Domestic brands in China outpace foreign entrants, report finds

While some foreign brands are finding sustained success in the Chinese market, others have lost their once dominant position and exited the market since the pandemic, a new report has found.

Domestic brands in China are outpacing foreign competitors, many of which have exited the market since the Covid-19 pandemic. Picutres: Nanjing Road in Shanghai.

A growing number of foreign brands are deserting the Chinese market, as their once-dominant influence and appeal to local consumers has significantly declined since the pandemic, new Forrester research has found.

The report tracked sales, revenue and market share of companies across categories such as sportswear, automotive, smartphones and coffee shops, and found that some of the largest foreign brands operating in the Chinese market are losing ground compared with local competitors.

While there are still some foreign star-performers operating successfully in China, such as Apple, Coca-Cola, McDonald’s and Dyson, a growing number of foreign brands are losing their competitive advantage as consumer preferences are shifting towards domestic brands, the report found.

The pandemic could also be to blame, according to the research.

Forrester principal analyst Xiaofeng Wang, pictured right, explained: “Ultimately, foreign brands often exit China due to poor business performance, particularly during challenging times like the Covid-19 pandemic,” she said. “Additionally, China’s strict zero-Covid policy, which heavily impacted businesses reliant on foot traffic like retail, also played a significant role in their decision to exit the market.”

Xiaofeng Wang is a principal analyst at Forrester

During and after the pandemic, fast fashion companies Topshop, ASOS and American Eagle Outfitters all departed the Chinese market. In the beauty category, Maybelline and Revlon left, while in automotive, Mitsubishi Motors and Suzuki have exited. In retail, UK-based supermarket chains Marks & Spencer and Tesco have also departed.

Ms Wang explained that consumer attitudes towards foreign brands are shifting as some domestic brands have been making significant improvements to the quality and design of their products, and tailoring those to local customer needs more effectively.

She added that social values are also playing a role.

“Chinese consumers place high importance on values like demonstrating respect for their country in their purchasing decisions,” she said. “Unfortunately, some foreign brands have failed to align with these values or have even acted in ways that contradict the current trend of national pride and cultural confidence among Chinese consumers.”

Foreign brands are also missing opportunities to market products to Chinese consumers.

“Foreign brands are falling behind domestic brands in utilising local digital ecosystems, such as Chinese social media and e-commerce marketplaces, for effective marketing and sales to Chinese consumers,” Ms Wang explained.

Chinese coffeehouse chain Luckin’s 2023 Q2 revenue increased by 88 per cent year-on-year, with a combined revenue, sales and market share value of USD $855m ($1290m), compared with just 3 per cent year-on-year growth at its American competitor, Starbucks, which reached USD $763m across the same growth metrics, according to the report.

While the dollar figure difference is sizeable, it’s not as stark as the contrast between growth.

And that broader growth opportunity in China – the second largest consumer market in the world – is still too valuable to ignore for some foreign brands.

Chris Reitermann is WPP president, China

Advertising agency WPP’s newly appointed president in China, Chris Reitermann, said that competition between foreign and local brands is becoming more pronounced.

“Today in China, many categories have strong, top three local brand contenders. These brands, many of them newcomers, offer similar quality at an often lower price point to foreign brands, presenting a real challenge to foreign brands. While we aren’t seeing a decline in multinationals, we are seeing a shift in strategic focus,” he explained.

“As such, WPP is focused on supporting our foreign clients’ creative transformations as they move to adopt a ‘China for China’ strategy.”

Mr Reitermann explained the most successful foreign brands in China share some common traits.

These include “their ability to cater to local needs, native use of China’s rich digital and social ecosystems, as well as a refined approach to branding – including rich experiences across a brand’s ecosystem.”

“One of the most successful foreign brands in China is WPP’s client, KFC. They entered the market over 35 years ago and over time have managed to develop a product portfolio that is highly localised, thanks in part to a management approach that enabled them to translate a global brand positioning into the Chinese market. They’ve also adjusted to China’s local digital landscape, developing their own digital ecosystem to cater to local media behaviours – including prominence in China’s large-scale ­eSports world.”

KFC also now has approximately 10,000 restaurants in China – more than double the number in the US.

Some foreign companies also make common mistakes when entering the market, according to Mr Reitermann. He said that local brands that move rapidly in their go-to-market strategies can outpace foreign entrants.

“In the auto sector for example, multinationals typically need three to four years to develop a new auto platform, compared with just 12-18 months for local brands. Local brands ‘fail fast’ and adapt, while multinationals spend a long time on the planning and strategic phases,” Mr Reitermann said.

“In terms of branding, some foreign brands can focus too much on their brand heritage, which may not translate into a winning proposition in China, while others mistakenly believe that they can command a price premium simply because of their origin, or purported superior product performance. Others simply face a positioning conundrum – ‘stuck in the middle’ – they are neither premium nor luxury, both of which would offer a larger competitive advantage.”

With “super apps” like WeChat and a burgeoning e-commerce market, successful foreign companies understand local nuances.

“Finally, to win in China, brands must become natives in China’s digital ecosystem – only those who can master this approach win, while those who remain traditional in their approach will not,” Mr Reitermann said.