By Lin Bai | Tuesday, December 15, 2009

In the US, ‘Black Friday’ is the unofficial start of the holiday shopping season. Marked as the Friday after Thanksgiving, hordes of people line up at retail stores hours before the store opens in hopes to be one of the first to get in on early holiday shopping.

In China, while they may not have ‘Black Friday’, the idea of bargain shopping is not novel and is part of the shopping culture that now is prevalent in the market today. On November 14^th, there was a line 600 people deep waiting patiently hours before the opening of H&M store in China – all waiting for the worldwide start date of H&M’s Jimmy Choo line.

‘M-SHAPE’ SOCIETY

For me, the whole dichotomy of an affordable apparel brand with high-end style such as H&M is hard for me to grasp. ‘Affordable’ and ‘high-end’ doesn’t belong in the same sentence together and I’ve been accustomed to the idea of very segmented shopping tiers.

For many retail analysts, the trend of ‘affordable luxury’ is the sign of a shrinking middle class - otherwise known as the M-shaped phenomenon. Japanese economist and strategist Kenichi Ohmae refers the ‘M’ as the polarization of the extreme rich and extreme poor in society – thus the ‘M’ shape with peaks and valleys in societal status.

In a well-developed modern society, class distribution is often inverted where the middle class forms the bulk of society. However, with China’s economy booming as fast as it is as a consequence of rapid globalization (whether for good or bad), the middle class diminished and quickly assimilated on to either side of the economic class spectrum.

I should preface that the M-Shape phenomenon is a global phenomenon and China is not just the exception. Even here in the United States, the middle class is slowly disappearing and the gap between rich and poor continue to grow. Unfortunately, going ‘upwards’ is often much more difficult than sliding ‘backwards’ and more of the polarization of the Chinese middle class has shifted to the poor.

So, how does this tie together with H&M and what does this mean for brands in China. For starters, this does present a very unique consumer market where, like everyone around the world, these lower-end consumers still aspire to a better quality of life. However, they are value buyers and have monumental expectations for great quality at affordable prices. For brands such as H&M and IKEA, China is a golden opportunity to tap into this enormous market.

H&M: SUCCESS IN CHINA

I admit that I am a self-professed avid fan of H&M. H&M brings a chic Euro-style to China with trendy replicas of luxury products at inexpensive prices, fitting the needs of the majority of Chinese consumers (low-income but pursuing expensive taste). Contrary in India where only upper middle class consumers follow Western fashion, the majority of Chinese consumers follow Western trends no matter where they fall in the economic spectrum.

H&M has been one of the most popular Western retail brands since first entering China in 2007. There is a common joke that says there are only 2 places in Shanghai that you need to line up for: in front of the bank to buy funds, and in front of H&M to shop. According to H&M, first day sales at their Shanghai store reached 2 million RMB ($292,000), which easily eclipses the total daily sales of 200 Chinese domestic brands put together.

It is also important to note that the price of foreign brands is typically higher in China than anywhere else around the world – namely due to the high tariffs China places on imports. However, H&M kept to their pricing integrity and remained prices similar to that of Europe.

"Of course I love Louis Vuitton, Chanel, and Dior, but I can't afford their prices," 25-year-old Zhang Xi tells a reporter, "H&M have reasonable prices, and yet keep pace with the trends. You can always find the most fashionable items in their store."

According to market research from China, H&M is priced at a fraction of some luxury brands yet features similar trend-savvy seasonal design elements – a winning combination that has generated an unprecedented buying upsurge in the market.

FOREIGN BRANDS IN CHINA

H&M’s strategy is not rocket science. Logic is actually very simple – chic clothes coupled with affordable prices is a winning combination in retail. However in China, there is more than winning on price alone. Especially with foreign brands increasingly entering the China market, the retail strategy has shifted from focus on the wealthy to where the majority of where the Chinese market stands.

Brand Strategy

For foreign brands, prices are typically 20%-30% higher in China than overseas due to China’s high import taxes on foreign goods and to the brand positioning strategy where there is a concerted effort to set foreign brands apart from their local counterparts.

For example in China, Starbucks is considered “a symbol of status and success”, young people go to KFC and McDonalds to date since it’s often regarded as “romantic” (but mainly because it has nice lighting, air conditioning, and a nicer bathroom), and owning a pair of Nike shoes or Levi’s jeans is just a young person’s dream.

“[Foreign retailers in China] don't feel that they have to compete on price, because they are offering a wider selection of goods and a more pleasant shopping experience than domestic competitors”, said Ann Chen, a retail analyst at Boston-based consultancy Bain & Co.

Pricing Strategy

In contrast to the overall high-price approach, some foreign brands have recently adopted a price-cutting strategy in order to attract more customers. When IKEA (known for its inexpensive and modern furniture) first entered China in 1998, it positioned itself as high-end brand and offered their products at premium prices. This strategy failed as many Chinese consumers crowded the IKEA stores not particularly shopping, but enjoying the ‘freebies’ the store had to offer (e.g. air-conditioning, comfy chairs). Needless to say, window shopping doesn’t always result in sales and IKEA fell short in their revenue expectations.

Consequently, in the last few years, the company has adjusted its marketing position by transitioning into a mainstream commodity. Because of its success in localizing products for the China market specifically, IKEA has been able to cut prices by an average of 54% in more than 1,000 categories since 2005. IKEA broke the regular foreign brand pricing strategy and succeed in China because they decided to “stand on the side of the majority of people”.

"I had to make a break, change [Chinese] perceptions that Western-branded goods are normally more expensive…," said Ian Duffy, IKEA president for Asia Pacific said.

In the face of fierce competition from both global and domestic competitors, more and more global brands are adopting this mentality of ‘standing on the majority side of the people’ by cutting prices. For example, McDonalds recently cut nearly 40% off its prices for its special lunch package. Even premier brands like Louis Vuitton, Gucci, and Salvatore Ferragamo are dropping prices “to trim the price gap between China and other regions and to entice customers”.

CONCLUSION

What does this all mean for brands and consumers in this M-Shaped China market? For consumers, even the lower-end of the M-Shape consumer market is striving for excellence and quality. However, they are not willing at premium prices usually associated with many foreign brands.

For foreign brands, both a branding and pricing strategy is necessary to succeed in China. Given its ‘M’ consumer distribution, cutting prices to create larger sales volume is a trend many brands have adopted and are successful at. Will this trend continue even as China continues to grow economically and people will have more money on-hand? Hard to say, but as a consumer who fits the ‘mold’ and mentality of the majority of the China market, my thoughts gravitate towards no. While ‘branding’ and ‘pricing’ are both very important factors in my shopping behavior, ‘value’ drives me to say ‘yes’ and that only happens when you have both.