Are foreign brands dead in China? — Q&A with Mark Tanner

As news of Nike and Adidas performing poorly in China this year contrasts with the growth of their local rivals, are Chinese consumers turning away from foreign brands? How are Chinese people feeling with all the economic gloom and doom in China? Has the metropolis of Shanghai lost its swagger after months of strict lockdowns and no prospect of an end to COVID zero?

To discuss these questions and more, I called up Mark Tanner, who founded China Skinny in Shanghai 2011 to offer marketing, branding, and research services to consumer brands in China. Some of the things I learned: Foreign milk brands have got their package sizes wrong in China, and while Chinese women prefer local weight loss brands, if they want to put on muscle, they turn to foreign products!

We chatted by video call on August 24. This is a lightly edited transcript of our conversation.

—Jeremy Goldkorn

There’s been so much negative news about the Chinese economy in the last year, and the gloom has intensified in the last few months. When you’re on the outside, the gloom and doom tends to be amplified.

So, put it into context for someone who’s outside of China: What’s the mood in China right now with consumers and among the companies that are your clients?

It’s definitely less rosy than it’s been in the past. I’m not going to pretend it’s not. I think consumer confidence is lower than I’ve seen in the last decade. And I think that’s down to a number of reasons. Obviously, the big one is COVID-zero and the uncertainty around that. But the other one is property.

As you know, property wealth has contributed to almost all of the wealth growth for individual Chinese over the last generation. And now property is not growing. It’s really impacted the way consumers feel about their growing affluence. Then there are other contributors such as youth unemployment and slowing headline data that is impacting confidence.

But still. I remember a long, long time ago in South Africa, I met some business buddy of my uncle’s, a really offensive nouveau riche guy…the first time I’ve ever met somebody who aggressively ordered the most expensive thing on the menu at a restaurant just to show off.

But he was a successful business guy who had all kinds of companies. I remember him saying something to me like, “I don’t believe in recessions. It doesn’t matter if the economists are unhappy. People still need to eat and play.”

Totally. And I think Chinese people are very resilient. They bounce back really quickly, as I’m sure you’ve seen over the years. They’ve been through some tough times over the generations, but return to their inherently positive perceptions quicker than people do in most countries. But I think right now COVID-zero has rattled a few of them. They can’t go on holiday without worrying. They can’t go to Ikea without worrying about getting locked in.

So, it’s had some impact on things. But yeah, people are still spending, they still need to buy. You look at car sales, which have obviously been nudged along by Beijing’s policies, but that increased 17% last month. Chinese people are still buying the big-ticket items. It’s not quite the lipstick economy that everyone talks about.

Are you noticing changing trends in the way companies are marketing to consumers or in consumer preferences? Is there something you can point to, like people are not buying durian fruit anymore, they’re buying regular bananas? Are you noticing consumer habit changes?

Something I’ve noticed is that the gap between foreign brands and Chinese brands has increased since 2020. Some of that’s due to nationalism. Everyone’s talking about nationalism, but I think the weighting is far too much. A lot of the decision makers at foreign companies haven’t been to China since then. They’re disconnected, and China has obviously changed dramatically since COVID. And as a result, a lot of these decision makers and stakeholders are a little bit lost and really not understanding what’s happening in the market.

Are you saying that people are blaming the poor performance of foreign brands on nationalism? But there are also other factors?

Yeah. I remember we were doing some work in the dairy industry, and it was quite some years ago, before COVID. A lot of decision makers from foreign brands will come to China and they’ll go into a store and they’ll look at ecommerce sites and they’ll find all these one-liter Tetra Pak dairy products from all the other foreign brands. So, they’re like, “We’ve got to have a one-liter Tetra Pak.”

But if you look at the way Chinese consumers are consuming, they don’t drink milk in the same volume that people do in America, or in New Zealand. They much prefer a smaller portion that’s fresh on opening, and that they can carry around in their handbag or whatever. If you look at the way Chinese are buying milk, 70% of them are buying 250 ml or smaller portions, whereas 98% of all the one-liter Tetra Paks are foreign brands. It’s a disconnect. They are not localizing enough.

I remember in the 1990s, people running businesses a little like yours, one of whose major selling points would be, “We’ll help you localize and actually make a good product-market fit.” And it sounds like some foreign companies haven’t moved on!

