Asian Market Entry: China vs. Japan
We have chosen not to enter Japan because the Japanese market is already mature, complex, fragmented, and highly competitive. Moreover, the cost of goods, product development, promotion, advertising, management, and start-up investment are much higher than in China. We have chosen to enter the Chinese market because the competition from foreign competitors is low as compared to Japan. Also, the Chinese population is almost ten times more than the Japan; growth rate is high, and therefore, overall consumption in China is higher. Consumption in China has an annual growth rate of 6.6%. In spite of a lower average lower retail price of $9 in China as compared to $25 in Japan and a lower gross margin of $2.02 in China as compared to $9.45 in Japan, we decided to enter China because product development, promotion, management overhead and start-up investment costs are significantly lower in China as compared to Japan. (Exhibit 7 depicts the comparisons of the economics of two markets.) Although $1 million has been invested in a Japanese entry, we will use that for future Japanese entry and to leverage Japanese support after having been established and successful in the Chinese market.
SWOT Analysis
Strengths
-Quality of products and meets consumer demand
-Already operating in 19 international countries
-Entrepreneurial opportunities create economic independence
-Unique educational component to direct selling process
-established brand in Taiwan (Asian influence)
-Superior quality products with reasonable prices
Weaknesses
-No brand awareness, intro PLC phase
-No diversification. Avon has clothing, jewelry, and cosmetic market
-Only one manufacturing & distribution center (Dallas)
-Products consume plenty of space; party plan not conducive to small homes
-Too dependent on Mary Kay Ash's personality to recruit beauty consultants; no Asian charismatic role model
(China)
Opportunities
-Entry into China market: high growth potential
-Less competitive market than Japan
-Foreign brand product preference among Chinese consumers
-Foreign investments becoming more acceptable in China
-Economic need for part-time work- 87% women had 2 jobs in China
-Joint ventures eliminate high tariffs in China
-Increased urbanization & life expectancy: 6.6% annual increase in consumption
-Adoption rate of new products increasing in China
-$825 million cosmetics market
-Progress on human rights, which relates to increased women working and beauty standard in China
-New education program by Chinese Ministry of Commerce
(China)
Threats
-Foreign competitors (Avon –Direct Selling)
-Rule and regulation by Chinese Ministry of Commerce
-Political instability
-High tariffs for imports
-Half of 3000 cosmetics manufactured in Shanghai
-Devaluation of Chinese currency will increase retail prices & impede consumer spending
-Limited entertainment quarters threatens party plan strategy
-Profitability is less in China as compared to profitability in Japan
-Long standing premier is about to retire so political instability
-China was not granted political freedom compared to the economic freedom they were enjoying
-Multinationals importing goods in China are to face high tariffs
Impediment
Our main impediment is our direct selling distribution method. Direct selling companies account for only 3% of all consumer product retail sales in China. Skincare products account for even a smaller share of this 3%. Specifically, this direct selling method entails a party-planning selling strategy, which, while well-received in China, is limited by the lack of entertainment and product storage space of prospective beauty consultants. The major problem with the party plan method is the lack of space to entertain and house products in the Chinese home of our target market: married women ages 25-40. Although Avon, the first direct selling cosmetics company in China, was highly successful with $8 million in sales in 1992, they used catalogs and door-to-door selling strategy instead of a party plan selling strategy. Also, the Chinese consumer had traditionally made the majority of their purchases from state-owned department stores and collectively and individually owned stores.
Impediment Defense
An alternative impediment is the narrow product line of MKC. MKC has only 225 SKUs. The demand by the Chinese consumers is for products such as anti-wrinkle and anti-aging creams, products for healing acne, and purifying pores. This impediment is not major because MKC already composes a product line that is globally accepted by women. Shiseido’s revenue growth to $80 million in 5 years with only 15 SKUs proves that having an extensive line is not necessary for proper growth. Instead, having quality products in products that are in high demand will boost sales. Also, the product line will automatically be extended to local favorites with developing with a joint venture.
Another alternative impediment we considered was the fact that the success of our promotional strategies in U.S.A, Mexico and Canada was based on the personality, charm and charisma of Mary Kay Ash as the central entrepreneurial role model. The average Chinese consumer may not interpret this Western role model as a demonstration on what they should strive for or as an attainable goal. Therefore, the company would not be able to utilize the same role-models in the promotional strategies in China. This impediment could be easily solved by finding an urban Chinese female influence that that has the charisma of Mary Kay Ash and is identifiable to the Chinese consumer. Maggie Cheung Man-yuk, a 32 year old actress, would be that identifiable Chinese role-model.
Solution
The best solution to the impediment is to use a modified party plan selling strategy. MKC focus groups suggested that the party plan method would be well-received in China. This strategy will be well-received due to the collectivistic culture in China. Chinese women value social gatherings and this party plan selling strategy will be a great avenue for social entertaining and business. However, entertaining and storage in the home is limited due to small living quarters. The modified strategy includes developing the “Mary Kay Institute of Advanced Skin Care.” This institute will serve as an educational training facility, have glamorized storage units to house a beauty consultant’s products for sale, and serve as an entertainment facility for beauty consultants to facilitate product selling parties. We will develop regionally dispersed institutes; 5 institutes in Shanghai and 3 in Guangzhou. Shanghai is a city of choice because there are no direct selling competitors. It is the cultural and commercial capital and will be of influence to the remainder of the Chinese market, and the women are vain. Guangzhou is a city of choice because of its consumers' high disposable income and its proximity to Taiwan and other Chinese provinces.
