Analysis of the Chinese Markets according to market potential for a premium coffee brand

Table of Content

Acknowledgements

List of Figures

List of Tables

1. Introduction
1.1 Research question and motivation
1.2 Scope and limitation
1.3 Methodology
1.4 Company profile

2. Brand Culture in China
2.1 Character of Transitional Economies
2.2 Brand Evolution in China
2.2.1 Purchasing Best Brand
2.2.2 Brand Competition
2.3 Food and beverage
2.4 Cosmetic
2.5 Coffee

3. Culture values according and regional differences in China
3.1 Modernising versus westernising
3.2 Individualism and Collectivism
3.3 Purchase decision
3.4 New Nationalism
3.5 Differences among regional markets in China
3.5.1 The seven regional markets of China
3.5.2 Geographic diversity and economic disparity
3.5.3 Dramatic differences among customers
3.5.4 Notable differences across regions
3.5.5 Significant differences in consumption patterns
3.5.6 Income has had a direct impact on demand
3.5.7 Beijing the traditional capital
3.6 Major Findings

4. Target group segmentation
4.1 Working Class
4.2 Salary Class
4.3 Middle Class
4.4 Economic- Policy Elite
4.5 Gender issues
4.6 Target group specification
4.6.1 Occupation
4.6.2 Gender
4.6.3 Age
4.6.4 Lifestyle
4.7 Major Findings

5. Brand building in China
5.1 Brand equity literature
5.2 The functions of a brand
5.2.1 The functions of a brand for consumers
5.2.2 The functions of brands from a company’s perspective
5.3 A brand building process based on core values
5.4 Brand core development
5.5 The Keller brand equity approach and the model of the brand- nature
5.6 The brand- nature Model
5.7 Suitable brand-drivers for the Chinese market
5.7.1 Brand name and Country-of-origin effect
5.7.2 Chinese identities
5.7.3 Quality
5.7.4 Price
5.8 Major Findings
5.9 Basic economics legal conditions for foreign investors
5.9.1 Trade mark right
5.9.2 Anti Unfair Competition Law
5.9.3 Contract Law
5.9.3.1 Contract law of the People’s Republic and legal choice for contract negotiations
5.9.3.2 Expiry of the contract negotiations
5.9.3.3 Contract fulfilment
5.9.3.4 Legal pursuit
5.9.3.5 Arbitration

6. Branding
6.1 Brand naming and brand name translation
6.1.1 The need for brand name translation into Chinese
6.1.2 Brand Naming in International Marketing
6.1.3 Critical methods for brand naming in China
6.1.4 Critical aspects for brand naming in China
6.2 Brand logo
6.2.1 Logo design of foreign brands in China
6.2.2 Logo design of foreign brands according to aesthestics
6.3 Product packing
6.3.1 Packing elements in China
6.3.2 Packing elements according to Chinese luxury goods

7. Relationship Marketing
7.1 Relational benefits
7.2 Relationship between brand and target group
7.2.1 Dimensions of brand- personality
7.2.2 Effects of brand- relationship
7.2.3 Relationship between brand and consumer
7.3 Culture and Relational Orientation
7.3.1 Power Distance
7.3.2 Uncertainty Avoidance
7.3.3 Individualism / Collectivism
7.3.4 Masculinity/Femininity
7.4 Relationship Communication
7.5 Relationship communication in China by advertisements
7.6.1 Informational versus Emotional Advertisements
7.6.2 Essential notions and important backgrounds
7.7 Tools for relationship communication
7.7.1 Selection of communication tools
7.7.2 Personal and interactive communication tools
7.8 Suggestions for brand- advertisements
7.8.1 Structure of the Communication Mix
7.8.2 Advertising Objectives
7.8.3 Target Group
7.8.4 Choice of an Advertising Agency
7.8.5 Advertisement Regulation

8. Conclusion

References

Acknowledgements

The author would like to thank the following for their co operation in helping with this report:

Many thanks to my supervisor Michael Zerres for his guidance and our conversation.

List of Figures

Figure 1: The Tchibo Group is one of the largest consumer goods companies in Germany

Figure 2: The Eight Economic Regions of China

Figure 3: China - No Uniform Market

Figure 4: Like Europe - Diverging Sub Markets

Figure 5: The Pyramid of China’s Urban Market

Figure 6: Corporate Brand Building

Figure 7: The BBDO Five level Model of brand management

Figure 8: The Keller equity approach

Figure 9: Brand- nature Modell

Figure 10: Combination of Keller’s system and the brand- nature model

Figure 11: Possible conflict solutions

Figure 12: Brand view

Figure 13: Dimension of brand identity

Figure 14: Brands Build Relationship

List of Tables

Table 1: Rejected Foreign and Domestic Competitors in Chinese Agro- food Market

Table 2: Skin care market share, China- based on 2002 estimates

Table 3: China Skincare and Suncare Market Value (US $Mio.)

Table 4: Urban Consumer Segments in China: Psychographics, Lifestyles, and Media Use

Table 5: Urban Consumer Segments in China: Demographics

Table 6: Audience exposure to advertising media

Table 7: Media and audience memory towards advertisement

Table 8: Buying motive, promotional media and product types

Table 9: Media use per consumer segment

1. Introduction

1.1 Research question and motivation

The Chinese market, with its 1.3 billion population, has had a double- digit growth rate over the past few years. (iMove, 2003). It is for this reason that these days, everyone is talking about China as the sales market. Foreign companies have to ask the question what their market and their potential target group really are like (Bugs, 2005).

In spite of the increasing income per head, the growing middle- class, the economic elite and also the increasing openness toward western life- style, the sales market in Shanghai and Beijing is relatively small. Nevertheless the ever expanding group of Chinese who can afford consumption beyond their daily needs is becoming more and more sophisticated and looking for premium brands (Stenvall, 2005).

Since the open door policy in the 1980s and entering the World Trade Organisation (WTO) in 2001 the number of foreign companies flooding into China occurs uninterruptedly. Despite this many are still struggling with distribution and with an understanding of the complexity of the market. Nevertheless, market competition is already entering the next stage - competition between brands.

Brands have long been recognized as the single most powerful marketing asset of a company (Aaker and Joachimsthaler, 2000). It takes a huge amount of resources over a long period of time to build strong brands in the market place (Aaker and Joachimsthaler, 2000; Keller, 1993).

Not only do domestic brands and trademarks enjoy high awareness and are able to take advantage of real consumer insight, but they are also becoming increasingly successful at using marketing tools to make their way into the minds and hearts of consumers.

In this study, the primary goal is to discover which consumers belong to the premium brands target group, how they develop a premium brand and what the characteristics of a premium brand in China actually are. Finally, it is important to understand the right methods in which to communicate with the Chinese in order to build up a relationship with them. These three points are key when researching how to establish premium brands in China, especially premium coffee products.

This paper observes the differences and obstacles within of the Chinese market for foreign brands in doing business in China. The Chinese market and consumer behaviour are very different compared to western markets. It is necessary to know regional differences in consumption and even more important to know who belongs to the target group especially when the foreign company is dealing with a premium brand in a complex market like China. The complexity ranges from cultural aspects to what legal aspects have to be taken into consideration. The thesis makes it clear that premium brand building in China is linked to a close relationship marketing as well as relationship communication. Relationship communication to the Chinese consumers and the target group respectively can lay the foundations to develop strong premium brands in China.

1.2 Scope and limitation

This thesis exclusively focuses on the cities Shanghai and Beijing, and will show that, at the moment the target group and market for premium brands especially for a premium coffee can almost only be found in the urban areas. In the thesis it becomes obvious, that the enormous economically undeveloped rural and back- country areas of China are not important for premium brands as yet.

The primary focus lays on premium brands with the emphasis of the premium coffee ‘Davidoff,’ as the thesis was made for the company Tchibo. Tchibo bought the license from Davidoff Coffee to sell their coffee. With background information of Tchibo, the industry overview in the chapter 2 about “Food and Beverage”, “Cosmetics” and “Alcohol and Tobacco” makes sense. According to their requirements and their already established business partner network the focus of the interviews in Shanghai and Beijing was threefold.

