China is comprised of 650 cities — including 150 with more than 1 million inhabitants; an infrastructure being built at a speed unseen in human history; and an on-going and rapid growth in spending power... All of these factors —compounded with the arrival of hundreds of thousands of freshly-graduated students every year, eager to work and learn — shape China’s magnetic force as a place for business.
However, after more than a decade of massive investments in acquiring local businesses, the reality seems to be more difficult than anticipated. After the first, easy phase of restructuring and consolidation, a great number of companies in all sectors find themselves in a difficult situation in relation to where the growth in profitability and necessary margin increases are going to come from.
It was in this context that we were called on to help a world-leading beer company which was struggling to find the right model for growth in China.
Massive opportunities reside in China through the development of optimal route-to-market. Efficiencies can result in more than doubling of commercial margins, while greatly improving channel penetration, brand positioning, points of sale control, and customer relationships. Our client is one of the most successful brewers in the world, with increased revenue of 29% in 2009-2010. The company showed a very high level of profitability, with a record EBITDA.
The expansion in China was fueled by a policy of intense acquisition. China boasted a great opportunity for growth as the biggest beer market in the world, with very low per capita consumption and very low end prices in comparison to similar markets in the world. However, our client’s market share was only at 15% — leaving a great deal of room for improvement.
So what exactly was the problem? Well, a lackluster growth rate, behind the market by far. In fact, while the beer market was growing by 12%, we were flat.
Of course, one of the explanations for the poor performance was route-to-market, resulting in production overlaps, logistical inefficiencies, and poor commercial coverage.
RTM assessment is a holistic approach which covers many aspects of the commercialization process, such as outlet segmentation, account management, sales force activity, order and delivery modes, third-party relationships, depot networks, and drop size by segment. The ultimate objective is to have the right product, at the right place, at the right time, for the right occasion, and at the right price.
Also, route-to-market solutions are not universal. Everything truly depends on the reality of local markets. It is imperative that every solution be tailored to the local reality.
Our mission was to design an optimal route-to-market model, delivering more control, better territory coverage, and product penetration. The geographical magnitude of the country, facts and data collection, unskilled workforce, cultural resistance to change, and the difficulty of accessing local distributors all rendered this task formidable. Furthermore, the transformational model had to be simple: simple to plan and simple to execute.
The first key lesson in China was to learn to deal with complexity. In fact, in the beer segment we were possibly touching one of the most complex distribution networks in the world. The wholesaler system was deeply fragmented and layered. Some of these layers, though inactive, were costly; others were inefficient, while remaining very active. In a particularly striking example, a wholesaler with a motorbike was attributed a separate layer from a wholesaler with a bike! At times, over 6 layers separated the producer and the point of sale, each of them taking a part of the margin with very little added value.
The complexity of this system fogged our visibility, control, and efficiency. In fact, these traditional models were not at all adapted to modern business requirements, being both inefficient and ineffective. They limited store access, market execution, and Point of Sale control. They added unnecessary costs and limited productivity.
The second key lesson was that of information. We were operating in a “fact-free” environment. We had to send teams to collect the necessary information in eight cities, interviewing hundreds of points of sale and wholesalers in order to better understand the key critical drivers of the marketplace. Doing this required teams with the capability of speaking and understanding local languages, but also with sufficient international experience to translate the findings into actionable business information.
The third key lesson was to understand the real local economic model for all the participants in the value chain. Why did we have such a complex system; what would be the economic consequences of change; who could be affected? What undesired consequences might there be? After having understood all these elements, we had to design a new economic model better adapted to our purpose. This implied that there would be winners and losers in the transformation phase. Consequences had to be anticipated.
Finally, we had to test. If there was a country where pilot testing was key, it was China. We had to imagine, design, and execute a revolutionary route-to-market system and test it in an area that we could monitor, control, and measure. A comparable “control” zone had to be set up, in which the results could be compared and analyzed. This pilot test covered key aspects such as (among others): a network consolidation model, how to deal with unnecessary wholesalers, what to do with selected wholesalers, how to organize the sales force, what kind of systems to put in place, and which channel and products to select.
The fundamentals of the pilot test were all critical: define a clear destination, precisely organize the processes and individual activity, fine-tune the economic model, as well as benchmark and measure through a good set of KPIs. Of course, here more than ever, it could be said that the devil was in the details!
The results of the pilot test for the new route-to-market model were spectacular. The test area performed 44% better than the benchmark and nearly doubled the level of profitability. It also highlighted new key areas of improvement, helped fine-tune and upgrade the model, and finally left the client with a good team of well-trained and motivated local talent. Roll-out was agreed upon for many more regions. After this test, a roll-out in 7 new regions was decided on by the client.
In conclusion, I would say that numerous opportunities exist in China for improving revenues and margins. Route-to-market is one of the key elements. This is far from simple, and many companies fail due to simply applying models which are not locally relevant. In comparison, the design of this model comes from experience combined with an “outside-in” approach created by collecting facts and data in the marketplace.
It is also imperative to combine working with the local people, concerning cultural sensitivity and languages, with previously-learned knowledge and experience pertaining to similar challenges outside of China.
Implementation is critical and cannot be done without testing and monitoring. There is a fragile equilibrium between a very strong traditional culture and business modernity, which is not easy to achieve. However, finding the right balance gives rise to compelling results.
Philippe Marmara is an authority on marketing, customer centricity, and commercial management. Former Head of International Customer Service, Head of Marketing, CEO, and Division President for Amex and Coca-Cola, he is now Senior Partner at Globalpraxis, a leading international consulting firm specialized in Route-to-market and Commercialization. He collaborates with multinational companies such as AB InBev, Coca-Cola, Unilever, KLM, Exxon Mobil, Zain, and Vodafone. He is a visiting professor at the CEIBS/Zurich Institute of Business Education in Zurich, member of the board of The Master in Management Program at Cass Business School in London, and also serves as a non-executive board member for several companies.