Culturally suited strategies are essential

All marketing activities, anywhere, begin with an analysis of the market and a process of formulating strategies and plans, according to all trained marketers and their text books. Some argue that setting up the right strategies is crucial to success in international business; others believe the implementation of strategy is more important. It is argued here that establishing correct strategies is a prerequisite for adequate implementation.

The first stage of the Foster’s marketing strategy was relatively simple: give the Chinese partners the sales and marketing functions. This soon proved to be ineffective and various other strategies were implemented. Foster’s believed that its Chinese partners had all the knowledge of the market and it only had to ensure a quality product; that in a market where product quality was often inconsistent, producing consistent quality would be a strong competitive advantage.

This was the first initiative and the task was given to a large team of expatriate Australians looking after operations in Shanghai and Guangdong, using quality ingredients. However, the strategy dramatically increased product unit costs and was soon found not to be feasible. Sales did not grow as expected and strategies were reviewed. The Chinese sales representatives had wide knowledge of the local market and consumers, but this was limited to local products. Foster’s was an international brand and it was necessary to sell it at a premium price. To create, expand and sustain an international premium brand image, the product had to be sold at a premium consistent with international rivals. This strategy was sound in theory, but in a market where disposable income was limited it was inevitable that sales were small and it was difficult to grow the market.

To apply modern Western marketing theories to the market, young Australian graduates with good language skills were employed to head the marketing of these premium brands. But they lacked the commercial experience and, especially, knowledge of Chinese business culture and Chinese consumers. These were crucial in dealing with local employees, suppliers and customers. At the same time, in a culture where age is respected, the local Chinese staff were uncomfortable being supervised by young expatriate Australian managers with little knowledge, skills and experience in the Chinese market.

Having trialled the strategy of using expatriates without success, Foster’s belatedly recognised the importance of language and culture, and brought in overseas Chinese from Hong Kong, Taiwan, Singapore, Canada and elsewhere, in another attempt to introduce Western sales and marketing concepts and processes. Market research was initially conducted by Hong Kong firms, but many Hong Kong marketing professionals did not like living and working in China. A day-trip was often the only effort they made locally to understand the Chinese market.

After this strategy also failed, marketing support was sought from the Foster’s head office in Australia. Pursuing a policy of uniformity of products and marketing activities, the head office marketing department then helped to implement strategies used across all sections at Foster’s International. This produced a global image of the Foster’s brand but the complexity of the Chinese market meant that securing improved sales was slow in the short term. To many marketers this meant their careers were unlikely to progress by working in China; hence there was a high turnover of young marketing professionals.

The attraction of China

Chinese market entry strategy was implemented at a time when Foster’s was experiencing a decline in its Australian market as well as in the UK (the UK brewing business, Courage, was sold in 1995). The China entry was part of a broader Asian strategy that focused on markets with significant growth opportunities, rather than simply continuing to compete in mature markets such as Europe and America.

Foster’s research in the early 1990s indicated that per capita consumption of beer in China was expected to grow quickly, and that China would become the world’s largest beer market by 2000, and would become a larger market for Foster’s than Australia. It was also estimated that China’s beer market was the second largest in the world (behind America) in 1993. Meanwhile, in the early 1990s, the Chinese Government recognised that the beer industry was in urgent need of updating, especially in technology and management, and was under-resourced. Attracting foreign direct investment was a major solution.

Background work by Foster’s for its China investment began in late 1991 and was ahead of most other international brewers. By 1993, the year before Foster’s China was established, a Shanghai Foster’s brewery feasibility study noted there were only six deals (mostly joint ventures) in progress. By 1997 there were at least 88 joint venture or licensing agreements signed with Chinese breweries.

The level of competition among domestic brewers was not as intense in the early 1990s as later because there were few international breweries in the market. They brought international standards of brewing to China, which was the Foster’s strategy for major product differentiation. This quality approach ensured there would be little competition in the market other than from international players and a few Chinese.

But Foster’s was aware this was likely to change rapidly. Indeed, other major international brands went into China either at the same time or just after Foster’s. Very quickly, Heineken, Carlsberg, Budweiser, Suntory and others were competing with each other. Even major Chinese brands joined the competition. Qingdao is a good example, a national beer brand that has become an international brand.

Foster’s saw the potential market growth and the lack of a unified international standard in China. Having a brand that was already established worldwide, Foster’s Lager, it believed it was in a strong position to compete with the majority of Chinese breweries, of which there were more than 800 across the country at the time. The strategy to have a competitive advantage through consistent quality was easily achieved because of strong technical resources. However, in a market where consumers did not know the difference between consistent and inconsistent quality, it made no difference.

It also used the Foster’s brand as a major competitive tool, even though as a successful international brand it was less well known in China than, say, Heineken.

Exporting, licensing agreements, joint ventures and subsidiaries were the main methods used by Foster’s when entering international markets and building brands. Foster’s focused on manufacturing in China for several reasons:

Reports from consultants in Hong Kong suggested potential market growth was huge and rapid, so importing would not be cost effective.

Licensing agreements were not considered suitable for China for three main reasons. First, China had an unsophisticated legal system to protect commercial parties. Second, the low industry standards suggested there would be a very limited number of breweries capable of fulfilling the role; and those that might produce Foster’s brand at the required quality were large national breweries and not interested in licensing arrangements because they were direct competitors. Third, using smaller Chinese breweries would mean substantial training, at great cost, to reach the required quality. This could potentially introduce competitors into the market at a later date.

Joint ventures the only suitable vehicle

Foster’s considered joint ventures as the only sound strategy because it believed its Chinese partners had the best local knowledge of the market. It is still common for companies to rush into China without thorough planning. In the early 1990s companies were more concerned about missing opportunities than spending time doing their homework.