Firstly the focus was put on Food and Beverage managers in four and five star hotels. These hotels harboured parts of the target group, which were the foreigners and Chinese business people. These kinds of hotels also provide the right environment to serve a premium coffee. Another reason is also to get a market overview of the Food and Beverage industry from an opinion leader like a Food and Beverage Manager.

The second focus was put on the opinions and knowledge from professors about the topics of brand building, consumer behaviour and culture aspects in China.

The last focus was put on consultancy and law firms to reflect the current situation or the Chinese market compared to the theoretical background.

1.3 Methodology

Detailed library research in the Fudan University and the University of Hamburg as well as internet literature research was done to provide a reliable basis for the investigation of this topic. Additionally the author had 35 open interviews of certain questions with professors, managers, lawyers and other relevant interviewees’ partners in Shanghai and Beijing from June to August 2005 and via email and telephone. The outline of the thesis was used as a form of guideline and the results were sorted into categories. The creation of an information chain didn’t just come from a represented group, as different groups provided different information (Laatz, 1993). The interviews were supplemented by personal observation throughout a whole year in China.

The thesis is split into six chapters, many with numerous subchapters.

Chapter two gives an overview of brand culture in the Food and Beverage, Cosmetic and the Alcohol and Tobacco industries. It starts with an outline of brand history and the character of transitional economies. Before the actual overview of the mentioned industries starts, an explanation about the brand competition is explained.

Chapter three focuses on Chinese consumer according to their purchasing decisions, their attitude regarding modernising and westernising, individualism and collectivism and also the differences among regional markets in China. This chapter provides the basis for the following chapters discussing to the Chinese behaviour as well as their attitude toward premium brands and coffee consumption.

The chapter four gives the segmentation of Chinese consumers into four key consumer groups according to socio- demographic factors as well as discussing gender aspect. The findings lead to a target group specification, one of which includes premium coffee consumers.

Chapter five covers the brand building criteria for a premium brand as well as the legal aspects according to this. The first aspect covering the function of a brand from both the consumer and the company perspective. The model of brand core developments, the brand equity approach and the model of brand nature led to the findings of a brand- driver for the Chinese market as well as some major guidelines for successful branding. There is a paragraph giving additional information about basic economics, legal conditions for foreign investors (including competition law), trade mark law and contract law.

The chapter six gives inside information about branding. This includes the brand naming, brand name translation and the brand logo. These aspects have to be seen as one to get complete overview of branding in China and to see the need for brand name translation into Chinese. Additionally, product packaging is also covered.

1.4 Company profile

Following is the company profile, which gives an overview of Tchibo GmbH. The industry overview of chapter two is not related to the coffee industry but makes more and more sense linked to the company profile of Tchibo GmbH.

Tchibo Holding AG

As the parent company of the Tchibo Group, Tchibo Holding AG is responsible for managing its portfolio of equity investments. It holds 100% of the shares in Tchibo GmbH as well as a majority interest of 50,46% in Beiersdorf AG.

With brand awareness of almost 100 per cent Tchibo is one of the top brands in Germany. Solidity unbeatable price-performance, quality offerings, innovative ideas and enjoyment and enthusiasm are the core values.

Tchibo creates a positive environment for its customers. As a result, trust in the Group and in the products is very high.

With its unique business system, which combines consumer merchandise and services as well as freshly-made coffee specialities in its shops, Tchibo offers customers a feel-good haven. In other words a place where they can experience a special atmosphere away from the monotony of traditional shopping.

The wide variety of first-class coffee brands and a total of around 2,300 different consumer goods per year, not to mention its services and special offers, Tchibo always has a surprise in store for its customers. In the future, Tchibo will strengthen its presence in the international gastronomy segment with Davidoff, the super premium brand (Tchibo, 2005).

illustration not visible in this excerpt

Figure 1: The Tchibo Group is one of the largest consumer goods companies in Germany

Source: Tchibo, 2005, no page.

Tchibo is the world’s fifth-largest coffee producer and the market leader for roasted coffee in Germany. In most weeks of the year Tchibo has sold more of their lead products than the entire German specialist trade together. Tchibo products can be found in almost every household - as can products from Beierdorf. Nivea, Labello, tesa and Hansaplast/Elastoplast are not only leading brands in many countries, but in some cases are even synonyms for the product categories concerned.

2. Brand Culture in China

When looking at brand culture in China it is necessary to give an overview about the past and current situation of the consumers and their behaviour. To understand current brand culture in China one needs to discuss the development of the country and the population’s attitudes to national and foreign brands.

While research on brand equity has gone a long way, research into branding in transitional markets has just started (Batra 1997; Tse, Belk, and Zhou, 1989; Schmitt and Pan, 1994; Schmitt, Pan, and Tavassoli, 1994). In this section, the development of the transitional economies which affects the evolution of brand equity will be examined. Forces that have led to the rise in indigenous brands and the relative weakening of foreign brands are of particular interest to this study.

2.1 Character of Transitional Economies

The world witnessed the collapse of the former-planned economies from the late 1970s. Countries such as China, Vietnam, the former Soviet Union, Poland, Hungary and the Slovak Republic amongst others have embarked on the journey to transform their economies to a market economy. The process of transition has been gradual for many countries and therefore these economies are referred to as “transitional economies,” (Batra, 1997). Before the reform consumers in China had little to choose from whether luxury items or even daily necessities. The need for branding was nothing more than the need for tracking which item was sold. When the door was opened to the West in the late 1970s Western goods flooded into China. Chinese consumers were caught by surprise by the inflow of so many Western brands, Marlboro, Coca-Cola, Sony, Toshiba, Chrysler, and so on. The consumers were stunned by the fact that almost all of them were superior to the local Chinese products. Along with the increased exposure of consumers to global media, depictions of Western lifestyles in local media, and most importantly the rapid rise in living standards, a global consumer culture in China has emerged (Alden, Steenkamp, and Batra, 1999).

Chinese consumers have increased their desire for quality branded goods and services. Technology and feature/functionality expectations were rising and therefore China had a severe shortage of competitive new brands from local firms. Furthermore, many products bought by consumers were new to the local firms, and their low knowledge levels regarding these product categories led them to rely on brand names. Many Chinese consumers associated new foreign products with superior quality.

In short, there are two dramatic changes taking place from the consumer’s perspective. The first is the explosion of products onto the market. In the former planned economies, consumers had little choice and thus didn’t need to spend time comparing goods. Product and brand knowledge was low level. Along with market competition, dozens of brands in each product category appeared on the shelves. It became a daunting task for average consumers to know brands and to assess the best value for their own purpose. The second change is the explosion of disposable income.

In planned economies individuals were given a nominal salary that just covered food. Housing, medical services, pension, education, transport and so on were either provided or heavily subsidized by the state. Individuals now get much higher pay, but they also have to take care of many expenses like consumers in the West. What brand is a best buy becomes an important decision? As consumers know more about brands, they develop a brand knowledge base. The influx of foreign brands in terms of luxury and premium products has led to a serious situation. Nicolas Ziegler (2005) (as found in: N. Schaffmeister, B, 2005), consultant of BBDO in Shanghai, claims foreign brands faced difficulties because they failed to adapt their market strategy, product portfolio and the communication of the brand value.

A lot of foreign brands did not do enough research into the objectives and wishes of the Chinese consumer. Even if meaningful market research was available, the headquarter and the local management were quite often not able to adapt the marketing action.

2.2 Brand Evolution in China

The evolution of brands in China passed through four distinctive eras: central planning,

catching up, hyper-competition, and post-industrialism (Schlevogt, 2000). In the first two eras,

firms focused on production and supply, while in the last two eras, firms paid more

attention to consumer preferences. In the planned-economy era, production, not market demand, dictated resource allocation. There was no need to build brands. In the catching-up era, firms began to understand the importance of product quality, but still lacked the true appreciation of brands. In the early years of reform, companies could sell most of what they produced due to the huge pent-up demand.

By early 1990s, China entered the era of hyper-competition where market demand began to

slow down. As competition intensified, firms looked towards the high-price and high-demand

products that some strong foreign brands commanded in China. They began to appreciate the value of strong brands (Pan and Schmitt, 1995).

