Why China? A growing middle class (part1/3)

February 6, 2018
This is the first article in short three-piece series called: “Why China?” Read on to find out why some of America’s biggest retailers are focusing on selling in China over the US.

A country of firsts

Earlier this month, Starbucks opened its doors to welcome customers to its largest mega-store in Shanghai, China. This 2,700-square-meter establishment is not only the second of its kind created by the company – it’s the first ever of its kind created overseas. This largely symbolic store reflects the company’s effort to continue to woo the Chinese market and expand in China.

Image source: Starbucks

“When people ask me how much can you really grow in China, I don’t really know what the answer is, but I do believe it’s going to be larger than the U.S.,” said Starbucks’s chairman Howard Schulz to the New York Times.

Growing middle class

The opportunity lies in China’s growing middle class market that currently comprises of around 240 million Chinese consumers, according to a report by China Economic Weekly. Many of America’s largest companies are finding greater growth opportunities in China that far exceed the U.S. market. The online retail sector in China, for example, is 80% bigger than the U.S. Companies are finding that earlier entry to market result in a competitive advantage as the market is still in its early stages.

Image source: Shutterstock

The question for many American brands is whether to focus expansion efforts domestically or overseas. The market for online grocery, for example, is a significant area of opportunity for growth that has been identified by both Amazon and Walmart. Their approaches have been different.

Amazon made headlines this summer by purchasing Whole Foods for $13.7 billion in order to better position itself in the American market. A major part Walmart’s strategy, on the other hand, was to focus its efforts in China. According to Bloomberg, online sales for fresh groceries only make a small portion of the entire industry in China worth approximately $695 billion.

By owning 10% of China’s second largest e-commerce company JD.com, also known as the Amazon of China, Walmart now has a greater share in China’s online grocery market by gaining access to China’s local network and infrastructure. Walmart has further expanded on local partnerships by investing $50 billion in New Dada, a major app for delivery, while creating a network of mini-warehouses throughout the country.

Localized approach

China’s growing middle class is a market that will continue to expand in the coming years. However, entering the China market without a localization strategy can prove to be a major risk, especially when done alone. Uber’s attempt to expand in China resulted in a $1 billion a year loss. The result was local car sharing app Didi Chuxing acquiring the company’s China-based business in 2016.

When successful, the opportunity to enter the Chinese market early on can pay off in spades. With a new Starbucks store opening up in China every 15 hours, it’s forecasted to eventually have twice as many stores than the U.S.

Understanding the Chinese market is key if you plan on doing business in China. Having direct access to the Chinese marketplace, localizing your marketing strategy and tailoring online communication to Chinese audiences are some important steps to take before expanding your business in China.

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