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1、56THE McKINSEY QUARTERLY 1996 NUMBER 3DEVELOPING NEW MARKETSJim Ayala is a principal and Richard Lai is a former consultant in McKinseys Hong Kongofice.Copyright 1996 McKinsey&Company.All rights reserved.Chinas consumer market:A huge opportunity to fail?Jim Ayala Richard LaiTHE McKINSEY QUARTERLY 19
2、96 NUMBER 357CHINAS MARKET FOR MASS CONSUMER GOODShasexploded over the past decade and will continue togrow with breathtaking speed,outpacing overalleconomic growth.By 2000,some 260 million people will beable to aford packaged consumer products(Exhibit 1),makingChina the worlds largest market in man
3、y categories such asbeer and biscuits.Winning in China has therefore become atop priority for multinational corporations,many of which seethe Chinese market as a once-in-a-lifetime opportunity tocatapult themselves into position for global leadership.But winning wont be easy.Chinas vast area and wea
4、k dis-tribution infrastructure,as well as increasingly intense com-petition,will make market leadership an elusive prize.Manycompanies are already having to reconsider their approach todoing business in China,failing to translate their ambitiousaspirations into clear growth trajectories;in all too m
5、any cases,early gains have turned into a serious drain on resources.Itseems clear that approaches followed so far arent the formulasfor success in the Chinese consumer market of the 21st century.Something quite diferent is needed.What will market leaders look like?One thing is certain:in coming year
6、s the market leaders of thenext century will dramatically increase the breadth and depthof their China operations.For many companies,destructive cycles reverse early successesStrong sales,distribution,and organizational capabilities are keyYour goal:$1 billion in sales by the year 2000Note:This arti
7、cle is based on research that also involved Benjamin Mok,FrankWei,and Henry Zhang,consultants in McKinseys Hong Kong,Shanghai,andBeijing ofices,respectively.By 2000,leaders will need to have category market shares of at least 20 to 25percent nationwide,probably more to be considered clear winners.Fo
8、r massmarket categories such asfood,beverages,or personalcare,this implies achievingannual sales in excess of$1billion.Yet in a survey of 13leading multinationals,wefound that most had Chinasales in 1995 of less than$100 million.Leaders will also need farwider geographic coverage.Each of the surveye
9、d companies typically had salespeople in only about 15 cities.But with millions more consumers set to cross the$800 annualincome threshold the level at which consumerism takes of winningcompanies will need sales ofices and established supply lines in well over100 cities by the year 2000.Nor will it
10、sufice to continue focusing on higher-end department stores andlarge chain supermarkets,as most multinationals currently do.Althoughspecific coverage requirements will vary by category,winners will generallyneed much deeper outlet coverage than they have today.For real marketimpact,multinationals wi
11、ll have to supply the small local groceries and cornerstores that command over three-quarters of the volume of mass products inlarge Chinese cities.That means penetrating more than 250,000 outlets,versus todays 20,000.Leaders in China also will need to deal with an increasing number of jointventure
12、partners,as JVs will remain the principal means of expansion.Theaverage multinational in our survey had just four JVs;the winners in 2000could easily have a dozen or more.Finally,the organizations needed to support all these activities will be muchlarger and much more capable.The companies in our su
13、rvey still are relativelysmall with 200 or so employees working within sales in China,for example and have only nascent organizational capabilities.Winners in 2000 willeasily employ ten times as many people as they do today,and they will haveworld-class sales and marketing skills underpinning their
14、success.Obstacles to market leadershipA number of consumer goods companies are rapidly increasing their presence in China.Procter&Gamble,Coca-Cola,Unilever,and Nestl CHINAS CONSUMER MARKET:A HUGE OPPORTUNITY TO FAIL?58THE McKINSEY QUARTERLY 1996 NUMBER 3Growth of the urban packaged goods marketUrban
15、 population above income thresholdMillions1990199519952000*30180260240*ProjectedSource:China Statistical Yearbook,199095;US Bureau of the Census,1990 and 1993;McKinsey analysisChinaUnited Stateslook set to reach a popular goal:“one by two,”that is,$1 billion in annualsales by the year 2000.Many othe
16、rs,however,are struggling to achieve the necessary growth and market coverage.They face five formidableobstacles.1.Rapidly escalating competitionEarly this decade the main challenge in China was to negotiate joint venturesand establish local manufacturing.Pent-up demand and the scarcity of high-qual
17、ity foreign goods meant sales would take care of themselves.But as competition has intensified,market share and volume growth are muchmore dificult to achieve.Practically all leading consumer multinationals haveestablished operations in China.In skin care,food,and premium beer,forexample,50 world-cl
