Just because it works in Minneapolis doesnt mean it will necessarily work in Qingdao.
A significant proportion of the American populace has been middle class for almost 70 years. That means that over three generations of experience goes into the current generation's attitudes, knowledge and approach to shopping for appliances, cars and other relatively big ticket consumer purchases. Many, even the relatively less well-off, have come to expect a certain level of quality, convenience and sophistication in the products they buy. Outfitting a home is second nature, based on a compendium of personal references from Thanksgiving at grandma's to watching MTV's 'Cribs.'
So imagine what it must be like to open stores in China where the bulk of your customers may be the first members of their family to own or rent their own apartment. They can not rely on parents or grandparents for guidance, because those generations know even less than they do. Dishwashers, driers, TVs, beds and air conditioners must all be evaluated and purchased on trust. Which is in short supply pretty much everywhere these days. Selling in China is probably more like selling in Europe or the US in the early 1950s than in contemporary times.
It has taken some time to figure all of this out. Home Depot and Best Buy, familiar 'big box' destinations for American consumers have closed many of their Chinese outlets. But they have found that when they invest in Chinese companies and share knowledge, the results can be impressive.
And the potential payoff is vast: China's middle class, though poorer than that of the US, is now about the same size in terms of population. And China is already the world's leading market for such middle class emblems as cars, personal computers and cell phones. Though they have less to spend per capita, the size of the market will soon permit manufacturers to make it up on volume. Furthermore, the stagnation of western economies, China's favorite export markets, has spurred the government to increase Chinese consumerism to make up the difference.
To reach this market, US and other foreign companies are having to learn how to sell to people who dont use credit cards, require more salesmanship and guidance than western customers and who take the long view, not a self-indulgent 'I owe it to myself' ethos. For those who have the stamina, fortitude, adaptability and budget, this will pay off. Manufacturers certainly sense the opportunity. But for those discouraged by the struggle, the reality can be harsh. JL
Laurie Burkitt and Bob Davis report in the Wall Street Journal:
Shopping for a water heater at Jiangsu Five Star Appliance, first-time homeowner Zhong Lei listens intently as a salesman explains how a digital-control system makes taking a shower more comfortable.
"We need to learn about all these features because our parents didn't have most of this stuff,"
Mr. Zhong, a 31-year-old military employee, explains later.
He buys the water heater—as well as a refrigerator, a washing machine and a $950 flat-screen television set.
Mr. Zhong's experience at the Best Buy Co. BBY +0.30%unit offers a glimpse inside China's evolving middle class.
China is counting on rising domestic demand from this rapidly growing segment. So, too, are Western exporters, faced with anemic growth in Europe and North America.
But China's middle class isn't Charleston's. Western companies have misjudged Chinese shoppers' priorities and clumsily tried to export U.S.-style stores.
"We were stupid and arrogant," says David Deno, who was Best Buy's Asia chief until recently.
But through trial and error, China has become a rare bright spot for Best Buy, which has been pummeled by slumping U.S. sales and racked by management turmoil culminating with the April resignation of its chief executive.
The company is betting that its Five Star subsidiary can make China the retailer's largest overseas market, one that could rival U.S. operations. Five Star has about 200 stores and by 2016 plans to add up to 500 more, targeting $4 billion in sales. Five Star declines to disclose last year's sales.
The potential buying power of China's middle class is vast. About 247 million Chinese, 18.2% of the population, qualify as middle class, meaning their households spend between $10 and $100 a day on average, according to Brookings Institution economist Homi Kharas.
If current patterns continue, the number will soar to 607 million by 2020, and spending by China's middle class will rival that of the U.S., after adjusting for inflation and purchasing power.
The trend has the potential to remake China. With export markets weakening in Europe and the U.S., economists say, Beijing needs to lift spending by its own middle class or risk that growth will slow sharply. Steady middle-class growth also could help China's trading partners, bolstering a market for computers, cars and trendy clothing, as well as for commodities such as copper, oil and cotton.
China already is the world's largest market for some middle-class emblems, including cars, personal computers and smartphones. And multinational companies show no signs of taking their feet off the gas. Whirlpool Corp. WHR -0.50%plans to boost distribution of fridges, washing machines and other appliances to China's inland cities. Coca-Cola Co. KO -0.61%plans to invest $4 billion over the next three years.