In their efforts to build brands, many Chinese firms worked on improving product quality. Local brand names like Bank of China and TV set maker Changhong enjoy strong recognition. Competition between foreign brands and local brands has intensified. Local branding becomes a strategy for foreign firms.

2.2.1 Purchasing Best Brand

According to the theory of brand choice, consumers are aware of a set of brands (Shocker, Boccara and Nedungadi, 1991). That is all the brands that they are aware of and this awareness set comprises of the most number of brands. Among the awareness set, there are brands that consumers regard the best quality, such as Sony in consumer electronics.

However, in the market place, the best quality brand often charges the highest premium price.

Most average individuals can not afford to buy this brand even they are aware of it. Thus, in the actual deliberation of which brand to buy, consumers often have a set of brands called the consideration set (Lehmann and Pan, 1994). In the actual purchase, consumers would balance between their financial resources and the price that a brand charges. Often they end up buying the brand that is not the most ideal in their mind.

As mentioned above, one unique feature of a transitional economy is market competition. Companies, both foreign and local, invest resources to build brands through the product quality enhancement and brand image. Consumers, on the other hand, actively engage in a learning process to acquire knowledge about brands. Within a short period of time, the gap between brands widened, and consumers knew which brands were ideal in most product categories. At the same time, the majority of consumers saw their disposable income rising at a much slower rate than their knowledge about brands. They may know which brand is of the highest quality, but their income does not allow them to buy that brand. They have to balance between quality and price to achieve the best value for their money. At the early phase of transitional economy, there were a high proportion of consumers that could not afford to buy what they perceived as the most ideal brand. As the transitional economies grew and purchasing power of consumers rose, the percentage of consumers who purchase their ideal brand increased (Bugs, 2005).

China is no exception to the general rule that, as an economy develops in complexity, the role of its service sector grows. Echoing the government's goals, Chinese sources taking an international perspective, outline a time table of development informed by changes in consumption patterns. At the first consumption is focused on basic necessities like food and clothing, while the second phase, characterises Western countries when they entered industrial society and is typified by the provision of consumer goods, cars and improved housing. The third, and as yet final stage, is a knowledge economy of information products and services, to which advanced Western countries have begun the transition. A refinement of these themes will now be applied to contemporary China.

As stated above, initially consumption is focused on cheap basic necessities for daily life, and in the Chinese context this is equivalent to a demand structure of 4,000 Chinese RMB gross domestic product (GDP); at the second level of 4,000-7,000 RMB GDP, the need for essentials has been satisfied and further goods and services are consumed; in the third instance at 7,000-15,000 RMB, sometimes known as the reasonably well-off phase, the main contents are consumer durables together with commercial housing and higher level services; and finally, at 15,000 RMB and above, often referred to the prosperous stage, wealth confers personal development through sophisticated products and advanced information services.

The trend during the transition from the lower to higher stages relies on the proportion spent on commodities to fall and services to rise. At the moment, much of urban China like Shanghai, Beijing and Shenzhen is entering or has just entered the second stage. Lastly, wealthy entrepreneurs and others advantaged by ventures with foreign investment are more typical of this stage (Chen, 1999; Hu, 2000).

2.2.2 Brand Competition

When consumers in the transitional economies know little about brands, they tend to rely on the image of the brands. Thus, brands that sit on the top of the product category pyramid often command an overwhelming consumer base. As consumers in the transitional economies gradually acquire the knowledge about brands, they begin to be able to tell the difference between brands. They depend on the actual performance of brands when judging the brands, instead of relying on perceptions. At the same time, companies engage in fierce competition.

The quality of brands tends to improve and the gap in quality between the top brand and the follower brands narrows. In the first instance Chinese competitors compete over the price but the quality is still lower compare to the foreign brands (Stenvall, 2005). As the competition among brands increases, the ability of top brands to dominate the market decreases. In other words, the differences in the mind of consumers between top brands and the rest of brands were more visible in the early phase of transition, but less substantial as the market progresses. As the transitional economies grow and purchasing power of consumers rises, the dominance of top brands in the product category decreases (Yao, 2005).

The following industries are unrelated but can be used as a comparison to the background information about Tchibo.

2.3 Food and beverage

The food consumption habits of urban Chinese citizens have shifted to a higher fat, higher sugar diet, similar to western people (Popkin, Sahasporn, Ge, Fengying, 1995). This evidenced by steady increases in consumption of meats, edible oils, and dairy products, as well as processed foods, snacks, and food away from home (Economic Research Service, 2003). Consumers who demand western style convenience food are younger adults, both married and single, with higher income levels and previous western food experience. Additionally, consumers who demand these kinds of products tend to eat out more often and consume more snack foods (Veeck and Veeck, 2000). Per capita income in urban China rose from 1500 RMB per year in 1990 to 686o RMB per year in 2001, an increase of over 400%. A similar situation in rural china caused per capita income to rise over 300%. Per capita living expenditures increased in equal percentages to those of income, with food expenditures rising over 300% in urban areas, and 200% in rural areas (Economic Research Service, 2003). The reduction in the share of household expenditure on food as incomes in increase is the natural consequence of increased purchasing power. Regmi (2003) said that consumers in lower income countries spend a large share of their income on food and clothes, while consumer in higher- income countries spend more of their income on housing, services and luxury goods.

With the overall improvement of living conditions, the economists refer to the potential for more diversified consumption in terms of a fall in the ratio of expenditure on food to total spending, and the measure of this, the Engel Index has been falling since the 1990s. The Statistical Yearbook (2002) released the numbers 37.9 in urban and 47.7 in rural areas in 2001. Domestic trademarks dominate sales in all traditionally available processed food. A number of larger brand name companies has emerged recently (Wang, 2005).

Foreign brands usually find it difficult to compete with local firms when producing food items mainly because of local firms expertise but also because China is far from being ‘one’ nation in terms of consumption habits (Sun and Wu, 2004). Also, the foreign brands still lack behind in terms of distribution channel, price and the barrier from the culture point of view (Bugs, 2005).

Some global players for example Danone, Unilever and Nestle localize and gain access to regional distribution networks via acquisitions of shares or complete domestic brands.

These days, domestic or Taiwanese companies are dominating China's packaged-food and drink sectors. a few multinational companies that brought a laser-like focus to specific sectors, including Groupe Danone SA in biscuits and bottled water and Wm. Wrigley Jr. Co. in candy have also successful. In three of China's fastest-growing beverage categories, Nestle doesn't claim a top spot: It is No. 3 in the dairy sector, No. 7 in bottled water, and far down the list in bottled tea, according to figures from the National Bureau of Statistics and industry analysts (as found in: Chang, 2004).

In the packaged food industries, such as instant noodles, snack, milk powder, and beverages, foreign investors exercise a larger influence. The two Taiwanese companies alone, Tingyi and President, represent about half of Chinese instant noodle sales. The bottled water market is led by two Chinese enterprises, Wahaha and Robust; however, Danone has a controlling stake in both. Expensive foreign brands like Evian or Perrier have virtually no market share (IMI, 2001 A).

Coca Cola and Pepsi dominate the carbonated drink segment, and their combined production constitutes almost half of total beverage sales. Past domestic cola imitations failed to provide originality and acceptable taste. Wahaha´s “Future Cola” survives and claims at 15% market share but is a mere copy of Pepsi’s and Coke’s names and designs (Song, 2005).

Foreign brands of biscuits, chocolate, and ice cream are always the childrens’ favourites. McDonald’s and Kentucky Fried Chicken are the only nation-wide fast food chains in China. In addition, Carrefour, Wal-Mart, and Metro are among the top 10 food retail chains in China. Widespread presence of foreign brands and investors seems to suggest an overwhelming victory of foreign investors. However, if looking closely at the market dynamics of many food segments, today’s achievements of foreign investors come from long and difficult struggles, gains and losses.

Within the international brand’s experience Henderson (1998) (as found in Wei, A.; Cacho, J., 2001) analyzed the sources of competitive advantage in the processed food industry in the context of globalization and found that the importance of the endowment of natural resources is superseded by that of brand-related intellectual property as the vehicle to carry multinational food companies’ products globally. This has been true for many multinationals investing in China. For most food multinationals who have entered China, their international brands acted as a key to open the door of the China market (Rabobank International, 1995, 1999) (as found in Wei and Cacho, 2001).

