Michael Ziegler, marketing and sales director of Asia Development Enterprise (ADE), who started the company with two others in 1997, has a lot to say about China's market. Ziegler, 52, grew up near Pittsburg, Pa., and has 14 years of experience in retail. He also spent seven years with Christian Dior in the U.S. Although he had never visited China before 1996 – and still doesn't speak the language -- Ziegler has spent the last 10 years helping to successfully develop the country's perfume business.
Beijing-based Asia Development Enterprise, which does sales, marketing and distribution for prestigious fragrances in China, now has 50% of the market, excluding the perfume sector of cosmetic brands which sell directly in China. In 10 years time, ADE has evolved from a small team of several people to a company with 500 employees located all over the country.
Its brand portfolio includes those premier perfumes you frequently see in big department stores or in Chinese fashion magazines: Hugo Boss, Calvin Klein, Davidoff, Jennifer Lopez, Marc Jacobs, Bvlgari, Ferragamo Ungaro, Guess, Paris Hilton and Roberto Verino, among others.
During the last decade, Ziegler has not only witnessed the fast growing fragrance market but also seen, first-hand, China’s booming economy. Yet he is still surprised at the rapid changes taking place. China is now the second largest cosmetics market in Asia. A report issued by Li & Fung Research Center early this month suggests that the boom times in the cosmetics market are likely to keep rolling. According to the National Bureau of Statistics (NBS), China's middle class households are expected to grow from 5% of the economy in 2005 to 45% in 2020. "As consumers continue to unleash their spending power, the cosmetics sector presents a rosy prospect," said the report.
Although fragrance counts for only a small portion of the whole cosmetic business, it is growing robustly. How can one sell perfume to a population that has traditionally been unfamiliar with this product, and how does one build brand awareness among Chinese consumers? China Knowledge@Wharton asked Ziegler to talk about his recent success in the China market. Below is an edited version of the conversation.
China Knowledge@Wharton: Could you tell us briefly about your experiences doing business in China?
Ziegler: The company is owned by a married couple: Sam Chen and May Zhang. The husband is Taiwanese and his wife is from Beijing. She left China after high school and continued her education in the U.S. She has always been interested in the perfume business. At that time, I was working for Christian Dior. I got to know [the couple] personally and felt perhaps it would be a good idea to start a distribution business in China. We talked it over.
We came to China in 1996 and looked around. Then we said it cannot happen; (the idea) is too crazy; it doesn't make sense. But finally we decided to give it a try. It was a very difficult start, because -- no surprise -- no one wanted to do business with China at that time. They didn't trust that China would be a viable market.
My first impression of China in terms of the retail business was that it was disorganized and messy. It was true 10 years ago. Now things are changing every day. At that time, not many brands were here [except for] Christian Dior and a little bit of Shiseido. We toured around Beijing, Shanghai and Guangzhou. All the stores were dirty. So it turned out to be more of a project than I thought it would be. But I had spent 14 years in retail and seven years at Dior, so I felt that I could figure this out. I didn't realize there really wasn't a perfume business in China. It didn't exist. It was all domestic products retailing for maybe RMB10 (US$1.20) for 200ml bottles.
The first big brand we had success with was Michael Jordan, because at that time he was the superstar. The customers knew who Michael Jordan was and then they liked the perfume and bought it. But our first big international brand was Hugo Boss. In 2000, there were customers who were willing to pay RMB300 (US$38) for a 30ml bottle. So we really started the imported perfume business from scratch.
The changes I see in China are just unbelievable. The first day I was in Beijing, I was in a car on Chang'an Road. I was sitting by the window and I felt something looking at me. It was a donkey. This was in the capital of China in 1996! Now you see Bentleys, Rolls Royces and Ferraris in Beijing. Ten years ago, you had a donkey looking at me and now you see all these very expensive cars. And you notice those changes everywhere. It’s not only in Beijing and Shanghai. You see all the other cities moving and growing up. It's happening very fast. It’s unbelievable.
China Knowledge@Wharton: How did you shape your marketing strategy for these products? Is it correct that at the first stage you had to invest a lot of money, with little return?
Ziegler: You do a lot of investment. A lot. As I said, I was in retailing for 14 years and at Dior for seven years, and I was very accustomed to doing business only in the U.S. I thought things would not be that tough. You put out some advertisements and people will come. No.
It forced me to rethink everything I knew. Because what I knew doesn't necessarily work in China. So I had to reorganize my own thinking in terms of what do customers want and how do they respond.
I spent a lot time then with a marketing guy from Procter & Gamble, which owns Hugo Boss. He is Dutch and was new to Asia as well. We started doing some research, talking to the beauty advisers behind the counter and talking to the customers, and then we realized that the Chinese customer, unlike customers in the rest of the world, is very interested in the history of the product. They want to know what the product is all about. Where does it come from? Who created it? What was her idea and what does she think? So we had to change our advertising strategy, and we were really the first ones to do it --- now you see it a lot--- so we could put out a page of information on where this product comes from and why, and then sell the product. Because that's what the customers really want to know. They are wondering: "Okay, you want me to spend 300 RMB. So what's it about?"
