"Chinese consumers are less brand loyal": Interview

Interview with Steve M. Schmidt, President and CEO of VNU Marketing Information and ACNielsen, by Yong Tang, People's Daily correspondent based in Washington DC

Steve M. Schmidt, President and CEO of VNU Marketing Information and ACNielsen

Steve M. Schmidt, President and CEO of VNU Marketing Information and ACNielsen and People's Daily correspondent Yong Tang.

For most Chinese consumers, it is an unknown company. But for major businesses in China, it is a household word. It understands Chinese consumers so well that every single major consumer package goods manufacturer and retailer in the world hires it to help them develop their marketing strategy. It is ACNielsen.

ACNielsen was established in the United States in 1923 by Arthur C. Nielsen, Sr., one of the founders of the modern marketing research industry. Today, ACNielsen is one of the largest businesses of VNU, a world leader in marketing information, media measurement and information and business media, with headquarters in Haarlem, the Netherlands, and New York. Recently Yong Tang, People's Daily Washington-based correspondent, conducted an exclusive interview with Steve M. Schmidt, President and CEO of VNU Marketing Information and ACNielsen.

Yong Tang: How many times have you visited China?

Schmidt: Three times. The first time I visited China was three years ago. I visited Beijing and Shanghai, where we have two large offices and where most of our clients are based. ACNielsen China has more than 500 research professionals and supporting staff found in Beijing, Shanghai and Guangzhou, with another 1,100 full-time field work staffers in 30 cities.

Yong Tang: Is China the most important growth market for your company?

Schmidt: Without a doubt. If I look around the world at where the most growth will come from in the next 5 or 10 or 15 or 20 years, they are countries like China, Russia, Brazil, and India. Of those four markets, China clearly offers us by far the largest growth opportunities. China would be number one, India would be two, Russia three and Brazil four.

Yong Tang: Is China the most profitable market for you?

Schmidt: No, I wouldn't say most profitable. The way we look at China is as a developing market with the potential to reach 1.4 billion consumers, which means there is opportunity for us and our clients to grow. Like any major corporation in the world, you have to think about an investment strategy, you need to build infrastructure, you need to build people, you need to invest significantly to meet the growing needs of your client base. So I don't really look at China or India or Russia necessarily today in terms of profit. I think of dramatic growth. If you are able to obtain that dramatic growth, profits will come.

Yong Tang: Can you tell me a few of your major clients?

Schmidt: We deal with every single major consumer package goods manufacturer and retailer, as well many other large industries like Telecom and Electronics. In China there are over 220 retailer banners, of which over 160 cooperate with ACNielsen and these are the major players in the field. We service global retailers like Carrefour and leading local retailers like Wumart Group, one of China's leading retailer groups that mainly focuses on hypermarkets. On the manufacturing side, we deal with all consumer packaged goods multinationals like Coca-Cola, Procter & Gamble, Kraft, General Foods, General Mills, and Unilever, as well as domestic manufacturers such as Mengniu Dairy and Yili Dairy, two leading manufacturers of dairy products in China.

Yong Tang: Your company is not very famous, isn't it?

Schmidt: We are a business to business company, not business to consumer. While we are not a well-known brand for the average consumer, ACNielsen has been and continues to be a highly respected company in China as the leader in market research.

Yong Tang: Do you want to expand awareness of your company among the general public?

Schmidt: No, we really don't have any desire to have our name known among the general public. But we want our name to be even better known among the major businesses in China.

Yong Tang: Your company came to China in 1984. In the past 22 years, what has been the biggest change in Chinese consumers?

Schmidt: Yes, we have been in the Chinese market for 22 years. When you think about consumers in China, it is like the evolution in any developing market in the world. First of all, as you know, you can't generalize about the "Chinese consumer", whether they are in the cities or in the countryside. Each of your provinces has different languages and different cultures. So it is very diversified. There is no way that you can just make one blanket statement about Chinese consumers.

If I have to generalize, I would say that they are being exposed to globalization, they are being exposed to knowledge that they never had before through the Internet. As the government continues to relax their policies of openness they are obviously being exposed to western culture and things that are influencing their day-to-day lives. They are obviously being impacted in terms of the number of items they are purchasing, whether it is cars or homes or televisions or things that are becoming essential to their day-to-day life. So you see what I'll call a natural evolution of change going on in China. Not so atypical to what you might see in other developing markets around the world, but the speed of change is what really sets China apart.

Yong Tang: What is the major driver behind this change? Is it the influx of the foreign products into Chinese markets or the increasing openness of Chinese society?

Schmidt: The impact of foreign products into Chinese markets for Chinese consumers is that it is creating a brand awareness and brand loyalty that wasn't there before. Typically when you look at developing markets, the quality of products typically is better coming in from foreign countries. That is primarily because they have 25/30/50/100 years to develop their products and services. What happens is that you have a higher quality product many times coming in and a diversification of products. What is happening in China right now, and this happens in most markets, is that then the local manufacturers and local companies start to get much better. Actually it is a win-win for consumers because local manufacturers say "I've got to improve my product quality and I have to be as good as other global products coming in." Consumers are demanding high quality products at the right price. Clearly in China today price is of great importance for the Chinese consumer because basically while the economic levels are growing and GDP is growing in China, it is still highly underdeveloped relative to developed markets around the world.

