Summary

• Same same but no different is not a strategy
• When entering a foreign market, it is very difficult to compete head to head against local rivals in the mass market space who already have production economies of scale
• Important to consider the industry economics and whether you can realistically be competitive quickly, especially if scale is key determinant of success
• If cannot be competitive quickly in scale and costs, then explore M&A3 (mergers & acquisitions, alliances, and alternatives) to quickly buy, build or borrow such scale advantages

Background

Swedish appliance maker Electrolux spent 15 years trying to be a major mass-market supplier of washers, refrigerators and other home appliances in China before conceding defeat and is now preparing to reintroduce itself in China as a premium brand.

What Electrolux Did Poorly

The initial plan was to build factories to make cheap simple appliances better than Chinese competitors.   Not surprisingly, the result was merchandise which failed to differentiate itself with Chinese consumers - i.e. Chinese consumers did not consider the Electrolux appliances special.

The real failure of this strategy was Electrolux's production costs were far higher than those of Chinese rivals because it lacked scale starting from zero.  Its Chinese rivals already were producing millions.

Changing a Bad Strategy is Expensive in Terms of Both Lost Time and Money

To reduce costs, Electrolux closed 3 of 4 factories in China. Its remaining plant, in Hangzhou, concentrates on cooking appliances. It will rely on imports of other appliances from an Electolux factory in Thailand and on outside contractors in China.

Electrolux still must persuade Chinese shoppers that its appliances merit a premium price, which will require massive investments in marketing and distribution.  This will be even more challenging now that many Chinese consumers consider home-grown brands of suitable and sometimes even better quality than foreign products in mass market space.

What Electrolux is Doing Differently

Electrolux plans to launch variety of appliances aimed at people seeking more style and features instead of trying to compete on cost in basic appliances.  Easier said than done as so is everyone else.

What Electrolux Learned from Brazil

In Brazil, unlike in China, Electrolux bought a large Brazilian manufacturer, Refrigeração Paraná, in 1996 and spent several years investing to build sufficient scale.

Important to success, managers at Electrolux Brazil were systematic in efforts to understand consumer preferences and design and develop innovative products and features to tap into these preferences.   The company interviews about 5,000 Brazilians each year and developed the "70% rule." When a new model is being considered, Electrolux creates a prototype and shows to consumers alongside the most popular rival offering. At least 70% of consumers must prefer the proposed Electrolux model before the company proceeds with a launch.  

Conclusion

Should happen without saying, but local adaptation of a global product is not sufficient - must design from the start with local needs and desires in mind, and standardize the components, especially internal components not visible to consumer's eye.  All consumer business' are local.

Source:
"Wash, Rinse, Rebrand: Electrolux Spiffs Up Appliances in China", Wall Street Journal, September 19, 2013
http://online.wsj.com/article/SB10001424127887324807704579083494127969298.html?mod=ITP_businessandfinance_2

CKB Solutions is all about real solutions for the real world.  To learn how we can help your business, contact Greg Kovacic in Hong Kong.

For years, consumer goods companies have relied on consumers "overdosing" to drive their growth.  Examples of overdosing include consumers pouring more laundry detergent than is needed or putting more toothpaste on the toothbrush than is really needed, etc.  This is because consumers tend to over-pour or over-use products which are in larger package sizes   Also larger spouts or wider bottle openings in package design also encourage overdosing.

In certain categories, such as laundry detergent, the overdosing phenomenon became more pronounced when manufacturers rolled out increasingly concentrated detergent: consumer-product makers could count on extra sales from shoppers who poured in too much concentrated detergent with every load.

P&G decided to think different and burst this bubble.  P&G introduced Tide Pods capsules, which fixed the amount of detergent used per wash and ushered in the era of "unit dose" products.   The result was total U.S. sales of laundry detergents fell 2.1% in the 12 months to March, according to market-information firm Nielsen, whose data excludes sales from Costco and some other retailers. Compared with the pre-pod age 3 years ago, detergent sales are down 5.1% in dollar terms, to US$7.06b from US$7.44b.

Competitors selling low-price detergents have been negatively affected by P&G's Pods and the shrinking of the size of the industry. Church & Dwight, which sells low-price detergents under the Arm & Hammer and Xtra brands, blames P&G.

Traditional thinking is new products should expand the revenue pie for manufacturers and retailers, not shrink it.  The last round of more-concentrated liquid in 2008 drove laundry detergent sales up 5%. Clorox noted concentrated bleach helped lift overall bleach sales.