It took us a lot of time and study to figure this out. We had to rethink our advertising strategy and also the beauty advisers' training approach....The product training had to be much more specific to address the customers' questions. So it really turned into how to talk to the Chinese customers, and to forget all the things we learned from the U.S. and Europe, because they didn't work.
Secondly, the China market has a lot of counterfeit goods, so it's very important to build up consumers' confidence, i.e., [to show] that this is really imported from Europe; it's not a counterfeit product. That's why you have to take a strong position in key department stores. The customer here, if she used to shop in Shanghai's number one department store, [then that's the type of place] she trusts. So where you are selling your product becomes very important in China. We spent a lot of time and effort to reassure the customers that this is a legitimate product; it is imported and we do all the right things.
China Knowledge@Wharton: Apart from advertising, what other strategies do you use to promote your products?
Ziegler: A lot of in-store animation. This is a concept applied internationally but it just hasn't been done in China before, in a big way, for the fragrance business. It's very interesting to see how customers are changing.
I remember once at the beginning, we did an in-store animation and the customers were kind of intimidated. But I know what we are doing is really working. Three years ago, we had an event on Valentine 's Day in a department store and we invited the customers on stage to talk. One young boy went up to the stage and proposed marriage to his girlfriend! So now you can see that customer confidence is on rise. We do some dance performances as well to try to get the customers interested. Now the customers are actually participating. The whole mindset of China is changing.
China Knowledge@Wharton: What do you think of Chinese customers today? Are they more like American customers?
Ziegler: No way like Americans. I think they are becoming more international, more aware of brands, perhaps a little … more hyper-brand-conscious today.
They need to have that logo on their shirt. They need that reassurance. There are a lot of new international designers in China, but consumers are not willing to look, or are hesitant to look, and they are not ready to purchase these new brands. Maybe they will look [at them], but they still want a Chanel, a Burberry or a Prada. I think they have logo-mania.
But as you can see, that is changing as well. Basically in Shanghai, Beijing and Hangzhou, customers are much more international, much more willing to experiment with new things.
China Knowledge@Wharton: So now you have to do business in the secondary cities in China?
Ziegler: What is a secondary city? I grew up in a town of 2000 people. When people say that [something] is a secondary city with only five 5 million people….You see international companies starting to build shops there. Bvlgari opened a new shop in Chongqing, and they will open another new shop next week in Nanjing. A lot of these prestige boutiques are going to those "secondary cities," but the world sees them as "big, important cities."
It’s hard to predict the time line in China. I was in a meeting last year in France. Some guy said to me, "Hey, tell me, how will China look like in 20 years?" I said, "20 years? I don't even know what China will look in 20 months because it is changing so fast." I can't imagine China will keep moving at this speed, but it looks like it's moving faster and faster. There is more information available, more magazines, more local people traveling to Hong Kong and abroad. They see more and then they come back and expect more.
China Knowledge@Wharton: What's the biggest challenge now for you in operating your business?
Ziegler: Running as fast as the market is running. Ten years ago, we had distributions in two department stores: Sogo Beijing and Parkson Shanghai. Today, we have about 250 distributions and it changes everyday. Everyday you see new opportunities. I met people from Capital Land, owned by Raffles Group, a month and a half ago, and they said, "We are going to open 100 shopping malls in the next five years." And I know they mean it. So just to keep up with the changes [made by] the retailers is a big challenge for me. For example, in Beijing, two years ago it was Scitech; now it's not in the top tier. Those who were luxury stores are not luxury stores any more in two years time. So you have to deal with new ones, changing ones, or those that are upgrading themselves. You need to maintain good relationships and get close to the retail people to try to understand the stores' real progress. But you still need to be sensitive to those growing up.
China Knowledge@Wharton: Which brand sells the best, and what makes people buy your perfume?
Ziegler: Hugo Boss is our biggest brand today. Calvin Klein, which we only started one year ago, is second. The Bvlgari brand is going up fast.
Why do they buy? I think first of all, they know the brand name. They are international brands. [Globally,] Burberry does a 'not bad' business in fragrances. But in China, business is very good because Burberry is a very famous fashion brand here. A lot of consumer confidence comes from whether they know that brand or not. Then, are they attracted by [the shape of] the bottle? The bottle gets their attention. The bottle is the eye catcher, the way to wake them up. If the bottle attracts consumers, they get closer, and then it's the fragrance that makes the decision.
