central and local control. And they developed loyalty programs to gain and retain customers. Online booking increased significantly.
INSURERS ADD AGENTS TO IMPROVE SERVICE
Insurance brands added agents and strengthened various selling channels in an effort to reach consumers more effectively and persuade members of the rising middle class that insurance to protect their increasing assets is an important investment.
During a period of slower growth, and with the prospect of increased competition resulting from market reform, brands attempted innovative approaches to reach customers and improve service.
Extensive promotion drove e-insurance sales increases for New China Life. PICC Property and Casualty Company, Ltd. collaborated with Tencent, the Internet portal, to create a car platform that adds maps and other online resources to PICC’s offline capabilities.
Six Chinese insurance brands appeared in 2015 BrandZTM China Top 100, with a total brand value of $28.3 billion dollars, accounting for 6 percent of the ranking’s total brand value.
Jewelry Retailer (-2%)
MULTIPLE FACTORS SLOW SALES GROWTH
Jewelry retail continued to benefit from China’s growing affluence, but several factors contributed to sluggish sales, including: slower economic growth, government policies discouraging extravagant official gift giving, and increased overseas Chinese tourism.
Chinese traditionally view precious jewelry as both a status symbol and an investment that holds its value even during periods of inflation. But costume and fashion jewelry are growing in popularity among young professionals, especially men.
Local brands benefit from this trend by offering relatively affordable jewelry in contemporary designs made with less expensive materials. Meanwhile, international jewelry retailers derive competitive strength from branding, design and quality.
Although store-based retailing continues to dominate jewelry sales, because consumers prefer to try on the merchandise, Hong Kong jewelers have started to incorporate ecommerce aggressively, even offering exclusive online designs.
Mainland Chinese jewelry retailers have yet to fully embrace ecommerce, however brands like Lao Feng Xiao integrate the online channel by providing detailed product and store information on their websites. Ming Jewelry built its official online shop on Tmall.com.
Oil and Gas (+4%)
POLITICAL AND ECONOMIC CHANGE IMPACT CATEGORY
Along with slower economic growth, political forces pressured a category considered vital to the nation’s welfare. Policy emerging from the Third Plenary Session, at the end of 2013, directed the oil and gas category, dominated by SOEs (State Owned Enterprises), to become more market driven.
In addition, driving restrictions promulgated by local governments to reduce air pollution reduced demand for fuel. In an effort to ensure the supply of cleaner energy, PetroChina accelerated its shale gas operations in China. China signed long-term agreements with Russia to import massive amounts of gas through a network of pipelines spanning the two countries.
To develop potential outside its petrochemical core business, Sinopec partnered with Tencent. Together with the online portal, Sinopec will explore digital initiatives, such as ecommerce and mobile payment. Sinopec arranged with S.F. Express to use Sinopec service stations as package pick-up and drop-off locations.
Personal Care (+4%)
DEMAND TRIGGERS SEGMENTATION AND PREMIUMIZATION
The personal care category continued to expand, reflecting the interests and the financial wellbeing of China’s widening middle-class. Personal care brands were among the most adept at ecommerce.
Brands introduced more benefits with line extensions in sectors like skin care. Segmentation resulted in more products for babies, children and men. Premiumization continued as more discriminating consumers sought high-quality products.
Concerned about product safety, especially the potentially deleterious effects of chemicals, consumers preferred products and brands with healthy and natural ingredients that inspired trust.
Meanwhile, international players such as P&G, Unilever and L’Oreal dominated the personal care category with both their own brands and local acquisitions. Dabao, a famous local skin care brand, is owned by J&J. Unilever owns the local toothpaste brand Zhong Hua. Both brands are ranked in the BrandZTM China Top 100.
Real Estate (0%)
BRANDS ADJUST TO NEW MARKET DYNAMICS AND SLOWER GROWTH
To rebalance the economy, and avoid a real estate bubble, the government slowed housing demand by raising interest rates, which tightened credit. Following boom years that were driven by rising affluence and rapid urbanization, the real estate market adjusted.
Brands advanced a variety of initiatives, including: shifting from building and selling to building and renting; expanding into lower tier cities and overseas; and extending brands into related sectors, like retirement communities.
Anticipating a period of consolidation, and a more market-driven industry because of government reforms, brands also took steps to better understand consumer
preferences, improve customer experience and build loyalty.