We are working with a protein powder, which kills it globally — it’s the leader in just about every market in the world — but in China, they are just getting hammered. I think they’re number five and they couldn’t understand why. And it turned out that the problem is they’re targeting big muscly men like they do in other markets. Whereas in China, the majority of protein powder purchases are females who obviously prefer smaller formats and all sorts of different messaging and positioning.

Why are the women buying the protein powder?

Chinese women are really into health and looking good. And they think that that will help them do that.

Protein powder!

We’ve done work with some of the big FMCG [fast moving consumer goods] brands and they couldn’t understand why they were having circles run around them by these local disrupting upstarts. And we found that structurally, a lot of these foreign companies are not set up to adapt as quickly as Chinese companies.

These Chinese brands are so dynamic, even the massive brands. All they’ve ever known is constant change, so that’s reflected in the way they run their businesses. Whereas the foreign brands will come in and they’ll have decision makers in New York or London or Sydney or Paris or wherever. And so they are slower to make decisions. There are a lot more gates to make decisions. So, by the time they’re finally making a decision, even if they know an awful lot and they’ve got a lot of data to support them, often that trend has moved on.

So, the global head of Acme Corp widgets has to sign off on the new widget design for China, and that takes three months, by which time the Chinese companies have already innovated the new product?

Yeah. And there’s another new trend. We talked to a shampoo company that had taken three years to develop a shampoo from ideation through to selling on shelves and screens. As you know, what was fashionable in shampoo in 2019 is not so fashionable now. Whereas we talked to a Chinese company that had taken three days to develop a face mask. They take a lean startup approach, just chuck a whole lot of spaghetti against the wall and see what sticks. They’re not afraid to try a whole lot of different products and tweaks and see what works and amend.

Right.

And this is starting to affect everything: Really ambitious, smart Chinese employees may be getting a little more nationalistic, and so they want to work for a Chinese company more than they used to, back when everyone just wanted to work for multinationals. But now, it’s also like, “Why do I want to work for this sluggish brand that takes months to make a decision when I can work for this really dynamic local company that’s winning?”

As a result, the best and the brightest are attracted to Chinese companies. Whereas a lot of these formerly quite appealing foreign companies are finding it harder to attract really good staff.

My colleague Lizzi Lee just interviewed Joerg Wuttke, the head of the European Chamber of Commerce in China.

One of the things he said was that he felt that the big established multinationals that have operations in China are still there. They’re not going to go anywhere, and they’re able to deal with the changing situation, but it’s becoming much less attractive to small- to medium-sized companies and startup entrepreneurs. Does that sound right to you?

Yeah. China Skinny used to get a lot of market entry type work, but the majority of our work now is brands that have been in the market for decades and are wanting to grow, wanting to get a little more connected with what they should be doing. I think the brands that have a large presence in China, that have people on the ground, that are quite autonomous and can make decisions, have fared better than brands where most or all decision making is still done outside of China.

And getting back to my original point that the decision makers are unable to get to China, which has made them even less connected to what’s happening in the market, so that’s been a real challenge.

Whilst by nature SMEs are usually quite nimble, China is just such a weird, wacky market with all sorts of different consumer behaviors and preferences, marketing and sales platforms and channels. They look at it and think, oh, how do I start? And they’re still talking about things like WeChat and Tmall and things which a lot of the more dynamic brands have moved on a little bit from or have diversified from.

Where are the opportunities for foreign brands in China now?

It’s partly about focus and finding the right market niche.

I’ll give you an example around health supplements, and China Skinny tracks the health supplements category. We have a tracker that’s an online dashboard that measures things like ecommerce sales, claims, ingredients, and consumer sentiment through a quarterly panel. If you’re looking at things like weight loss products, over 90% of weight loss sales are from Chinese brands. Whereas you look at weight gain products, like the muscle-building type products, around 70% of sales are foreign brands. It’s a smaller category, but more premium.

Again, it’s about getting a little more focused and not just looking at the overall health supplements category, but looking at the subcategory, which is relevant where Chinese consumers still feel that foreign brands are better and more reliable, safer, healthier, whatever it is…

Even for categories like beauty and skincare, whilst there’s a lot of hype around some of the C-beauty brands [Chinese beauty], the foreign brands are still doing incredibly well. You look at their sales, they’re still out selling a lot of these C-beauty brands.

