261 CHAPTER 7 SEGMENTATION, TARGETING, AND POSITIONING CASE 7-1 Continued (refer to page 236) Segmenting the Chinese Luxury Goods Market iego Della Valle, chief executive of Italian luxury goods marketer Despite or because of their humble origins, members of this group sometimes engage in freewheeling spending and conspicuous growth in China. In a recent interview, Della Valle noted that China consumption. The term Tuhao is a popular way for Chinese to mock has upended traditional models of the way luxury markets evolve this type of consumer behavior. Tu literally means "dirt," but in common In the waterfall or cascade model, a luxury brand's reputation usage it has taken on the connotation of vulgar" or "unrefined." Hao's would mature over the course of many years. The reason is simple translation of rich is an extension of its original meaning as "bullying Elite, wealthy customers would be the first to purchase high-quality or "despotic"In sum, tuhao is a pejorative term that roughly translates high-end brands. The middle class would aspire to own those same as "uncultured rich and is sometimes applied to me loban and oth brands, but only at a later time would they acquire them. In a similar ers with a penchant for profligate spending tied to uncouth behavior manner, lower-income consumers would aspire to the luxury goods With these definitions in mind, imagine witnessing the following that the middle class had acquired, later, some in the lower-income tier scene would be able to buy select luxury brands. Today, Della Valle notes, huge numbers of Chinese consumers are A Chinese couple is shopping at the New York City flagship simultaneously dem ury goods. The challenge is to main store of French luxury goods marketer Hermes. The man is a tain an image of exclusivity in the face of exploding popularity. Tod's moi loban, the woman his Xiao San (Chinese slang for the and other luxury goods marketers are working hard to understand the Chinese luxury consumer One thing the marketers have discovered is third woman in a marriage, usually a young woman seeking that the milions of newly wealthy Chinese consumers can be divided money from an older married man). The couple is shopping for into several segments: the super-elite, the newly rich and government Hermes's iconic Brkin bag, a limited-production item priced at officials $10,000 or more. The Xiao San has a Birkin on each arm, and can't decide which one she likes better. The mi laaban says Super-Elite "Buy both, buy both, its just another truck of coal, it's nothing." The first segment, the super-elite" or "extremely rich, consists of individuals who seized entrepreneurial opportunities in the 1980s when Both types of newly rich invest heavily in their children's educa Beijing instituted economic reform policies and began to open China's tions, due in large part to the fact that they themselves did not go to market. A typical member of this segment is educated, influential and college. In fact, the term "rich redneck is sometimes applied to this well respected in Chinese society. These individuals started businesses Segment as a put-down) There is a sense among the newly rich that and now, decades later number among China's economic elite they neither command the respect nor have the influence of the super For example, 61-year-old Jianlin Wang has a net worth of more elite. Arious for their children to earn respect, parents in the newly than $15 bilion. He is chairman of the Dalian Wanda group, which rich segment aspire to send their children abroad to attend college is a powerful force in Chinese real estate. Wang is the richest man In 2017, there were 350,755 Chinese students enrolled in U.S. in China, and ranked No. 56 in Forbes magazine's 2014 rankings of educational programs, including secondary schools, undergraduate the world's billionaires. His company currently operates dozens of studies, and graduate School Chinese students represent one-third shopping centers, and is developing plans for a new theme park. of the total international student population in the United States, and Yan Jiehe is another member of the super-elite, a former high school their numbers have tripled over the past decade. The most popular teacher, he rose to prominence by restructuring some of China's programs for these students are STEM ("science, technology, engineer poor performing state-owned enterprises. Pacific Construction ing, mathematics") and business administration and marketing. The Group, the company he founded, is China's largest privately owned University of Southern California is currently the number 1 destination construction company for students from China India, South Korea, Saudi Arabia, and Canada also send tens of thousands of students to the United States each year Newly Rich The second segment, the newly rich consists of Chinese whose Government Officials wealth, like that of the super-elite, dates back only one generation The third luxury Subsegment consists of government officials, ranging In contrast to the super-elite, however, the newly rich typically grew from senior officials("tigers") to petty bureaucrats fies) Gift-giving up in rural areas and do not have college educations. While in their is deeply embedded in 5,000 years of Chinese culture and history. His 20s, some members of this group moved to large cities seeking newtorically, there is a sales spike in demand for cury goods each March opportunities. Largely self-taught, this group improved their skills by when thousands of Communist Party delegates converge on Beijing for reading and immersing themselves in self-study. After joining the urban annual meetings Lower level officials seek favor with superiors by giving workforce, they dimbed the corporate ladder and ultimately rose to Hermes scarves, handbags from Louis Vuitton or Gucci, or Montblanc leadership positions. Not as affluent as the super elite, this segment pens. Overall, government officials account for an estimated 50 percent spends selectively as well as splurges of luxury goods sales. Chinese businessmen seeking government con A variation on the newly rich were those Chinese who exhib tracts, business license, or tax breaks also buy luxury gifts for govern ited little desire to move to the city. Instead, they stayed in the prov ment officials. In addition, cash gifts enable the recipients to buy Swiss inces, where they exploited the local natural