Famous foreign food brands, such as Nestle’s infant formula, Coca Cola’s soft drinks, Unilever’s ice cream, and Carlsberg’s beer, were highly recognized for their quality, associated lifestyle, and after-sale services when they were produced and sold in the Chinese market. They were treated as premium brands at the high-end market. China’s consumer market can be divided into three segments: mass market, value-for money-market, and high-end market. Many international brands did not intend their products to be in the high-end market in China as they are widely sold in the mass market in developed economies. However, when these brands came to China, their quality was much higher than that of local products and hence they were more expensive.

To produce and maintain the brands cost much more than to produce local products. Thus, international brand-name foods naturally fell into the category of the high-end market in China. The high-end market position at first benefited many international brands. High prices were associated with high margins, and the sales were supported by a group of rich consumers. Famous international food brands are the image of high quality new life, which make the draw of local products pale in comparison. However, not all famous foreign brands had an immediate success when they were introduced and first produced in China. One of the reasons could be the price, because imported products are more expensive compare to the domestic products. For instance a 300g package of imported chocolate costs around 45 RMB. This is equivalent to a complete meal for two persons at an average restaurant. Also, imported products are consumed as special treats and presents, whereas domestic produced dairy products are slowly becoming part of the daily diet of urban residents (IMI, 2001, B).

Non- alcoholic beverages, meats, cereals, fruits, and vegetables account for the majority of Chinese expenditures on processed foods, which tend to be western in orientation (Bhandari, Smith, 2000).

The increased frequency of eating out, especially within the urban areas, derives from a growing need to save time as well as the availablility of a higher level of disposable income. The World Bank predicts continued urbanisation in China, with 42% of the population, or upwards of 600 million people, living in urban areas by the year 2020 (Wu, Gottlieb and Davis, 1998-1999). More and more of the Chinese population become familiar with both western and non- western processed foods, which lead to continued growth in demand for these products (Ye, 2005).

illustration not visible in this excerpt

Table 1: Rejected Foreign and Domestic Competitors in Chinese Agro- food Market

Source: Rabobank International Database (as found in Wei, A.; Cacho, J., 2001).

2.4 Cosmetic

China is one of the key drivers of growth in the global cosmetics and toiletries industry. Euromonitor International (as found in: China Daily, 2005) predicts China's cosmetics sales are expected to rise in excess of 18 billion RMB by 2008. The Euromonitor's report on the Chinese cosmetics industry is based on research conducted into L'Oreal's expansion in China. L'Oreal's strategy gives a good example how important the Chinese cosmetic market is and will be in the future. This can be seen by the opening of a L'Oreal research and development centre in Shanghai in June this year, the fourth centre to be founded after Paris, New York and Tokyo. L'Oreal is now shifting from its traditional focus on the major cities of Shanghai, Beijing and Guangzhou and is looking towards developing markets in China's other cities.

As explained before, China's recent impressive economic development has not only raised the standard of living but also boosted disposable incomes. This has allowed the nation's cosmetics and toiletries industry to enjoy significant growth last year, with total sales reaching 53.5 billion RMB.

Functional cosmetics and toiletries account for the lion's share of this figure, with daily-use products such as skincare and hair care being the two largest sectors representing more than 50 per cent of total sales (Chiou, Zou, Wang, 2005).

Although these sectors are the most lucrative, they are close to saturation point. Given the 60 per cent of the Chinese population live in rural areas, and thus have low incomes, the Chinese market is geared towards low-end mass products. Major cosmetics multinationals are therefore focusing their efforts of grabbing a slice of the low-end market, where great development potential exists (China Daily, 2005).

Within China, Shanghai and Beijing, both have different emphases in the cosmetics industry. Beijing is more important both for the mass market and the premium market. Consumers in Beijing are empowered to purchase for their company or the government. For instance giving gifts is common when doing business or maintaining relationships. Quite often consumers buy the items not for themselves but for others. Shanghai is more open-minded and more westernised. There is a bigger middle market and it is more likely that this group of buyers or social group is faster able to buy premium goods (Chiou et al., 2005).

Paolo Gasparrini, president of L'Oreal China, (2004) (as found in: O´Neill, 2004) said that Chinese consumers are very demanding. They want new products that are more sophisticated and more high-tech. One of the reasons could be that consumers from collectivist cultures are more concerned about their personal appearance and about how they seen by others (Sun et al., 2004). Chinese skin has special needs, especially the eye area where women are very sensitive about ageing. There is a special need for products for oily skin, especially in summer, because Chinese do not like skin that shines. The sales of women care products are much stronger than men’s care products (Chiou et al., 2005). Therefore, it’s very interesting to know that female consumers in China's major cities have what some marketers are calling the “J-Sense”. They are increasingly tapping into the essence of Japanese consumer culture. While local brands are still strong players in the market, many compete on imitation and price while brands from Japan such as Shiseido and Kanebo have found a lucrative market in the major cities of China's coast. There, young urban women are turning towards localised expensive Japanese cosmetics in increasing numbers. Young female consumers in cities like Shanghai and Beijing who typically earn $200-$250 a month are willing to pay top prices for these brands. There is a belief in this demographic that Japanese products are better suited to Asian skin than Western equivalents and they are more aware about the importance of Traditional Chinese Medicine in cosmetics products. These brands also only use Asian models in their marketing which appeals to a self-confident market that is experiencing something of a backlash against overt Westernisation (Brand Strategy, 2004). The Chinese market is very competitive and advertisement is one of the key weapons within this industry (Owen- Jones, 2005). Advertising in the cosmetic industry is so important due to the focus on the mass market and is found most commonly on television and in international magazines such as Vogue, Cosmopolitan, Elle and Figaro (Chiou et al., 2005).

Another point of view is from Avon. Avon sees an increase of sales due to the increase in what it terms as “consumer-ready” households, defined as those with annual income of 45 000 RMB or greater. In Shanghai and the top 30 coastal cities, the number of “consumer-ready” households are expected to increase from 24 million in 2001 to 40 million in 2006. In the top 20 inland cities and the rest of urban China, the number of “consumer-ready” households is expected to increase from 21 million in 2001 to 100 million by 2006. And even in rural areas, the number of consumer-ready households is expected to increase to 16 million by 2006.

Like other companies, Procter & Gamble is increasing its position in China. Earlier this year, Procter & Gamble purchased for $1.8 billion the remaining 20 percent stake in P&G-Hutchison Ltd., its China joint venture with Hutchison Whampoa China Ltd. The venture sells consumer products, including personal care products, in China. P&G had an option to buy out the remaining 20 percent between 2007 and 2017, but decided to move sooner on the expectation that the price tag would be higher if it waited (Van Arnum, 2004).

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Table 2: Skin care market share, China- based on 2002 estimates

Source: Datamonitor (as found in: Van Arnum, 2004, no page).

Category

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Table 3: China Ski ncare and Suncare Market Value (US $Mio.)

Source: Datamonitor (found in: Van Arnum, 2004, no page).

Domestic cosmetic firms are handicapped by a late start, lack of capital to fund research and development and inexperience with the sophisticated marketing that is the hallmark of the global players. For example, L'Oreal uses two of China's best-known actresses, Gong Li and Zhang Ziyi, to advertise two of its brands (O´Neill, 2004; Chiou et al., 2005).

However, China is a complex market overall, varying widely from region to region. The country is really a collection of regional markets, with very few companies able to operate on a truly national level. The most successful foreign brands communicate where they are from, because this allows them to demand higher prices and ensures the consumer a stabile, quality product. Failure to do this has caused Garnier to suffer.

Though popular in Europe, in China the company were not able to transfer their success because they used a different brand name. This was a mistake, because they had to establish a “new” brand name. It is therefore clear that foreign brands should rely on their competitive advantage. The success of foreign brands is the perception that foreign products have higher standards and better quality (Chiou et al., 2005).

