Unlike previous years, there is no barrage of real-time reports and chest-thumping assertions of being even bigger and better than ever before.
Double 11 (November 11th) became famous as the world’s biggest online shopping day, dwarfing any such event anywhere in the world in terms of revenue. While it’s gone from a single day to a more extended shopping period, the final day sees consumers rushing to take advantage of promotions and deals before they disappear and hourly updates from Alibaba and JD on GMV and how they’re outperforming previous years.
This year, there was no real-time reporting on the numbers. No astonishing claims around the previous years day one sales being breached in the first minute. No hype, no hoopla. The figures that were eventually released did show an 8% growth for Alibaba and 28% for JD, though we should parse those carefully to make sure we’re comparing like periods.
Now, there could be several reasons for the general cooling of sentiment over 11.11, the lack of enthusiasm for reporting real-time statistics and the lower growth rates. From reasons as far-fetched as some people being apprehensive of COVID being spread on courier parcels during this period of intense delivery logistics, to a slight dampening of economic sentiment, to tech-giants in China being scrutinized to the point where they’re not comfortable being in the public eye.
It’s very likely that next year everything will bounce back and we’ll see the boisterous optimism of previous years. However, for the first time, we saw big brands being forced to engage in an ongoing series of promotions and discounts far later than they usually do. For the first time, there was a sense of sellers chasing buyers on the platforms rather than buyers chasing that elusive “now or never” deal. Perhaps that experience may make brands question, just a little bit, what they’re getting out of 11.11 and other shopping festivals.
From our perspective, one of the main purposes a promotional period serves is helping to drive new users. If you’re a brand with a large base of current users, does selling to them at deep discounts really help the brand? Especially if you’re discounting below an affordable level? Does it make sense to be in the hurly-burly of a crowded, noisy environment like 11.11?
While it makes sense for a lot of new brands, we believe there are many businesses who need to think about a counter-intuitive approach to the big shopping festivals. Maybe the first “cool” year in the history of 11.11 will spark such thinking.
At Searchlight, we help clients think about their China business and marketing – often coming up with counterintuitive, effective strategies based on deep experience in this marketing ecosystem. Reach out to us on enquiries@searchlightchina.com if you’d like to learn more about what we do and how we work.
To try and create greater familiarity for those living elsewhere, we’ll periodically profile some China brands and businesses that we believe will be household names across the world soon – though this week’s example is a cautionary tale of a Chinese brand that was already in many markets around the world but may need to consolidate and regroup in China before it continues its expansion.
Lining up for a seat at the table
Hui Lau Shan (that’s the Cantonese rendering of 许留山 – Xu Liu Shan) was a pioneering dessert chain that started in Hong Kong in 1960 and eventually expanded into several markets around the world. Hong Kong desserts is a category that is very popular and huge across China and Southeast Asia and Hui Lau Shan is one of the reasons why. They invented many desserts that are still popular (and copied by many new dessert shops) and eventually had 260 stores across China, HK, US, Korea, Singapore and the UK of which about half were directly operated by the holding company in HK while the rest were franchises. Nearly 50 of those stores were in HK.
In 2007 the original family (3rd generation) sold off the HK business to a Malaysian company Navis Capital – this company eventually had a dispute over the ownership of the company name and so the franchisee in China, Hui Lau Shan was forced to change its name to Tang Lau Shan. The company was then acquired by Royal Dynasty International Holdings in 2015 but over the course of 2020, faced winding up actions from several of the property owners from whom it leased premises. It seems to have weathered that storm with some negotiation and settlements for now but still faces a somewhat bleak future.
Why is this a cautionary tale? Well, there are a few different aspects to it that fit the description.
First, the 3rd generation owners in selling to the Malaysian investment company seem to have made a classic mistake in not reading the fine print. That company wanted to enter China, discovered they could actually prevent the original franchisee from using the brand name there and forced them to change their name while the investor was able to launch new stores under the original name. While the family sold the business and moved on, their franchisee who had a 8 year contract suffered and in the long run the company suffered through losing that franchise revenue and the expansion momentum in China at a moment when the category was exploding in China (competitive HK chains as well as home-grown mainland China competitors have both thrived in the last few years while HLS was mired in this dispute).
