Strategies Estee Lauders in China - Research Paper Example

Business and Research Methodology Table of Contents Table of Contents 2 Introduction 3 Research Aim 3 Research Objective 3 Research Question 3 Literature Review 4 China Luxury Market Overview 7 Main Distribution Channel of China 8 Luxury Cosmetics in China 9 Market Overview 9 Marketing and Sales Strategies in China’s Luxury Cosmetics Market 9 Competitive Landscape of Luxury Cosmetic Industry in China 9 Risk Factors of China Luxury Goods Market 10 Conclusion 10 Reference List 12 Introduction China is one of the fastest growing developing nations in terms of international business. It is estimated that the key for major financial growth in China would be due to the consumer market and not through investments. The growing standard of living in China and the increase in the middle income and higher income groups make the country’s market attractive for foreign luxury goods investment. The estimated growth of the luxury brand market in china is 18% yearly for the next 4 years and would constitute to 20% of the luxury market and surpassing the position of Japan as the largest market. The luxury cosmetic brand market players in China are Origins, Chanel, Lancôme, Paris, Kiehl’s, Estee Lauder, Dior, Swissweda, Lancaster, Elizabeth Arden (Estee Lauder, 2015). This report would focus on the market environment of the luxury brands in general giving stress on the cosmetic industry. The Chinese luxury brand market would be analysed by focusing on the distribution channel strategies implemented by Estee Lauder. Research Aim This research aims to explore the implementation of the distribution channel strategy for the international luxury goods in Chinese market and to execute the research it focuses on the Estee Lauder’s distribution channel strategies in China. Research Objective To explore the distribution channel strategies followed by the luxury brand in the Chinese Market. To survey the distribution channels of Estee Lauder and how it implements the distribution channel strategies to achieve its business goals. Research Question How the international luxury brands plan the distribution channel strategy? How the international luxury brands uses distribution channel in Chinese market? What is the target population for all the international luxury brands in Chinese market? What are the motivations and preferences of the Chinese consumers to buy luxury goods? What distribution channel strategies have been applied by Estee Lauder in China? Literature Review As stated by Kotler, Keller and Brady (2009), distribution channel is a process of allocation of products, services and resources to the market by a set of co-dependent companies in such a way that it is easily available to the customers for consumption or business unit for use in production. The distribution channel decision making is the most important part of a business process as it affects every other marketing decision making of a company. Kotler, et.al (2006), emphasizes distribution system includes all activities which leads to the transfer of goods from the producer to the consumers. It is a coordinated distribution system which initiates supply of goods on time as well as satisfies the estimated demand of the market. The nature of distribution channel depends on the type, space, volume and time taken by the manufactured goods to reach its consumers. The distribution channel system is divided into two parts that is the acquisition distribution system and the physical distribution system also known as the Logistics. Rosenbloom (2004) argued that the division of the distribution channel was not accurate as both have functions that are interdependent at the initial stages. He explained that the acquisition distribution system offers management of the distribution channel, whereas, logistics is focused on diminishing the space and time taken to transport and store goods as well as systematically processing orders and shipment of products which is part of the supply management system. The distribution channel can be further replaced by the term marketing channel as it is more complex in nature used mostly in the USA. The term is considered more complex because it not only defines the participants involved in the physical transfer of the product or services to the consumers, but also determines the role of the participants involved in the transfer of the product ownership and the intermediaries that contribute in the value distribution of the goods from the manufacturers to the end users. Hence, it can be concluded that there are three types of marketing channels which are communication channels, distribution channels and service channels (Kotler, Keller and Brady, 2009). Ray (2010) explained that the term distributor related to different participants in the distribution channel system. There are primarily two types of distributors which are the general distributors and the specialist distributors. General distributors are the agents who initiate the availability of the products to the consumers at different demographic region, whereas, the specialist distributors provide services like information and technology as well as application of specific products. There is a third category of distributors which are known as the public distributors who are part of the general and specialist distributors. These distributors are namely the wholesaler, distributors of general shopping, association distributors, storekeeper distributors (Rosenbloom, 2004). The different elements of the distributor network are the manufacturers and importers who transfer goods to the network, then the wholesalers who play the role of an intermediary between the manufacturers and the retailers. Exclusive agents are also element of the distributor network and the retailers are the final