In less than a year, between 1992 and 1993, Foster’s conducted site analyses at more than a dozen breweries scattered throughout China, but these audits only focused on technical elements. The list of available breweries was also limited. For instance, Guangdong Foster’s in Doumen was considered a bad purchase by many executives. In addition, Foster’s executives believed that joint ventures were the only form of ventures permitted by the Chinese Government, when in reality they were encouraged, whereas wholly foreign-owned enterprises were permitted but not encouraged.

The lack of preparation has not improved among Australian companies. More recent research found an alarmingly large number of companies did not do proper homework before entering China.

There is no doubt that market research by Foster’s was not thorough enough and its planning was inadequate. Accurate information plays an essential role in planning processes (Ehrman and Hamburg 1986). In countries such as China, where there is great cultural diversity, correct collection of data is relatively more difficult than in countries with few internal cultural differences. The planning process will also take longer, relative to the availability of data-collecting facilities, and of primary and secondary data.

In 1992 and 1993, initial market research was often carried out by Austrade or students who lacked a systematic professional approach. Furthermore, without a national infrastructure for market research in China, it was difficult for Foster’s to determine the quality of research. My research in 2008 showed that data mining was conducted by Melbourne-based companies mainly through researching on the Internet. The researchers were usually university graduates with no knowledge of China and the Chinese market.

Two major problems are highlighted by this process. First, the data that is published and approved by the Chinese agencies should only be used as a reference, because of the level of its accuracy. Second, graduates without any knowledge of China simply cannot judge the usefulness and relevance of data collected.

It is reasonable to conclude that for Foster’s to base major decisions on limited research results, it was likely to lead to inappropriate strategies in building brands. It is also reasonable to suggest that the entry decision by Foster’s was rushed and therefore difficult to execute. Indeed, deciding on joint venture entry did cause big operational difficulties later on.

An Australian ‘flying squad’ approach

To search for suitable locations, Foster’s used an initial ‘flying squad’ of Carlton & United Breweries employees for research and site analyses to find potential joint venture partners. Four main geographical locations were identified as essential: Guangdong, Beijing, Shanghai and Sichuan. Initial feasibility studies showed the three areas with significant growth in beer sales were Beijing, Guangdong and Shandong. Shanghai’s sales growth rate was one of the slowest in 1991, at 5.3 per cent compared to an average of 21.86 per cent across the country.

Other studies found that greater Guangdong and greater Shanghai were two prime areas of higher GDP growth (Frewen and Mosely 1995). Therefore, the decision to invest in the Shanghai market was also a sound decision.

In the meantime, technical auditing of a large number of breweries, mainly by the flying squad, gave Foster’s opportunities to understand many aspects of China’s market. Several leading national brands, such as Qingdao, Yanjing and Five Star, had good brand image and value. Qingdao was and still is the main export brand. It is now listed on the stock exchange and is the largest brewery in China. Yanjing is nominated as the official drink for state banquets.

Apart from these top brands, the industry as a whole lacked quality and consistency. Across the board, breweries used low-quality raw materials to produce beer cheaply. At the time of Foster’s entry, few industry standards were imposed on brewers and suppliers’ standards were segmented and inconsistent along geographical lines.

A good example of the industry problems is beer bottles, to demonstrate not only standards and inconsistency in supplies but also the regional differences in the beer industry as a whole. China’s bottle returns system determines the packaging system. Bottles are returned to the manufacturer via retailers and distributors. Manufacturers rely on this but it is up to consumers to return bottles at their leisure and receive a small refund.

Bottles are specially manufactured to take the pressure of the gas in the beer but there is no system to check that only beer bottles are returned; retailers accept any bottles of a similar shape and size. When other types are returned, soy sauce bottles for example, accidents and injuries have resulted from refilling with beer.

On establishing the Shanghai joint venture, Foster’s put a great deal of effort into meeting suppliers of all types of material, because the Australian manager very quickly recognised the importance of relationships to the smooth day-to-day running of the business. With little experience in a totally different culture, the importance of supplier— manufacturer relationships was not widely recognised by Foster’s management for about a year.

Lack of knowledge leads to nasty surprises

In an effort to gain a broad knowledge of the market before entry, Foster’s used two main sources of information: a market definition study done by internal resources, and a feasibility study purchased from a Hong Kong firm. The latter’s level of usefulness was an issue. Figures were mainly on the basis of certain assumptions; for instance, the growth of market size was based on population, with little consideration of other economic and social factors (for example, the level of disposable income in relation to the ability of consumers to buy a premium product).

The feasibility reports appeared to be mass produced to cater for all customers in the same industry. As a result, international brewers who purchased similar reports appear to have adopted similar strategies.

What was fundamentally lacking was consumer information about cultural characteristics. For example, at no time was Foster’s prepared for the seasonal fluctuations of the Chinese beer market. This was simply because all of them only had knowledge of the Australian market. Management, marketers and operations managers were all shocked by the different sales figures between seasons. The Chinese believe that beer has a natural quality of coolness that is good for reducing internal body heat in summer, but in winter this damages health. A high level of health consciousness is an important part of Chinese culture, which is deeply reflected in cuisine.

The beer consumption pattern in China was totally foreign to Foster’s and all international brewers. It was estimated by one manager that in Shanghai the difference between summer peak months and winter months was as high as a factor of 10.

This distinct consumer culture caused further problems in distribution, warehousing, production, packaging, supply and general management. In both Shanghai and Guangzhou, several warehouses were established to hold stock in the quieter season in the hope of building an adequate supply for the peak season. But this created large storage costs and a stock rotation problem (the use-by date). Foster’s and international brewers strictly followed the standard of six months’ product shelf life.

In packaging, for example, further capital investment went into purchasing additional bottles to overcome problems with the returns system. But because it was an industrywide system rather than manufacturer based, additional bottles simply went into the system and benefited other manufacturers.