resources and thereby watches, jewelry, designer clothes, or imported sport utility vehicles accumulated wealth on a par with the super-elite. The term mi loban The result of this behavior has been rampant corruption in China's coal boss" or "coal baron") was coined to describe rich mine owners bureaucracy. In recent years, President Xi Jinping has targeted this from Shanxi Province, where abundant coal reserves are found. group by cracking down on lavish spending, which has dampened 262 PART 3. APPROACHING GLOBAL MARKETS the vehicle of choice for U.S. presidents and Hollywood stars. Accord- ing to Kumar Galhotra, former group vice president for Lincoln and chief marketing officer for Ford Motor Company, focus groups in China repeatedly use the word "presidentialfor example, referring to John F. Kennedy-when describing Lincoln's heritage and image The latest generation of Continental was designed specifically to appeal to wealthy Chinese who can afford chauffeurs. Interior options include premium materials such as Alcantara suede. Now that Beijing has lifted the one child per family limit, some buyers are looking for a vehicle that can carry children as well as grandparents. And, with the Chinese government restricting the number of cars on the road in an effort to reduce pollution, the decision a first-time lucury car buyer makes becomes critical Galhotra notes that managers at Lincoln's Chinese dealerships are always on the lookout for ways to enhance the customer experience and build relationships with buyers. One observation: The name of Lincoln's top-of-the-line SUV, the MKX, is hard for Chinese speak ers to pronounce. Therefore, starting in 2019, the name will be the Lincoln Nautilus. The localization approach is clearly working: Lincoln's sales in China increased from 32.558 in 2016 to almost 50,000 in 2017 demand for some lucury goods. Although bribery is against the law in China, the law is not enforced consistently. To protect their customers, luxury goods companies are discreet. Managers at some stores keep special accounts and use code names for government officials. Some times a middleman, rather than the gift-giver makes the purchase. For example, a private businessman might use his credit card to make the purchase. He then passes the gift off to a government official, who in turn gives it to the ultimate recipient. Thus, the purchase process is sometimes a two-person activity: One person, the gift-giver, selects the gift, the second person pays for it. Shopping Behavior Varies by Segment The extremely rich favor luxury brands that reflect the buyers' superior taste. For example, a Louis Vuitton handbag with its iconic monogram would be too commonplace. Instead, this customer would prefer a handbag from Bottega Veneta that offers renowned Italian craftsman ship but signals the brand identity more discreetly. The extremely rich consumer also shops for luxury goods abroad while on business trips or when vacationing. This segment was an early adopter of Apple's iPhone, even before Apple established stores on the mainland, the extremely rich purchased the phones in Hong Kong, the United States, and the United Kingdom The newly rich shopper, by contrast, is not as knowledgeable about luxury brands and does not seek out information about them. Com- ing from a frugal background, this shopper is aware that less-exclusive brands can be purchased for reasonable prices, even so, newly rich shoppers also want a reward for years of hard work. "Practical luxury brands such as Louis Vuitton, Gucci, and Chanel are the right choke. The exception would be the tuhao variant of the newly rich, who would be more status conscious and more likely to make extravagant purchases Government officials, the third segment, must be strategic officials can't flaunt purchases that they can't afford on their state salaries. "Accessible luxury brands such as Coach are the ideal purchase for this group. This segment also favors group shopping trips arranged by travel agencies. The agency takes care of transportation, accommoda- tions, and other logistical issues, the tourists get to focus on shopping According to the Paris Tourism Office, nearly 2 million Chinese tourists visited Pans in 2016, where they spent more than E1 bilion. Tour buses regularly stop at Galeries Lafayette and other popular destinations in the French capital. Overall, the average Chinese tourist on such trips spends $5,000 Lincoln's Focus on the Chinese Market Executives at Ford and the Lincoln Motor Company acknowledge that the Chinese market is critical for the revitalization of the Lincoln name- plate. The Lincoln Continental, out of production since 2002, was once Discussion Questions 7-6. Compare and contrast the various segments of Chinese luxury consumers and customers profiled in the case. 7-7. How have luxury goods brands responded to President Xi Jinping's crackdown on corruption? 7-8. Why do so many Chinese parents want their children to study at foreign universities? 7-9. Assess the prospects for success for the Lincoln Motor Company's entry in the China market. Sources: Phoebe Wall Howard, inco's Leader in China Adapts to Seling lucu SUV, USA Today December 15, 2017), p. 68, Brook Lamar, "The Now Kids, The New York Times Magazine (February 5, 2017), pp. 40-45, Brian Groom, "Fears over Loss of Billions from Overseas Students, Financial Times-FT Special Report: Destine Bion North of England (April 15, 2016), p 2. Te-Ping Chen, China Cuts Elite Programs Aimed at Overseas Study." The Wall Street Joumal (December 21, 2015), p. 119, Bal Vask, "Chinese Tastes and American Heritage Inspire New Continental, The New York Times March 30, 20151.p. B2: Laurie Burkitt and Alyssa Abkowitz, "Corruption Crackdown a Boon for Lingerie." The Wall Street Journal February 14-15, 2015 p. B4, Scott Condrowski, "China's Baddest Billionaire Builder Fortune July 7, 2014 pp. 105-114: Joseph B. White and Mike Ramsey, "Ford's China Beach head for Lincoln," The Wall Street Journal (April 18, 2014), p. 36, David Gelles Bringing Lusury, Fast, to China's Cities. The New York Times September 11, 2014 pp. 81. & Amy in Yet Another Way to Mock China's Rich, The New York Times (October 15, 2013, p. 14; Tim Higgins, Chinese Students Major in Luury Cars, Bloomberg Businessweek (December 23, 2013. pp. 23-25, David Barboza, "For Bribing Officials, Chinese Give the Best The New York Times (March 14, 2009). p. Ad