18、ass competitors now have manufacturing facilities inChina,more than four times as many as there were in 1990.In addition,manymid-sized Asian manufacturers such as Lam Soon,Yeo Hiap Seng,andPresident Foods have used their superior understanding of China to makesignificant inroads.Not to be let behind
19、,progressive local companies,suchas Yanjing Beer and LuckyFilm,are also pressing toimprove quality and competewith joint venture brands.There are several conse-quences of this assault on theChinese consumer:Market share is volatile.Bombarded with opportuni-ties to buy a bewilderingarray of products,
20、consumersare in experimental modeand significant market sharegains can be won and lost with dismaying speed.InShanghai,for example,themarket share of a nutrition drink named Wahaha went from 33 percent to80 percent to 8 percent in a matter of six years.Oten the competition is acompletely diferent pr
21、oduct,as consumers with limited disposable incomedecide between trying a foreign shampoo or a new food(Exhibit 2).Overcapacity is already apparent.For example,the worlds top 10 beercompanies and many smaller ones have rushed to buy or build capacity.Allhave visions of achieving leading national mark
22、et share,but most will besorely disappointed.If all their capacity announcements materialize,CHINAS CONSUMER MARKET:A HUGE OPPORTUNITY TO FAIL?THE McKINSEY QUARTERLY 1996 NUMBER 359150Average available spending on packaged and processed goodsRenminbi per month per householdSource:Gallup Organization
23、;interviews;McKinsey analysisCosts of some representative MNC products15 Coffee creamer(Maxwell House:200g)32 Cookies(Danone:10oz pack)21 Coffee(Maxwell House:100g)40 Shampoo(Pantene:400ml bottle)18 Soap(Lux:four 80g bars)30 Soft drink(Coca-Cola:ten cans)Cross-category substitutionproduction of prem
24、ium beer could exceed demand by 80 percent by the endof the decade.Sales and marketing costs are on the rise.To keep up with competitors in major cities,companies need to supplement distributors with a moreexpensive,direct sales presence.They also must spend more on promotionalitems and channel supp
25、ort in order to stand out.Meanwhile,advertising costsare soaring:the price of airtime in Guangdong,for example,is rising by over25 percent a year.2.Poor transportation infrastructureBy the year 2000,almost 250 Chinese cities will have suficient averageannual income levels to support consumerism.More
26、 than 160 of these citieswill have populations exceed-ing one million.And 20 willhave the absolute spendingpower that Guangzhou hastoday(Exhibit 3).Delivering products reliablyand cost-efectively to severaldozen cities,will,however,bean enormous challenge givenChinas poor transportationinfrastructur
27、e.It generallytakes four times longer totransport a container ofsnacks from Beijing toGuangzhou,1,900 kilometersaway,than it does to coverthe similar distance fromBaltimore to Houston.More-over,the contents of the con-tainer are up to 20 times morelikely to arrive damaged.Journeys to smaller,moredis
28、tant cities are even moreproblematic.The current situation canonly get worse,as plannedincreases in transportationcapacity are unlikely to copewith growing demand.And though private investors can invest in rail,shipping,and trucking,they are discouraged by the governments reluctanceCHINAS CONSUMER M
29、ARKET:A HUGE OPPORTUNITY TO FAIL?60THE McKINSEY QUARTERLY 1996 NUMBER 3to let them earn more than 15 percent on their investments,as well as bycontrols on pricing and routing.Stockpiling products is no easy solution to unreliable transportation.Warehouses are scarce and so have to be built.Moreover,
30、inventories aredificult to manage as market estimates are notoriously inaccurate,and thereis practically no information about when product shipments will arrive.3.Underdeveloped and fragmented distribution channelsPoor public transportation and limited ownership of motor vehicles accountfor the prol
31、iferation of small-scale groceries and corner stores in China.As aresult,less than 10 percent of grocery sales go through large format stores,even in major cities.This fact,combined with lower customer spendingpower,means that an average retail outlet in China sells less than one-thirtieth of the av
32、erage US or Japanese store.Restocking and merchandisingtherefore pose expensive logistical challenges for multinationals,particularlyfor smaller ones with limited product portfolios or weaker brands.Using local distributors to reach all these stores might in theory ofer a cost-efective answer;howeve
33、r,distribution channels are also highly fragmented.Most foreign companies findtheir joint venture partnershave hundreds or even thou-sands of distributors thatthey deal with directly.Thetypical state-owned breweryin a large city will have over2,000 primary distributors,many of whom resell to hun-dre
