Brand Importance Increases, Touches all Categories, Buoys Value in Slower Economy
Brand importance in China continues to increase.
As the Chinese become wealthier and more sophisticated consumers, they grow more aware of their relationship with brands and the impact brands have on their lives.
Increasingly, Chinese consumers view brands not simply as badges denoting accomplishment and wealth, but rather as useful symbols embedded with cues about product quality, design and safety and other data necessary for making informed purchasing decisions.
The growing importance of brand in China emerges from a close analysis of this third annual BrandZ™ Top 50 Most Valuable Chinese Brands study, which finds that the total value of the BrandZ™ Top 50 2013 declined 1.6 percent to a total of US$320.2 billion.
Stock Appreciation Mirrors Brand Contribution
The key to understanding this result is that the growing importance of brand in China mitigated the depressive effect that lower financial results can have on brand value. The level of Brand Contribution for the Top 10 brands increased to 36.9 percent from 33.2 percent. The level of Brand Contribution for the Top 50 increased to 38.8 percent from 38.2 percent. Brand Contribution is a key metric that indicates the portion of brand value that can be directly attributed to the sole influence of the brand after other factors, such as financial performance, have been stripped away. (Please see Methodology)
The power of Brand Contribution also is evident in stock market performance. All of the Top 50 brands are publicly traded, mostly on the Hong Kong or Shanghai Stock Exchanges, but on other exchanges as well. The BrandZ™ China Top 50 Portfolio consists of the BrandZ™ Top 50 Most Valuable Brands and tracks their stock market performance. Measured over 14 months, starting in July 2010, against MSCI China, an equity index of Chinese stocks, the BrandZ™ China Top 50 Portfolio consistently outperformed the equity index of Chinese stocks and was up 5.8 percent in September 2012 when the MSCI was down 5.6 percent. The BrandZ™ China Top 50 Portfolio outperformed the market by 11.4 percent.
Even more compelling, the share price of the Top 10 brands in Brand Contribution gained an extraordinary 29.2 percent over the same period. This contrast in stock performance indicates both how important brand is to stock appreciation and how stock appreciation is a return on investment in brand. (open the stock market chart)
Some of the strongest evidence revealing the increasing importance of brand comes from the shifting balance between State Owned Enterprises (SOEs) and private brands driven by market forces alone. Market-driven brands comprised 27 percent of the China BrandZ™ Top 50 total brand value in 2013, up from 22 percent in 2011. And the importance of brand varies even among SOEs.(open the SOE chart)
SOE brands deemed to have strategic national importance, such as banks or energy companies, are more tightly controlled than SOE brands in categories like baijiu, the traditional Chinese clear liquor. The brand value of these competitive SOEs increased 12 percent, while the brand value for the more state-involved brands declined 7 percent. This contrast indicates that the investment in brand building by the competitive SOEs yields higher brand value.
Most important, a BrandZ™ analysis of the performance of more than 1,100 Chinese brands over three years reveals a strong correlation between Brand Contribution and market share. In other words, higher Brand Contribution translates into higher sales. (open the Brand Contribution chart)
Consumers Influence Brand Development
With the expansion of the middle class, rise in disposable income and shift from rural to urban living, the influence of Chinese consumers on the development of brands has increased in many ways, including: faster innovation; more choice and competition; and increased focus on brand identity and communication. And this consumer influence touches all categories and is felt across the country as both Chinese and international brands establish presence in the large urban centers other than Shanghai, Beijing and Guangzhou.
Opportunity awaits brands that can get it right in these lower tier cities. A strong presence in lower tier cities is one of the reasons why the brand value of Hainan Airlines appreciated 23 percent while most of its competitors felt the effects of a slowdown in international air travel. Being a top tier brand in a lower tier setting proved to be a successful strategy for the apparel brand Septwolves.
Although the tiers are converging in income level, consumer attitudes and behavior differences remain. Consumers in lower tier cities tend to be more driven by practical concerns like price and performance rather than status.
Serving China's large and diverse market helps strengthen Chinese brands and even prepares them for overseas ventures. Brands also are tempered by an attitude shared by Chinese consumers regardless of where they reside. They expect more today. Simply being a famous brand is no longer enough. Sustained success requires anticipating and meeting consumer desires or, put another way, constant, useful and relevant innovation.
Innovation, Competition and Choice
The impact of this market dynamic is evident in the technology category. Of all the categories measured in this report, technology gained the most in brand value—35 percent—with the increase led by Tencent, China’s largest Internet portal that connects over 700 million users. Formed in 1998, Tencent shifted its business during 2012 to focus more intensively on its mobile messaging app, Weixin, which reached about 200 million users by March 2012, just over one year after launch. The brand's value surged upward 60 percent.
