White China Markers

Chinese Low-Priced Consumer Goods Market Calls for Powerful Brands

As the living standard of the Chinese people becomes higher with greater economic development, domestic and international corporations hurry to provide consumers with more purchasing choices. Yet, choices are created not only by new products, but also by different brands with different attributes and images that attract different segments of the population. Brands signify attributes such as high quality or fashionable style, but also affiliation to a certain social class or group, and can thus be sold at premium prices even when they are made at the same production costs of non-branded alternatives.

In a developing country like China, there is also a large portion of the market that still does not have a great purchasing power. With an annual per capita urban resident consumption expenditure of only 8696 CNY in 2006, we can hardly expect the vast majority of the Chinese population to become regular customers of premium brands. Instead, the firms that can gain a much greater market share are the ones that invest in creating strong low-priced brands for the consumer goods market made by the budget-concerned Chinese public.

The sheer size of the consumer goods market in China has been an incentive for intense competition in almost every industry. Small firms can inexpensively enter the market due to the lack of IPR enforcements, use their capabilities to imitate existing products, and successfully overcome technical barriers. At the same time, effective use of mass production allows them to lower the production cost and retail prices. They can further undercut their competitors by reducing profit margins, making up for lost revenue by selling large quantities of the same products.

Such a saturated and established consumer goods market strongly discourages investment in creating strong low-end brands and improving their market share. After all, in a market long dependent on price competition to attract consumers, generating brand loyalty even for well-known and well-established brands seems to be difficult. Many firms believe it is better to cut branding costs in order to have a price advantage. In this article, however, we will argue that for low-priced products the brand remains the distinctive factor on which Chinese consumer base their purchasing decisions.

The Benefits of Branding Chinese Low Priced Consumer Goods

In a market that is famous for replicating goods to be sold in massive quantities, and very often with scarce attention given to design, material quality, or production processes, the brand can function as a quality marker. In other words, given a small price difference for similar goods in the low-end market, the consumer will buy products from a more reputable brand because it is perceived to be of higher quality, partially because well-known translates mentally into “more people buy it, so it must be better”

Indeed, consumer purchasing is affected by strong brands as they are seen as a mark of product safety. Studies show that product-related factors such as price and brand name, in addition to store name, promotion channels, source credibility, country of origin, nature of product testing authority, and warranty, all significantly affect the final choice the consumer makes with regards to similar product offerings. Therefore, by carefully manipulating these variables when formulating brand strategy managers can attract the large and growing market of safety-conscious consumers and gain a significant competitive edge .

In addition to product quality and safety, the brand can also be differentiated through benefits above and beyond the products’ functional attributes. In other words, the brand itself becomes a tool of product differentiation and therefore a competitive advantage. Even when the branded product is essentially the same as the non-branded one, the brand name gives it added qualities.

Chinese consumers tend to have a short list of preferred brands for the products they purchase regularly and do not easily stray from it when making purchases. Naturally, and especially in light of the current economic crisis, consumers of low-priced products are price sensitive and thus not always loyal to their preferred brands (in-store deals and promotions can divert purchase from preferred brand). Still, on average Chinese consumers are willing to pay a premium of about 2.5 percent for a branded product they purchase regularly. Thus brand building and development in this segment of the market is and will remain essential .

Challenges of Successful brand building for Low-Priced Goods

As previously mentioned, the prevalence of price competition in the low-end market constitutes one of the biggest challenges firms have to face in order to develop a profitable and sustainable brand.
This has enormous implications for brand value especially because of widespread piracy and copyright infringement. In the Chinese market many low-end firms do not invest in building an original brand in order to cut costs, but instead use brand names and visual identities very similar to those of the well-known existing ones as promotion of own products.

For instance Whitecat (??), the historical domestic brand of detergent, has reason to be annoyed by the existence of Dailycat “??” that has copied not only the brand name but also the logo and packaging design. Many consumers purchase Dailycat by mistake as they believe that what they’re getting is the famous brand Whitecat or a sub-brand – slightly cheaper - of its portfolio.

Moreover, in order to overcome competition from cheap pirated goods, low-end firms have a tendency to become producers of copycat, if not pirated, goods. There is a strong incentive to give up branding investment and focus on price competition for short-term profits in the low-priced consumer goods market. In other words, strong commitment and persistent brand investments that are more for long term revenues than for short term profits are necessary to truly create strong low-priced brands. The problem is that many firms simply do not have the financial capability to continue such investments over long periods of time.

Domestic cell phone brand CECT is a case in point. CECT entered the competitive Chinese cell phone market by selling branded low cost phones. In order to remain competitive and gain market share, CECT quickly gave up on branding and began to produce copycat mobiles - Nokia, Samsung, Motorola, and more - and sell them at half price of the original if not lower. Some of these models are not even branded "CECT". As you can see, it was both easy and profitable for CECT to move from producing legitimate, branded cell phones to non-branded imitations.