If your strategy relies on giving consumers more product than they really need to, and can, use, somewhere out there is a competitor thinking about how to disrupt your business.  By thinking differently, P&G figured out a way to make the economics of pods shift to its favor, at the expense of several competitors.  Consumers pay about US$0.25 per load for Tide Pods vs. US$0.20 per wash load for bottled Tide.  This compares to US$0.07 for competitors' low-price detergents.  By shifting its customers to pods, P&G is earning more money.

P&G expects sales of Tide Pods to hit US$500m in the fiscal year ending in June 2013 with sales of unit dose and higher-priced detergents growing while the low-end market is losing share.

Strategy and new products are about growing the higher/top-end, not the bottom end.  Competing at the bottom end is based purely on price.  Innovation, differentiation and value comes from competing in the top end.

Source:
"Is Innovation Killing the Soap Business?", Wall Street Journal, April 3, 2013
http://online.wsj.com/article/SB10001424127887323916304578400521297972496.html?mod=ITP_marketplace_0

CKB Solutions is all about real solutions for the real world.  To learn how we can help your business, contact Greg Kovacic in Hong Kong.

Adidas is shaking up its retail strategy in China.  After years positioning itself as a top sports brand, adidias is widening the adidas brand in China beyond shoes and sweats. The new retail strategy will have individual stores focus on specific niches ranging from basketball and other athletic apparel to teen and casual wear.  No more "one size fits all" with each store trying to stock everything.

Think of it as specialized shops offering specialized products to attract the right audience interested in what is in the store.  

Challenges to correctly manage 

• Store branding will be key so consumers are not confused or disappointed by going to the wrong store.  
• The stores should be seamlessly integrated so a customer can be led from one store to the one carrying what they are looking for.  I.e. if someone interested in basketball gear walks into a store focused on fashion, what happens?  Will a customer take the time to go to the other store if far away?
  
• Consider dominating real estate by crowding out competitors.  Think of Starbucks being across the street from each other.
• How to determine which stores (and franchisees) focus on which niche?
• Marketing will be key to making sure consumers understand what the adidas brand stands for as the brand will be split at the retail level.

Implement first in company-owned stores, then roll out to franchise stores

To persuade China franchisees to adopt the new niches, adidas is first making changes in its company-owned stores.  Leading by example is smart.  adidas is then in a position to show the results to franchise owners.

However, before it can really roll out nationwide across China where adidas has about 7,000 stores, 90% which are franchisees, adidas must, and is, tightening control over inventory management. adidas is analyzing sales data of  franchise partners and overseeing ordering.

Test, prove, expand

Adidas tested this new retail strategy in China's central city of Wuhan.  It took 5 identical adidas stores and split them up to focus on different crowds: e.g. basketball players, fashion, etc.  The results were promising.  Sales at the revamped  stores jumped 80% in 2012 compared with a year earlier.

Source: "Adidas Sportswear Is Hot on Nike's Heels in China", Wall Street Journal, March 7, 2013.
http://online.wsj.com/article/SB10001424127887324034804578345741263753994.html?mod=ITP_businessandfinance_0

CKB Solutions is all about real solutions for the real world.  To learn how we can help your business, contact Greg Kovacic in Hong Kong.

Summary:

• Nokia lost the consumer smartphone market to Apple and Samsung/Android.
• Nokia is targeting Blackberry's business customers in its bid for survival.
• Samsung and Apple are also targeting Blackberry's business customers.
• Nokia is betting on a third software ecosystem for smartphones.  The history of the software market shows this rarely happens in mass markets. 
• When smartphone markets converge, consumers not businesses set the standard.
  

When Smartphone Markets Converge, Consumers Not Businesses Set the Standard

Nokia, once the global leader in mobile phones, missed the smartphone market.  Blackberry finds itself on the ropes after misjudging how smartphones would open cracks in its stronghold with business users.  Building a dominant position in the business market is crucial for both Nokia and BlackBerry as they fight for survival since Apple and Samsung have built dominant positions in the consumer smartphone market.  Unfortunately, Apple and Samsung and are now targeting business users.

In targeting Blackberry's stronghold, Nokia is betting its partnership with corporate-computing giant Microsoft will help it win business users.   Nokia, as the biggest seller of handsets running Windows, is trying to appeal to IT chiefs seeking easy synchronization between smartphones and company computers, which most often use Microsoft’s operating system.

Unfortunately for Nokia and Blackberry, the iPhone and Android have already captured a combined 78% of the business- smartphone market in 2012.  BlackBerry 16%.  Nokia 4%.  The reality is Blackberry missed the impact people choosing their own phones for use at work, and they were choosing Apple and Samsung, would have on its business. 