34、ds of secondary whole-salers and thousands ofindependent street hawkers.Compounding the problem,these distributors tend to beundercapitalized and havevery poor coverage and salesand merchandising skills.Companies in our survey feltmost of their distributorswere inadequate with respect to delivery,sa
35、les,merchandising,promotion,and collection(Exhibit 4).Few had even the most basic customer trackingand credit systems.Unfortunately,better distributors are unlikely to emerge soon,again becauseof government restrictions on foreign investment.Currently,with a fewCHINAS CONSUMER MARKET:A HUGE OPPORTUN
36、ITY TO FAIL?THE McKINSEY QUARTERLY 1996 NUMBER 361Source:McKinsey analysisLead time managementInventory controlConditions of delivered productsCoverageSales skills/techniquesEffectivenessMerchandising skillsStocking/inventory managementCleaning up stockDisplaying productsRetailer managementIn-house
37、promotionTrade promotionCredit controlRisk assessment/credit checkingCollection controlPhysicaldeliveryServiceBestDistributorperformance levelTypicalSalesMerchandisingPromotionCollectionexceptions,joint ventures are limited to distributing only goods that theythemselves manufacture.Another formidabl
38、e challenge is the lack of control multinationals have overtheir goods:counterfeiting and arbitrary pricing are commonplace.Somecompanies are trying to overcome these problems by using counterfeit-proofpackaging,by printing retail prices on packages,and by marking productionruns diferently by channe
39、l so that counterfeits can be pinpointed moreaccurately.Nevertheless,the sheer scale of these problems increases the levelof complexity for managers in China.4.Scarcity of talentThe fourth obstacle,and one of the biggest brakes on growth,is the dearth ofgood managers.Typically,Chinese joint venture
40、partners are responsible formanufacturing and sales and distribution,while foreign partners focus onmarketing and broader strategic issues.But most multinationals soon discoverthat their local partners lack the product and market knowledge,distributionreach,and financial resources to match MNC aspir
41、ations.Skilled local managers and experienced expatriates capable of leadinginitiatives in China are woefully scarce.One executive had to spend the firstnine months of his China posting on recruiting,just to satisfy currentrequirements.Most companies,meanwhile,are projecting growth rates thatwill ne
42、cessitate a tenfold increase in staf levels over the next five years.Allthis in an environment where staf turnover of over 30 percent a year iscommon,as multinationals and leading Chinese enterprises poach peoplefrom one another with promises of ever-increasing salaries.5.Unwieldy joint venture rela
43、tionshipsAs the China business expands,manufacturing,logistics,sales,and marketingactivities all need to be carefully coordinated,to realize synergies,maximizeimpact,and manage cost duplication.Thats no easy task in the best of worlds,and all the more dificult in China,where it usually means orchest
44、rating agrowing number of joint ventures.JV partners do not necessarily want tocooperate.Some might want to expand more rapidly,others wont want tomake further investments,still others will oppose staf reductions.Achievinga consensus is tough enough when dealing with three or four joint ventures;the
45、 problems only escalate as more partners are added.Three approaches that fall shortIn our work with multinationals in China,weve seen three commonapproaches.Companies following the first two routes “Wait for payback”and“Bet on a few strong brands”oten get of to a fine start but thensputter and stall
46、,simply because they are under-gunning it in China andCHINAS CONSUMER MARKET:A HUGE OPPORTUNITY TO FAIL?62THE McKINSEY QUARTERLY 1996 NUMBER 3dont have the power to win long term,especially once strong competitorsenter the race.The third approach “Build volume fast”rightly aims foraggressive growth,
47、but oten fails because market expansion gets too farahead of the organizations ability to support broad sales and distributioneforts.None of these approaches squarely addresses the challenges outlinedabove,and companies get trapped into vicious cycles from which it is dificultto escape.Waiting for p
48、ayback before investing furtherThis is a cautious approach that aims to generate clear returns beforecommitting further investments.Multinationals following this course typicallyhave made heavy investments in manufacturing and have enjoyed earlysuccess in wealthier markets and high-end channels with
49、out makingsignificant investments in sales and distribution.They might be holding backbecause of concerns about the pace of market reform in China,or a beliefthat their local partners are better equipped to manage day-to-day problems.As a result,their strategy is based on the premise that further in
50、vestments(e.g.,in training,advertising,and promotion)should wait until its certainthat success is sustainable.This might work in a world without competitors;but once other,more committed players come into the picture,the earlymovers share of existing markets rarely increases,and they face dificultie