Second, the original owners had a reputation for innovation, with several new desserts that have now become popular. However, as the company has evolved, it has stopped that product innovation and been copied by new startup dessert chains, or in some cases out-innovated by them with new versions of the original desserts popularized by HLS. Their most standout mango pomelo sago (楊枝甘露) has now been evolved into flavors for bubble tea by brands in that space and become a standard dessert everywhere else.
Third, HLS has been, for too long, a HK focused business. Even until a few years ago, 45 of it’s 260 outlets worldwide were in HK, significantly more than in mainland China which is a much larger opportunity.
Fourth, HLS has about half owned / half franchised outlets – neither of which is bad in and of itself but speaks to a lack of clarity on what kind of business they want to run.
There are no separate financials for HLS since it’s part of a holding company (Royal Dynasty) but their unpaid rental woes in 2020 and reports of a declining business are clear signs that their owned outlets and overdependence on HK as a market are core to their problems.
Unlike some of the other brands that we’ve featured here, Hui Lau Shan probably needs to rebuild a China business and potentially trim down its bleeding HK business in order to be well poised for the future. After which, funded by a large revenue base in the world’s largest market for Chinese desserts, it can continue to expand across the rest of the globe.
While our focus as a consultancy is making new brands famous in China, there are many (already) famous Chinese brands that aren’t well known overseas. We will be bringing them to light in this series over time.
If you’d like your brand to be famous and successful in China reach out to us at enquiries@searchlightchina.com – we work with both local startups as well as international brands that would like to do better in this market.
6.45 million new homes were built in China in 2019. Culturally, owning a home is a prerequisite to getting married and starting a family, and as a result 90% of households own their home; one of the highest ownership rates in the world.
Two brands, IKEA and Home Depot seemed perfectly poised to capitalise on this environment but where one succeeded, the other floundered. The difference is partly in the fundamentals; one focuses on furniture, the other hardware and materials. But there’s more to it than that.
Home depot: a head start but unable to win the race
Home Depot, is a US-based home-improvement store, stocking everything from paint to power tools, curtains to cleaning supplies. They entered the China market in 2006, acquiring local chain The Home Way which immediately gave them 12 outlets across 6 cities. However, after 6 years, they had failed to turn a profit and took the difficult decision to leave the market.
What went wrong? Or was it wrong before it even started?
As many people pointed out after Home Depot’s departure, the average Chinese person does not want to decorate their own home. For one, home decoration is a relatively new phenomenon in China and people didn’t grow up helping their dads build sheds and patios like the average American or European, so most people simply don’t have the skills. Added to which, most people buy new homes in a 毛胚 state i.e. an empty concrete shell, so decorating in China is a much more involved process than putting up some shelves. But more importantly, as the country has developed, people have moved away from manual labour and doing-it-yourself goes against the idea of upward mobility. “You Can Do It, We Can Help” doesn’t work if I am planning on having someone to do it for me.
IKEA: building aspiration
IKEA on the other hand has seen huge success in China, with 2018 revenues growing more than 9 percent to exceed 14 billion RMB. According to Statista, China accounts for 4.8% of IKEA’s global revenue.
So why has IKEA succeeded where Home Depot did not?
Firstly, IKEA recognised the distaste for DIY in China, while also understanding the “IKEA effect” (a cognitive bias whereby people place more value on a product they have contributed to) doesn’t require complete DIY and can be had through ‘soft’ decoration, while leaving the ‘hard’ decoration to the professionals. So instead, they focused on the Scandinavian design of their furniture. They emphasized the results of decorated rooms, while playing down the need to assemble it yourself; even offering to send workmen out to assemble the furniture for customers.
Secondly IKEA invested in building a brand. Their stores are a destination (with the restaurant becoming a place for older singles to meet), there are smaller downtown stores for more day-to-day engagement, and it has invested heavily in digital marketing. Through the emphasis on design and brand building, IKEA furniture has become aspirational to Chinese home owners.
Could Home Depot have learned from IKEA?
In the first post in the Goldilocks Zone series, we discussed how Subway took an oversimplified approach to China; transplanting what worked overseas; and Home Depot seems to have fallen for the same trap. So, taking some learning from IKEA, what might have worked better for Home Depot?
It should be noted that a major reason for the differing fortunes of these two brands comes down to the fundamentals of what they sell; one sells modern Scandinavian furniture, while the other focuses on hardware and materials. However, that is not all that Home Depot stocks; they also carry furniture and appliances. Focusing less on hardware and more on these end-consumer products seems to be an obvious opportunity, especially given their American origins would signify high quality.