Classic Case of Disruption: Consumer Smartphones Ultimately Become Smart & Secure Enough for Business Users

Apple and Samsung are not standing still. In January 2012, Samsung, acquired a stake in security software company Fixmo Inc. In February 2013, Samsung introduced its Knox security software, which it teamed up with General Dynamics, a military contractor, to develop to ensure its phones met the strict security standards of government agencies.

As tablet computers become more commonplace, the company which is strong in both tablets and smartphones will have an advantage with business customers.  This favors Apple and Samsung over Nokia and Blackberry.

Third Ecosystems Rarely Exist in Operating Software

Nokia insists there can be a “third ecosystem” in the smartphone business.  Unlikely.  Smartphones are smart because of the software.  In every other software business, especially operating systems, one or two become dominant and everyone else is relegated to a small niche on the sideline.  Think Windows and Apple for computers.  Of the two dominant software systems, one is an open system (e.g. Windows), and the other is proprietary (e.g. Apple).  Symbian, Nokia's own attempt at a smartphone operating system, was unsuccessful for several reasons.  Symbian was late to the party after iOS and Android.  Google gave Android away and Nokia stuck to charging royalties.  The result is iPhones and Android devices together account for about 90% of smartphone sales.  Blackberry 3.2%.

Blackberry Missed Being Disrupted Because it Mis-Defined the Market's Needs

BlackBerry insist the BlackBerry is still the top phone for professionals. And yet in 2012, according to IDC, Android phones and Apple iPhones replaced BlackBerrys as the most-used phones among workers all over the world.  More businesses are buying iPhones for their employees.  Android phones the most popular among workers buying their own phones. Nokia and Blackberry are competing for a far distant third place after Samsung and Apple in both the consumer and business smartphone markets.

Will Blackberry be the Next Iridium?

If Blackberry is not acquired by Nokia, it will likely go the route of Iridium, which was re-built targeting use in environments and locations other phones could not reliably provide service to.  Blackberry may become the dominant niche in corporate and government communications requiring THE ultra-secure network.  But this will be a small market.

Sources:

• "Failing to Beat Apple, Nokia Aims for BlackBerry", Bloomberg, February 27, 2013.
  http://www.bloomberg.com/news/2013-02-26/failing-to-beat-apple-nokia-aims-for-blackberry.html
• "Samsung Armors Android to Take On BlackBerry", New York Times, February 27, 2013.
  http://www.nytimes.com/2013/02/28/technology/samsung-armors-android-to-take-on-blackberry.html?pagewanted=all&_r=0

CKB Solutions is all about real solutions for the real world.  To learn how we can help your business, contact Greg Kovacic in Hong Kong.

Summary:

• Mexican food is unfamiliar to most Londoners and Brits.
  
• Chipotle is struggling in its international expansion plans, including London.
• Many other competitors have failed to gain significant traction in the U.K., which raises the question of why target this market?
• Chipotle is expensive compared to the alternatives.  This strategy works when selling an experience in an emerging market, but not in an advanced market with insufficient marketing and many alternatives.
  
• Chipotle is spreading itself too thin (pun intended): Few restaurants means lost opportunity to take advantage of scale in operations, sourcing and marketing, further raising the hurdle to successful expansion.  It should focus on a few specific markets and achieve scale before entering a new market.
• Chipotle needs to invest in marketing which is educational (about the food) and entertaining/humorous (about the Mexican-American angle) to create an image and atmosphere which makes people want to first try, and second come back with friends.

American-Mexican food restaurant chain Chipotle has a strong following in the U.S.  They seem to have trouble translating this success as it expands overseas.  The south-of-the-border food is failing to attract a following across the pond in London.

Why choose to expand abroad into a market where similar products have struggled?

Mexican food has always struggled in the U.K. Taco Bell launched in the U.K. in the late 1980s and had 3 outlets in London and 1 in Birmingham.  All 4 were closed by the mid 1990s.   Taco Bell returned in 2010 and now has three whole (sarcastic emphasis added) restaurants in the U.K.  Taco Bell positions itself at the lower end of the price-spectrum.  Chipotle positions itself at the higher end as “gourmet burritos and tacos” as American-style Mexican food.

U.K. burrito chain Tortilla was founded in 2007 by California-native Brandon Stephens.  By February 2013 after 5+ years, Tortilla has opened 11 restaurants.

Hardly numbers which are going to move the needle to a company the size of Chipotle.  But Chipotle seems to be spreading itself too thin when it comes to international expansion.  In Canada, Chipotle has opened 5 stores in 5 years.  This reduces Chipotles ability the achieve scale in operations, sourcing, marketing, etc. in any single market, in effect weakening its position in each market.

Why choose to expand abroad into a market where consumers are unfamiliar with your products?