2.5 Alcohol and tobacco

The whole national alcohol market is covered by fiercely competing Chinese brands. Traditionally, the market has been very local although best selling brands like Moutai and Wuliangye have nationwide reputation (Kohlen, 2005). Although not a traditional alcohol product, beer has become one of the most popular alcohol drinks. The market is growing at strong rates and might overtake the US as the greatest national beer market (Access Asia, 2003). More than 100 foreign brands are operating in China’s beer market and occupy the premium segment (Wei and Cacho, 2001). Together they represented 34.4% of total beer production, amounting to 20.5 million tonnes, and 16.7% of the number of breweries (Guo, 2000) (as found in Wei and Cacho, 2001). Foreign brands are competing with each other in a narrow market segment called the high-end market, representing less than 10% of total sales. It was not surprising that more than 90% of international breweries lose money. The CEO of Tsingdao Beer, a leading Chinese brewery, summarized the causes of failure of many international brands as: high initial investment to build facilities, high management costs associated with expensive expatriates, high marketing costs aiming at high-end consumers and using expensive media channels, and high working capital costs for selling expensive beer in a small market segment (Economic Daily, 2000) (as found in Wei and Cacho, 2001).

The whole of China has seen unprecedented social and commercial changes. The increases in personal income and the standard of living in China have contributed to a dramatic increase in beer consumption. China consumed 25 million tons of beer in 2003 whereas demand is flat elsewhere worldwide. But while China may be the largest beer-consuming nation in the world, its citizens drink an average of only 18 litres per head each year, which is incredibly little compared to the 80 litres consumed by Europeans, or the 50 litres in Japan and the 84 litres in the United States.

Today, China’s beer industry is characterized by fragmentation as dozens of regional breweries aim for regional dominance. Many small bottlers are simply struggling to survive, while several ambitious international superpowers are infiltating local territory. Price competition, too, is forcing smaller regional breweries to seek safety under the umbrella of larger brewers or foreign brewers. It is expected that the industry will consolidate over time and that the larger brewers, and in particular premium brands, will grow at a faster rate than the industry overall (Fitzpatrick, 2004).

Wine consumption is increasing significantly in China. Statistics show that Chinese people consumed 390 million liters of wine in 2001, with per capita consumption reaching 0.27 liters.

The potential of grape wine in China is seen to be huge with these figures. China's annual wine output was expected to reach 500,000 tons by 2005 (People´s Daily, 2002). Wines includes fruit wine, yellow rice wine and millet wine. All segments are dominated by domestic brands. Rice and millet wines are widely unknown in Western countries and under the firm grip of domestic brands like industry leader Moutai. The three grape wine giants Great Wall, Zhangyu and Dynasty account for two thirds of the sales income of the whole domestic wine industry. However, in international comparison they are thought to be inferior products. In China, western wines do not seem to have significant market shares. Kohlen (2005) also describes several reasons for the small market share. The wine market is very competitive. There are a lot of suppliers for the relatively low wine consumption especially in the high premium segment. The consumers do not know much about wine and this is a obstacle to sell premium or foreign wine to the Chinese consumer. Also, Chinese consumers are aware of the high prices and there are just a few people can afford a good bottle of wine or who don’t have know the difference in price between the foreign and the domestic brand.

Therefore, western wines are mainly purchased by foreigners and, although expected to increasingly appeal to younger and wealthier Chinese aided by associations with Western lifestyle and the possibility to show off and give themselves “face” within a group. Despite the growth in Western style grape wine within mainly upper and middle class urban consumers, most Chinese find it too dry. Mixing red wine with Sprite and has had the dual perceived benefit of making the taste more acceptable and being seen as western (Kohlen, 2005).

One third of the hard liquor market is occupied by Moutai, Wuliangye and Jiannanchun, the other two third by local brands. A decrease in the industry has already eliminated many producers. Lately inexpensive high quality spirits like Jingzhi White Spirit have become popular. There seems to be almost no market share for foreign brands in the national hard liquor market. The foreign brands like Hennesy XO are very expensive and get to used for presents or parties for business partners. This kind of brands helps to get “face” within the group and also the possibility to show off. The Chinese consumer is not ready yet for the foreign liquor brands. They still mix spirits with other drinks to make them more enjoyable. For instance it is very fashionable at the moment to mix Chivas Regal Whiskey with green tea (Sze, 2005).

Within the tobacco industry the number of the companies and brands are constantly reduced and the rate of concentration is greatly improved. Starting from 2002 until the end of 2004 the total number of tobacco companies declined from 123 to 57. According to the output of cigarette products, the rate of concentration of the 10 largest companies was 31.3%, 36.8% and 46.3% respectively, increased by 7.5% on a yearly basis. The number of cigarettes brands during the three years was 758 and 584 and 423, decreasing by 168 each year. This shows that many weak companies and inferior brands have gradually been withdrawn from the market.

Also, the government is trying to consolidate the market and prepare for the run from abroad by deleting small producers. In 2004, the State Tobacco Monopoly Administration, has established and publicized the “Directory for Hundred Cigarette Brands” aimed at guiding companies to properly regulate their product structure. It is important to control excessive and overly- mixed cigarette brands, while improving the brand concentration. In addition, due to the insufficient supply of low- segment cigarettes, State Tobacco Monopoly Administration has adopted a series of measures to improve the production of low- price cigarettes to meet massive consumer’s demands. In 2004, a total of 1877.86 billion cigarettes were sold, with a year-on-year growth of 4.5% (Gao, 2005).

In China official statistics show that there are over 380 million smokers, although the unofficial number might be larger. ¶Smokers are mainly between 16 and 85 years old 80% of whom are male. The best cigarette producer in China is Baisha. N¶NNNnnnnNNNNationally Baisha, Hongmei, Hongtashan and Zhonghuaare the most recognised brands.. ¶The most expensive brands are Xiongmao selling at 80 RMB per pack, Zhonghua costing 60 RMB and Suyan at 50 RMB per pack.

The tobacco industry contributes annually 200 billiarden yuan (10%) to the country’s entire tax receipts. In China ¶the tobacco market distributes its market share in three dominant areas: ¶South China (40%) by the Hongta group, east China (35%) by the Shanghai group and north China (25%) by the Beifang group. ¶The main difference between the urban and rural area is that the rural area is more influenced by local cigarette providers and that smokers in cities like Shanghai and Beijing are able to effort premium cigarettes.

The market share of the foreign companies is less than 1%. ¶The main reason lies in the fact that the tobacco industry is like a planned economy market and highly protected by the state. Compared with domestic brands the foreign marks put more emphasis on a uniform image, packing, colour, design and promotion activities. ¶The domestic companies have stronger control of the net sales. ¶Smokers who prefer foreign brands are mostly young people, to whom fashion and social status is very important. ¶The demand of the more expensive cigarette brands does not lie in principle in own consumption, but as gifts for holidays and special occasions. For instance gifts are for¶ business meetings, in order to increase and keep the relationship between the business partners as well as to boost the image of the company. Giving cigarettes as¶Giving cigarettes ass presents occurs more frequently in Beijing and Shanghai (Chan, 2005; Sze, 2005).

¶As a Chiou et al. (2005) claim that this is due to both cities putting high emphasis on maintaining business relations. Advertising tobacco is forbidden in China. One good way to promote the cigarettes industry is through social engagement. For instance the cigarettes companies in Shanghai donated over 10 million RMB for needy pupils and students. Since China entered the World Trade Organization (WTO), the country has faced a key phase for the Chinese tobacco industry which needs to deepen its reform, regulate its structure, integrate and reorganise (Gao, 2005).

