Selurse

37% of urban Chinese women are believed to buy skincare and beauty product with the 18 to 30 year old age group making up 77% of the consumers. So to summarize, young urban women are the major buyers and there is still a potential growth of 63% in that segment alone. If we add to that, the age group of 30 to 50 years old then, we realize just how attractive the Chinese market is.

However, the 3,000 plus brand competing for consumers' attention transforms this attractive market expected to triple its value to reach US $39 billion by 2010, into one that is characterized by fierce competition. The competition just got a little fiercer after direct selling licenses were granted in late 2005 following the lift of the seven-year old ban on direct sales. With direct sales due to resume this year, this additional distribution channel will further increase pressure on leading global Cosmetics brands. With their flexible business model and positioning on the mid to low end market segments, such brands will be able to target mass market and reach non urban population faster than traditional global Cosmetics brands. On the bright side, emerging trends for natural, organic and ethnic products, beauty salon booms, baby skin care and anti-ageing products are all offering significant growth perspectives to be sustained by the mid market rise.

Global insight with a Chinese perspective can summarize the strategy that global Cosmetics brand should adopt. Understanding the Chinese consumer needs, creating innovative and localized products is a challenge in itself, but frankly this is just the basis for success. The real challenge lies in building a brand image, fighting off brand imitation and retaining customers. To win over this one, advertising is the mean.

Indeed, designing an effective advertising campaign in a large scale is a key success factor and requires a significant budget. Sales staff headcount, sales training, marketing events, informative leaflet production and massive campaigns represent a cost that needs to be planned well in advance. The challenge of securing prime television ad spots at the annual CCTV (China Central TeleVision) November auction reaching US $634 million in 2005, call for alternative solutions such as outdoor and specialty advertising also known as LCD advertising. This new stream media registered a 79% ad spending growth in 2005 reaching a US $1.7 billion value. With the Olympics approaching, sponsoring should see a sharp increase too. So, in fine it is advertise, advertise, advertise.

The constant search for the optimum message delivery-time by advertisers has created a new market for LCD technology. Public LCD screens are the latest hottest advertising media. Falling press publishing figures, TV viewers' adverse reaction to ads, and internet technology development to block banner ads have all contributed to the emergence of this new segment in the advertizing industry. LCD screens are slowly becoming part of our environment. We see them at the airport, inside the underground, in buses, in public squares, in office lobbies elevators, shopping malls and, more recently inside hypermarkets.

An attractive market size with high potential growth

Let us consider China where hypermarket advertising is well under way with only a couple of companies sharing the market of some 1'500 hypermarkets averaging 10'000 visitors per day, according to Tian Guan Yong, CGEN CEO, a small Shanghai based flat screen TV advertising network operator in China set up in 2003. With an unplanned purchase rate of 70% in Chinese hypermarkets, this is indeed a gold mine for advertisers. According to New-York based research company ACNielson Corp., spending on advertising in China, the world's third-largest ad market rose 21% last year to US $37 billion.

For FMCG advertisers, hypermarket advertising is an excellent opportunity to reach customers without being intrusive and influence their decision at the very moment when the purchasing decision is made. Imagine the ability to deliver a customized message right beofre the consumer chooses a product.

Key players

The market emerged in 2003 when a couple of Chinese entrepreneurs saw an opportunity to reconcile the difficult equation of a) China double digit economic growth, b) the non flexible and expensive TV gridlock advertising and c) the ever increasing demand for advertising space. China is therefore an excellent case for an empirical analysis of this emerging LCD advertising market.

Two years after starting its business, CGEN had 350 points of presence in hypermarkets at the end of 2005 representing a 23% market share. In 2006, it plans to grow to 40% market share penetration with 600 points of presence still in hypermarkets and Kodak stores. CGEN is a niche LCD advertising that focuses on hypermarkets with some exception made to supermarkets as part of the contract signed with the French retail chain store Carrefour. CGEN hypermarket focus allows it to deliver a full added-value service platform with customized local information such as bus timetable.

CGEN's strength lies in its focused differentiation strategy where it combines both hypermarkets and FMCGs' interests, securing a three-way long-term partnership. The other benefit of that strategy, is to increase platform switching cost for hypermarket and thus strenghen it customer retention rate. However, its smaller network and its limited financial resources, despite CGEN being backed by JCDecaux S.A., Europe largest outdoor advertising company, affect its development capability and that, will eventually become a weackness by exposing it to rival firms and make it an easy buy-out target.

Jason Jiang, Focus Media CEO runs a larger network with more than 60'000 LCD screens spread in 75 cities. The company serves more than 500 domestic and international brands. It has achieved sales of US $68.2 million and a net income of US $23.5 million in 2005, registering a staggering growth of 113% year on year. Its primary segments are high buildings, airports, buses, but recently Focus Media has entered the hypermarket segment. Today, it has become a serious challenger to CGEN as they can leverage their wider LCDs netowrk points of presence outside hypermarket to attract FMCG advertisers. Its latest acquisition target is Dotad Media Holdings, a Chinese company that advertises on mobile phones, another strategic market in China, which will complete its Chinese global offer to advertisers.

