Interesting WSJ article By Orit Gadiesh and Till Vestring of Bain & Company, Capturing China’s Middle Market, positing how to capture China’s fastest growing market segment with “good enough” brands:
Historically, multinationals have focused on China’s premium market. But the playing field over the last few years has changed rapidly. Multinationals sticking with a premium-only strategy are increasingly under attack from emerging Chinese champions with a compelling offering: fairly reliable products at prices low enough to attract China’s growing ranks of mid-level consumers. Indeed, China’s middle market is growing faster than both the premium and low-end segments. In some categories, the “good enough” space already accounts for nearly half of all revenues. Eight out of every 10 washing machines and televisions now sold in China, for instance, are “good enough” brands.
The article notes how Gillette, Anheuser-Busch, and Colgate-Palmolive purchased Chinese companies to gain access to China’s middle tier:
Gillette was extremely careful to protect both Duracell’s and Nanfu’s brands — a crucial part of the strategy as Gillette continues to sell premium batteries under the Duracell brand and has maintained Nanfu as the leading national brand for the mass market. Dual branding, cost synergies, a broadened product portfolio, economies of scale, and distribution to more than three million retail outlets in China have paid off for Gillette, which has seen significant increases in its operating margins in China.
In 2004, for instance, Anheuser-Busch outbid its competitor SABMiller to acquire Harbin, the fourth-largest brewer in China. That acquisition allowed Anheuser-Busch to reach the masses while preventing Harbin from moving upmarket. The next year, it increased its stake in Tsingtao Brewery, to 27% from 9.9%. Both moves enabled the global brewer to rapidly increase its share among China’s current mid-market beer drinkers.
Colgate-Palmolive made similar moves in China. It entered into a joint venture in the early 1990s with one of China’s largest toothpaste producers, and it acquired China’s market leader for toothbrushes a decade later, allowing it to scale up and then leverage its production processes to compete in other parts of the world. As a result, Colgate more than doubled its oral hygiene revenues in China between 1998 and 2005, and it now exports its China products to 70 countries.
The problem is Beijing seems to be cracking down on foreign company purchases of Chinese companies with strong brand names.