[China Focus] Turning Point in China's High-End Refrigerator Market

China's home electronics market has always been very price sensitive, which is one of the reasons why factories engage in price wars.

Jul 11, 2007
Nikkei Electronics Asia
Fig 1 Average Price Trends for Primary White Goods
Fig 1 Average Price Trends for Primary White Goods
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Fig 2 Market Share Trends for Domestic and Foreign Brand Retail Sales in China's High-End Refrigerator Market
Fig 2 Market Share Trends for Domestic and Foreign Brand Retail Sales in China's High-End Refrigerator Market
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Fig 3 High-End Refrigerator Sales Volume in Key Cities
Fig 3 High-End Refrigerator Sales Volume in Key Cities
[Click to enlarge image]

China's home electronics market has always been very price sensitive, which is one of the reasons why factories engage in price wars. Research indicates that Chinese consumers are now buying higher quality goods at higher prices. Is this trend evident in China's refrigerator market? If so, what are the implications for makers of high-end refrigerators? This article explores these issues to serve as a point of reference for industry insiders.

Trend toward High-End Refrigerators
There is as yet no clear definition of what constitutes a "high-end" refrigerator in China. In 2004, Sino Market Research Ltd (Sino-MR) produced a study in which high-end refrigerators were identified as those being in the Rmb3,000 and higher cost bracket.

Rising average prices are a long-term trend. Fig 1 below (provided by Sino-MR) provides the average price trends for primary white goods. Refrigerators, washing machines, and air conditioners all exhibit rising average prices over the long term. For example, the average price for a refrigerator at the beginning of 2003 was approximately Rmb2,200, but this increased to almost Rmb2,800 by January 2007. Price increases can be due to any number of reasons, such as more expensive raw materials, increases in gross profit for channel partners, upgrades to product structure, and so on.

There has also been an increase in high-end consumption, with higher consumer incomes now available. The rapidly growing middle-income class of consumers in China is drawn to higher-end and newer types of products, and accepts the need to pay higher prices.

Meanwhile, management philosophy and profit goals have been strengthening. In the past, major producers placed the highest priority on market share; that is, they followed the traditional management philosophy that you should do whatever it takes to enhance market share and expand. However, through the struggles they've experienced during the past few years of competing in the market, major producers have discovered that this management philosophy does not necessarily lead to expanded market share, and their profit margins have been decreasing. Thus businesses have changed their management philosophy and placed profit higher on their list of priorities.

Development Trends for High-end Refrigerators
Sino-MR estimates that 14.27 million refrigerators were sold in China in 2006. If we assume that 15% of these were high-end, that would mean that 2.14 million high-end refrigerators were sold. However, considering that high-end refrigerators have a lower share of the third- and fourth-class market, a more reasonable estimate for high-end refrigerator sales is 1.6 million units. Assuming a per-unit profit of Rmb480, the total profit from sales of high-end refrigerators is Rmb800 million. Thus, although high-end refrigerators represent only 11% of sales volume, they generate nearly 40% of the profits.

Our analysis shows that high-end refrigerators are a profitable market, and the market opportunity has already arrived. However, Sino-MR's research shows that domestic brands represent less than 30% of high-end refrigerator sales; that is, 70% of the market is occupied by foreign brands. Hai'er is the only domestic manufacturer that performs well in the high-end refrigerator market, with 26% of high-end sales in China. So Hai'er holds nearly the entire market share for domestic brand high-end refrigerators. Sino-MR's most recent statistics also show that domestic brands such as Hisense, Rong Sheng, and Frestech have been increasing their market share for high-end refrigerators.

What Are the Market Challenges with Domestic High-End Refrigerators?
Most domestic brands perform worse than foreign brands in the following six respects: 1) There is an insufficient number of high-end refrigerator models on the market; 2) High-end refrigerator models don't contribute enough to sales for domestic brands. Indeed, the sales share for new models put on the market by domestic brands is quite low; 3) The strength of domestic brands lags behind foreign brands; 4) Price positions vary. There is not a unified understanding of where domestic brands should position themselves on price; 5) Improper regional placement. The main battlefield for high-end refrigerators should be in tier 1 cities, but some domestic manufacturers focus on tier 3 and tier 4 cities; and 6) Domestic brands are not sufficiently competitive.

How Can Makers Succeed in the High-End Refrigerator Market?
First, transform premium brands. McKinsey & Company's research shows that there are four types of brand in the world: premium, economy, dead-end, and hitchhikes. Premium brands are those that can both occupy an even larger market and obtain an even bigger profit, and represent relatively high-end products.

Second, transform management philosophy. As previously mentioned, traditional management philosophy is outmoded; businesses should now shift their focus to researching the demands of high-end consumers, and management goals should prioritize raising market share in the high-end market.

Three, research the high-end market. In order to establish a solid base for occupying the high-end market, more in-depth research should be performed on market scope, market structure, competition, brand strategies, models that sell well, etc.

Fourth, choose a regional focus. The high-end refrigerator market only exists in a few developed cities; by performing well in these cities, a brand will do well in the high-end market.

Five, choose a key position. Advancing in the high-end market is a step by step process; to enter into this market, one must choose products that not only can be sold at a higher price but which also can occupy a relatively large market share. It's not enough to simply come out with a couple of high image products that will sell for for Rmb10,000 or 20,000.

Six, strengthen your product. Only high quality products can attract consumers and convince them to pay a higher price.

by Ye Ping, Zhang Dongmei,
Sino Market Research Ltd