Secondly, while the end-user is not usually involved in the selection of materials, they care greatly about the quality and the health impact of those materials; people tend to avoid oil-based paints and it’s common to let a newly decorated property air out for one or two months before moving in. So, again by leveraging their US heritage and offering guaranteed quality and health benefits over locally available materials, Home Depot could have got people involved in the selection of materials for their homes.
Finally, decorating one’s home is a highly emotive time. It’s full of imagination and fantasy and any brand helping to fulfil that dream misses a trick if it doesn’t use that to its advantage. To this end, Home Depot might have positioned itself as a provider of services or experiences; employing interior designers to help home owners plan and design their perfect home or room, and a team of skilled workers to make it a reality. They might have built digital engagement around people’s own designs for their homes or partnered with design magazines or home makeover programmes. What if they had bought and decorated some amazing properties around the country and invited KOLs to stay in them? Instead of “you can do it, we can help” it could have been “you can dream it, we can make it happen”.
This is of course all easier said than done, and we appreciate there were other aspects to Home Depot’s difficulties, but with the right approach to home decoration in China they may have seen some of the success that IKEA has.
Navigating the complexities of the China market is not easy for any brand, and Searchlight is perfectly positioned to help find the Goldilocks zone between complexity and simplicity. Reach out to us at enquiries@searchlightchina.com. We work with both local start-ups as well as international brands that would like to do better in this market.
To try and create greater familiarity for those living elsewhere, we’ll periodically profile some China brands and businesses that we believe will be household names across the world soon, except perhaps for this time’s example.
It’s getting to the hottest part of summer and quite naturally, our thoughts turn more and more often to beer – that glorious drink that defines many of the best things about this season.
I made the astonishing discovery that the worlds largest selling beer is from China – but not only have you probably never heard of it, it’s very likely not even available where you are. Even more likely, it probably will never be distributed where you are – unlike some of the other brands we’ve covered in this series. Yet, it is such an astonishing success purely from a volume and market penetration perspective that we thought it would be worth a writeup.
Ladies and gentlemen, introducing the world’s largest selling beer that you’ve never heard of: China’s 雪花 or Snow Beer.
Background
Snow Beer was first launched in 1993 in Shenyang (Liaoning Province), China by a company called CR Snow that was originally owned by SAB Miller (49%) and China Resource Enterprises (51%) but when Anheuser-Busch acquired SAB Miller they were forced to sell their stake in Snow for 1.6 billion USD to CRE. In 2018 Heineken acquired 40% of the company. Over the years as it became a more and more successful business, it was spun-off as a separate company and is now listed on the HK Stock Exchange as China Resource Beer (Holdings) Company Limited which has a slightly more complicated shareholding that we won’t get into now.
Financials
It was a little hard to get recent figures on beer sales around the world but the last complete audit of these numbers from 2017 shows Snow holding 5.5% of the total market worldwide, followed by Tsingtao at 2.6%. Now, Tsingtao is sold all over the world but Snow is pretty much only in China, which tells you just how big a brand can get by focusing on this one market and no others!
A look at the 2020 annual report for CRB shows their total sales at 11.1 million kilo-liters – but this is across all their brands, not just Snow. However, they still claim Snow as the largest single-brand of beer globally. The company seems to have done well over 2020, while turnover was slightly less than in 2019 (31.5 billion RMB down from 33.2), profit attributable to shareholders grew from 1.3 to 2.2 billion RMB.
Success Factors
I’d love to be able to say that Snow does well because it is a damn good beer. Unfortunately, it isn’t. In fact, the local joke is that it’s called Snow because it tastes like melted snow – water, basically.
The reasons for it’s success are very simple – it’s really cheap (under 2.5 RMB/ 330ml can for the cheapest variant) and it is available everywhere. All over China, practically in every kind of local restaurant, you can buy Snow. It lends itself to the long drawn-out toasting culture that accompanies most gatherings in China and with it’s low alcohol content doesn’t hit people as hard as baijiu. They’ve also invested in brand-building advertising over a long period of time, including once paying for a billboard that was so high up and inconvenient to remove that it remained in place for years after the brand stopped paying for it.
Snow is really a triumph of 3 of the 4 P’s in marketing – price, place and promotion. With that singular focus on being well-known, ubiquitous and cheap in China, it has achieved the status of the largest beer brand in the world.