Disposable income is an issue. If we look at China today, one of the things that make China unique is its high level of savings. Over 30% of the dollars being earned by Chinese consumers are being put into savings. If you look at the impact of cars and homes in terms of how that's viewed by Chinese consumers, it is very different. It is just a cultural difference and it is not negative. You have got to understand that every culture is different.

Chinese consumers are very brand conscious. That is partially why China is one of the largest markets for luxury products. But Chinese consumers are less brand loyal than consumers in some other markets in the world. Yes, they initially view foreign products as high quality, so they want to try foreign products. However, once they tried some types of foreign products, they will switch frequently and quickly to other foreign products based on price and other factors.

Yong Tang: Why don't Chinese consumers want to spend as much as consumers in other countries?

Schmidt: If you think about where China was and where China is going, if the trend continues, you will see the shrinking of that gap. Family values have a lot to do with that. In China, large purchase decisions are typically family decisions. It is something being made by friends and family versus in more western developed countries where it is a more individual decision. Also, Chinese consumers are just now starting to experience the economic boom, but the urban markets are very different from non-urban markets. You have much higher income rates and optimism over what they can do in the future in the urban markets. So they are more likely to spend than people in the non-urban markets. The situation will change as the economy continues to grow and as more and more people move into the middle class. When I look at China, the priority is on saving for education, so that they can educate their youth to ensure growth in the future. But if you're saving 30%, and your focus is on education, this doesn't leave a lot of disposable income to spend on other durable goods or fast moving consumer goods. I think that will slowly change, but that is a part of the culture of China.

On the other hand, we should see Chinese consumers increasingly keen to spend their spare cash in order to improve their quality of life. The overall optimism about the economy and the rising sense of "enjoying life" are spurring more spending, not just by people in the key cities but by people in the massive second and perhaps third tier markets. And because of the size of the Chinese population, this increasing consumer spending means an attractive consumer market opportunity for our clients.

Yong Tang: The auto market and real estate market are extremely hot in China today. What is the concept of Chinese people on car and housing consumption? How do Chinese people differ from western consumers in car and housing consumption?

Schmidt: Let's talk about cars first. There is an explosion of cars in China's major cities like Beijing. Car ownership in China's three key cities has more than doubled since 2004, and over 40 percent of the vehicles (42%) were bought in 2005 alone. It is very different when you talk about Beijing and Shanghai versus the countryside or rural markets around China. The priorities in China are also different. There is a growing interest around fitness, status and individualism versus necessarily the status of cars. Today in China, American and European cars are viewed as higher quality while Japanese and South Korean cars are viewed as lower quality. Local Chinese cars, which were also viewed as lower quality, are beginning to try and match foreigners in terms of quality. The price of gas is very low right now because it is being subsidized by the government. This is also something that changes the car market in China. It is understandable that people want to show off their cars, homes and assets. It is a natural transformation in any economy. A car in the US also represents status for some people. Cars represent egos and many different things to different people. Chinese consumers are not that different.

On the housing side, if you look at the soul of the Chinese, it is a kind of life fulfillment to have land and property. That is kind of the culture. I'll give you one example. Most Chinese, when they own homes, they want fences around their yards. It is not so much about not wanting to talk to neighbors, not about being outward, it is about "my family" and "my world" and the ownership I have from an individual equity perspective.

Car and housing markets in China are exploding right now. There are more cranes helping to build high-rise buildings in Beijing and Shanghai than anywhere else in the world. Townhouses are becoming more and more important. Fengshui is important to the Chinese when you are designing a house. In western civilizations there are usually big kitchens because it is a central place where people can go and talk and eat. In Chinese culture, you've got a lot of people working and in many cases meals are provided by their company. They spend weekends typically with their families and parents and eating there. So the kitchen is much less important.

Yong Tang: Western consumers have their unique consuming habits thanks to their culture. The same is true with Chinese consumers. How does the "consuming" concept reflect the difference on the western culture and the oriental culture?

Schmidt: The key to success for any company in China is all about great marketing. Great marketing understands the consumer better than anyone else. Every single consumer packaged goods company, every one of our clients, is creating unique products and services, unique flavors, unique packages, unique distribution methodologies to meet the needs of the local consumer base. Are Chinese different? Yes. Are they different from Indians, Brazilians, Americans or Europeans? Yes, they have different tastes. But I don't think that the Chinese should look at themselves as being so different.