2.5 Coffee

China has always been regarded as a tea drinking nation. The whole country drinks tea but a closer look towards the big cities like Beijing, Shanghai and Hong Kong shows that there has been a recent shift towards western habits and patterns. China is still a small player in terms of domestic coffee consumption and accounts for only 1 percent of world coffee consumption. However, patterns are shifting in China due in part to changing consumer aspirations and a demand to experience a more Western- lifestyle. One example is the world well known coffee chain Starbucks. Starbucks demonstrate the Chinese acceptance of premium coffee within the Chinese market. Wang (2005), Jiang (2005), Shu (2005), Wu (2005), Lu, S. (2005), Geng (2005) and Zhang, J. (2005) stated that Starbucks has changed the coffee consumption and behaviour of the Chinese consumer. Furthermore, Starbucks trying to cultivate a love of coffee and to bring coffee culture to China. The scale of potential for coffee consumption is shown by Starbucks’ latest expansion plans. Citing China's large urban population, rising economy and increase in coffee consumption, Starbucks estimates that China could ultimately be the largest market outside the United States. (Xinhua News Agency, 2005). They already have 174 coffee stores in China (status quo 08/2005), 34 stores in Hong Kong, 47 stores in Beijing and 53 stores in Shanghai (Starbucks, 2005). The expansion of a coffee shop chain is striking in China, a land of tea drinkers like Japan where Starbucks is becoming ubiquitous in parts of Tokyo. In China, Starbucks is going to continue to focus on current markets such as Beijing and Shanghai as well as rapidly opening stores in new cities (Business Wire, 2005). That shows that the potential of coffee drinkers is bigger in first tier cities like Shanghai and Beijing but also that the second tier cities gain more and more importance.

Ramiro (2005) said that China is like Japan. At first coffee was not very popular and hard to establish in Japan. Similarly, the Chinese consumers also need time to get use to the new taste of coffee, the preparation and also the related lifestyle of coffee. Japan already has 555 stores and due to the size of the Chinese market predictions show that there will be a large number of Starbucks stores in China in the future (Handelsblatt, 2005). If China develops in a similar fashion to Japan, the coffee consumption of the Chinese will increase from 200 grams per year to 2.3 kilograms (The Bonneuil Report, 2004). Experts like Wang (2005), Dai (2005) and Geng (2005) believe the penetration of coffee in China, currently confined to a few developed coastal regions and consumed by 0.1-0.5 per cent of the population, will increase significantly over the next several years. This will be driven by the influx of expatriates into China and China's Western-lifestyle-oriented youth.

Many international players are queuing up to take advantage of the expected boom. Before the entrance of instant-coffee brands such as Nescafe and Maxwell House into China in 1995, consumption of coffee was virtually unknown. Now, its Nescafe dominates the instant- coffee market. But since more and more coffee stores like Starbucks open their doors in the Chinese market the attitude toward coffee and the coffee quality changed. The Chinese consumers realize the differences between an instant coffee and a grounded coffee (Shu, 2005; Jiang, 2005). The coffee industry is changing from the instant coffee to grounded coffee and therefore to better premium coffee. The target group of coffee in general is between 18 and 45 years oldand not beyond due to the cultural revolution (1966-1976) in China. The population who grew up after the revolution are more open to foreign products and their lifestyle. Lu, Z. (2005) supplemented that one of the target group are students. Normally students in China study until they are 23 years old before which they are not able to afford coffee as a daily product. If there is a distinction between instant and ground coffee consumer, Lu, S. (2005) pointed out that young people preferring ground coffee, because Instant coffee has been available longer and young people are normally more interested in trying new things and tastes. The reasons lie in the fact that more and more cafes and western restaurants and fast food restaurants exist in the big cities of China. Additionally, the taste changed toward grounded coffee and the ground coffee smells better than the instant coffee (Lu, S., 2005).

Shanghai has always been a city which was influenced by many different cultures and the people in Shanghai are more open minded and western style orientated than elsewhere (Wang, 2005; Jiang, 2005; Shu, 2005; Wu, 2005; Lu, S., 2005; Geng, 2005). This could be one of the reasons why the city has the most of Starbucks in China and why coffee is more popular. Coffee consumption in Beijing is less than Shanghai, which also means there is a backlog of demand in the future. Beijing is a more traditional city and the influence of the government is stronger, therefore the development of the western lifestyle is slower (Wang, 2005; Dai, 2005).

Wang (2005) stated that there is a widely accepted view about Coffee among Chinese, which is coffee, is for luxury life style. Coffee is marked with high prices and branded as luxury everywhere in China. This is a misperception and has direct impact on both China’s coffee business community and its consumer groups. The coffee mass market should be affordable for everyone because at the moment the majority of Chinese cannot afford a cup of coffee everyday. If the situation continues it will take China 90 years to popularize coffee. Wang (2005) looks toward Japan which in the past also saw coffee as a luxury drink with its unreasonably high prices. It was believed that it would take Japan nearly 90 years to popularize coffee as it was low in per capita consumption among coffee bean importing countries. After several marketing campaigns by the International coffee organization (ICO) the coffee consumption is now increasing continuously. Beside this obvious effect there is also the effect of the gain of prosperity. Through economic wealth the Chinese eat more and nourish themselves in addition better (Shu, 2005).

Milan Gold didn’t just use this opportunity to mark themselves as the number one coffee producer in China. Milan Gold was founded 1995 in Beijing and since then has been devoted to providing coffee beans and ground coffee to Hotels and Resorts and also to promoting coffee culture in China. The sales volume in 2004 including beans and ground coffee reached 360 tonnes, with the turnover of around 56 million RMB if including coffee machines. This made Milan Gold the largest roasted coffee supplier in the niche market (Geng, 2005). They took over the leaders TW and Melitta and learned to be better through a strong team, which is young and aggressive and with reliable and long term staff and quality. Building good relationship to their customers has been even more important.

With their focus on the Food and Beverage area of luxury hotels and foreign restaurants Milan Gold can beat the foreign brands in price and flexibility. However, according to Geng (2005) the problem is not the communication of the price and the quality but that it is more the perception that Milan Gold is not really a premium brand. Their customers, for instance the five star hotel group Shangri La, are looking for a premium brand which suits their image and reputation. It is very important to have a premium coffee which has a good image. It is a must and they have to have it and a coffee supplier without a premium coffee brand will have it difficult to find its place in the market (Lohage, 2005).

90% of the fresh coffee consumption is in hotels. To get into the four and five star hotels as well as the foreign restaurants it is important on the one hand to provide a certain kind of brand image and quality but possibly more important to be able to serve coffee in a appealing and correct way. Concern within the Food and Beverage area is that the staff have little knowledge about how to prepare coffee products. Another aspect is the high employee turnover and therefore the service around training is very important. To complete the service it is very important for a coffee supplier to provide good and reliable coffee machines. The maintenance of the machine and the education how to use the machine are important aspects. These points seem to be crucial factors when deciding who will get into the Food and Beverage of four and five star hotels (Niefer, 2005; Liang, 2005; Larsen, 2005; Zhang, J., 2005; Lohage, 2005; Dietschi, 2005; Harvey, 2005).

The coffee consumption and the way of life towards a more western style is changing at the moment and will be for good. The Chinese consumer experienced the differences between instant and ground coffee. The price of coffee is quite high and still seems to be luxury drink. Only a certain percentage of the population can afford coffee. The industry has to take into consideration that it is not just the coffee that raises the price, but rather the service and whole logistics chain especially for foreign premium brands. To change the consumption habits of a nation is difficult and takes a lot of time. In order to ensure that it doesn’t take as long to instil a coffee culture in China, it is important that the coffee suppliers try to change the behaviour together. In this case the coffee suppliers should not work as competitors but partners (Shu, 2005). Coffee associations between several coffee and coffee product suppliers have been an positive initial action but further cooperation with the ICO will be necessary to establish a coffee culture in China (Wang, 2005).

3. Culture values according and regional differences in China

Basics of Confucian values like filial piety, respect for traditions, humility and protection of one’s face are still existent in China’s rural community. However, while urban Chinese are increasingly embracing modernity and individuality values, they still appreciate traditional values for moral and life guidance (Ye, 2005). The emergence of conspicuous consumption might derive from the intertwining of modern and traditional values. Lu, Z. (2005) suggest that symbolic consumption actually stems from a blend of Confucian values associated with appropriate consumption behaviour dependent on social status, as well as western cultural values of materialism and self-indulgence. Furthermore, it is not just polarities of individualism and collectivism societies which are significant, but also the enormous difference within China plays a role. These aspects have to be kept in mind if a foreign company wants to do business in the country.

3.1 Modernising versus westernising

A look at Chinese history reveals a century long tradition of adopting useful ideas and assimilating foreign influences rather than being assimilated. Already mentioned is the high influence of foreign cultures in Shanghai. The city has become a Mecca for foreign influences and life style. Shanghai can be used as a good example as it is influenced but not assimilated. This gives modern Chinese the possibility to adopt foreign values and concepts as they wish, while at the same time preserving traditional values as well.