Future Outlook
CRB seems focused on growing a premium segment, working with Heineken to introduce their premium brands and grow that part of the business in China. The annual report focuses exclusively on the China domestic business with no mention of any plans to take Snow abroad. Which means you’re probably not going to see this brand on a supermarket shelf near you anytime soon. Perhaps some day in the far future when today’s nascent trend for craft and premium beers has become the mainstay of the category, Snow may be toppled from its perch but until then, it will be one of the world’s biggest beers that is only available in China.
While our focus as a consultancy is making new brands famous in China, there are many (already) famous Chinese brands that aren’t well known overseas. We will be bringing them to light in this series over time.
If you’d like your brand to be famous and successful in China reach out to us at enquiries@searchlightchina.com – we work with both local startups as well as international brands that would like to do better in this market.
During the space race, NASA discovered that typical ball-point pens don’t work in space. So, they invested a million dollars to develop a pen that would work in zero gravity, could write upside down and could withstand the extremes of outer space. The Soviet space programme encountered the same problem… but they solved the problem by using a pencil.
It’s an often-told story, Jon Steel even mentions it in Truth, Lies and Advertising, that demonstrates that for even the most complex of problems there is a simple smart solution. And it’s a delightful story, except for the small problem; that it’s complete hogwash! The fact is, NASA did not invest a million dollars into researching the pen. A private individual named Paul Fisher saw an opportunity and invested a million dollars of his own money to develop the pen. He sold the pens to NASA for $6 each, so not a bad investment on NASA’s part. Today Fisher still sells more than a million Space Pens a year, so not bad for Fisher either. And the Russians? Well, they quickly discovered that the graphite in a pencil breaks off when it’s used, sending tiny shards of the conductive material floating around in a zero-gravity environment where they end up in equipment, and oxygen systems and astronauts’ eyes. They bought Fisher Space Pens too.
The solution wasn’t as simple as just using a pencil. And it wasn’t as complex as investing large amounts of government money in to research with limited application. More often than not the truth is both simpler and more complex than the received wisdom. And this is especially true when it comes to China; brands tend to either oversimplify and assume that what worked in the US or Europe will work in China. Or they overcomplicate it and believe that China is still a riddle wrapped in a mystery inside an enigma and therefore the rule book must be torn up and rewritten.
Over the next few weeks, we’ll be sharing examples of brands who have either overcomplicated or oversimplified their approach to business in China. And we’ll contrast each one with a business that has found the sweet spot between complexity and simplicity and reaped the rewards.
First up, we’ll have a look at a brand that oversimplified their approach, and that is Subway.
Until recently Subway had more outlets in the US than any other fast-food chain. In 2010 the founder believed they could match the number of outlets McDonald’s has in China by 2020. A decade or so later they have 598 stores, compared with 3,787 McDonald’s outlets and more than 7,000 by KFC. Perhaps more damning; a 2018 survey by Cint found that just 1.03% of respondents visited Subway in the past year – the lowest result of all QSRs, behind far less well-known brands like Famous Famiglia and Moe’s Southwest Grill (which doesn’t appear to have any outlets outside of North America!)
Oversimplification: what worked there doesn’t always work here
Subway is positioned as a healthier alternative to other Quick Service Restaurants, and to most people in the west, the health attributes are clearly apparent; more vegetables, wholemeal breads, less red meats and fried food all immediately shout “health(ier)”. Their communications for a long time built credibility in weight-loss.
However, in China they have been unable to build the same credentials. A major barrier in is that here, a sandwich is not seen as inherently healthy; it is placed in the same category as a hamburger, regardless of what is between the bread. There is a distinct difference in understanding of healthy foods in China vs the west; where in America in particular, healthy is generally synonymous with low fat, while in China healthy means nutritious. So, while their communications have worked to educate people about the health benefits of wholemeal bread and the low fat content of their sandwiches, they have been largely unsuccessful in overcoming this initial disadvantage.
Secondly, Subway has not managed to build the brand cachet that its rivals enjoy. The huge shares of voice and celebrity co-operations of the larger chains have driven their brand recognition and preference with clear impacts on their respective businesses.
But the biggest reason for consumers rejecting Subway in China is the menu itself. Not only does it consist entirely of western favourites like Italian Sausage and BLT, but (sin of sins) it’s cold!
