Market Entry into the Chinese Market by Thorntons Chocolate - Case Study Example

International Marketing Plan: Market entry into the Chinese market by Thornton’s Chocolate BY YOU YOUR SCHOOL INFO HERE HERE Market entry into the Chinese market by Thornton’s Chocolate 1. Introduction Thornton’s Chocolate was established in the United Kingdom in 1911 by Joseph William Thornton. Through a series of business model evolutions, Thornton’s now boasts annual revenues in the contemporary market of £218 million, supported by over 350 shops and cafes in the sales model and a total of 230 different franchises with distribution occurring via Internet, mail order and diverse commercial services. Thornton’s is currently positioned against competition in terms of quality, attempting to use appropriate marketing principles and integrated communications to express premium product as the primary selling point. Two advertising slogans that have brought Thornton’s more market recognition include “Chocolate Heaven since 1911” and “The Art of the Chocolatier”. These brand slogans reinforce both traditionalism for the sophisticated chocolate consumer and for markets that are attracted to premium and luxury products. In a highly dynamic and saturated competitive market that is mature, Thornton’s must rely on its brand reputation to sustain market share with considerable emphasis on promotion. On High Street in the UK, Thornton’s is one of the most well-known and respected chocolate makers appealing to sophisticated, higher-resource consumers. However, the brand has been experiencing significant declines in sales (23 percent in 2011), leaving Thornton’s executives uncertain about how to turnaround what seems to be a failing business model. To increase exposure, improve brand recognition internationally, and reposition the business to outperform competition, Thornton’s will be entering the Chinese market. This report highlights the marketing strategy for new market entry in China and a comprehensive analysis of the market environment favourable for the brand. 2. PEST Analysis – China The People’s Republic of China is just now emerging from its traditionalist past and Confucian-era political systems (Farh and Cheng 2000). Still in effect is a long-standing paternalistic governance system that favours male-domination in areas of politics and business, though the political environment is evolving into a more liberal and equal system that has occurred through the development of democratic philosophy. In 1999, radical amendments were introduced into the Chinese Constitution that set apart powers between the people and the government, giving citizens more democratic control under a new socialist system (CIIC 2012). Under a socialist mentality, more investment in business development and the positive support for international business leaders continues to expand, providing taxation incentives to businesses willing to provide direct foreign investment into the commercial infrastructure. The democratic-based, socialist-minded Republic is a favourable environment for new business development, as well as intellectual capital protectionism at the government legislative level. There are few political risks in this evolving and people-centric government system that does not restrict consumption activity of important market groups. All citizens and businesses have freedom of speech and the right to work under the Chinese Constitution (CIIC 2012), providing ample opportunities for non-restricted advertising and promotion and the assurance of market stability with adequate resources to achieve satisfactory profit goals. The economic environment in China, also, is relatively stable and satisfactory for new market entry. China just recently adjusted its national interest rate from 6.31 percent to six percent as a means of stimulating economic growth and lending (Fox 2012). Lower interest and borrowing rates as a result of these periodic interest rate changes provide an acceptable lending environment in a country with a considerable difference in currency value after exchange occurs in British pounds or other acceptable baskets of currencies. “Domestically, it has become more urgent but also more difficult to solve institutional and structural problems and alleviate the problem of unbalanced, uncoordinated, and unsustainable development” (Roberts 2012, p.2). The government has been focusing on changing the dynamics of the lending and banking infrastructure in the country which continues to support better business development and distribution. Additionally, related to the national economy, China has experienced a 2.2 percent increase in GDP in the third quarter of 2012 (Trading Economics 2012). GDP has been relatively stable between 1.6 percent and 2.2 percent growth annually, supporting domestic and foreign business practices through import/export support. Research did not identify any economic-based concerns, either micro- or macro-level, that would harm business development or prevent affordable lending rates for capital projects related to new market entry. The social environment in China, however, is often conflicted which is founded on the strong class system that resides in the country. Those with wealth and resources have considerable power distance between those in lower- and middle-class ranks, which affects many parts of business modelling. The primary social values of Chinese citizens in the middle- to upper-class include cultural superiority, prudence, and saving face (Chinese Culture Connection 1987). These are long-standing cultural dimensions related to vanity and also national heritage. So long as the marketer understands the patriotism of Chinese consumers and respects issues of personal reputation and character, consumers will respond to a product or company. Why is this? Chinese consumers are very hedonistic, which is defined as self-indulgence and pleasure-seeking mentality (Mees and Schmitt 2008; Veenhoven 2003; Overskeid 2002). Years of evolution in social system order have transformed a reserved and complacent consumer into one that considers that reputation is created by outward display of material wealth (Creative Media 1999). According to one particular cultural expert, “There are three important things that make a Chinese gentleman: classical dress, nice skin, and an elegant manner” (Wen 2007, p.65). Consumers, today, link status with financial wealth and consumption, which provides a considerable advantage for a luxury brand like Thornton’s. China is also a collectivist country, one that values group goals and needs and will often role model their favourite social reference groups (Hofstede, Hofstede and Minkov 2010; Hofstede 2001). This is also favourable in a country where word-of-mouth is an important concept for gaining brand loyalty. The technological environment is also highly supportive of new business development. Many foreign firms have manufacturing facilities and expert teams set up that have the knowledge and products designed to assist business. These include Oracle, SAP and ERP systems that provide important information technology support. Research did not uncover any technological barriers to conducting business with ample opportunities for tariff-reduced imports of needed technology. Growth in commercial manufacturing has provided an infrastructure for technology that includes radio frequency tag identification and many licensed support software systems. 