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Apple appeals to Chinese 'face' and desire for quality
00:00 UTC+8 January 11, 2013
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"FOR China, the sky's the limit," Apple CEO Tim Cook noted last year. "I've never seen so many people rise into the middle class who aspire to buy Apple products. It's quickly become No. 2 on our list of top revenue countries."
Much has been written about the successes of foreign brands in China ( KFC, GM, Starbucks, McDonald's and Microsoft) as well as the failures (Yahoo, MySpace and eBay). But Apple's success is unusual. Prior to 2008, the company had been quietly selling products on the Chinese mainland for more than a decade via its network of domestic specialty retailers.
Compared to its business model in the US, where Apple's company-owned stores are the centerpiece of its offline sales strategy, Apple effectively leveraged its network of third-party retailers to sell its products to Chinese consumers well before any Apple stores were opened there.
Although no one knows the exact number, analysts estimate that Apple's network of authorized offline specialty retailers in China exceeds 2,000. These sites look and feel like traditional Apple stores but are clearly marked as "authorized resellers" and boast names such as "iSpace." At the same time, the numerous unauthorized retailers throughout China can be difficult to distinguish from their authorized.
In July 2008, just prior to the start of the Olympics, the first Apple store in China opened to great fanfare in Beijing's Sanlitun Village. This was Apple's 219th store globally.
By the end of 2009, the mainland still remained a blip on Apple's revenue radar. But over the next three years, the growth of Apple's popularity and business in China soared as the company opened additional stores in Beijing and Shanghai.
During the opening of the 16,000-square-foot store in Shanghai in 2010, Ron Johnson, then-senior vice president of retail operations, estimated that Apple would open 25 additional stores on the mainland over the next two years. By mid-2012, there were only six stores. The reasoning behind the slower-than-expected pace remains unclear, but most analysts attribute this delay to site-acquisition and general logistical challenges. Nevertheless, the limited number of Apple stores in China has not hindered the company's success there.
According to Fortune magazine, Apple generates an average of US$4,032 in revenue per square foot per year in its stores globally, a number that would make any retailer jealous.
In comparison, luxury jeweler Tiffany and consumer-electronics giant Best Buy generate US$2,666 and US$930 in revenue per square foot per year, respectively, in their company-owned stores.
Highly profitable
Apple's Chinese mainland stores are said to be among the company's highest-trafficked and most profitable stores globally. According to Apple's second quarter 2012 analyst earnings call, the company generated US$7.9 billion in revenue in China, up 300 percent compared to the same period in 2011. iPhone sales were up 500 percent from a year earlier. China accounted for 20 percent of Apple's total second-quarter revenue, up from 2 percent during the same period in 2009.
Given there is currently only one Apple store for every 216 million people in China, it is no surprise that Apple's Cook sees China as a massive future-growth opportunity for the company in China.
Apple devices are considered luxury products in China. According to the 2011 McKinsey Insights China report "Understanding China's Love for Luxury," the luxury market in China is projected to hit US$27 billion by 2015, accounting for more than 20 percent of the global luxury market. Apple's iPhone 4 retails for 6,000 yuan (US$945) on the mainland, which equates to roughly 25 percent to 30 percent of the average annual income in China.
Luxury, social status and standing out from the crowd often go hand in hand. In China, this relationship is accentuated by an innate Chinese cultural mind set known as mian zi, or "face." One's "face" implies one's reputation, honor and, to a certain extent, social standing.
In a market with more than one billion mobile subscribers, a mobile device is, in some ways, the ubiquitous representation of status in China.
According to Mickey Du, an investment professional at Innovation Works - a seed-stage investment fund, founded by former Microsoft and Google China head Kai-Fu Lee, that focuses heavily on the mobile market in China - the iPhone is the ultimate expression of a smartphone in China. It should come as no surprise that the iPhone is approaching double-digit smartphone market share in Tier 1 cities such as Shanghai, which, according to McKinsey, accounts for 21 percent of China's luxury market.
McKinsey notes the number of upper-middle-class households in China earning 94,500 to189,000 yuan (US$15,000-US$30,000) annually is expected to reach 76 million by 2015, which should translate into continued success for Apple in China for the foreseeable future.
