The Coming War for the Mind of the Consumer
by Roger Sinclair, BrandMetrics

We have to be a little envious of the economic growth in China and India. What did they do that we are not doing? South Africa's target is 6% - which remains elusive even though the signs have been good. It is not as though they are model nations. They each have appalling poverty; China still treats its people as minions and India, unofficially, retains the caste system.

I will not pretend to know the reason and anyway this is not the platform to even attempt to deal with it.

But there are three streams that seem to have had an influence:

Free market: They have freed their markets to allow anyone with an idea to go into business and benefit from their own enterprise.

Education: They have each concentrated on ensuring they have an adequate supply of workers with technological training.

Labor freedom: They understand that producing low cost goods will grow the economy and the growth will eventually reduce unemployment and create new job opportunities. No minimum wages and complex employment regulations.

Both China and India had socialist economies - China of the most extreme version. There are none so keen as the newly converted and all countries could learn a thing or two from these new capitalists. Let's not argue about that: Simply put, they have the growth that comes from free trade and entrepreneurship - we don't.

The New Capitalists

Only Cuba and North Korea still cling to communist ideals - although in the latter case, despotic might be more apt a label - and in their own ways they are each a mess. It is nearly thirty years now since the late Chinese Chairman, Deng Xiaopeng, rocked the communist world by praising the free enterprise system. "To be rich is glorious", he announced, and then set about freeing up his people to allow them to create wealth in the time honoured way. Over three decades the western world has watched in astonishment as the Chinese version of its economic system has produced year after year of unprecedented growth.

Chinese cities are no longer drab and grey. They glitter with neon lights and imported German cars. The people wear business suits, jeans and t-shirts. You will rarely see the old fashioned Mao jacket; what you will see is the previously unthinkable: the golden arches of MacDonald's. There are over 250 000 dollar millionaires. Wealth is being created at the speed of light.

What is so ironic is the understanding by these avowed communists that you do not impose minimum wages and high costs of employment. That is destructive. You simply free the market, provide good infrastructure, education and training, and let the human urge to individual betterment do the rest. Of course it helps that the people are naturally industrious: willing to work hard and put in the hours.

Now we learn (from the McKinsey online quarterly report - 25th February, 2006) that the Chinese are being encouraged by their government to move beyond the status they currently hold in the world economy of suppliers of original equipment. They have turned their attention to entering foreign markets with branded goods. They want to take on the big brands face to face in their own backyards.

McKinsey concludes that they are not quite ready for this because at this stage they lack sophisticated marketing and branding skills. But they plan to acquire these quickly after which the joke that even the "made in America" strip is made in China, will become redundant. Chinese brands will compete on level terms with the locals. Expect soon to see new brand names on western shelves such as Galanz micro wave ovens; TCL electronic equipment and Haier appliances.

The Benefits of Branding

The reason for their interest is not hard to find and in fact was the subject of a timely article in the Journal of Marketing (January, 2006). Claes Fornell, Sunil Mithas, Forrest V. Morgeson lll and M.S Krishnan, collaborated in a study that not only confirms the economic benefits of owning brands that have loyal customers who buy repeatedly, but they have proven something else as well. Loyal customers translate into share price benefits: they provide higher returns for the shareholders. High returns normally indicate high risk, but this is the amazing finding: not when it comes to customer satisfaction. As brand marketing and customer experience leads to improved satisfaction, the income flow increases, but the cost of capital remains as it was: the risk does not increase. In fact it is almost axiomatic that the more loyal customers are to a brand, the more secure is the income stream they produce.

The researchers confirm that firms that make an effort to care for their customers and understand what makes them satisfied, are rewarded with repeat business, lower price elasticity, more cross-selling opportunities, greater marketing efficiencies, word of mouth recommendations and others.

According to McKinsey, businesses that sell unbranded products miss out on these economically beneficial advantages and this is what the Chinese have spotted. There is something of an imperative behind this move however due to the highly competitive nature of the home market. The need for foreign skills and technologies means that the Chinese must compete at home with the world's most sophisticated businesses. To gain the scale advantages that are essential for their own products, they must respond by selling abroad as well. And that means meeting the competition in their own countries, using the same tools and winning profitable market share. That is what brands do and that is why the Chinese have no choice.

The Missing Link

When McKinsey state that the Chinese are not yet ready for this new onslaught, they are probably suggesting that this will require a focus on consistent high quality and attention to customer service; two attributes that are not critical when you are selling commodities or cheap original equipment.

Getting their newly branded products into the conventional channels will be a challenge in itself. Assume they are successful and the brand is on the shelf, it will only last if the consumer likes what it offers. Satisfy them and they will reward the brand with all the benefits mentioned earlier. The brand owner will make money. Get it wrong and consumers are quick to apply the most effective punishment in commerce: they stop buying. This is conventional wisdom to seasoned western brand owners.

What is intriguing about this possibility is that western brand owners have not been very successful at launching new brands into existing markets. The failure rate is greater than three in four and each attempt is very expensive. That is why many companies prefer to buy established brands than to take the very extravagant route of starting from scratch. Perhaps that is what the Chinese will do. McKinsey hints at this. Owners of second, third and fourth tier brands which have distribution and some consumer acceptance, can expect a knock on the door.

And what will the man from the east want to buy? Not the resource - the machines and raw materials. They have all of that and know more about volume manufacture than most westerners. They will be after (to paraphrase the accounting definition of an asset) the economic benefits that flow from the resource. They will be buying the registered trademark, its associated brand equity and the income stream that this produces.

The Chinese purchase of British motor manufacturer, Rover and MG, is more of a rescue mission than a purchase of a going concern, but it makes the point extremely elegantly. The Chinese buyers will have been less interested in the plant and equipment than in the very well known and respected brand names.

Branding has been central to developments in marketing and marketing thought for the past few decades. If this prediction becomes reality, the impact on world economies and the marketing industry will be substantial. What we are witnessing now is the battlefield being demarcated for World War v.3 in which what is at stake is not the lives of the people, but the minds and pockets of consumers. It promises to be a great scrap.