Contrast this with KFC. Its’ core offering of fried chicken is seen as a nutritious food, and tray mats, instead of promoting products, talks about nutrition. Their combos come with juice and sweetcorn rather than Coke and fries, so KFC owns the positioning of the less-guilty fast food. Furthermore, KFC have successfully adapted their menu to Chinese tastes with specifically developed lines like rice bowls, Beijing duck wraps, and soy milk. The same Cint research quoted above showed that more than 70% of respondents had visited a KFC.
What could Subway have done to overcome these challenges?
The obvious would be to adapt the menu to local tastes. Locally inspired flavours, ingredients, and menu items would clearly appeal more to local palates and would have instantly improved their chances of success.
Secondly, while their set up precludes Subway from cooking much food on premises, they do have ovens and the servers will offer to heat up a sub after it is made. A new, localised menu could include options that are heated as a default. Communications could talk about ‘freshly cooked’ rather than just fresh ingredients.
Speaking of communications, a pivot from “health” to “nutrition”, while unlikely to be enough to upset KFC, would better establish health credentials from the brand.
Currently, beyond the not-convincing-enough health messaging, Subway does not have a strong brand positioning. The consumption occasions; working late, having to grab something quickly before catching a train etc. are all negative experiences. Perhaps they could build more positive occasions around a positioning relating to the American spirit. Or, given their globally inspired menu items, a United Nations of flavours.
Finally, Chinese people are rarely in a hurry when it comes to food. So while a Subway can be an excellent option for those who have little time for lunch, that is not a consumer need that is very apparent in this market. To build more positive consumption occasions, Subway could take a leaf from Starbuck’s book create a version of their “3rd space” where people are happy to spend time. Doing business in China is certainly a difficult battle for any brand, and the cards are not stacked in Subway’s favour. It seems unlikely they could ever match McDonald’s in number of restaurants in China, but with some tweaks to the menu, their restaurants, and their communications it’s feasible they could capture a larger portion of the fast-food market.
Searchlight can help your brand navigate the complexities of China and find the Goldilocks zone between complexity and simplicity. Reach out to us at enquiries@searchlightchina.com. We work with both local startups as well as international brands that would like to do better in this market.
To try and create greater familiarity for those living elsewhere, we’ll periodically profile some China brands and businesses that we believe will be household names across the world soon. This month let’s look at something quintessentially Chinese – a hotpot restaurant chain called XiaBu XiaBu （呷哺呷哺）
Background
Xiabu Xiabu started in 1998, pioneering the concept of a DIY hotpot restaurant. They expanded slowly initially, until taking on some funding and rapidly growing after 2008.
The company now operates Xiabu Xiabu, which is the low price, popular brand, as well as Cou Cou, which is a more premium hotpot with herbal soups and higher quality ingredients. The founder, Ho Kuang-Chi, from Taiwan had stepped aside in recent years and appointed Zhao Yi – previously CFO of the company – into the CEO role. However, Zhao Yi left the company just a month ago and the founder has taken back the reins of leadership.
They claim more than 50% of the fast casual hotpot segment and are a leading player in casual dining in China. While rival Hai Di Lao is a better known hotpot brand and has about thrice the revenue, Xiabu Xiabu occupies a unique niche in the fast casual segment, with low prices and fast turnaround.
The company is listed on the Hong Kong stock exchange under XBXB
Financials
In one of its worst years in recent history (because of the pandemic) Xiabu Xiabu has still held its own. Revenue dropped last year by 10% to 5.5 billion RMB, profit dropped 96% to 11.5 million RMB. Those are not bad numbers to have in a year where F&B was ravaged by the pandemic.
Success Factors
The main thing driving the success of Xiabu Xiabu is a very well thought out model which has led to tremendous scalability. The store design is standardized for maximum seating capacity and efficiency. The individual DIY hotpot concept offers maximum flexibility to diners while minimizing any kitchen or food preparation arrangements – there is no chef in any of the restaurants, no complicated in-store kitchen. It’s really a business about optimizing the supply chain of fresh ingredients and delivering them to the diner on their table.
That scalability makes it easier and faster for each new store to achieve profitability, driving the ability of the chain to expand.
Future Outlook
China loves hotpot. Xiabu Xiabu, despite a hard 2020, has held on to its revenue (with only a 10% drop) and still managed to be above breakeven. That’s a great platform for the future.