There was also a culturally related characteristic of consumption by geographical location. Beer drinking is associated with blue-collar culture in the north (Beijing and Tianjin) but class is less of a concern in southern China (Shanghai and Guangdong). This created challenges in market penetration and marketing the brand, especially for marketers who only had experience of one market type, such as Australia or Hong Kong. This lack of experience in marketing in different cultures led to unsuitable and ineffective strategies.

Accurate market research a major challenge

In the early 1990s, the concept of marketing was fairly new to all Chinese consumers, which presented opportunities and challenges. In May 1996 Foster’s used a range of research specialists, including Guangdong White Horse Marketing Research (a joint venture), Shanghai Modern International Research (which produced hand-written briefs in English), the George Patterson agency, and marketing personnel from Carlton & United Breweries.

Guangdong White Horse, a Chinese firm that conducted a major research project for Foster’s, was capable of presenting briefs and reports in English of a standard close to what would be expected from any firm in Australia. Shanghai Modern International Research appeared to be behind in its standard and presentation but had a basic understanding of general market research methods commonly used by other firms. George Patterson produced standard market research documentation as expected. The final report, however, was produced by the Carlton & United Breweries marketing team in head office, using raw data from the other research.

The research was of a qualitative nature, carried out by local Chinese research staff in Shanghai, where the respondents were sourced. Lack of appropriate skills by local researchers was recognised as a concern by the Foster’s research team, but the need to conduct research in the local dialect was important to gather data. It is questionable whether the research was conducted to the requirement of Foster’s and that the data collected was as useful as it could have been.

Processes were observed by Foster’s marketing people and the research reports were not used directly to influence decision-making. The reports produced by the head office team incorporated some of the most useful research data. A manager commented: ‘Unfortunately the Chinese researchers in those earlier days were not into non-directed consumer focus groups. They would actually probably watch the process go through, not understanding the need for non-directive input.’

The Chinese researchers would direct the respondents during the focus groups. This is generally considered as leading. Compared to purchasing costly research reports from Hong Kong firms, this research at least presented the benefits of selecting real informant samples from the consumer-base population. Nevertheless, unfortunately very little understanding of the market was obtained before full Foster’s operations started in China.

Evaluating information was difficult, in the early days especially, when relatively poor-quality data was presented and expatriates had little contextual knowledge to evaluate it. When research was carried out by students, Foster’s made an effort to confirm the data but that was ‘not very effective,’ one marketer recalls. In later years, Foster’s had no choice but to use Chinese market research firms, with unsatisfactory results.

These limitations were beyond the control of Foster’s in terms of supply and quality of the data and this created difficulties in information evaluation and decision-making.

The brands conundrum

Foster’s has a range of very successful brands in Australia. The brand that dominates the Victorian market is Victoria Bitter, known as VB. Internationally, Foster’s Group consciously promotes Foster’s Lager, a successful strategy in other overseas markets, such as America and Europe. In 2005 Foster’s (led by Foster’s Lager) was the seventh-largest international premium brand by volume, the second-largest brand in the UK, and among the top ten in Western Europe.

The price factor forced Foster’s to operate differently in China because Foster’s could only be a premium brand to achieve profitability. The initial strategy was to purchase local brands from breweries, form joint ventures, stop producing the local brands and then produce only Foster’s Lager. The strategy proved to be inadequate because the size of the premium beer market was not as large as Foster’s had hoped and there was fierce international competition.

Foster’s recognised that a range of brands was needed and three levels were developed: international premium brand (Foster’s Lager and Foster’s Ice); a Chinese premium brand (Shanghai Dragon, which was exported from Shanghai to Europe and Australia); and local brands.

In Shanghai, the Chinese partner had two brands that covered different market segments. Guangming was, and still is, a commodity product with a strong consumer following. It was the mainstay for Huaguang brewery for many years and it soon came to serve a similar role in the joint venture. Huaguang’s premium brand was Shanghai beer (relaunched later as Shanghai Dragon) and Shanghai Foster’s Brewery continued to build it into a sub-premium brand, but it has never taken off.

Foster’s also decided that an international launch was needed for Shanghai Dragon to sell it in Europe, so a new marketing campaign was developed, again by George Patterson, the Australian market research and advertising firm.

The Shanghai Dragon Girl promotion was launched in 1998. By 2004, Shanghai Beer as a brand was taken out of the local commodity range and put in the premium portfolio. However, the Shanghai Dragon Girl advertisement was rejected by the Chinese marketers, although it was briefly used in London and Taiwan. It produced no real noticeable results. The promotion is analysed further in this chapter.

The Foster’s head office marketing team acknowledged after ten years of struggling in the Shanghai market that Foster’s was too strong for Chinese consumers and that this had been the major difficulty in selling it. A Foster’s executive commented:

Foreign brands were unfamiliar to the Chinese consumers; therefore marketing education was necessary but this required time. Many European brands, Heineken for example, are seen by Chinese consumers as high quality even though they are produced in China, often to a different local specification. On the other hand, Foster’s was not known to Chinese consumers. Australia was not a country as large (economically) as the US or as well known as European countries such as the UK or Germany. Therefore to educate Chinese consumers about an Australian brand, Foster’s first had to educate them about Australia.

In Doumen, the Chinese partner was already producing Huangmei (Princess) and Huangmei Fruit Beer (a specialty product for the Hainan market made of half beer and half fruit juice). Both had a strong presence in Hainan Island, with about 30 per cent of the market there.

Foster’s Lager was launched in June 1995, two years after the establishment of the joint ventures and at a time when many other international brands were being launched. Foster’s wanted a head start. Foster’s Lager did not yield the expected results, so two additional brands, Power’s and Eazy, were created and launched in the Guangdong market. They were launched early in 1997 in readiness for the peak summer season.