This article was adapted from China Knowledge@Wharton, http://www.knowledgeatwharton.com.cn. To read the original version, please visit: http://www.knowledgeatwharton.com.cn/index.cfm?fa=article&articleid=2725
Much has been written about the successes of foreign brands in China ( KFC, GM, Starbucks, McDonald's and Microsoft) as well as the failures (Yahoo, MySpace and eBay). But Apple's success is unusual. Prior to 2008, the company had been quietly selling products on the Chinese mainland for more than a decade via its network of domestic specialty retailers.
Compared to its business model in the US, where Apple's company-owned stores are the centerpiece of its offline sales strategy, Apple effectively leveraged its network of third-party retailers to sell its products to Chinese consumers well before any Apple stores were opened there.
Although no one knows the exact number, analysts estimate that Apple's network of authorized offline specialty retailers in China exceeds 2,000. These sites look and feel like traditional Apple stores but are clearly marked as "authorized resellers" and boast names such as "iSpace." At the same time, the numerous unauthorized retailers throughout China can be difficult to distinguish from their authorized.
In July 2008, just prior to the start of the Olympics, the first Apple store in China opened to great fanfare in Beijing's Sanlitun Village. This was Apple's 219th store globally.
By the end of 2009, the mainland still remained a blip on Apple's revenue radar. But over the next three years, the growth of Apple's popularity and business in China soared as the company opened additional stores in Beijing and Shanghai.
During the opening of the 16,000-square-foot store in Shanghai in 2010, Ron Johnson, then-senior vice president of retail operations, estimated that Apple would open 25 additional stores on the mainland over the next two years. By mid-2012, there were only six stores. The reasoning behind the slower-than-expected pace remains unclear, but most analysts attribute this delay to site-acquisition and general logistical challenges. Nevertheless, the limited number of Apple stores in China has not hindered the company's success there.
According to Fortune magazine, Apple generates an average of US$4,032 in revenue per square foot per year in its stores globally, a number that would make any retailer jealous.
In comparison, luxury jeweler Tiffany and consumer-electronics giant Best Buy generate US$2,666 and US$930 in revenue per square foot per year, respectively, in their company-owned stores.
Highly profitable
Apple's Chinese mainland stores are said to be among the company's highest-trafficked and most profitable stores globally. According to Apple's second quarter 2012 analyst earnings call, the company generated US$7.9 billion in revenue in China, up 300 percent compared to the same period in 2011. iPhone sales were up 500 percent from a year earlier. China accounted for 20 percent of Apple's total second-quarter revenue, up from 2 percent during the same period in 2009.
Given there is currently only one Apple store for every 216 million people in China, it is no surprise that Apple's Cook sees China as a massive future-growth opportunity for the company in China.
Apple devices are considered luxury products in China. According to the 2011 McKinsey Insights China report "Understanding China's Love for Luxury," the luxury market in China is projected to hit US$27 billion by 2015, accounting for more than 20 percent of the global luxury market. Apple's iPhone 4 retails for 6,000 yuan (US$945) on the mainland, which equates to roughly 25 percent to 30 percent of the average annual income in China.
Luxury, social status and standing out from the crowd often go hand in hand. In China, this relationship is accentuated by an innate Chinese cultural mind set known as mian zi, or "face." One's "face" implies one's reputation, honor and, to a certain extent, social standing.
In a market with more than one billion mobile subscribers, a mobile device is, in some ways, the ubiquitous representation of status in China.
According to Mickey Du, an investment professional at Innovation Works - a seed-stage investment fund, founded by former Microsoft and Google China head Kai-Fu Lee, that focuses heavily on the mobile market in China - the iPhone is the ultimate expression of a smartphone in China. It should come as no surprise that the iPhone is approaching double-digit smartphone market share in Tier 1 cities such as Shanghai, which, according to McKinsey, accounts for 21 percent of China's luxury market.
McKinsey notes the number of upper-middle-class households in China earning 94,500 to189,000 yuan (US$15,000-US$30,000) annually is expected to reach 76 million by 2015, which should translate into continued success for Apple in China for the foreseeable future.
This article was adapted from China Knowledge@Wharton, http://www.knowledgeatwharton.com.cn. To read the original version, please visit: http://www.knowledgeatwharton.com.cn/index.cfm?fa=article&articleid=2725
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