suppliers of the product to the customers. The different distribution participants can be integrated by connecting their functions which would create the integrated distribution channel system. Figure 1 shows the integrated and the non integrated channel system (Rosenbloom, 2004). Figure 1: Ordinary to Complex Distribution Channels (Source: Kotler, Keller and Brady, 2009) Vertical marketing systems are structured by integrating the functions of individual participants in the distribution channel (Hollensen, 2015). They are planned to reduce competition and concentration in the market as the organisation tends to expand by taking over the functions of other channel members. Further, as discussed by Chinomon and Ming‐Sung Cheng (2013), there are other distribution channel systems like multichannel marketing system and hybrid. Hybrid marketing channel system is the integration of the resources of two or more vertically unrelated firm to gain the market share and opportunities. For example, integrating retailers in a supply channel as well as trade centre or banks integrate their retail banking facilities in the super market. The multichannel marketing system is the same as the hybrid, but the product is sold to consumers at different countries which mean separate market. Both the channel system is gaining importance where the hybrid distribution system as shown in figure 2 uses multiple channels for distribution and highlights the advantages of using more than one channel, whereas, the multi channel deals with the optimisation of the channel coverage, exposure, control and adjustability. Figure 2: Hybrid Distribution Channels (Source: Hollensen, 2015) Baker (2014) explains that the three types of distributed channel selection strategies are the widespread distribution policy, exclusive distribution policy and selective distribution. The widespread distribution policy is implemented when there is an urgent need of a consumer that needs to be satisfied and he does not have any brand preference. These types of distribution strategies are applied on FMCG products like toothpaste, soap and consumer goods. Exclusive distribution policy is implemented when the company uses small number of wholesalers and retailers for distribution of their products. The company have greater control over the retailers and decide on the pricing and promotional policies of the dealers. These types of policies are used for speciality products like cars and branded garments and luxury goods as the customer loyalty for the products are high and they are willing to travel long distance to avail it. The selective distribution takes place where there are selected retailers selling the products at desired locations. This way the manufactures can select the best selling locations to gain higher profit and the customer loyalty of the products are high (Hollensen, 2015). As referred by Mosca, Bertoldi and Giachino (2015), the disadvantages faced due to inclusion of intermediaries in the distribution channels are revenue loss, loss of communication control and loss of product importance. The revenue loss occurs as the manufactures tend to sell the products to the intermediary channels at a lower price than sold to the consumers by the distributors. Therefore, the producers suffer a loss and moreover, they never get any services from these intermediaries until they get benefit from the sale of the products. Loss of communications takes place as the distribution channel are the primary communicators who convey of the brand message to the consumers therefore the manufactures lose control over the brand image and awareness message conveyed to the customers. Finally, the loss of product importance takes place as it is the manufacturer’s responsibility to reach its product to the consumers on time. Therefore, the distribution channel does not take any responsibility of transportation delays and if the goods are not delivered on time to the consumers, it loses its importance and the brand image is affected which results in the decrease of sales. The distribution intermediaries may also have biased preference of competitive brands as they might offer higher promotional incentives. China Luxury Market Overview Kapferer, (2012) referred China ranks second in the world luxury goods market, Japan being the largest market in luxury goods consumption. As per the World Luxury Association, the consumption of luxury products in China is very high, constituting to an annual average rate of 18% to USD 28.3 billion in 2010. Luxury consumption in the domestic market rises by 23% and reaches USD 13.2 billion, with USD 1.34 billion coming from new customers (Kapferer, 2012). The luxury cosmetic products are gaining importance in the domestic market consumption contributing to a quarter of the total market. The major consumer preferences are on luxury products like exclusive garment labels, designer bags, watches, jewellery and cosmetics. A survey conducted on the luxury brands in China came up with the result that the most preferred luxury brands are Louis Vuitton, Chanel and Gucci (Kapferer, 2012). Main Distribution Channel of China The figure 3 shows that in the year 2010 the major distribution channel in the China retail market for luxury goods was the shopping malls and the departmental stores. The access to departmental stores for luxury good consumption is more in tier two cities than in tier one cities in China. The luxury brands follow the penetrating marketing strategy in China thereby increasing the sales growth through retail distribution channel. Tier one cities are more popular for luxury brand channel distribution through standalone stores which represents 34% of the total retail sales in China. Online stores and multi brands stores are also growing as it is in the early stage and contribute limited