Eazy was created for the lucrative Guangzhou market, which was the initial target for Guangzhou Foster’s Brewery. Visually, its design resembled a Hong Kong-style beer, which was seen as desirable by Guangdong consumers, and was a lighter beer with a preferred less-bitter taste. Power’s was a relaunch of an old Queensland favourite and chosen for the Hainan market as an Australian-style beer.

In Tianjin, the joint venture had its original brand, Great Wall, which was discontinued as soon as the old Tianjin brewery was closed. In its place, two new brands were created, Largo and Witz. Largo became an instant success in a market where there was no competition and within two to three months was the market leader. Its price was pitched at about 1.3 yuan a bottle, a very low price that locals could afford. It was recognised that a local brand at a commodity price was necessary.

After Foster’s had been in China for ten years, the general situation in the brewing industry had changed. By 2004, the total number of breweries in China had fallen from more than 800 to 200 and the nature of competition had changed. Importantly, surviving breweries have also changed industry standards for the better. Now international standards are fundamental and consistency of quality is expected, even for local brands.

Previously, only a handful of international players had been competitors. Today, all surviving breweries compete, whether they are international or Chinese. This increased competition has created areas of difficulty for companies, for instance in branding, pricing and distribution networks.

Multi-level strong international brands require strong financial backing in promotion, because price competition restricts profit margins and there are still limitations on distribution networks for certain geographical locations.

Disastrous brand names by characters

An area of distinct cultural difference between the West and China is the degree of care given to choosing a brand name. In the West, a name is a symbol, a sign that is used to distinguish one product from another. In China, a name is more than just a symbol and a sign. It must have a meaning.

In the Chinese language, words with the same sound or tone may be represented by totally different characters, which carry totally different meanings. For a brand name, not only must the characters be chosen to represent a meaning, but also the sound of the characters must be carefully considered. An added difficulty is the different pronunciation used in different dialects for the same word.

When Foster’s beer was first sold in Hong Kong, the brand name was translated into Huoshida 霍士达 . It is meant to have a close sound to the English word Foster’s by pronunciation. In Cantonese this set of sounds does not have any significant meaning.

The first character Huo (霍) is merely a surname and shida (士达) were just characters with the closest sound to the English in Cantonese. They have no real meaning. When pronounced in Mandarin, Huoshida (霍士达) shares the same sound as (祸事达), which means ‘the disasters just arrived’. It is not difficult to understand why consumers would not buy the product. The name was changed later to Fushida (富士达), which was not intended to carry any meaning. However the choice of Chinese characters was wrong: 富士 was also used in Fuji Mountain (富士山). Chinese consumers know about Japan and the Japanese, and immediately associated Fushida (富士达) with Fuji Mountain and took Foster’s to be a Japanese brand. There is a strong cultural resentment among Chinese towards the Japanese because of the Chinese–Japanese war (1937–1945).

Suntory, a Japanese company, named its beer xili (喜力). That does not resemble the sound of Suntory but the characters bear the meaning of ‘happy energy’, which is acceptable to consumers and gives no indication of its Japanese origin. Budweiser chose Baiwei (百威), which means ‘a hundred times impressive strength’ and faintly resembles the sound of Budweiser.

China is more like Europe than America when it comes to languages. In America, people speak English with distinct accents but have little difficulty understanding each other. In China, there are 292 officially listed languages and many dialects are so different that people refer to them as different languages. For instance, Cantonese and Shanghainese are very different from Mandarin, so much so that people speaking the different dialects cannot understand each other.

Although Foster’s was the fourth-largest brewery (Shanghai Foster’s Brewery, 1993) at the time of the joint venture’s formation, in 2003 it was number 22 in the world and Foster’s was not a well-known brand in China. Indeed, after being in the Chinese market for more than ten years, it was still unclear how well Foster’s was known as a brand or an Australian brand. This clearly showed the failure of its marketing exercise.

Being part of a large and culturally diverse country, Chinese consumers assign great significance to products from specific geographical locations. Yet little consideration was given by Foster’s to the exact geographical location of the breweries. Guangzhou Foster’s Brewery soon discovered that a brand from Doumen, a small county, would not sell in large cities such as Guangzhou, because city people would not drink ‘peasants’ products’. Guangzhou Foster’s chose to register itself in Zhuhai, to be able to sell its products in Guangzhou.

Packaging and labelling the Chinese way

Like other multinational companies, Foster’s has its own guidelines on packaging and labelling as part of its branding exercise. These are a means of ensuring consistency of brand image and value, and product quality. The ability and quality of packaging material suppliers are key elements for consistent packaging and labelling of any product. From the beginning, Foster’s recognised the importance of packaging and expatriate packaging managers were appointed to all three China plants.

The beer industry in China had low-quality packaging standards. For Foster’s, the practice of recycling bottles through production was not only below industry standards in terms of image, but also against health and safety regulations in countries such as Australia. To address such issues and establish the Foster’s brand, the joint ventures invested heavily in packaging and labelling.

In analysis of the cause of the relatively unsuccessful sales compared with other international brands, it was suggested by some that Chinese consumers were not keen on the colour blue. This line of thought was not shared by the marketing team in Melbourne, because Pepsi is a successful brand in China and its dominant label colour is dark blue, similar to Foster’s Lager. However, Asian consumers found the design of the label was somewhat confusing. A former Melbourne manager commented:

The need to adapt packaging and labelling is not an alien concept to companies marketing international brands. ‘Foster’s Lager’, the text on the label, created difficulty in the Asian market as it does not say beer, so the word beer was added. The great success of Foster’s in Australia and other countries led to arrogance about the brand and product, according to some Foster’s people interviewed. A Chinese manager said: ‘It is such a good brand with good quality. It was not a slightest thought to Foster’s that people would not buy it; Chinese must all want to drink Foster’s.’