3. Appraisal of target market There are virtually unlimited opportunities for new market entry based on population demographics in major urban regions such as Beijing and Shanghai. With a total population of 1.3 billion, China maintains the highest population in the world. There are 22 provinces in this large country, of which each maintains several major metropolitan regions supporting considerable domestic and foreign commercialism including ample low-end and high-end retailing, housing and foods services. Beijing, the capital city alone, has over 19 million people in an urban environment where household disposable incomes are satisfactory for a higher-end chocolate brand and well-supported by job growth and investment in job infrastructure in recent decades. The majority of consumers, 78 percent between 18 and 65, have incomes ranging between USD $12,447 and USD $25,800. Demographically, it is a favourable market for entry with ample consumerism, demand for luxury products, and a commercial sales infrastructure that gives large distribution advantages. Growth in this market is an estimation, however, as political policies restrict birthing volumes. Historically, however, growth in population has occurred at between one and two percent annually, illustrating zero decline in market availability. Competition is not as much of a risk factor in China as it is in the UK and other Western countries where business is saturated and markets mature. Competitors in China include Kraft Foods, Godiva Chocolate and Cadbury, which combined maintain 70 percent of market share (Zhang 2008). These are trusted and well-developed promotional models and product competency that pose significant risks for gaining market share in China. There are currently a total of 20 different major candy producers that have recently entered this market (Zhang). However, it is a four billion pound industry with ample opportunities for differentiating Thornton’s using effective integrated marketing communications. As identified previously, Chinese consumers strongly favour luxury brands and tend to seek their consumption as a means of expressing their liberation, financial wealth and attitude (Wen 2007). Thornton’s, if it can establish brand recall effectively, can use its customized brand personality to differentiate from competition. Consumers value high-end merchandise purchases which serve as an advantage to Thornton’s existing business model in the UK that might have transferability in China where high-end consumption is a booming, multi-billion pound industry. This would represent a significant cost-savings by transferring some existing promotion and business operations without significant remodelling of these activities. 4. Market entry recommendation Because China maintains both governmental support for foreign business investment, because of the efficient retailing and distribution opportunities, and due to a proven franchising model currently being used by Thornton’s, franchising is the recommended entry model. Franchising will allow Thornton’s to avoid the high cost of operations, allowing independent venture capitalists or private investors to adopt the Thornton’s business model. Through franchising, Thornton’s will be able to maintain creative control over promotional content to ensure that consistent messages are being delivered to important target consumers (Nickels, McHugh and McHugh 2005). Franchising will also allow the company officials to work with domestic investors to improve brand knowledge and brand concept transfer through training. This will create perceptions of corporate social responsibility and also build a framework infrastructure that does not burden Thornton’s with high capital investment for operating expense expansion. Thornton’s had considered establishing a turnkey project for market entry, which involves hiring a domestic contractor in China who takes on responsibility for establishing a new operations or manufacturing facility. Upon completion, the turnkey agent hands the key back to the foreign company (Nickels et al. 2005). However, Thornton’s has adequate production facilities in the UK which will allow for export activities in China without redesigning the corporate manufacturing infrastructure. Following the existing model of franchising is a long-term cost recognition activity that will benefit Thornton’s until the business has established a competitive reputation, brand recall, and trust in this new market environment. Because consumers are unfamiliar with the Thornton’s brand and historical legacy of quality, direct foreign investment into new facilities development is not cost effective or practical. Market entry must be incremental in order to create brand recall in this saturated market. There are many unpredictable variables related to consumer behaviour, cost predictions, and operational strategy to neglect franchising as the best option to gain new ground in this market. Direct construction costs under a turnkey project or through capital facilities development would be a long-term commitment requiring credit and lending, something not beneficial with a large budget setup just to ensure successful market entry and penetration. 5. Marketing Strategy 5.1 Objectives Establish effective brand recognition in key target markets by end of 2013 Increase total corporate sales volume by 10 percent at end of 2013 Establish the foundation of key target market brand loyalty by mid-year 2014. 5.2 Segments To effectively target integrated, consistent communications, psychographic and behavioural segmentation variables will be considered. Because the desire to seek out premium and luxury products with moderately-high pricing structures is strong in this vanity-inspired consumerist nation, making emotional connections will be very important to Thornton’s success in this new market. Segmentation must take into consideration buyer attitudes and values, much more advanced than simple demographic segmentation. This will require conducting considerable early market research on consumer attitudes about chocolate, their luxury focus, and their experiences with major competitors in this quickly saturating market. Based on market data both qualitative and quantitative, as well as psychographics, it will be efficient to determine which markets are the most possible for achieving sales results. Lifestyle marketing will support psychographic segmentation efforts. 