Strategies to be used for low-priced consumer goods

Even though the aforementioned challenges may seem insurmountable, there are strategies that have proved successful in building profitable low-end market brands to attract a large share of price conscious consumers.

1. First Go High, Then Go Low
Firstly, and especially in the case of well-established firms, the brand can be introduced in the mid- to high-range markets before starting to target the low-end market. A strong reputation of high quality in mid-to-high end products can give the firm a sustainable competitive advantage when the same brand is introduced to the low-end market. On the one hand a sound reputation will allow the firm to benefit from economies of scale in marketing and branding. On the other hand, low-end consumers can be easily attracted by the brand as this is perceived as “high status” since it is widespread also among mid-to high end consumers. At that point, the brand can defeat competitors both on price and perceived quality.

For instance Nokia, no 1 in China in the mobile phone market, first captured a large segment of the high-end urban market before starting to sell cheap durable cell phones to the Chinese rural market. Nokia 1100, the first Nokia low-end phone in China, was launched in 2003 when color screens already prevailed in the overcrowded Chinese mobile phone market. The phone featured a black and white screen but it nevertheless became one of Nokia largest cash cows. Chinese farmers' craze for Nokia 1100 largely stemmed from its well-known attribute of high quality matched with customized features – the mobile was dust-proof and had an in-built flashlight, both very useful functional characteristics if living in rural China. The customized attributes were developed by the famous Finnish mobile brand after having conducted extensive market research to understand the specific needs of the Chinese rural market.
Naturally, as in the case of Nokia, in order to successfully build a strong low-priced brand, the firm must also understand how to satisfy the needs of the target consumer base.

2. Niche brand strategy
Secondly, firms trying to build strong low-end market brands in China will be more successful if they target consumers with unique and specific needs in this market bracket rather than producing products that are similar to the other non-branded, low priced ones.

For instance, Chinese candy Yake V9 secured the market for candy-lovers with strong concerns for nutrition by specifically advertising the Vitamin C content.

Another example is Asus, the Chinese manufacturer of cheap computers and laptops, who has developed a low-priced, small and well-designed laptop that successfully targets budget-concerned consumers who wish to have a sleek and light PC to carry around without having to spend a significant amount of money to get it.

Similarly, Cortry Cosmetics, a successful low-priced domestic brand, targets its products to female consumers who appreciate the curative powers of Chinese traditional medicine. In fact, the brand uses the concept of "????" [hanfangyangyan] to distinguish itself from competitors, which expresses the idea of making eye care products accordingly to traditional Chinese medicine practices – supposedly handed down since the Han Dynasty.

3. Provide a Brand Experience
Thirdly, in order to minimize branding expenses to remain competitive in the market for low-priced goods, brand managers can exploit cheaper and more innovative alternatives to traditional brand building and marketing. Public displays, media coverage, and word-of-mouth are all low cost ways to increase the visibility of a brand in the marketplace.

3M security glass outdoor advertisement is a good example of such tactics. Even though they are not the highest priced solution in the market, to show how strong the branded security glass really is, the firm set up a glass box filled with money in urban central locations. The “ad” drew not only the attention of passers-by but also of media and the general public – media reports worked more effectively than traditional advertisement and were totally free!

Sinoway Herb is a Chinese cosmetic brand focused on natural herbal personal care products. In order to increase market share inexpensively the company used Internet as it main branding channel, and specifically weyii.com, a large online cosmetic community. By sending free samples, collecting users' information, getting feedback, and more generally interacting with its target market consumers – young girls – the brand reached more than two hundred thousand people. This demonstrates that brand experience can be virtual in nature and still be effective.

All in all, are brand investments worthwhile to build successful low-priced brands?

We certainly believe so. China’s budget-conscious consumers account for the majority of the domestic market. Indeed, Chinese shoppers are not likely to change from known and preferred brands for unfamiliar ones . In a country where the cheapest price tag often means low, if not dangerous, quality standards, it is reasonable for consumers to fear that the wrong product choice could lead to unpleasant consequences, especially when talking about food or personal care products.

The key to building a profitable low-priced brand is strong brand differentiation, thereby creating a significant obstacle for copycat brands to overcome. This will drive domestic consumers to recognize the brand for its perceived higher quality or ability to satisfy their needs and eventually build a large consumer base willing to pay a small brand premium.
This will allow companies offering low-priced consumer goods to increase their market share and profitability in a sustainable manner.

About the Author

Vladimir Djurovic is the founder and Managing Director of Labbrand, a Shanghai based innovative brand agency specialized in brand research, strategic and creative services. Labbrand website at: http://labbrand.com/ is also the portal to Labbrand branding blog: http://labbrand.com/english/news_and_articles.php/
and reviews of branding related hot topics, with a special focus on China.

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