Given the proximity to each other, there are obviously more Mexicans in the U.S. than the U.K.   This makes Mexican food staples like salsa, guacamole and tacos novel and unfamiliar in the U.K.. Customers even had basic questions on how to just eat the food - some would unwrap their burrito to eat it.

Why choose to expand abroad and then not invest in marketing to educate and entertain potential customers?

KFC, McDonald's, etc. have been successful expanding abroad in part because they were selling American-culture in an age of America The Undisputed Superpower.

Most Londoners are not yet familiar with the Chipotle brand.  This is no surprise given they have 6 stores and have not done any interesting marketing.  Chipotle is not selling American culture.  It needs an angle.  Chipotle could have some interesting and fun marketing around Mexican and American themes to educate people about the food and the restaurants.

Chipotle's prices are not helping.  in the U.K., many diners have a mental barrier against paying more than £5 for a lunch item. Chipotle’s burritos start at £6.50.  If you want to charge a premium, you need to use marketing and the customer experience to convince customers the premium is justified.

Source:  "Why Chipotle Sales Lag in London", BusinessWeek, February 26, 2013
http://www.businessweek.com/articles/2013-02-26/why-chipotle-sales-are-low-in-london#r=hpt-ls

CKB Solutions is all about real solutions for the real world.  To learn how we can help your business, contact Greg Kovacic in Hong Kong.

Family-owned single-brand Lego has come a long way from being the poorly managed and stagnant business in 2003.  It is now the 2nd largest toy company in terms of revenue behind #1 multi-brand Mattel and ahead of #3 multi-brand Hasbro.  What is impressive is while Mattel's and Hasbro's revenue has largely been flat from 2008 through 2012, Lego's has grown 150%.  The toy business is facing many challenges:

• Competition from consumer-electronics with hand-held devices is changing the way children play in and between offline and online worlds
• Tough economic conditions are cutting discretionary spending
• Intense retailer competition (especially in the U.S.) and e-commerce is driving prices and value down

Not surprisingly, revenue growth of the overall U.S. toy market was flat in 2012 from 2011.  What is surprising is the building block sector grew 20%.  Lego's U.S. building-block market share is 85%.

Understandably, competitors are looking to enter Lego's domain and create and sell their own versions of construction building block toys.

• In 2011, Hasbro launched its Kre-O Transformers construction sets which are compatible with Lego
• In 2012, Mattel teamed up with Canada's Mega Brands to launch a line of Barbie construction toys, directly challenging Lego Friends and trying to reinvent the Barbie doll, which itself saw sales decline in 2012.
• In 2013, Hasbro plans to launch Kre-O G.I. Joe.

Will they be successful?  Hasbro and Mattel have plenty of brands.  But Lego is one of those rare iconic brands which defines an entire category.  Think Xerox, Kleenex, Q-Tips, Band-Aids, Coke, Swiss Army Knife, FedEx, Ziploc, iPod, Skype, Google, etc., which enter common usage as either a verb or noun to describe all competitors.  

For Lego, the block is core.  For Hasbro and Mattel, the block is simply an extension of their main toy brands.  Lego has history.  Many generations have grown up playing with Legos, who then encourage their kids to play with Legos and so on in a virtuous cycle.  Some kids who grew up playing with Legos remain customers of much high-priced collector edition sets, which is a big part of Legos turnaround over the last decade.  Lego is the dominant product, with everyone else being looked at as a copycat.  If you are invested in huge Lego sets, you do not want to play with blocks which are not compatible.  Would Hasbro and Mattel not be better off entering licensing agreements with Lego so all the big brands can integrate into the Lego platform?  Habsro and Mattel would sell more.  Together, Lego, Hasbro and Mattel could create an even stronger incentive and attraction for kids to put the video games down.  This is a good example of where instead of turning an indirect competitor into a direct competitor, cooperation would yield better results for all. 

Source: "Lego Shrugs Off Toy-Market Blues", Wall Street Journal, February 21, 2013.
http://online.wsj.com/article/SB10001424127887323549204578317603729616028.html?mod=ITP_businessandfinance_3

CKB Solutions is all about real solutions for the real world.  To learn how we can help your business, contact Greg Kovacic in Hong Kong.

This is a good case study on how NOT to enter a foreign market.  Partner with a local company whose core business is unrelated to yours to enter a highly regulated industry and compete against much larger, entrenched, politically-connected, and dominant competitors.  And be limited to a minority equity position.  This battle was over before it started.