Collectivism is often thought to be contradictive to modernity, but this can be disproved by looking at deeply collectivistic, ultra modern Japan. In China, the importance of the individual and individuality is increasing among young well educated urbanities. Due to ongoing social stratification further individualization can be expected, especially in the big cities. The individual’s self concept is nevertheless mainly determined by his or her social identity, which derives from social group membership (Lu, Z., 2005). This has influence on brand consumption and behaviour insofar as Chinese consumers choose and recall brands in order to express similarity to others, rather than uniqueness and individuality (Yao, 2005). In other words, while consumers from collectivist cultures are more willing to be influenced by their in-group members, they were less likely to consider themselves as opinion leaders.

Success in the Chinese markets can only be achieved if this is considered. Dell has struggled in China because its strategy has been to target people who want to customise their products to meet their needs. The Chinese consumers seem to prefer a more standard product and do not try to tailor products for their own needs (Melewar, Meadow, Zheng, Richards, 2003). The typical Chinese consumer chooses and recalls brands in order to express similarity with others. It is only the wealthier and richer Chinese who try to distinguish themselves from the mass through more individualism and want to be able to show off as well as thinking they are something special. Only since the Culture Revolution has this been made possible. In the past everyone was on the same level in terms of importance and income (Stenvall, 2005).

The collectivist background also means that Chinese generally use informal information sources and worth of mouth (WOM) recommendations to a higher extent than consumer in the most Westerns societies. In a collectivist culture that emphasizes connectedness and relationship (Hui and Triandis, 1986), information about products or services flows between in-group members (Lu, Z., 2005) and individual experiences are more likely to be shared within in-groups. Consumer decisions are also more likely to be made with family or group members.

3.2 Individualism and Collectivism

The Chinese culture has long been perceived to be collective-oriented and characterized by a set of relationships defined by the Confucian doctrine, including being polite and obeying the rules, respecting authority, desiring harmony, reducing competitiveness as well as contentedness, conservatism, order and stability in society and tolerance of others. While an individual in the West identifies him/herself as a separate entity stressing on self-reliance and equality, in the Chinese culture, an individual is inherently connected to others and fosters relationships through reciprocity, sentiment, and kinship networks (Joy, 2001).

The distinction between individualistic and collectivist societies is crucial to the cross-cultural understanding the behaviour of the consumer and the target group respectively (Maheswaran and Shavitt, 2000). Hofstede (1980) for example said that this dimension has been identified as one of the major aspects of culture and is perhaps one of the most significant ways in which societies differ. In China collectivism dominates.

Generally speaking, this dimension refers to the relationship one perceives between one's self and the group one belongs to (Hawkins, Best and Coney, 2001). Individualism was defined as emotional independence from “groups, organizations, and other collectivities” (Hofstede, 1980, page 221). Compared to people in collectivist cultures, people in individualistic societies tend to be more self-centered, less willing to sacrifice for their in-groups, less loyal and emotionally attached to in-groups, and less concerned with their in-group needs, goals, norms, interests, integrity and consequences. They tend to consider the individual self as the basic unit and a source of life identity, purpose and goals. On the other hand, those in collectivist cultures value their group membership, respect group processes and decisions, and expect other in-group members to look after or protect them in case of needs or crisis. For them, keeping good and harmonious relationships inside their in-group is a priority; and avoiding loss of face is vital (Wong and Ahuvia, 1998).

To “save or lose” or to “earn” face especially to the in-group members is very important, because the face concept is particularly salient for people of Confucian culture. As Hsu (1985) observe, face is more a way of meeting the expectations of others than acting in accordance with one's own wishes. Western culture is seen to be adventurous in nature and the mode of living is characterized by change and movement as well as confrontation with or “active mastery” of the external environment (Hong, Pecotich, Shultz, 1987). In contrast, the Chinese way of life centres on adaptation or passive acceptance of fate by prizing stability and seeking harmony and happiness with the given, natural conditions.

Collectivists not only have higher expectations from their in-groups, but also they are more concerned about making their in-group members happy. Thus highly contextual and relational collectivists might be more likely to tie their own perceived happiness to the happiness of their in-groups. It is, therefore, possible that in such self-administered surveys as used in this study, collectivist consumers´ own perceived happiness level might be tempered by evaluating the overall happiness of not only themselves, but also their in-groups (especially their close family members). However, for the collectivist-culture consumers, impulse buying might be considered a hedonic desire that should be consciously suppressed in favour of group goals and interests (Kacen and Lee, 2002).

Actually Kacen and Lee (2002) found that people in individualist cultures usually ignore the potential negative consequences of their impulsive buying behaviour and prefer to focus on the positive consequences and on their own feelings and goals. On the contrary, collectivist-culture consumers were found to be more prone to consider themselves as impulsive buyers. Kacen and Lee (2002) found a weaker correlation between the self-reported buying impulsiveness trait and the frequency of impulsive buying behaviour for collectivists as compared to individualists.

In collectivist cultures, cooperation is high within in-groups, but is unlikely when the other person belongs to an out-group. As a comparison, people in individualist cultures are good at forming new in-groups and getting along with those from out-groups (Hui and Triandis, 1986).

Like other highly collectivistic societies, the Chinese clearly discriminate insiders and outsiders of social groups. Their social interaction is built in layers from inside to outside. Insiders include family, friends and all those someone is connected with in a social relationship. For instance, classmates from university are their network today and their connections for later. In terms of membership groups, the family or kin groups is the most central, most important and longest lasting. Not the single member but the family is in front. This expression of family values seems to be cherished even more under the weakening influence that modernisation has brought, including nuclear families, urbanisation and increasing labour mobility which exerts on traditional family relationship (Ye, 2005).

Consumers from collectivist cultures were also more conservative in their attitudes toward the gender roles in the society. They represented the opinion that a woman's place was in the home, that men are smarter than women and that the father should be the boss in the household. Collectiveness is an important part of Chinese society, and there is evidence that this strong tradition is unlikely to disappear in the near future. For example, it is still common for three or even four generations of the same family to live under one roof, and family meals are still a central part of life. Respect for the elderly is another characteristic of the Chinese culture. People show more concern about their parents or grandparents than is often seen in the West (Lu, Z., 2005).

Collectiveness is also reflected in some shopping patterns. Family values, stability and the desire to belong and for closeness will be some of the strongest emotional appeals usable for branding when evaluating consumer behaviour (Song, 2005).

3.3 Purchase decision

Before the Chinese make a purchased, they consider the perceived risk and the amount of external information to help them make a better choice, on the contrary in the West the search is limited, with the greatest proportion engaging in minimal external search immediately prior to the purchase (Hawkins et al, 2001). The Chinese saying “never make a purchase until you have compared three shops” reflects the typical searching behaviour of Chinese consumers.

Due to their limited experience with modern marketing, Chinese consumers depend on reputable brands. A well-known brand is not only an assurance of quality but also earns “face” for them and also they think that foreign products are of higher quality and therefore foreign products enjoy a leap of faith. In other words, foreign brand names are more likely to reduce risks for Chinese consumers.

Another important factor is the price. The price is one of the main reasons for “comparing three shops before purchasing” (Yao, 2005). Hard work and thrift are highly praised traditional virtues in China. To pay more for a product than necessary is considered shameful and a waste of money. On the other hand, the Chinese also believe that cheap products are never good. If two products with the same or similar functions differ largely in price, Chinese consumers may think the cheap one has quality problems or other kinds of defects. Therefore, while Chinese consumers are price conscious, they also use price to signify quality similar to Westerners (Lu, Z., 2005).

According to Dodds' (1991) the subjective notion of price plays a dual role in product evaluation and a curvilinear relationship exists between price and perceived value. The perceived sacrifice may outweigh perceived quality below or beyond certain price points. The relatively lower purchasing power of Chinese consumers compared to Westerners, combined with Confucian cultural influence, suggests that the acceptable value range for Chinese consumers is narrower. In other words, the high price limit at which the Chinese consumers perceive value is less than in the West. The only way to demand a higher price is a premium quality combined with a premium brand. But on the other hand, consumers have to know the brand otherwise they won’t be willing to pay the price or will fear making a mis-purchase, which will lead to a loss of “face”. If the price is too high, the Chinese consumers get the feeling of being ripped-off which destroys any relationship between the brand and the consumer for a long time (Song, 2005).