Similarly, Baidu, China's largest search engine, formed in 2000, invested heavily in the Cloud during 2012, and its brand value increased by 40 percent. In contrast, the social media site Renren felt the impact of these innovative competitors and its brand value declined by 77 percent. In part, consumer interest in the Internet and social media, which drove the rapid rise of Renren, left the company vulnerable as consumers discovered newer ideas and wider choice.
Some of China's greatest innovators, brands that identified and developed entirely new businesses, now face intense competition as rivals enter the market offering an incremental improvement or change calculated to steal market share. The brand Ctrip, for example, pioneered online travel services in China in 1999. Today, the e-commerce sites of airlines, hotels, other travel providers and online shopping malls, such as Taobao, battle for the revenue generated by the tourism of China's expanding middle class. In this crowded field, Ctrip’s brand value declined 39 percent.
Increased Focus on Brand Building
Having built a multi-channel approach to travel, with access online or through an extensive network of call centers, Ctrip is meeting this heated competition by investing in its brand with a $US500 million promotion and marketing campaign. As competition increases in just about every product category, brands look for ways to differentiate and increase their appeal. Apparel brands face a particularly difficult challenge in a category that declined 18 percent in brand value because of weakened demand, excess inventory, a competitive field of domestic and international players and shifting consumer preferences away from casual wear and toward smarter everyday wardrobes.
Despite these pressures, certain apparel brands did relatively well in part because of their clarity of focus. Septwolves took greater control over its brand, shifting priorities from wholesale to retail with plans to open over 1,000 company-owned stores during the next couple of years. Building on its heritage as a clothing manufacturer, Youngor is marketing under its own brand. Semir effectively targeted the youth market. Both brands ascended to the Top 50 ranks for the first time.
Effective brand positioning was evident also in the performance of the Moutai, the traditional Chinese baijiu liquor, and Harbin beer. Both brands faced considerable competition in categories where brand plays a central role. Harbin associated the brand with the sports, including the National Basketball Association, and appealed to the growing taste for more premium beer. Harbin entered the Top 50 ranking for the first time. By emphasizing its long brand heritage and leveraging the popularity of baijiu, Moutai increased 42 percent in brand value.
The Next Opportunities
Despite the growing importance of brand in China, many challenges remain. Product safety lapses continue to erode consumer trust. Although the issue most directly impacted the food and dairy category the fallout has affected consumer trust in general, which has declined steadily during the past several years, even among the most trusted brands.
Brands are acting strategically to repair reputations damaged by safety issues, and also to build long-term brand strength by forming alliances with international businesses that can introduce world-class production, supply chain, quality control and marketing best practices. Mengniu entered an arrangement with the Danish dairy group Arla Foods. Determined to become the leader in the premium dairy segment, Bright made a series of overseas acquisitions. Its brand value rose 34 percent.
Chinese companies have formed overseas partnerships before. In the car category, for example, Western manufacturers traded their technological knowledge for access to the world’s largest consumer market. There’s a key difference between the car industry example and some of these new arrangements, however. These alliances often are designed to raise the profile and credibility of the Chinese brand, not of the foreign partner.
Internationalization, of course, works the other way round, with Chinese brands exporting merchandise, not simply as manufacturers for Western brands, but as Chinese brand marketers. Most international activity takes place in categories dominated by SOEs: financial services, airlines, financial services and oil and gas. Brand becomes more important as SOEs, renowned at home, increasingly compete in countries where they’re relatively unknown.
Entrepreneurial Chinese companies, without state ownership, are active overseas, too, building global brands in categories such as technology and household appliances. Lenovo, which recently became the world’s largest PC maker, derives 58 percent of its revenues from outside China. For air conditioner supplier Midea, overseas sales amount to 28 percent of revenue. (open the international revenue chart)
While consumers outside of China remain mostly uninformed about Chinese brands and wary about Chinese products, they are willing to try Chinese brands, according to a recent Millward Brown study.
Achieving quality consistency and an emotional connection remain the critical challenges for Chinese brands that, ultimately, can have an enormous impact in a global economy where a product’s provenance is less important than its quality, design and value - the improvement it makes in the life of the consumer.
Chinese brands are still early in the brand development process. Generally well known in China and considered relevant, the brands typically have failed to form the strong customer bonds that can lead to intense loyalty, even brand advocacy. Chinese brands are growing in strength, as evidenced by the appreciation in Brand Contribution scores in the BrandZ™ Top 50. Brands can gain additional value and unlock enormous competitive advantage with meaningful differentiation by more actively connecting emotionally with consumers.
As brand continues to become even more important in China, the winners across all categories will be those brands that offer consumers products and services with relevant functional and emotional advantages that the brands communicate, using both traditional and social media, in original and compelling ways.