Reflecting the dynamism of the past few years, 10 real estate brands are listed in the BrandZTM Top 100 Most Valuable Chinese Brands 2015, making the category among the most represented in the ranking.
ECOMMERCE RAPIDLY RESHAPES RETAIL
The BrandZTM Top 100 Most Valuable Chinese Brands2015, includes four retail brands compared with only one brand a year ago.
The most notable addition is Alibaba, whose arrival in the ranking, at number two, drove category value growth and suggests the impact of ecommerce. Even without Alibaba, however, retail brand value rose 64 percent.
Suning, the single retailer ranked last year, advanced plans to strengthen its core appliance business with its physical stores, but also devoted significant attention to ecommerce, opening its online platform to more third-party collaboration.
The grocer brand Yihaodian, which operates only online, expanded its product range and strengthened its distribution capabilities, locating package pick-up locations in major apartment developments and at over 300 FamilyMart locations in Shanghai.
In another example of effective O2O, online-to-offline integration, Yonghui Superstore introduced a click and collect app that enables customers to shop and pay online with their mobile devices and pick up purchases at a physical location.
Ecommerce was further strengthened with the rapid emergence of mobile payment options offered my most banks, often in collaboration with a powerful Internet brand like the portal Tencent, or Baidu, the search leader.
BRANDS DEVELOP ECOSYSTEMS TO COMPETE EFFECTIVELY
Technology surpassed banks this year as the category contributing the largest share of brand value to the BrandZTM Top 100 Most Valuable Chinese Brands. The nine technology brands in the BrandZTM China 100 comprise almost a quarter its total value.
Tencent, the Internet portal, ranks number one, displacing China Mobile, which has led the BrandZTM China ranking since its inception in 2011. The search engine Baidu ranks fifth.
Both Tencent and Baidu continued to evolve into online ecosystems to compete more effectively with ecommerce giant Alibaba for consumer time and advertiser revenue. Tencent, for example, bought a 15 percent stock share of JD.com and linked it with its WeChat messaging service to provide seamless shifting between ecommerce and social media.
Similarly, the Internet portal and media company Sina conducted an IPO (Initial Public Offering) of Weibo, its social media subsidiary. As Alibaba owns about 30 percent of Weibo, the transaction facilitates contact between Weibo users and merchants on Alibaba sites.
Technology brands also moved rapidly into mobile, particularly mobile payment. And some technology brands extended to other categories. Letv, a streaming video site, also produces its own brand smart TV. Some brands, such as Lenovo, expanded their global presence.
Telecom Providers (-4%)
PROVIDERS EXPAND NETWORKS TO MEET RAPID MOBILE GROWTH
Consumer adaption of mobile drove the telecom provider category. Mobile surpassed the PC as the access point to the Internet in China for the first time. The number of people accessing the Internet with mobile devices totaled 527 million – over 90 percent with smartphones – at the end of June 2014, according to the China Network Information Center.
To meet the growing demand for voice and data transmission, China’s three telecoms – China Mobile, China Unicom, and China Telecom – strengthened their 3G networks and accelerated deployment of 4G, at least in urban areas. China Mobile expanded its TD- LTE network, a variation of 4G developed in collaboration with several international technology and handset companies.
All of the telecoms added products and services, like mobile payment apps, to differentiate and connect meaningfully with customers. China Telecom, for example, introduced a banking app in partnership with China Minsheng Bank. In an initiative designed to reach young people, China Unicom launched its WeChat-Wo card, a SIM card specifically designed for the WeChat social network of Tencent, the Internet portal.
Travel Agencies (+48%)
LEISURE TRAVEL DRIVES CATEGORY GROWTH
Leisure travel continued to drive category growth, even as business travel slowed because of government austerity measures. Infrastructure development – rapid rail and airports in lower tier cities – facilitated movement domestically.
Meanwhile, China led the world in the growth rate of overseas travel, with spending by Chinese traveling abroad increasing 16 percent through the first nine months of 2014, according to the World Tourism Organization, an agency of the UN.
Travel agencies benefited from this growth and conducted an increasing amount of business online. Ctrip completed over 80 percent of all transactions online. Ctrip’s mobile app has been downloaded over 200 million times.
The well-established travel brand CITS, with over 100 branches, focused on transforming from a traditional travel agency into more of an Internet-driven operation.