retail sales to China. Due to the increasing growth of the E-commerce business, luxury brands are expected to get more attracted to the online distribution and sales of the products in future, though, due to the security issues and price factors Chinese consumers prefer physical stores rather than virtual stores for luxury goods (Turnbull and Valla, 2013). Figure 3: Distribution Channel for Luxury Goods in China (Source: Kerin and Hartley, 2015) Luxury Cosmetics in China Market Overview The China market for luxury cosmetics is fast growing and is developing at a stable rate. In 2010, the local consumption of luxury cosmetics in China was USD 3.3 billion which is a quarter of the total luxury products consumption. The luxury cosmetic market is forecasted to grow at a rate of 20% for the next 5 years constantly increasing its market share in the cosmetic market (Hua, Zhang and Xu, 2011). Hua, Zhang and Xu (2011) further elaborated that the luxury branded cosmetics usually depends on the imports. As the luxury cosmetic market in China is in its growth stage, companies are earning higher returns and profits in the market, multinational companies and international brands are showing interest in investing in the Chinese market. For example, Estee Lauder has invested in continuous marketing and launching of special cosmetic counters in Shanghai and Beijing for its new cosmetic line “Origin” (Estee Lauder, 2015). Marketing and Sales Strategies in China’s Luxury Cosmetics Market The biggest international brands that operate in China and are the market leaders are Chanel, Lancome, Dior, Estee Lauder, Shiseido, Gucci, etc (Hua, Zhang and Xu, 2011). Consumer awareness on Swiss brands of cosmetics are less in the market of China therefore, consumer preference is low due to very high price and result to low sales. These companies distribute their products through traditional channel like departmental stores. Luxury cosmetics are fast growing in the two and three tier cities of China as well due to the growth in the standard of living and level of income. The retail distribution systems in these cities are through Chain-store operations (Hua, Zhang and Xu, 2011). Competitive Landscape of Luxury Cosmetic Industry in China Chen, Yu and Murray (2013) explained that the competition is fierce in the luxury cosmetic market in China and new entrants would face massive obstructions from the market leaders who have huge influence and coverage in the market. Companies need to invest heavily on the marketing and promotional strategies to excel its sales in China. Market leaders like Estee Lauder and L’Oreal uses traditional and digital promotional tools to increase customer reach, awareness and preferences of their products and invests heavily on marketing strategies to enhance market share and growth (Estee Lauder, 2015). The market entrants in the cosmetic market follow the business model of distribution where the products are supplied through agents. In terms of traditional distribution channel, cosmetic companies prefer retailing through beauty counters in departmental stores or shopping malls. The fast growth of the internet is encouraging companies to invest in online shopping either by converting their website to online shopping portals or collaborating with third party E- commerce sites. Risk Factors of China Luxury Goods Market Som and Blanckaert (2015) discussed that the high revenue return depends on the brand image. The customer service facilities, brand identity and quality strengthen the brand worth and value. Therefore, it is very important for the luxury cosmetic brands to maintain their brand image in the market of China in order to position its brand identity and increase its brand equity. Location scarcity is high in China therefore, companies should make an effort to invest in promotional activities to enhance customer reach to gain high profit and fight competition. High cost is involved for the establishment of the brands image and distribute its products in departmental stores. The success of the brand depends on the negotiation abilities of the companies with the distribution channels like suppliers, retailers etc. The luxury brands must customise its products according to consumer preferences in specific areas as in case of China; it is a cultural and traditionally driven country where consumers have varied product preferences and perceptions. The brands would face negative consumer feedback if it is not delivered to the customers on time. The business of the brands mainly depends on its policies to protect its intellectual property right which are endangered in China due to replication and duplication of branded goods (Chinomona and Ming‐Sung Cheng, 2013). Conclusion The study demonstrated that the luxury cosmetic market in China has a high market potential to invest and gain higher returns. The Chinese market is strong and steadily growing and its GDP is expected to rise at an average rate of 7-8% in the next several years, therefore, investment potential is high. The income level and standard of living is increasing in China thereby leading to high net worth affluent target customers initiating opportunities for the various luxury products, including cosmetics to perform business in the market. Reference List Baker, M. J., 2014. Marketing strategy and management. Boston: Palgrave Macmillan. Chen, Z., Yu, L. and Murray, R., 2013. Brand Protection and Counterfeiting in the United Kingdom and China. International Journal of Management Cases, 15(4). Chinomona, R. and Ming‐Sung Cheng, J., 2013. Distribution Channel Relational Cohesion Exchange Model: A Small‐to‐Medium Enterprise Manufacturers Perspective. Journal of Small Business Management, 51(2), pp. 256-275. Estee Lauder., 2015. About Estee Lauder. 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