A major difficulty for Foster’s in selling its product was the taste. Foster’s was proud of its product, which has a strong hopsy taste. But this was not a taste that Chinese consumers were used to. Many other international brands gradually introduced light beer and found that more suited to Chinese consumers’ taste. Foster’s resisted until 2003 and launched Foster’s Ice, a beer with a lighter taste and colour, and a label of a different colour. However, the success of Bud Ice gave Budweiser a substantial market share in Shanghai. However, Foster’s Ice, although a similar product in the same market, was not a success.

Distribution swings, roundabouts and roadblocks

Distribution is much less straightforward in China compared to developed countries and was possibly the most difficult area for Foster’s because of market characteristics and lack of a distribution infrastructure. A major surprise for all executives was probably the alien nature of China’s distribution systems, which were a product of a centrally planned economy. The well-established Foster’s distribution structure in Australia had been built for a market economy. A Melbourne executive explained: ‘Carlton & United Breweries built its own distribution. This is why the business was so good. It owned all the pubs and therefore it created its own distribution . . . that’s how Victoria was built up and even Australia.’

Distribution was not a problem faced by Foster’s alone, but one that was recognised by other international firms. It has been suggested that distribution is the biggest operational problem that international companies have to deal with in China (Frewen and Mosely 1995).

China was a totally different proposition for all Western executives. There was an inefficient distribution system and it was not easy to build your own. Regulations supported a centrally controlled economy, and distribution systems were carefully planned and built up by the Government. Foster’s knowledge of building and running a distribution system was almost useless in such an environment. Another factor is the specific nature of the Chinese market, in which distribution is confined to geographical locations. Overcoming this is difficult, perhaps for political reasons, so the selection of an initial geographical base will influence the effectiveness of distribution.

At the start of the China project, a Melbourne beverages export manager was partially involved in the flying squad in the hope of setting up marketing and distribution channels. He visited China many times and commented: ‘In hindsight, I should not have been sent. What did I know about China? It is so different to anything we know. I was given an interpreter. The interpreter said yes and no and I was told yes and no. I didn’t really know whether it was yes or no.’

He was responsible for setting up the Hong Kong sales office, where he recruited a Hong Kong Chinese who had strong beliefs about recruiting Chinese staff to compensate for Australians’ ignorance of Chinese culture. Until 2003, the Hong Kong office was a major sales and marketing base for Foster’s China, and marketing strategies for China were designed there by experts from Hong Kong and Australia.

In Hong Kong, sales were customarily achieved by paying a ‘tap fee’ at a retail outlet, determined according to sales volume. These outlets were generally large customers who did not engage distributors. Marketing was according to Foster’s guidelines, providing many standard lines, display fridges, point-of-sales promotion, glasses and other accessories.

In the early years of the joint ventures, Foster’s had little choice but to use the strictly regulated distribution channels set up by the Ministry of Light Industry. Manufacturers could not act as wholesalers or distributors. Australian expertise in distribution had very little value and it was a wise decision to leave distribution to the Chinese partners. What Foster’s did not understand was the need to match the distribution channels to the products. Huaguang brewery’s commodity brand was Guangming, a product for the Shanghai market. It was mainly sold in the western suburbs, where the population was mainly workers with low disposable income. The retail price was 1.5 yuan (about 25 Australian cents) a bottle.

Foster’s was an international brand with a different cost base, reflected in its retail price of about 5 yuan a bottle, in line with other international brands. The Foster’s and Guangming brands were targeted at different market segments, so the existing distribution channels were not entirely suitable for both. When the joint ventures were formed, none had suitable distribution channels for their premium brands. Initially, distribution expertise was sought within the joint ventures, but it was soon apparent that the existing system was ineffective.

When transport infrastructure means bicycles

In Guangdong, distribution was quickly given to several large distributors based in Zhuhai (a newly developed economic zone in Guangdong near the border with Hong Kong), whereas previously a range of smaller Huangmei distributors had been used. But retailers, often small, had to pick up stock from Zhuhai and this created additional costs and inconvenience.

So although Huangmei was the best-selling brand for many existing retailers, it was too difficult to obtain once stock was concentrated in the hands of several larger distributors, especially when transport infrastructure often came down to using bicycles. Haizhu, the main competitor at the time, grabbed the opportunity and delivered to any retailers who could not pick up the Foster’s Princess or Huangmei brands stock from Zhuhai.

The inability to sell enough products of any brands in Guangdong had seen the total production of the Doumen plant fall to 20,000 tonnes in 1998, compared with 40,000 to 50,000 tonnes before the joint venture. Sales promotions and new brand launches became the only hope of reviving Doumen. Through arrogance, naivety or insufficient market research, Australia’s largest brewing company had paid a high price for adopting a marketing strategy where it was assumed that if a good product was made, people would rush to buy it.

Following later changes from a centrally planned economy to a market-driven one, the distribution system in China was liberalised. Some distribution channels were allowed to become privately owned to improve efficiency and organisations were permitted to select more suitable and cost-efficient distributors. By 2003, Foster’s could select distributors based on their infrastructure, financial capability, the other brands they carried, transportation and relationships with local government.

In 2004, a Shanghai sales office was established to take advantage of further changes expected from China joining the World Trade Organization. No real result came from this exercise either.

The power of local marketing knowledge

It has been highlighted previously that local market knowledge is the most important element in marketing and is fundamental to any organisation’s success, but it is a very complex concept, especially when applied across cultures. Unlike most knowledge management literature, De Long and Fahey (2000) have defined knowledge into three types: human knowledge, social knowledge and structured knowledge, as distinct from the more commonly recognised categories of tacit and explicit knowledge. De Long and Fahey facilitate a better understanding of the process of knowledge transfer.