They’ve had their share of controversy with a diner claiming there was a rat in her hotpot, (though apparently that isn’t a straightforward story and there may be mala fide intentions at play) but for a chain with 23 years of history they’ve been remarkably un-newsworthy, which is really a sign of consistency and food safety practices that work.
Call me sentimental, but a founder coming back from semi-retirement to take the helm and redefine the future is something I always root for. While the stock price may have declined precipitously in recent times with the somewhat unflattering annual report and the departure of two senior management executives, to me that feels like a temporary blip in what seems to be a company poised for world domination, one hot-pot at a time.
While our focus as a consultancy is making new brands famous in China, there are many (already) famous Chinese brands that aren’t well known overseas. We will be bringing them to light in this series over time.
If you’d like your brand to be famous and successful in China reach out to us at enquiries@searchlightchina.com – we work with both local startups as well as international brands that would like to do better in this market.
As perhaps many people are already aware, 11.11 (November 11) was launched as a shopping extravaganza by Alibaba’s TMall – initially named “Singles Day” although now it’s become pretty universal. Jing Dong (JD) launched their own special shopping day on June 18 which was their founder’s birthday and over the years it’s become China’s second largest shopping day.
Neither festival has remained exclusive to any platform – all the e-commerce, social commerce, group buying and even offline retail channels now have special pricing and promotions for these two days.
Also, neither “day” is now strictly just one day. 618 starts from June 1 when people can start putting things in their shopping carts and 11.11 also stretches effectively over nearly two weeks. (This year 618 started from May 24 so it’ll soon be a 3 month affair!)
To put things in perspective, 11.11.2020 showed a GMV of nearly 500 billion RMB for Alibaba’s TMall and 272 billion RMB for JD. For the same year, 618 showed 269 billion RMB of GMV for JD so the two days are almost identical in GMV terms for JD.
618 for 2021 has just concluded and apparently JD clocked in at 344 billion RMB, so about 26% growth over the previous year.
Two trends that are interesting to watch here are the gradual lengthening of the promotional period (whether by allowing people to start marking their “wish-lists” earlier and earlier or by having different phases of promotions) and the convergence of the sales numbers across these two key shopping festivals.
The bigger question of course, is how long these kinds of highly promotional festivals will continue and how widespread the participation of brands will continue to be. Brands must surely be struggling to continue to sell at deeply discounted prices over longer periods and more occasions every year. These were great ways for the platforms to establish themselves with consumers but as they get bigger, many established brands are questioning the value of participating in these festivals and thinking of ways of getting around the rules and systems of the big e-commerce platforms that create them.
To try and create greater familiarity for those living elsewhere, we’ll periodically profile some China brands and businesses that we believe will be household names across the world soon. This month let’s look at Huazhu Hotels , a silent giant in the hotel category in China.
The Huazhu Group has several brands, well over a thousand properties in China, a strategic alliance with Accor and acquired a German hotel group called Deutsche Hospitality in late 2019. They’re listed on NASDAQ under HTHT.
A typical Hanting hotel – middle of a regular city-block, functional rather than fancy, but everywhere!
Background
Ji Qi ( 季琦) the founder, apparently got the idea to start the chain when he read a book about the Accor Hotels group. Interestingly for the founder, the group that inspired him eventually had a strategic alliance with HuaZhu from 2016 although recent reports suggest that Accor has now started to divest their shareholding in the group given it’s focus on budget and mid-price hotels rather than luxury.
The company brands include Hanting Inns and Hotels (汉庭连锁酒店; 漢庭連鎖酒店; Hàntíng Liánsuǒ Jiǔdiàn) including Hanting Express (汉庭快捷; 漢庭快捷; Hàntíng Kuàijié); Hi Inn (海友酒店; Hǎiyǒu Jiǔdiàn); JI Hotel (全季酒店; Quánjì Jiǔdiàn), Starway Hotel (星程酒店; Xīngchéng Jiǔdiàn), Joya Hotel (禧玥酒店; Xǐyuè Jiǔdiàn), and Manxin Hotels and Resorts (漫心度假酒店; Mànxīn Dùjià Jiǔdiàn). The company classifies Joya and Manxin as upscale brands, JI and Starway as midscale, and Hanting and Hi Inn as economy brands. The most casual traveler to China will start seeing these hotels right as they leave the airport or train station in any city – low cost and ubiquity are key to the success of the business.