5.3 Source of competitive advantage Thornton’s makes quality products with top quality ingredients that support its premium positioning. Product should be considered Thornton’s most critical competitive advantage, especially among lesser competition such as Kraft Foods that uses moderate luxury ingredients in a variety of chocolate and candy offerings. Thornton’s must capitalise on product quality to differentiate the business from very large competitive forces. Using promotions that focus on this quality and exclusivity will provide the necessary advantages. 6. Marketing mix recommendations As indicated, product is the main selling feature and differentiation tactic available to this high-end chocolate producer. The business will simply transfer its existing premium positioning based on quality into the Chinese environment where these attributes and luxuries based on hedonism are well-established. Visual imagery of the actual product along with consistent messages reinforcing ingredient quality will serve product effectively in the marketing mix. Promotion is another critical element of the marketing mix, especially due to the need to establish brand recognition in a very new market unfamiliar with Thornton’s. Promotion will consist of taste sampling in high end retailers contracted to carry the product, giving consumers incentives to make a impulsive purchase. Advertising will be constructed prior to market entry to familiarise markets with the Thornton’s concept, distributed in newspapers and billboard advertisements heralding the entry of this luxury chocolatier to gain market interest. Low-key guerrilla marketing will also accompany this marketing strategy, carrying samples of product into the commercial environment to gain business professional market interest; a market with much more disposable resources. Promotional material will maintain culturally-relevant communications to meet the patriotic needs of this collectivist culture, adding respect and trust for Thornton’s early after market entry. Chinese consumers are notoriously price-sensitive in many different industries and are often willing to defect to competing brands with only moderate price changes between competing brands (Kelly 2011). Because of this, pricing must be a strategic objective aligned with consumer defection risks. Pricing must be established according to an analysis of competing price models based on quality offerings available with each competitor. This will occur prior to market entry from current talent experts in marketing to determine which pricing models will best suit long-term profit objectives and avoid conflict in key profitable target markets. The current sustainable pricing structure which is approximately 20 percent higher than lower-end competitors will be piloted in China. Results of sales through quantitative data as well as surveys provided to customers will provide valuable pricing data in the event that future adjustments need to be made to satisfy price-sensitive buyer markets. Digital marketing will consist of an online website that provides information about Thornton’s history, legacy, recipes and press release accomplishments in the last several years. A dedicated sales website, constructed in appropriate Chinese language, will be developed to ensure more online sales and reduce the costs of retailing operations. This will serve also as a forum for setting up relationship management with new customers, including various incentive coupons for one-time price reductions on Thornton’s merchandise. This website will be linked with Facebook and other social media technologies part of the Chinese lifestyle to improve brand interactivity and relationship development. This model will be assessed for sales volumes and consumer self-reporting of experience with Thornton’s products and brand concept. It will serve as a valuable demographic measurement medium as well as an outlet to improve total sales revenues. 7. Budget It will be difficult to accurately predict what budget requirements will be needed to enter the Chinese market as there are variables of consumption behaviour and environment that will be learned after launch of the brand. However, a generic snapshot of expected costs can be developed that will include the first year of market entry operations. Preliminary market research $50,000 Pre launch advertising $600,000 Post-launch advertising $1,250,000 Distribution of new inventories $2,000,000 Franchise fees $1,500,000 Total Budget $5,400,000 8. Evaluation As identified previously, Thornton’s will conduct quantitative analysis of online demographic data and actual sales receipts to determine which markets are providing the most benefit in sales volume and total brand performance. The data achieved digitally will be correlated by marketing research experts to decide where strengths and weaknesses reside in the current, transferred business model being piloted in this new market. Thornton’s will also develop a corporate governance system whereby franchisees will be provided much more interactivity to assist in the sales and promotional processes. Corporate executives familiar with the Thornton’s UK business model will provide support and control systems to ensure that franchised representatives are effectively supporting and advertising the brand concept. Human resource experts from the UK will travel to China to assist in teaching staff members about the sales philosophy and branding strategies of Thornton’s to ensure cultural development and effective training models. Evaluation will also occur through an ongoing online and in-store questionnaire and survey system to gain real-time sentiment about consumers’ experiences with this new brand. Lifestyle-related questions and opportunities to suggest improvements in variety and pricing (or other important dimensions of the business model) to promote more relationship interactivity between brand and target consumers. Thornton’s cannot cheapen the brand by setting up deep discounting to gain market interest when the goal of the campaign is to express the same exclusivity and premium positioning that will be critical to gaining higher revenues and meeting marketing strategy objectives for profit growth. Evaluation of pricing structures used in profitable and less-profitable retail environments will determine which pricing structures are most effective and gain the most consumer interest. Price-sensitivity must be built into a risk model of evaluation to decide whether Thornton’s transferred business model is meeting with similar market approval as it has found in the United Kingdom. References Chinese Culture Connection. (1987). Chinese values and the search for culture-free dimensions of culture, Journal of Cross-Cultural Psychology, 18(2), pp.143-164. CIIC. (2012). China’s political system, China Internet Information Centre. 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