We will invest a portion of the Earnings before Interest and Tax from the worldwide market ($110 million in 1992) to purchase the Mary Kay Institutes. Also, we will use this money to purchase a 60% stake in a joint venture in Guangzhou to manufacture our existing products and combine them with their top-selling products to the Chinese consumer, which will take approximately two years. Also during these two years, we will update and modify the joint venture’s existing manufacturing facility to accommodate our product line. This update will be less costly than building an entirely new facility. Despite the fact that Avon is a major market player in Guangzhou, we will use a joint venture with a factory in Guangzhou, which is located close to both Shanghai and Taiwan. By doing this, we can leverage its factory operations to supply our products to both countries. We chose the Cosmetic Factory of Nanjing as the first preliminary to develop a joint venture with because their personnel have strong relationships with Chinese government officials. Also, their most successful product is a pearl cream, which will be used in the introduction phase to help add to our product line's differentiation. We will have a 60% stake in the Cosmetic Factory of Nanjing while the other 40% will be retained by the existing shareholders and owners.
With implementing this solution, it will take two years to establish the joint venture and manufacturing facility, 6 months for beauty consultant training, and two years to break even.
Solution Defense
The 4 P`s of our marketing strategy are as follows:
Pricing
The products should be priced with consideration of the price of competitors and in competition with their prices. A major discrepancy in pricing would result in alternative perceptions of Mary Kay in China. A pricing policy that puts Mary Kay products at a significantly higher range may lead the urban middle class to the unwanted perception of being an elitist brand. Similarly, pricing the products in the lower range of market prices may result in the perception of having products of inferior quality. We want our cosmetic products to target customers in the burgeoning middle class of China, which emphasizes appearance. In China, 66% of the women are 25 years old and married. Therefore, they have more disposable income. The average urban Chinese female consumer is 32 years old. Our target customer would be the average urban woman who is in the age range of 25-40 years and spends disposable income on western cosmetics.
We will strategically adapt our price strategies to be based in local market conditions. In this respect, Mary Kay should follow a premium pricing policy with respect to local brands; with consideration that the population is willing to pay 15 times the retail price for imported goods and pay 8 times for Western/Chinese joint venture goods. Also, because we are in the introduction phase of the product life cycle (Exhibit 8), we want cost plus basis pricing. In this phase only, Mary Kay will use the average $4-6 wholesale price that Avon has. Pricing will adjust accordingly in the growth phase.
Promotion and Positioning
Based on being in the introduction phase of the product life cycle in the first two years, we will be using a push strategy with the door to door selling method, which is a strategy that will call for using the beauty consultants and trade promotion to push the product line through the distribution channels. Once we reach the growth phase, our advertisements will serve as a pull strategy, and the door to door and parties will utilize a push strategy. A push strategy is necessary because the cosmetic market demands the consumer to be influenced to purchase. (See Exhibit 9 to view Consumer Buying Process manipulation.)
To promote Mary Kay products and gain brand recognition, television advertising and print advertising will be used. Mary Kay should promote television advertising through satellite television due to lack of censorship, and because it is relatively inexpensive in China. Radio and print advertising in newspapers is highly fragmented. Therefore, we will utilize print advertising in popular magazines. We will target early adopters in our promotions, which should be a significantly high amount in Shanghai due to their willingness to try new products and favorable view of Western brands (Exhibit 10-11).
The advertisements will be focused on highlighting Mary Kay as a quality skin care cosmetic line, with a primary focus on proper skin care practices through education and quality products, and then makeup being used to accentuate healthy skin. Relative to the competition, Mary Kay will hold the positioning of being "skin care experts." The educational and instructional component of the parties will satisfy the Chinese consumer's rising desire for higher education and increased knowledge.
We will also use a direct marketing campaign because the essence of a party plan selling method involves a two-way interaction and face to face selling. Also, the method utilizes individual distribution and customer retention based in complete customer profiles. Customer feedback will also be used to aid in product line development.
The recent investments by the Chinese Ministry of Commerce to train people to appraise the quality of beauty products should be leveraged as a beginning source to attract new beauty consultants. We will spend 6 months training the beauty consultants in the party plan and door to door selling method. Mary Kay will build brand differentiation by placing emphasis on being a brand that values a quality skin care system. Also, the entrepreneurial initiatives on the brand will be used to promote our line to the 87% of women that have two jobs and desire economic empowerment. This will differentiate our brand from our major direct selling competitor, Avon.