Knowledge in general is created in a certain social setting and regulated by a certain structure, that is, an organisational structure. De Long and Fahey assert that in the process of marketing, knowledge transfer, human knowledge and social knowledge overwhelm structured knowledge.

In Shanghai, the Foster’s strategy was to develop its own marketing channels through professional young sales people; for Guangdong brewery, one major distributor was appointed in Zhuhai and Hainan; in Tianjin, products were mainly distributed through Tianjin Foster’s Brewery.

The retail structure in China was so different from Australia: large numbers of small outlets that sold small volume. As one expatriate put it: ‘Carlton & United Breweries was used to selling truck loads, not bicycle loads.’ Small retailers were so financially weak that offers of fees, signs and promotional activities were all extremely attractive to them. At a time when many international brewers were pouring into the Chinese market, there was no shortage of promotional dollars and small retailers quickly learnt how to have their neon signs made free. A Foster’s manager recalls:

In short, Foster’s did not leverage well on their existing brand value when transferring it into China. This was because China’s different cultural system prevented certain values from being transferred.

Local market on a global scale

China is such a large country of segmented markets that the cultural differences between these segments are as great as they are between Australia and China. Not surprisingly, this added further distribution problems for the joint ventures. Knowledge gained from one brewery, for example Guangdong, had little value for operations at the others. It was mostly a case of local problem, local solution.

For example, at Hainan Island, the Princess brand distribution was dominated by a company owned by three brothers. One had a monopoly on distribution of beer, another controlled the return of bottles. Having a large percentage of the product sold in Hainan without the bottles being returned could place Guangzhou Foster’s Brewery in serious financial jeopardy.

Within the permission of government policies, both direct and indirect distribution channels were used, depending on which was more suitable and effective. In Guangzhou, a sales office and several warehouses were established to distribute the products. In Shanghai, three warehouses were established between 1996 and 1998 to maintain inventory levels. In Tianjin, at its peak, trucks lined up outside the brewery when it was operating at full capacity.

When intensive distribution was more effective, as in Tianjin, it was adopted as best practice. In Guangdong, selective distribution was implemented and that strategy was sound. In Tianjin there was no competitor, so intensive distribution provided coverage of the market. In Guangzhou there were many other international brands, so Foster’s needed to select areas such as Guangzhou and Zhuhai to market its premium brand.

Intensive distribution is relatively expensive, especially in China because the culture emphasises building relationships among employees, suppliers and customers. Entertaining costs money but is effective and necessary.

Effective promotional communication

Promotional communication can only be effective f its objectives are clearly defined. Promotion for sales or marketing is different but it is not uncommon for sales and marketing objectives not to be clearly identified, because focus at first is on distribution to consumers; then the needs and wants of consumers can be addressed, based on market research. A Foster’s manager explained: ‘Marketing and sales kind of got muddied. Did we want marketing or did we want sales? We really wanted sales because we had some good brands, like Shanghai, which is an excellent brand.’

In marketing concepts, sales and marketing are clearly distinguished as the fundamentals of marketing. According to Kotler and co-workers (1998), marketing is the managing of markets to bring about exchanges for the purpose of satisfying human needs and wants. Sales, however, is about moving the products from the manufacturers to the customers.

In 1992, marketing was still a relatively new concept in China. It was really distribution, how to get the products to the customers. The initial decision to leave sales and marketing to the Chinese partners did bring satisfactory results.

In 2010, organisations often enjoy their marketing efforts implemented when they first entered the Chinese market. For example, Dove is the largest chocolate brand in China. This is because Dove did a lot of advertising, especially in its early days there. Through promotional communication it managed to establish a strong brand image in Chinese consumers’ minds. This is referred to by Chinese today as the ‘eye-ball’ economy, meaning once they see it they will buy it.

The uniqueness of Chinese culture presented operational practices that were difficult for the Australians to comprehend. For example, at the Doumen plant, purchasing was performed by sales personnel provided by the Chinese partner. At one management meeting they were discussing a fall in production caused by wet coal. The Australian general manager was totally confused because he could not see how the two topics could be linked. The decrease in production was caused by purchasing wet coal, which was cheaper but did not burn as well, less steam was generated and therefore production volume was reduced.

For the Chinese, the principle behind purchasing, being a part of the sales team’s duty, was to ensure they spent only what was earned through sales. Buying lower-quality raw material was standard practice in China’s brewing and other industries as a result of the centrally planned economy (Purves 1991). It was a way of controlling costs yet still producing the same quantity of product. A direct consequence was that products were not of consistent quality.

Unfortunately for Foster’s, sales did not increase with the improvement in product quality. In response, a special marketing research project was carried out between 1994 and 1996 under the control of the marketing department at head office in Melbourne. Chinese market research companies were engaged, and a report on new marketing strategies was presented.

These efforts did not come to fruition because of radical changes at board level on the direction of investment strategy, a general lack of confidence in the Chinese market, and pressure from shareholders. A sales and marketing manager was appointed at the time and a personal-selling strategy was implemented on a small scale in Shanghai, with good results.

The Hong Kong way is not Chinese

This was replaced by the next approach, which involved using Hong Kong marketing and sales firms, in the belief that if Australians could not gain market share and the mainland Chinese did not have enough training and knowledge, then Hong Kong Chinese must be able to succeed.

Thus Foster’s attempted to apply Hong Kong sales and marketing knowledge to mainland China. The delusion was that Chinese who spoke Mandarin were Chinese, and if they were Chinese and spoke Chinese, they would also understand the Chinese market.

Stanley Cheung was born in Taiwan, raised in America and was a Foster’s executive in China when interviewed. He did not believe that Hong Kong marketing experts were suitable because they lacked a fundamental understanding of the nature of the Chinese market: ‘He is from Hong Kong, lives in Hong Kong, works in Hong Kong and goes to China once in a while. I actually lived and worked in Tianjin for about a year.’