Financials
Huazhu Group is listed on the NYSE and publishes annual reports, so it’s easy to track their financial performance. After steady growth in revenue and profit from 2017 all the way until 2019, when they finished up with about 11 billion RMB in revenue and 1.7 billion in profit, they slid to just over 10 billion RMB and a loss of over 2 billion in 2020. Clearly they were hugely hit by the pandemic and called that out as a major factor in their annual report – the fact that their acquisition in Europe was on Jan 2, 2020 would have been unfortunate timing, since the impact on travel there lasted through most of the year. At the same time Accor divested 1.5% of Huazhu shares for $289 million (they continue to have a 3.3% holding) so the company is clearly worth a great deal and should be able to weather the storms of the pandemic, especially as China recovered fairly quickly.
Huazhu is the 3rd largest hotel group in China after Oyo and Jin Jiang Hotels, with 5400 properties against 19,000 and 10,000 for the other two. Jin Jiang is state owned and reported a 32% drop in revenue to about 14 billion RMB in 2020 with 1.68 billion in profit. Oyo is more an aggregator than a hotel chain with its own properties. Huazhu has the wherewithal to overtake the other two, especially as Oyo is still loss-making after 8 years of existence.
Success Factors
The two strategies clearly in favor of the group are ubiquity and a focus on the budget / mid-priced segment. While they do claim to own two “premium” brands, those are not the focus and they’ve successfully captured the budget travel market across China. Their acquisition in Europe seems to be based on the same approach and while that seems to have caused some change of heart at Accor, Huazhu will very likely continue with M&A to extend its vision for affordable accommodation across the rest of the world.
Future Outlook
The significant loss in 2020 is somewhat surprising given that China bounced back from COVID by mid-year. If Huazhu is able to overcome that setback in 2021 and beyond it should be well-poised to continue its expansion outside China.
While our focus as a consultancy is making new brands famous in China, there are many (already) famous Chinese brands that aren’t well known overseas. We will be bringing them to light in this series over time.
If you’d like your brand to be famous and successful in China reach out to us at enquiries@searchlightchina.com – we work with both local startups as well as international brands that would like to do better in this market.
To try and create greater familiarity for those living elsewhere, we’ll periodically profile some China brands and businesses that we believe will be household names across the world soon.This month let’s look at one of the hottest tea brands in China – HeyTea (喜茶）.
Background and History:
China is synonymous with tea-drinking, yet in a country steeped in a tradition of drinking tea, a business model built around inventing new tea traditions is doing remarkably well. Heytea(喜茶）which started life in 2012 as a small tea shop in an alley in Jiangmen in China’s Guangdong province, was most recently valued at $2.3 billion and has raised $95.1 million over 6 funding rounds.
Are they profitable? How much revenue do they make? There is a 2020 “annual report” which is not a standard annual financial report (it’s not a public listed company) but more of a curated report card with some highlights of the year. Apparently the company generated $116 million in revenue for the farmers in its supply chain – which points to some significant scale. They now have 695 stores across 61 cities in China (and now Singapore).
Their WeChat mini-program (major source of online orders) now has over 35 million members. There is now a Hey Tea Mini sub-brand which has 18 stores of its own that sold over a million drinks in 2020. The sub-brand has also sold 1.4 million bottles of sparkling water and over 250,000 tea gift boxes.
At its core, Hey Tea is about innovating tea. They started with a foamy layer of “Salty Cheese” on tea which proved to be a successful innovation but apparently are relentlessly pursuing a new product strategy that has them launching a new product every 1.2 weeks (this from their 2020 report so presumably they launched about 40 new products over that year).
Success Factors:
HeyTea has been remarkably successful with developing digital channels for communication and business, building a following among youth, using WeChat and Tmall very well. Most importantly, they own their customer relationship and data and use these assets very well.
Their independent order and delivery model (as separate from the 3rd party delivery apps) gives them direct access to their consumer data. More importantly, they use customer data to read trends that drive product innovation – like switching to less sugary sweeteners and trying out new flavors and product innovation. This proprietary data and control of their relationship with consumers is a massive asset that is being leveraged very well to keep growing and their development of the digital channels is a significant competitive advantage that their competitors lack.