FMCG companies are well aware of the fact that they have to keep attracting new customers if they do not want to face a market share shrink. Indeed, with a combination of a zero-switching cost and numerous substitutes's products, customers need to be constantly reminded of the brand values and product features. That is where Focus Media draw it strength by being able to offer a global advertising communication plan in its various points of presence throughout China. Its recent IPO on the Nasdaq market has secured it financial stability another key strength in an industry undergoing an expension phase calling for substantial network deployment. On January 2006, Target Media Holding Ltd, a former competitor was acquired by Focus Media for US $325 million consolidating further an oligolistic market and increasing pressure over CGEN.

How this emerging business model is affecting the FMCG industry five forces

LCD advertising operator business model is based on the ownership and the operations of its network. This requires hardwares and software infracstructure investment as well as high flexible network management capabilities calling for high-skilled engineers. Smooth integrated engineering, operational and sales processes are crucial to the business efficiency in order to achieve near simultaneous delivery. From a commercial point, lobbying with hypermarket chains in one side and FMCGs in the other, are the key sucess factors as it enables investment leverage and secure market share. Sourcing LCD screen has no incidence due to the multiple suppliers.

LCD advertising companies pay a flat fee to place their screens inside hypermarkets. In addition, free advertising time slots on the network are allocated to the host hypermarket. These time slots are used for in-house promotional campaigns. On the other hand, LCD advertising operators sell advertising time slots to FMCG.

From the hypermarket viewpoint, this is an additional revenue sources and added value benefits that allow hypermarkets to promote their private label brand for free whilst improving customer experience. At the the same time, this business model further increases the retail stores bargaining power towards FMCG. Indeed, hypermarkets have strategic consumer purchasing data that FMCGs companies could use to adapt their advertising campaigns, promotions and pricing. All that will of course come at a cost. As brands are paying fees to have the right to display their products within a hypermarket, we can imagine that hypermarkets would want to levy a fee for having the right to advertise inside their premises.

 

Are we ready for it?

Today's technology could open doors to one-to-one advertising messages as featured in the futurist movie Minority Report from Steven Spielberg or in the novel Globalia from Jean-Christophe Rufin. It is only a matter of time before sophisticated ads delivery take place. All it would take is a software to analyse the data stored in shop cards as part of voucher program hold by millions of consumers and match that in realtime. Another avenue could be an individual LCD screen attached to the trolley where a customer would need to steep its store card to release the trolley. The identification process would then trigger series of promotional messages based on previous purchasing behaviors, seasonal events that would add to the shopper experience. That is assuming that Internet shopping would not have replaced traditional shopping. More importantly, the next development stage will depend on whether or not we, as individual, allow companies to intrude our privacy by tracking, storing and analysing our purchasing behaviors in the name of marketing. Let us not forget that in the FMCG industry, consumers have the ultimate upper bargaining power.

This week should be a week to remember in corporate gouvernance. Amidst disturbing news, we have heard about the resignation of RadioShark CEO, David Edmondson, under investigation for "errors in his resume", harsh criticisms for the way U.S. companies conduct their business in China. This has later led to Google business legitimacy being questionned over ICP licence validity (Internet Content Provider licence) in China and in the U.S. over ethical matters. But perhaps the worse of it all is the crucial day for RIM (Research In Motion, Blackberry) in the U.S. as it awaits from a court decision on whether or not they have to discontinue their operations there. Now all these tragic events, which have a direct impact on brand image for RadioShark and Google or strategic business results in the case of RIM, but certainly financial ones for both could and should have been prevented if risks had been managed appropriately.

 

Google rely on its "niceness" image to appeal to users and should have therefore done everything to protect it. Instead, to say the least, they have put themselves in a delicate position. On one hand, they are now under scrunity of their users to see if they sticks by their own ethics and on the other hand, Google have lost tremendous bargaining power in their negotiations with the Chinese government who has legal ground to potentially shut down Google.cn website. Google's move to display the message that the search results were being censored in China, is certainly seen as a defiant one by the Chinese authorities and not a sensible one in a country where "loosing face" is the worse possible offense. No surprise then in the response made. Google headquarters might be tempted to fight this one off on legal ground but no doubt that their Chinese Operations CEO knows better and will try to convince them to return to the negotiations table. The ten-year-old company has already learnt one valuable lesson in doing business in China: Do not force an issue publicly upon your negotiating partner.

RIM... How on earth could a company put in jeopardy their very existence?! Has RIM ever considered the risks other than immediate financial provisions during the four-year raging legal license infringement battle that opposed them to NTP? Well they might now! As they face a threat to be shut down in the U.S. in just 30 days. Customer confidence would be destroyed beyond repair in the U.S., brand image will suffer as legal actions might be looming in other countries, and yes immediate financial distress will materialise.

Risk management is not a useless/meaningless function. It is there to assure the continuity of a company. Management at sight or in a constant lower possible costs only lead to aggravated management issues and escalated financial distress. Hoping that this will be remembered as corporate strategic decisions are being made.