Which leads me to another really interesting point, I love Perfect Diary as a case study. Perfect Diary was the darling of the C-beauty industry a few years ago. Everyone was talking about Perfect Diary. They’d done this great job of making themselves look cool, and the products look clean and urbane, allowing them to compete with the big foreign brands.

They sell cosmetics and skincare products?

Yeah. They are “Chinese friendly.” They sell a lot of color and cosmetics products, using a lot of KOLs [key opinion leaders] and a lot of livestreams and all these common strategies that Chinese brands have. And they were going incredibly well. They listed on the New York Stock Exchange around two years ago. And initially they went way up. And then, I think people realized one of the drawbacks of listing on a stock exchange is you have to be a little bit transparent with your numbers. You’ve got to open the hood and show everyone how you’re doing it.

And I think people realized, wow, this brand isn’t actually very sustainable. In 2020, they were spending about two thirds of their sales revenue on marketing.

Whereas if you look at Estee Lauder, they spent around a quarter, L’Oreal was around 30%. So, Perfect Diary was having to spend significantly more to get any kind of runs on the board relative to these established foreign brands that are more sustainable and have more substance to their marketing strategies.

As a result, Perfect Diary, in 18 months, dropped from a high of around $25 to a little over 50 cents. So, they were down to one-fiftieth of their value!

There was a lot of cash sloshing around, particularly when the tech and education industries took a bit of a hit, a lot of that venture capital had to go somewhere. A lot of that venture capital went to FMCG products.

But it’s like crack. You can get runs on the board really quickly, just put out a whole lot of live streaming and get endorsed by numerous key opinion leaders, but it costs you 70% of your revenue. And then the next year, the cost to get an endorsement from the average key opinion leader went up around 50%. So, if your strategy is around these key opinion leaders, yeah, it makes it pretty…

Shitty?

Yeah. It makes it pretty difficult as a brand to compete when that’s been your strategy. We track many of these startup disruptive brands from China, and most of them don’t last five years, but at the same time, they are disrupting the industry.

But has there been a shift in China in people’s perception of quality? I am thinking of Chinese brands like the luxury ice-cream brand Chicecream, and the high-end low-calorie beverage brand Genki Forest. They seem to have come out of nowhere, and suddenly they are huge in China. And the products actually seem to be really high quality. Is this real?

Related to that is…I used to say that one of the key problems China has to solve is the lack of trust in society. Nobody trusts Chinese milk powder for their baby. It doesn’t matter who you are. If you are the poorest peasant farmer from Gansu or you are Xí Jìnpíng 习近平, if you can avoid it, you’re not going to feed your kid Chinese-made milk powder. You’re just going to get the foreign stuff.

But has that changed?

Yes. Consumers are wanting more safe, healthy, premium products…And Chinese brands recognized that quicker. We saw that in the dairy category where a lot of these foreign brands were just selling plain old white milk, but Chinese companies were selling kids’ milk with high calcium, and high protein to help you sleep, gym-going milk for Gen-Zs, elderly-focused milk for joints, all value-added products. As a result, they could sell at a significant premium.

When we were doing analysis back in 2016, the average price of a hundred milliliters (3.38 oz) of milk from foreign brands versus local brands was actually 38% higher for the local brands.

We couldn’t get our head around it because there was still this perception from the melamine scandal from 2008. We talked to a lot of consumers and most said foreign brands are better and safer and healthier.

Whereas the local brands were quicker to realize that consumers want to pay a premium. As a result, you’ve got Chicecream, you’ve got Genki Forest, which have both done really well. And Chinese consumers now feel much more confident about the quality control of many local brands.

With many consumers we talk to, there’s still a perception in a lot of categories that foreign brands are better, particularly amongst the millennials, but it comes up less than it used to. So, to answer your question, yes, consumers do see Chinese brands as safer than they used to.

And the positive perception of Chinese brands has accelerated since COVID. Back in 2020, Chinese looked at the way their country had responded to the pandemic while seeing what’s happening in other aspirational countries, such as the U.S. and the U.K., where everything imploded. And they’re like, “Maybe China’s not so bad as we once thought.” They’re looking at that pandemic control as a proxy for the way everything operates. And they’re kind of, “Yeah, China, we do things pretty well here.”