Foreign insurers have to set up JVs with Chinese companies to enter China's life insurance market. More than half of the 26 Sino-foreign insurance JVs involve non-financial Chinese partners. Only AIA, the Asian life insurer once owned by AIG, has its own full license obtained after years of lobbying China's leaders.  Examples include:

• Manulife partnered with a unit of Sinochem Group, a state-owned chemicals firm.
• Japan's Meiji Yasuda Life partnered with Haier, known for washing machines and refrigerators.  Haier has since sold the bulk of its stake to unlisted Founder Group, controlled by Peking University. Haier now has around 20% . Meiji Yasuda holds 29%. 
• Japan's Nippon Life partnered with Chinese consumer-electronics maker SVA.  SVA has since sold its entire 50% stake in the JV to Beijing-based Great Wall Asset Management.
• Korean insurer Samsung Life Insurance partnered with Air China, the airline.
• Sino French Life Insurance was formed by China Post Group, China's post-office operator, and French insurer CNP Assurances.
  
• AXA partnered with banking giant Industrial & Commercial Bank of China (ICBC) and Chinese metals giant Minmetals.
  
• Sun Life Financial reduced its stake in its partnership with China Everbright Group, the lone case the foreign party realizing the limitations they face in China and their capital is better deployed in other markets.
  

China's insurance market may be large, growing and hold much future potential, but it is dominated by a handful of Chinese firms: State-owned China Life Insurance, privately owned Ping An Insurance, and China Pacific Insurance.

The 26 Sino-foreign JV collected <5% of the industry's total premiums in 2012.  The figure was down from 8% in 2007.

Large potential markets tend to create untenable expectations.  A McKinsey consultant stated most of these JVs were hoping to break even in the first 7-8 years, but it took many much longer, and many are still losing money.  Understandably, the Chinese partners, particularly non-financial companies, are waking up to the fact a rising tide does not automatically lift all boats, and many are jumping overboard. 

What went wrong:

• Failure of Chinese partners with a large customer base to capitalize and cross-sell insurance products, even with the help of foreign insurers
• Insurance JVs face challenges expanding beyond their permitted geographies under their licenses allow.  There are complex regulatory requirements each time. Smaller firms also need constant capital injections from their owners to maintain strict government capital requirements.

Source: "China Firms Lose Interest In Insurance", Wall Street Journal, February 19, 2013
http://online.wsj.com/article/SB30001424127887323764804578313602576294418.html?mod=ITP_businessandfinance_0

CKB Solutions is all about real solutions for the real world.  To learn how we can help your business, contact Greg Kovacic in Hong Kong.

Before the ubiquity of smartphones, retailers had the advantage over consumers.  It was nearly impossible for consumers to compare prices in real time between offline and online retail channels.  The smartphone leveled the playing field for consumers.  Not surprisingly, prices are being leveled in the process.  All else being equal, consumers want to pay less than more.   Duh! Consumers, with the new found power in the palm of their hands, understandably took to showrooming to make sure they were getting the best price/deal. 

Showrooming is when a consumer checks out a product in a physical store then goes online to make the purchase.  Showrooming impacts some retailers more than others.  E.g. Customers showroom electronics more than any other product category.

Where digital is integrated in the real world, there is only going to be one price (adjusted for shipping and handling, warranty, etc) for both offline and online retail channels.  Retailers would be wise to use their pricing strategy to encourage consumers to visit their physical store, their online store, or both, and purchase via whichever makes them most comfortable.  With pricing leveled, retail success will be driven by service and selection.

Best Buy recently launched a new initiative "to price match the current pre-tax price for new, identical, immediately available products from local retail competitors and select designated major online retailers at the time of purchase only. (No subsequent price matching of competitors is allowed).  If Best Buy lowers a price on a product (online or in-store) we will allow price-matching up to 15 days following the original purchase."

With pricing leveled, Best Buy will have to compete on service and selection.  

Must Haves for Customer Service Differentiation:

• Seamless integration between offline and online
  
• Knowledgeable and supportive retail experience whether offline or online with no forced upselling
• Ability to purchase online in-store if out of stock in-store
  
• Do the homework for consumers and make it easy for consumers to self-educate themselves on why your price is  the best value for the product including delivery and warranty

Must Haves For Product Selection Differentiation:

• Exclusivity, even if only for a lead period
• If a mass market retailer, wide selection across styles and price points
• If a niche market retailer, unique selection at price points relevant to target consumers
• Latest models

Source: "Best Buy Says It Has Killed 'Showrooming' For Good", Business Insider, February 18, 2013
http://www.businessinsider.com/best-buy-new-price-matching-policy-2013-2

CKB Solutions is all about real solutions for the real world.  To learn how we can help your business, contact Greg Kovacic in Hong Kong.