Future Outlook:
Are they likely to be a financially successful company long term? Analyst estimates for their 2020 business suggest around 6 billion RMB in revenue and a 800 million EBIT but this isn’t public data and may not be accurate. It does feel like at this moment they’re chasing a valuation and exit rather than slowing down to build a profitable business. The frenetic pace of store openings and new product launches suggests a race to win as many consumers and markets as possible before they can go public.
Market expansion is clearly on the agenda. So far the brand has only expanded to Singapore but key Chinese speaking markets are not likely to be far behind. Additionally, there is the opportunity to go to big cities around the world that have a market for Chinese cuisine and lifestyle products – brands like Din Tai Fung that are now in multiple countries around the world are a good model to follow.. .so whether or not the company is profitable at this moment, there’s a good chance it could soon be popping up in a shopping mall near you.
While our focus as a consultancy is making new brands famous in China, there are many (already) famous Chinese brands that aren’t well known overseas. We will be bringing them to light in this series over time.
If you’d like your brand to be famous and successful in China reach out to us at enquiries@searchlightchina.com – we work with both local startups as well as international brands that would like to do better in this market.
For some time now, clients all over the world – especially in China – have been getting worked up about media transparency. They don’t believe they’re getting it. They keep firing agencies who don’t appear to be delivering it and hiring other agencies, who turn out not to be delivering it either…
As someone who’s run agencies as well as worked at a “media auditor” let me try and reframe this argument and suggest a better way for clients to work in partnership with their agency.
Let me first define “transparency”, since I find most clients aren’t entirely clear what they want when they ask for it. Transparency means disclosure of information – in the context of media buying it means agencies tell clients exactly how much they paid for a specific item of media inventory, which means also disclosing any rebates or other discounts they received for buying it.
Now, that does not imply that the agency then passes on all the rebates / discounts for that item of inventory and it does not imply that they charge the client what they paid for it – that’s a different topic than transparency which we’ll come to in a moment.
Let’s go back to the way most media buying pitches are done nowadays. With or without the help of a pitch consultant, clients ask agencies to place very specific bids on a very detailed media inventory list. Those bids aren’t based on last weeks rate or last years rate – they’re bids for the future – the next one year or in some cases, even further out.
Additionally, in many pitches, these rates are expected to be committed. That means, come rain or shine, the agency that wins the business is on the hook to deliver those prices and make up the difference when it can’t. To make matters worse, some clients insist on tracking EVERY single rate – not looking at the total and letting the savings and dis-savings cancel each other out.
What happens as a result? In most cases, agencies will try and make an estimate of future pricing with some buffers built in. This is a very natural behavior if you’re asking them for a cast iron guarantee. Occasionally, they get it wrong and in their zeal to win a client, bid prices that they are ultimately unable to achieve – often they have to pay the difference out of their pockets and also lose the account on the next pitch.
To my mind, in these situations, a client asked for a guaranteed price (and possibly a guaranteed rebate level) and that’s all they’re entitled to. If you’re only interested in that fixed outcome then you don’t get to see any of the variable information – because it doesn’t change the outcome you’ve insisted on.
What is likely to happen in this case is that if the agency manages a few wins in some of its negotiations, its going to try to keep the difference.
Is that wrong? The agency had to make guarantees and take the risk that it wouldn’t be able to meet them – if it’s able to get better pricing / terms than it guaranteed then doesn’t it deserve to benefit from them as a reward for taking that risk?
Unfortunately, agencies have got into the habit of claiming 100% transparency without understanding it, just as clients have got into the habit of asking for it without understanding it.
The conversation that is not happening is about the terms of the deal – fixed guarantees on pricing as opposed to shared agreement of targets and shared risks and rewards from underachievement or overachievement of them.
For clients, if you share the risk, you can share in the reward and participate in the process to make sure you know exactly what is happening.
For agencies, stop framing transparency as good and non-transparency as bad (and then offering 100% transparency to every client and not delivering on it). Instead, have an honest conversation with the client about the different kinds of risk/reward scenarios and how they affect pricing and information disclosure.
That might mean more work on both sides – 3 party contracts with media, fair penalty and incentive schemes and more open sharing of information – but that would lead to a much better result – the rebuilding of trust between clients and agencies.
With over 30 years experience managing agencies, ad-tech startups and consulting Sriram has a deep understanding of how media and ad-tech services work, especially in China. Most recently he’s had experience managing pitches for over 20 clients in the last 3 years. Reach out to him for advice on how to define and select your marketing services partners in China.
searchlightchina.com 