One of the greatest mistakes western companies make is that they come in and simply bring their products and services from the developing markets into China-many will fail immediately. They didn't take the time to understand what makes Chinese customers unique. It is the same when they try to bring western products into India, Brazil, Russia. You will fail unless you do massive amount of market research. You have to understand the distribution system, the retail system, differences in consumers and the social and economic environments, you have to understand culture and language, packaging preferences, shopping habits, and how products are being used in the household. If you are going to launch toothpaste or detergents in China, you need to understand how consumers are going to physically use that product in the household. Once you understand how it is going to be used, you can work a way back upstream, price the products properly and create the right kind of packaging to meet the unique needs of the Chinese consumer. Again, all of these things are happening today. It is the same process we go through and it is the same process our clients go through in China, versus India, versus Russia, versus other markets.

Yong Tang: But being an American and an American company, how can you and your company understand the uniqueness of Chinese consumers?

Schmidt: Today ACNielsen operates in 105 countries around the world and each of the ACNielsen offices has a great deal of local expertise. First of all, you have to do a large amount of market research to understand consumers, you have to spend the time and energy to talk to consumers. We hire a variety of local consultants in many countries who help us understand that. We hire local nationals living in the country to understand those cultural differences. We hire local Chinese to be among our management teams to make sure we are accountable to make the right products and services that meet our individual client needs.

As the largest global research and marketing information company, we can bring the world's best practices to our clients in various industries, which is seen as a unique benefit for our clients.

Yong Tang: The Chinese government is calling for sustainable development of its economy. Green GDP is one of the examples. It is inevitable that Chinese consumers will be affected by this strategy. How do you see this impacting the Chinese consumer?

Schmidt: If I look at China today, it is one of the most complex markets in the world. China is trying to transform itself from a totally planned economy to an open, flexible, international and global economy. They are fueling that growth by offering zero cost of capital to local companies so they can build infrastructure like roads, highways, buildings, educational process. They believe that is critical for the future growth of China going forward. They have an economy with the largest number of consumers in the world, 1.4 billion plus consumers who are totally diversified, ranging from people who make almost no income to billionaires. You have huge western influences coming in. You have an economy in China growing today at 12.5% or 13%, with the world a little concerned that maybe China is going too fast and whether it is sustainable. It is a combination of financial policies, economic policies, and global policies that Chinese government has to manage. I have to say very honestly that the complexity of that decision making process and how each one works either in concert or against each other is really a complexity around China today.

Our research in China does show an emerging concern about the proper use of natural resources and economic sustainability, although it is not yet a top consideration for the average Chinese citizen. The Chinese government has made significant efforts in educating the public; and even more can be done to make people realize the urgency and benefits of having a green economy.

Yong Tang: How will this concept affect the development of Chinese society?

Schmidt: It is hard to say what is going to happen. Look at Russia today; they went from a totally controlled communist government to becoming a more open democracy. But now you see Russia reverting to more control and more censorship and the old way of management. Will that happen in China or not? I don't know. But that will have a huge impact on the marketplace.

Yong Tang: What is the biggest challenge for you in China?

Schmidt: The biggest problem for our clients is the complexity of China. We are talking about over 2,200 TV channels, 2,000 magazine titles and close to 10,000 newspapers in China. So many different languages. You have no single retailer in all of China that represents more than 1% of the grocery business. How do you reach consumers? How do I market a product into this market? In markets like the US, France, Italy and UK, you can run advertisements on one TV program, but in China how many TV stations do you have? There are thousands of TV stations across China. What makes China so hard for our clients is the diversification. So it is a very difficult market to really penetrate and to have consumers understand your product's benefits. That is also the charm of China. It is challenging, but those who can figure it out can be very successful.

Yong Tang: Usually, how do you charge your clients for ACNielsen's products and services?

Schmidt: We don't charge enough! (Laughter) I can't give you specific examples of pricing practices. We deal with our clients all over the world and they know what our pricing practices are. The same discipline we use in the rest of the world, we have to use in China. Like our clients, we are investing in China. Making money is not a bad thing. The more money you make, the more you can invest.

Yong Tang: Can you tell me something about yourself and your family?

Schmidt: I was born here in the United States, in the Midwest, in a city called Cleveland, Ohio. I went to a Big Ten university, Purdue University in Indiana. I spent 18 years working for our clients like P&G and PepsiCo before I came to ACNielsen 11 years ago. I became the global CEO of ACNielsen about two and a half years ago.

I have been married to the same woman for 30 years. We have three daughters who are all very successful. They are 26, 24, and 21 years old. Besides managing my business career, I've been able to manage my family and my personal life very well, which is something I am very very proud of and I have been very very lucky in that regard.

Yong Tang: Your life has been very smooth!

Schmidt: (Laughter) I don't know if smooth is the right word. It is a great career and it is a lot of fun. I am still having fun and I am still energized. There are so many things to do.

Yong Tang: How about a hobby?

Schmidt: I play golf and tennis. I love sports because I love the competition. I do a physical workout at least three days a week to stay in shape and keep my mind fresh. I travel a great deal also, and that's a hobby in itself.

By Yong Tang, People's Daily correspondent based in Washington DC

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