People used to tell me, "Oh, that [perfume] will never sell in China because it's too strong." I think that people who say that might underestimate the customers in China. One fragrance of Hugo Boss is very strong but it sells very well here. The fact that the Japanese don't like it doesn't necessarily mean the Chinese don't like it. Customer confidence is different here.... Men, especially Shanghai men, are confident; they have no problem wearing fragrance. Shanghai is ahead of the whole country in the fashion business. And you can see that Beijing customers are now changing quickly.
China Knowledge@Wharton: How price sensitive is perfume, i.e., does its price depend on how well the Chinese economy is doing?
Ziegler: Perfume prices in China depend on the import tax China levies on the product, and it also has to do with the import procedures and the exchange rate. So basically perfume on the mainland will be more expensive than in Hong Kong or in Paris.
But price is not a main concern for the customers. Our perfumes basically sell within a price range of RMB 300-600 (US$40-$80) for a bottle of 30-50ml. They usually know the price range before they pick up the bottle.
China Knowledge@Wharton: Chinese women didn't wear perfume that much in the last several decades. Does that have an impact on your business?
Ziegler: The worst thing is to [try to] force customers to purchase…. I think it's a matter of the customers being willing to accept all the new things because there are a lot of new shopping opportunities in China today. It's a matter of customers becoming comfortable with it. It just takes time.
The fragrance business here will not be as big as the fragrance business in the U.S. now, but the business is growing. Today the fragrance business in China, depending on which department store [you are talking about] counts for around 10% to 20% of the total cosmetic sales. In America, it's about 60%. So it will never be like America, but can the business continue to grow up? Yes! It just takes time.
China Knowledge@Wharton: How does your business plan on maintaining the brands' prestige at the same time as you expand?
Ziegler: You do it through increased distribution in places and cities you were not in before. You do it through marketing activities. You have 1.3 billion people in China. Let's assume 800 million are farmers, and let's cut out the people under 18 and over 50. Now we have roughly 250 million people left. That's just a little bit less than the population of the U.S.
Then you say, what's the economics? Is disposable income growing? Ten years ago there was a donkey, and now when I drive back from the airport to the office building, I see 40 cars parking here and at least 25 of them are Audi A4s. There is a lot of new money in China. A young girl in our Beijing office is saving money for a Chanel handbag. Now people are willing to spend. I am not so worried about our customers. We just need to introduce more and more new products to keep the whole brand name fresh in China.
China Knowledge@Wharton: Who are your main customers?
Ziegler: Our target demographic is women between 18 and 35. It's interesting that we are starting to catch younger customers. In the U.S., some brands are targeting girls 12 and 13 for their perfume business. In China, if you look at a girl of 18, she is much more receptive than a woman of 35, because she doesn’t have a preconceived concept that it's not a good thing. It's just a new thing to her. Women, as a rule, are much more open minded than men in China. There is no way, I mean, there is absolutely no way to sell fragrance to a man over the age of 40 in China. Impossible! They think it's too feminine or whatever. Absolutely not.
China Knowledge@Wharton: On the whole, you have managed a very successful business in 10 years time in China. Any secrets to share with our readers? Any suggestions for new Western companies entering China?
Ziegler: There is really no secret. It's just how hard you want to work. But if you look at the success of our company, it's a Chinese company. I am the only American. So I think, especially for Westerners, the interesting thing is to have a good dialogue with the people here. Even though I am smart, I also have a lot of practice. And yet every day I can still learn something.
First of all, Westerners have to realize that you are working in China. It's not the U.S., France or the U.K. You are working in China. You need to have a lot of respect, first of all, for the customer. Then, there has to be a mutual respect for what you know and what local people know. Because as much as I listen… I will never be Chinese, so sometimes, I am given a situation and I am not so sure what to do. If I was in the U.S., I would know exactly what to do. Here my natural reaction is "do." Then I stop myself, talk to other people in the company, ask for their opinion. I need to think collaboratively on this topic.
The more the local team is open to new ideas, the more the foreign team is open to local ideas. If you put it together, you can win. But too often I see suppliers, when the foreign people come in, saying this and that…. They are not paying attention to the local knowledge, and they lose.
It's really a big opportunity for me to listen to what people say, what they think and what they do.
The first lesson I learned was two years into the business. I had a meeting with a person who doesn't understand English. We had an interpreter and she was not that good. I knew if I could draw [my idea] on a paper, he could understand. The only piece of paper available was his business card, so I turned it over and wrote on his card. He shut his book and walked out. And I asked the interpreter, "What happened?" She said it was "like spitting in his face. What you did is very impolite." Then I wondered how many other mistakes I had made. I still do. A lot of people think I am angry because I speak loudly. But I am just loud. Chinese people say, "Don't show too much emotion; you look mad and might hurt somebody." So now I still smile even when speaking loudly. It's just the process of trying to pay attention to what Chinese people are doing.
The company has a very good future. There are many new business opportunities coming along. The person who is funding it is very committed to long-term development. One of the secrets of doing business successfully in Asia is your commitment to people.