In addition, incentives will be provided to top sales consultants. Part of the bonus structure plan for consultants will be the reward of receiving a new apartment. Because Mary Kay should be considered as the brand that values improving the everyday life of promising sales consultants, this can be used as an effective method to improve economic conditions and give consultants the opportunity to increase their party plan selling strategy by being able to store products and entertain in their new company-sponsored housing. Using this incentive will also help the brand be seen as one comparable to offering benefits similar to the Chinese government, thereby increasing positioning in the consumers mind.
Various sales promotion tools used will be samples of products, patronage rewards (as developed by the beauty consultants to increase their individual sales), premium pricing (as noted in Pricing section above,) and beauty contests.
The existing brand mantra of "Enriching Women's Lives" will be conveyed in our entry into the Chinese market. With this, we will be held in high esteem because customers will respect our positioning of enhancing lives, rather than merely covering blemishes and preventing wrinkles. All of the existing elements of the Mary Kay brand convey this mantra and has global appeal. Therefore, all aspects of the existing branding will be used, with the exception of replacing the central role-model image with an Asian influence. This emphasis on educational and economic enrichment through quality products will differentiate our product from Avon and other competitors. This will leave us room to grow and the power to build. Essential to our branding, one element that will be emphasized is adaptability, which is “Kaizen”. Because we offer high quality products and science is always evolving, we will continuously update our products.
Place (Distribution)
The modified strategy includes developing a “Mary Kay Institute of Advanced Aesthetics” (Exhibit 12.) This institute will serve as an educational training facility, have glamorized storage units to house a beauty consultant’s products for sale, and serve as an entertainment facility for beauty consultants to facilitate product selling parties. We will develop regionally dispersed institutes; 5 institutes in Shanghai and 3 in Guangzhou. Shanghai is a city of choice because there are no direct selling competitors, it is the cultural and commercial capital and will be of influence to the remainder of the Chinese market, and the women are vain. Guangzhou is a city of choice because of its consumers' high disposable income and its proximity to Taiwan and other Chinese provinces.
The company should employ two country managers to oversee marketing strategies of Mary Kay in China. In addition to that, it should send people from U.S. To be responsible for training and recruitment as they had formerly done in Mexico. They should hire local consultants on similar payment structures as is the practice with Mary Kay operations in around the world.
Along with party planning, we will be using a door to door selling method, for the first two years. This will increase the efficiency of beauty consultants and increase the reach of the brand. These door to door consultants will take feedback through questionnaires to the product development team in order to continually develop highly desired products for Chinese women. The door to door selling method is a selective distribution method, adequate for the introduction phase of the product life cycle. We will build and increase distribution once we reach a growth phase, which will be when the educational institutes are constructed.
Product
To keep the product development stage at a minimum initially, the product line for China will be comprised mainly of Mary Kay's existing products and a few top-selling products from our joint venture for the first two years (Exhibit 13). After further market analysis and feedback, during the next three years the product line will comprise of Mary Kay products specially made for the Chinese market. MKC has 225 SKUs, which meets the basic demand by the Chinese consumers for products such as anti-wrinkle and anti-aging creams, healing acne products, and purifying pores products. MKC already composes a product line that is globally accepted by women. Because having an extensive line is not necessary for proper growth, we believe having quality products in products that are in high demand will boost sales. Also, the product line will automatically be extended to local favorites with the development with a joint venture. For example we will sell the Cosmetic Factory of Nanjing's most successful product, a pearl cream, which will help add to our product line's differentiation. We will use the existing colorful packaging to help distinguish our product from competitors and Chinese script will be used as the language (Exhibit 14.). Inserts of instructions will be colored brochures written in Chinese only on thin paper (Exhibit 15.)
Exhibits
Exhibit 1 Mary Kay Cosmetics- Net revenues
Compounded Annual Growth: 16% 1986-1992
Compounded Annual Growth: 1993-1998
Exhibit 2 Map of Eastern China
Exhibit 3 Prospective Profit Source Analysis
Exhibit 4 Strategic Business Planning Grid
Exhibit 5 Break Even Analysis
- Given Gross Margin = $ 2.02/unit
- BEP in Units = $5.25M/2.02=2.599
- Volume per Year = 0.86M units
- Total Sales = Volume X Wholesale =.86 X $4.5=$3.89 M
Exhibit 6 Estimated cost for 3 years: $ 5.25M
- Start-up investment cost : $ 3.0M
- Management overhead/Yr : $ 0.25M (For 3 yrs: .25 X 3 = .75)
- Promotion & Advertising/Yr : $ 0.4M ( For 3 yrs: .4 X 3 = 1.2)
- Product Development/Yr : $ 0.1M ( For 3 yrs : .1 X 3 = 0.3)
Exhibit 7 Preliminary Estimates of the First Year Economics of Market Entry：Japan and China
Exhibit 8 Product Life Cycle
Exhibit 9 Consumer Buying Process Marketing Considerations
Exhibit 10 Print Advertisement in Shanghai
Exhibit 11 Print Advertisement in Guangzhou
Exhibit 12 Print Advertisement for Mary Kay Institute
Exhibit 13 Print Advertisements of products
Exhibit 14 Packaging
Exhibit 15 Instructions in Chinese print