There’s that. And there’s also the fact that you’ve got a lot of imported products that were rumored to have traces of COVID on them. You saw it initially with Italian products. No one wanted to buy products imported from Italy because they could have COVID on them. Then there was frozen seafood with COVID, and cherries, and sweatshirts from Korea, and all sorts of crazy things.

As a result, people started thinking: “It is actually safer to buy these local products.” You’d go into a supermarket, and around the imported Australian beef, you’d have these full-on rubber gloves and spray right at the chiller, and big ribbons around it, showing everyone that this is imported so it could be deadly. That helped the perception that Chinese products are actually safe. And in many cases, people thought local products were actually safer because of the COVID risk from imports.

Then obviously, there’s geopolitics. China hasn’t been getting so much love since the pandemic. The sentiment toward China, particularly in the West, has decreased considerably. And as a result of Chinese people not feeling love, they don’t feel as much love about other countries. A basic human instinct. So yes, Chinese brands have definitely moved up the curve.

Cars are a really good example of how perceptions have changed. No one would buy a Chinese car not that long ago. It was one of the last categories where people would just spend larger on European, and to a lesser degree, American and Japanese brands. But now Chinese cars are selling quite well. And they’re actually selling outside of China as you know.

But getting back to infant formula, I think that’s a really good example, because that was one of the other last bastions of where foreign brands really held their own. If you’re a caring mother, you do everything you can to protect the health of your only child. You take no risks with that. So, foreign brands would just slap a made in Australia or made in the Netherlands, made in New Zealand label on it would do very well.

And then a brand called Feihe led the change. Initially, all of their marketing, communications, and positioning was around transparency. You could watch video streams of their safe, immaculate factories, the farms and all sorts of things. And there were QR codes and tracking. But if you look at the way they market now, safety and transparency is secondary. Their primary positioning is as a Chinese brand that has been tested on Chinese mothers, tested with Chinese babies rather than some foreign brand.

Chinese milk for Chinese babies?

Yeah. Photos of pretty white mums don’t resonate quite like they once did. Chinese mums, and Chinese consumers overall, feel they’re a little bit different with different needs to consumers in other markets. So, you’re seeing more brands playing on China-specific needs and preferences. But even as a foreign brand, I think it’s worth incorporating these elements.

We see that with the skincare category, which is another area we track quite closely. The number one thing that consumers want are products suitable for Chinese skin. Because again, Chinese skin is different from the skin of some lady living in New York, or in Paris. That’s something Shiseido has done a great job of, as a Japanese brand, they really drive the “suitable for Asian skin” angle. So, as a foreign brand from Paris, New York, or wherever, it’s worth really reiterating that yes, this may be driven by our Paris R&D, but we also have R&D in Shanghai. We have made sure that this really is tailored towards your unique needs as a Chinese consumer, rather than trying to force whatever’s great in France or America on you in Shanghai or Beijing.

You mentioned that at the beginning of the pandemic, maybe until just a few months ago, a lot of Chinese people were feeling that China had handled COVID very well. How is that changing, after the strict lockdowns in Shanghai and other cities?

Chinese consumers can be very defensive and proud of Beijing and its policies. And especially with all these crazy things going on elsewhere like Brexit and Trump, in these formerly aspirational countries, they have really helped fuel the way they feel, the idea that we’ve got this great system that is superior. But during that crazy lockdown in Shanghai, just a few months ago, for the first time you’re hearing Chinese consumers talk about this in [a different way]. We had people on our team that were protesting, which is pretty unusual, and they were banging pot lids from their balconies and filming it and posting it on Douyin and stuff.

So, the numbers of people that were inquiring about immigration spiked. People were not feeling as much love for the system as they have in many, many years. I think, in the short-term, that could probably help that perception around foreign brands a little bit.

It’ll be interesting how that pans out. I think also, when Chinese are allowed to travel — and this may be the reason they’re not allowed to travel — I think people will be a little more aware and have a little less tunnel vision. When you can’t travel, your mind’s a little more closed. So, I think getting out there and seeing the world again, and seeing that life in America is great, life in Europe’s great, life in Australia is great will probably help change perceptions in favor of foreign brands and foreign lifestyles.