Cheung’s view was shared by other executives at Shanghai Foster’s: ‘These (in Hong Kong) didn’t want to come to China anyway. If they could, they would fly in in the morning and out at night, rather than spend one more day in China. This is typical of the Hong Kong people.’

It is always difficult to implement any action from arm’s length; to expect results as well is asking a lot. The fact that these overseas Chinese are seen as Chinese does no service to the overseas Chinese themselves, as they themselves are not confident in China because of the cultural differences between mainland China and their own home countries. In some cases, sending them to China did no service to their careers.

Time to rock’n’roll

Foster’s was already an established international brand, a solid product of consistent quality, when it sought to enter the Chinese market. This meant it was a product with the potential to be accepted easily by consumers and the company had great confidence. Foster’s believed that Chinese consumers would flock to buy its beer, as much as could be produced.

With a population of 1.3 billion, one bottle per person was all that was needed, it was reasoned. Foster’s was certainly not the only company that had this attitude about the Chinese market, only to find out later that the formula is not so simple. Sales projections showed this was realistic and a series of advertising campaigns were launched in three cities.

In Shanghai there was a relaunch of Guangming, the local commodity brand, using the vice-president of production as a figurehead to communicate the message of a local beer at a local price, but with import quality. Theoretically this should be effective and it is still a method used broadly today.

The advertising of the Shanghai brand featured a young Chinese couple drinking beer from champagne glasses with Shanghai’s millions of neon lights as a backdrop. This communicated a modern message to the younger generation of Chinese, that beer is the new medium of intimacy. Signage space was also rented at huge cost in the most prominent positions in Shanghai.

In Tianjin, an advertisement including China’s ‘godfather’ of rock’n’roll, Cui Jian, was aired on television. An executive described it thus:

The Tianjin campaign was considered successful by many people. So much so that 40 or 50 trucks lined up outside and the brewery was manufacturing at its peak capacity. In reality, according to Foster’s sources, beer was sold at below cost, therefore the greater the sales, the bigger the losses. Reliable figures were not available for research to prove this point as large corporations’ financial data is difficult to obtain.

In Guangdong, TV commercials were also used throughout the years of operation and major signage was also leased until 1998, the year before Guangzhou Foster’s Brewery was sold. Newspapers were especially used for ceremonial events when VIPs and officials were involved.

All media were used for advertising in Shanghai, Guangzhou and Tianjin, including TV, radio, newspapers, posters and signage. In Shanghai, magazines were also used to advertise Shanghai Foster’s Brewery. Magazine, newspaper, poster and radio ads carried a strong message of joint venture and management personnel being Australian.

This approach was clearly to show that Shanghai Foster’s Brewery was different from other state-owned enterprises. Australians in the joint venture were used in advertisements to convince the public, and ‘Sino-Australian joint venture’ (中澳合资) was clearly visible on all packaging materials.

Tianjin was the only city where major road signage was not used because it appeared not to be cost effective. Because none of the plants reached a break-even point, it is difficult to determine which medium of advertising was more effective. Moreover, the effectiveness of each medium was not accurately assessed, and from time to time questions were raised about whether certain advertising was necessary, especially when costs were looked at. A typical comment was:

Signage proved to be a costly exercise for Foster’s. Although generally ineffective, it is a widely used method of advertising in China.

Consumer perceptions of Australia

An early problem for Foster’s was choosing advertising agencies. There were no suitable agencies with Western advertising expertise and an understanding of Chinese culture. In the early 1990s there were few advertising agencies in China and agencies from Hong Kong have been used in more recent years, as has ACNielsen.

The extremely strong position of Foster’s in Australia gave the company a false perception of its brand awareness and position in the context of the international market. Foster’s put itself in the same group as other international brands such as McDonald’s, Coca-Cola, Heineken, etc. But it was questionable whether Foster’s, as a brand, had the same level of awareness in China as those.

To many Chinese consumers, Australia is a small country with small consumer brands, and Foster’s was unknown. Even adding a kangaroo to the label apparently did not create a connection in consumers’ minds between the beer and Australia. For many Chinese, brewing is a concept associated with European culture, not the Australian Outback. Foster’s later changed TV commercials to focus on a message of Australian lifestyle: the beach, the Outback and relaxed living.

The strong positioning of Foster’s as Australian did not allow for creativity in advertising from its head office, over and above the Australian aspect, to bring brand relevance to Chinese consumers. When Heineken launched Reeb (beer spelt backwards), Foster’s launched Regal (lager spelt backwards). Foster’s Lager as a brand had to add the word beer simply because the word lager had no connection to beer in the mind of many Chinese consumers.

The Shanghai Dragon Girl advertisement was the most controversial. It was created by George Patterson of Melbourne and aimed to capture the European market. The full-body tattoo on the girl could be perceived as a symbol of the 1930s gangster culture of Shanghai and was a mix of perceptions of Shanghai and Chinese culture from a Westerner’s point of view.

As an advertisement for Shanghai Beer, it was successful only in London. But from the time it was developed, all personnel in the Chinese sales and marketing team used it. The advertisement indicated the lack of understanding by Australians of Chinese culture and highlights yet again what research for this book found: lack of cultural understanding affects the success of an Australian operation in China, and just how wide the gap is between the two cultures.

Some of the younger members of the marketing team were interested in using this advertisement in most recent years. The Shanghai Dragon Girl advertisement was observed recently in the Shanghai Long Bar, a popular destination for expatriates in Shanghai, and owned by a Westerner. Shanghai Dragon Girl is still culturally unsuited for Chinese consumers because it represents an Orientalist image that is designed to appeal to Westerners.