3.4 New Nationalism

After the inception of the open door policy of the Chinese government a lot of change has taken place. The central government has made a gradual retreat from social welfare towards global competition (in the aftermath of China’s accession to the World Trade Organisation in 2000). Unequal economic development within the population means enormous pressure and a loss of stability for many Chinese. A survey found that many urbanities were concerned about medical care, social welfare, social security, employment, housing and education (People’s Daily, 2004). Chinese consumers are not demanding and tend to have few desires. As a result, most of the Chinese are slow to accept new products and services. The “prudence” or “risk averse” characteristics embedded in the Chinese personality may help explain their reluctance in trying a new product or service. In big cities this risk adversity is not so distinctive anymore consumers are more open to foreign products and services (Song, 2005).

Chinese consumers need to be educated about the benefits and how they can be better off by using products. Products like coffee or deodorant are quite new for the Chinese consumer and they need to be educated how to use or prepare these products. This can be through WOM, advertisement or campaigns. For example in the article from van Fleit Hang (2005) in a local magazine from Beijing explained what coffee is and how to prepare a cup of coffee. This shows the stage of knowledge about westernized products and that the need for further education in certain fields of products. Once a new product has been adopted within one's “in-group”, a Chinese consumer might be more sensitive to advertising campaigns.

Pressure is particularly high on the so called “lost generation” of 40 year olds and the young generation. Many of the “lost generation” were deprived of education in the past political disorder and are put at a disadvantage in the increasingly competition labour market. In addition they face the double responsibility of caring for their ageing parents and providing education to their children. As already mentioned, the young generation sees enormous changes at the moment. In addition they are under high pressure to succeed from the money, power and status point of view. Many young people want the same and the there is a high competition among them (Lu, Z., 2005). Brands should provide a kind of guideline and should represent stability, self assertiveness, trust, a responsibility but positive attitude, and retreat from worries.

The new nationalism or in other words, we are “one” nation on the one hand and the enthusiasm for foreignness on the other is not contradictive. The Chinese are proud to be Chinese but also try to absorb the new western style of living as well as experience a new way of life through the better living conditions. China has a backlog of demands through their history. Longing for respect and recognition in the world, cultural pride and feeling of deprivation are common sentiments throughout society and is especially true for cities like Shanghai and Beijing. The central government utilizes these sentiments and China has seen a revival of Confucian values to promote a new national feeling. On the other side, the individual desire to distinguish from the masses, the opportunity to live a different life has helped the enthusiasm for foreignness. At the same time party officials and wealthy Chinese send their children abroad and consumers happily welcome symbols of foreign products like Kentucky Fried Chicken, Louis Vuitton handbags and Mont Blanc pens (Sze, 2005).

Young intellectuals and white collar office workers are particularly polarized and instable. This generation live at a time where there has been large scale changes from the economic, western influences and political point of view. This generation has grown up with the influence of western life style and brands. Consumption preferences are changing significantly among this younger urban generation as a result of substantial increases in income and exposure to the outside world. This group is picking up new values and Western ideas very rapidly and thus more willing than previous generations to absorb new products and ideas (Song, 2005). Therefore this generation are a promising target group for foreign brands.

3.5 Differences among regional markets in China

As multinational companies (MNC) are attracted to the size and growth of consumer markets in China, they have largely overlooked the diversity among the indigenous consumers. The popular misconception of a big emerging market (BEM) country as a huge market with homogeneous consumers often leads to difficulties in assessing demand and devising effective marketing strategies. In reality, the BEMs often have large geographic areas with significant regional disparities and multicultural consumer groups. As more MNCs converge in these markets and expand their operations, regional disparities in economic development, market infrastructure, and consumer purchasing power represent formidable barriers for smooth expansion and efficient operations. Thus, understanding the diversity among consumers and its implications for marketing strategies is essential for success in China (Batra, 1997; Swanson, 1998). Regional markets around the cities of Shanghai and Beijing, will be examined closely in this chapter as it explores the regional markets of China based on consumer characteristics and consumption patterns.

From the economic and consumption point of view China varies greatly from region to region, and between social classes, education, income level and occupational types. The Chinese market is not one entity, but an array of highly diverse region sub markets. Distinguishing between rural and urban areas shows great variation. For this reason, except from the political point of view, China is by far not one nation (Lu, Z. 2005).

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Figure 2: The Eight Economic Regions of China

Source: Fiducia Management Consultants, 2000, no page.

The complexity of China is massively ignored and Bugs (2005) claims that China is even more complex than Europe. To make these differences clearer Kracht (2000) shows in figures 2 and 3 that China has diverging sub-markets like Europe.

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Figure 3: China - No Uniform Market

Source: Kracht, 2000, no page.

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Figure 4: Like Europe - Diverging Sub Markets

Source: Kracht, 2000, no page.

Figures 2 to 4 makes clear, that China includes a number of smaller sub-markets that are distinctive from one another in many ways including language, culture, and economic development (Prahalad and Lieberthal, 1998). Regional disparities in economic infrastructure, consumer purchasing power, and distribution channels often pose significant barriers for MNCs to adopt uniform strategies in these markets (Batra, 1997). However, based on economic development and consumer purchasing power, the following explanation is based on Batson´s (1996) classification of seven regional markets in China: South, East, North, Central, Southwest, Northwest, and Northeast.

3.5.1 The seven regional markets of China

The regional markets in the South and East represent China's “growth markets”. They are more advanced in economic development and have more affluent consumers than in other provinces. South China includes Guangdong, Fujian, and Hainan Provinces. This regional economy was the first to attract foreign investment with its four original special economic zones (SEZs), and has become the most outward-oriented. In recent years, it has embarked on transforming itself from labour-intensive operations to high tech manufacturing. Guangdong has become more integrated with the economy of Hong Kong. Fujian has many investors from Taiwan, and is renewing its ties with the island. This region also represents the culture of the South, i.e. Min-Yue Culture, with plenty of contact with the outside world and great emphasis on mercantile entrepreneurship. Each province has its own main dialect, Cantonese and Fukienese. Consumers in this area, about 7 percent of the country's population, are among the most prosperous in China. Close to Hong Kong and Taiwan, they have long been exposed to foreign products and tend to emphasize conspicuous consumption (Ariga, Yasue and Wen, 1997).

East China, around the mouth of the Yangtze River, consists of the municipality of Shanghai and the provinces of Zhejiang and Jiangsu. This regional market is densely populated and highly urbanized. The most prosperous in Chinese history, this region is productive in both agriculture and industries. In recent years, it has become China's industrial powerhouse, boasting 30 percent of the country's industrial output (Batson, 1996). The delta area is also full of medium-size cities such as Wuxi and Suzhou that specialize in textile and light industry manufacturing. Shanghai is the industrial and financial centre of China and the gateway to the 200 million consumers in East China. Shanghai is also the regional cultural nucleus, representing the “Hai-pai” culture, well-known for having the best amenities and products for enhancing quality of life. Consumers in this regional market are the most innovative and cosmopolitan, setting trends in fashion and lifestyles (Song, 2005).

The “emerging markets” in North, Central and Southwest of China have become increasingly attractive to global companies. North China, including Beijing, Tianjin, and the provinces of Hebei and Shandong, historically has been the geopolitical base of this country. This regional economy has been growing fast over the last few years and attracted investment from many countries (Batson, 1996). Close to the centre, with access to key government agencies, this region is making tremendous investment in industries such as telecommunications, computer technology, and pharmaceuticals (Child and Stewart, 1997). With a number of port cities, the regional economy is increasingly open. Shandong is the biggest agricultural province in China and has some of the best township enterprises in China. Beijing, as the nation's capital, also represents the culture of North China - the Jing-pai culture - attaching great value to the Confucian doctrines of hierarchy, stability and control. Consumers here are relatively conservative yet are still open to new product ideas (Ariga et al., 1997).

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