"For fast-moving, everyday consumer goods, there are some broad megatrends that will continue to push demand forward, which are ongoing urbanization in China and then, of course, the related growth of the middle class," Hein Schumacher, the China chief for food maker H.J. Heinz Co., HNZ -2.18%told analysts last month.
Nicolas Wang, Five Star's chief executive, says that when the company opened its first store in 2001, he didn't even know the Chinese term for middle class. It's no wonder; less than 3% of the population fit the description then, says Mr. Kharas, the Brookings economist.
But many retailers jumped in anyway. Some quickly prospered, such as Yum Brands Inc.'s YUM -2.10%KFC.
Mattel Inc., MAT -0.15%however, shut its Barbie stores in March of last year, after learning that Chinese parents wanted their girls to model themselves after studious children, not flirts.
Home Depot Inc. HD -0.52%closed about half its stores here last year, finding scant interest among Chinese for do-it-yourself renovation. Mattel says it will promote more educational toys in China. Home Depot is revamping its strategy.
Best Buy used a two-track approach. It bought an initial 75% stake in Five Star in 2006. It also opened nine Best Buy stores, figuring that Chinese shoppers would covet the same gadgets Americans did, like espresso machines and surround-sound home-entertainment systems.
But Chinese consumers are different. For one thing, they are poorer. Median household income in Chinese cities was about $13,400 in 2010, according to Moody's Analytics, about a quarter the U.S. figure.
The Chinese middle class also is at a different stage of development. Many Chinese want appliances and basic TV sets to fill their first apartments. Chinese on average also save more than 30% of household income, vastly more than Americans, and rarely use credit cards. And many Chinese shoppers expect to haggle over prices—a foreign concept for the U.S. company.
Last year, Best Buy shut its China outlets, figuring that opening U.S.-style stores had been a mistake, and focused exclusively on building the Five Star brand.
Five Star targets China's lesser-known cities, where some people are just beginning to develop consumer habits. About 70% of its customers are young families earning around 5,000 yuan, or roughly $800, a month and looking for products that a decade ago only the rich could afford.
The moment a customer starts browsing a big-ticket item, a Five Star sales clerk will offer the shopper cherry tomatoes, a cup of hot water to sip or some time in a massage chair. Later, the clerk will try to persuade the customer to buy the chair.
The chain also offers the services of "solution experts," who help customers sort through the conflicting claims of manufacturers' representatives who work in the stores, where goods are organized by manufacturer, rather than by product.
Five Star's experts give out their telephone numbers so customers can call at any time. The goal is to build a web of loyal shoppers through referrals, borrowing from a Chinese custom of relying on a network of trusted acquaintances for advice.
One Five Star shopping expert, Wang Bo, says he has been invited to a half-dozen customer weddings. "I earn their trust and give them the smile and service of an angel," he says.
Growing sophistication among some Chinese middle-class customers has led Five Star to upgrade in some cities. The Qingdao store has higher-priced electronics than older outlets—for example, cameras and high-definition video equipment for a first voyage overseas or a road trip across China.
With brighter lighting, additional seating and customer-assistance stations, the store in this port city of 8.4 million people also has more of the trappings of a stateside Best Buy.
Best Buy also is giving Five Star a few tips from the U.S. playbook. The subsidiary displays mobile phones, which Chinese consumers regularly upgrade, in the front of the store to draw traffic.
Five Star also is working to develop its own brand as a retailer, helping it to compete with larger, brand-conscious Chinese chains, such as Suning Appliance Co. 002024.SZ +0.34%and GOME Electrical Appliances Holding Ltd. 0493.HK 0.00%
Following its parent's lead, Five Star opened a small research department last year to conduct consumer surveys. When it learned that some customers considered the chain stodgy, Five Star developed a new icon: cartoon characters that appear to be drawn by Hollywood animators.
Tan Peng and her fiancé, Hou Huimao, have a combined monthly income of 4,000 yuan. On a recent visit to Five Star's Qingdao outlet, they purchased a washing machine, a refrigerator and a flat-screen TV for their new two-bedroom apartment.
On their way out, the 28-year-olds stop to pore over an iPad but decide the time isn't right.
"We have to go to where we can get the best bargains," Ms. Tan says. "After all, we're not in the upper class."
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