Personal selling and other sales techniques

Personal selling was used by Foster’s in Shanghai for only a very short time and was based on the simple, old-fashioned door-to-door sales technique. The sales and marketing manager for China between 1994 and 1996 came through the Melbourne brewery and had many years of experience. In China he conducted many training programs for local sales people and is believed to be the only person to walk around the market and talk to distributors. He achieved good results and extended the customer list.

The reason other sales and marketing people, regardless of their nationalities, had not used such a simple sales technique could be because of their background and training; the others did not have a background in sales. Most had majored in marketing, some with a Master’s degree, so they were equipped with marketing theories and practices. Sales was not one of their strengths.

A large number of sales promotions were carried out constantly in all three cities. Price discounting and tasting promotions were the most common methods. The biggest sales promotion was the official launch of the Foster’s brand in China, in Guangzhou in June 1995. It was, in effect, the launch of the first batch of Chinese-brewed Foster’s Lager, and it was described by the chief operating officer of Foster’s China at the time as a ‘significant milestone in the implementation of Foster’s China strategy’. Although it was suggested at the time that the launch was too early, the timing was considered critical to keep ahead of other international brands.

The launch of Largo in Tianjin was an expensive exercise but was considered to be successful. It was a new Foster’s brand aimed at supplying local consumers with a local product, brewed using Chinese techniques and using rice instead of barley. Largo was sold at a local price and was a product of a strategy to marry consistent quality with local standards and price. The use of rice makes the brewing process slightly different from using barley, which is normally turned into malt first, either by the brewery or purchased.

In Shanghai there were many launches for several brands. At the start of the joint venture launch of Shanghai Beer, the existing brand of the Chinese partner (and still a strong brand today) had to be put on hold for six months. It was a difficult situation in which the brand was being ‘farmed out’ by the Ministry of Light Industry at various times to help smaller breweries to survive.

Because many smaller breweries were producing the Shanghai brand elsewhere, the quality was inconsistent and uncontrollable. It was unclear how many of these types of contracts had been signed or were operating. The decision to delay was in order to clear all existing stock from the market; it had a shelf life of six months but, as mentioned, use-by dates were not always followed.

The first relaunch, with new packaging and labelling, was in 1994. The promotional theme emphasised the joint venture and Australian management. Promotions were scheduled every three months and customers were rewarded with small gifts, such as key rings, umbrellas, etc.

Employing young women for promotion campaigns, although politically incorrect, was a common strategy also used by other international breweries. Young women were sent to restaurants, shopping centres and department stores. Some restaurants organised different brands for promotion on different nights and there were times when five or six brands were competing at the one promotion site. Obviously, the Australian managers did not like this but continued to take part in these promotions because other brands were doing the same thing.

A lesson in cultural behaviour

The launch of Eazy in Guangdong advertised that every two crown seals handed in entitled a customer to one free beer. Neither Australians nor overseas Chinese had considered that false crown seals might be produced for profiteering. A former manager recalls: ‘Normally in Australia you get about 20–30 per cent of people sending something back. We got more than 100 per cent return and soon realised that our distributor was printing them.’

A major cross-cultural difficulty is the inability to comprehend the other’s behaviour. Culture is influenced by the environment, historical factors, the political system and many other internal and external factors. The Chinese had been through the Cultural Revolution and 50 years of a socialist system. Improving their income level was a far stronger urge for most Chinese than for Australians, few of whom are brought up lacking basic necessities.

The crown seals fraud was a case in point. As a marketing strategy, Foster’s decided to put crown seals inside caps as a reward. Australian marketers were warned but did not believe anyone would open all the caps to search for crowns, without drinking the beer. But the shop owners did indeed open all the stock, then re-capped the bottles. Instead of giving the reward to the customers, the shop owners collected all the extra stock to improve their profit margin.

Foster’s has performed well in all other parts of the world in selling its products. One of its major strategies is corporate communication. One of Australian’s biggest sporting events became the Foster’s Melbourne Cup in 1985. Foster’s has been the major sponsor of several leading sports events with a worldwide focus, such as Formula One motor racing and ASP Men’s Championship surfing. In 2004 Shanghai hosted its first Formula One race and brand awareness gained from the Foster’s presence at the event has been huge.

The price structure in Australia meant that one standard drink cost roughly 0.0017 per cent of average monthly income. In China, a drink of premium beer cost 0.14 per cent of average monthly income. Even at the lower end of the commodity range, a standard drink still represented 0.004 per cent. That is still more than twice as much as in Australia, so premium brand prices would have been impossible for most Chinese to afford. In terms of volume, China was certainly very attractive to marketers. However, the situation has changed much since then. China as a market today provides international brands with high-volume as well as high-income consumers.

Cultural differences are the biggest of many challenges for international firms marketing their products in China. Without an understanding of these differences, marketers are unable to comprehend consumer behaviour and may adopt inappropriate strategies. Over-confidence or an arrogant attitude based on previous success can lead to total failure in a new national market.

Marketers should not take market information and distribution channels for granted. Cultural differences in China have to be analysed, fully understood and then accepted and dealt with, using the right strategies to ensure that products will reach customers. Thorough research before entering a new market is crucial to any strategy and only when all the marketing dynamics are considered and acted on will an organisation compete successfully in a cross-cultural international market.

Since its open-door policy shift in 1979, China has made great and rapid progress. Economically, it has changed from a totally centrally planned economy into a mix of centrally planned plus a market economy. This makes China a very complex market. In addition, it has been shown that Chinese consumers have low tolerance towards unadaptable marketing approaches because of their culture and economic structure. Too many organisations have failed in China because they have had an inflexible approach.

This chapter is based mainly on the Foster’s experience and is merely a sample of how one organisation among many has failed when not taking cultural differences into account to the extent necessary for success.

References