and the Mind of the New Chinese Consumer
China, the sky the limit Apple CEO Tim Cook noted last year. never seen so many people rise into the middle class who aspire to buy Apple products. It quickly become number two on our list of top revenue countries. But Apple success is unusual. Prior to 2008, the company had been quietly selling products in mainland China for more than a decade via its network of domestic specialty retailers.
By mid 2008, according to research firm InStat, between 400,000 and 1,000,000 iPhones were in use in China. where prices are roughly 30% cheaper than in mainland China and smuggled them into China via unofficial gray channels. These devices were then often sold for a profit on websites such as Taobao, the eBay of China.
In July 2008, just prior to the start of the Olympics, the first Apple store in China opened to great fanfare in Beijing Sanlitun Village. This was Apple 219th store globally. By the end of 2009, mainland China still remained a nike lunarepic flyknit blip on Apple revenue radar. But over the next three years, the growth of Apple 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 in mainland China 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 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 nike x pigalle that would make any retailer jealous.
According to Alvin Tse, product director at Flipboard China, a popular iOS application developer, there were 20 million to 30 million iPhone activations in mainland China at the end of 2011. He estimated that there will likely be a similar number of additional activations in 2012. These numbers include devices purchased both within and outside China.
According to Apple second quarter 2012 analyst earnings call, the company generated US$7.9 billion in revenue in China, up 300% compared to the same period in 2011. iPhone sales were up 500% from a year earlier. China accounted for 20% of Apple total second quarter revenue, up from 2% during the same period in 2009, despite just six Greater China retail stores. To put this in context, Reuters noted that Pennsylvania has eight Apple stores amid a population of nearly 13 million. Given there is currently only one Apple store for every 216 million people in China, it is no surprise that Apple Cook sees China as a massive future growth opportunity for the company in China.
On the third quarter 2012 earnings call, Cook stated that Apple revenue in China was US$5.7 billion for the quarter, an increase of 48% compared to the same period the year before. Through three quarters in 2012, the company revenues in China totaled US$12.4 billion, compared to US$13.3 billion for all of 2011. Apple successful launches of the iPhone 4S and the new iPad coupled with the recent addition of China Telecom and the potential near term addition of China Mobile (and its more than 600 million mobile subscribers) to its list of domestic Chinese mobile carrier partners are clear indications that the company shows no signs of slowing down in China.
In comparison, KFC and Starbucks are often highlighted as examples of successful foreign companies in China. According to KFC parent company YUM! Brands 2011 annual report, at the end of 2011, KFC had more than 3,700 restaurants in over 700 cities across China. The report went on to note that China accounted for 44%, or US$5.5 billion, of YUM US$12.6 billion global revenue in 2011. As of early 2012, Starbucks had more than 550 locations in China, and mainland China accounted for 5% of the company revenues. In the quarter ending in April 2012, KFC and Starbucks generated revenues of US$1.2 billion and US$176 million, respectively, in mainland China, compared to Apple US$7.9 billion in revenue during the same period.
Status and Independence devices are considered luxury products in China. According to the 2011 McKinsey Insights China report on China Love for Luxury, the luxury market in China is projected to hit US$27 billion by 2015, accounting for more than 20% of the global luxury market. Apple iPhone 4 retails for 6,000 RMB (US$945) in mainland China, which equates to roughly 25% to 30% 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 mindset known as mian zi, or One implies one 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. While few people in China actually understood this philosophy, they did know that the iPhone is not only a luxury that not everyone can afford; it is also the embodiment of what Hannah Beech referred to in her Time magazine article, Cult of Apple in China, as western culture, which allows Chinese iPhone owners to differentiate themselves from the masses. According to Mickey Du, an investment professional nike shoes 95 air max 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% of China luxury market.
Chris Evdemon, a partner at the Innovation Works Development Fund, is quick to point out that Apple products are still mainly about status in China. He notes that the extent to which status plays a role in buying decisions for Chinese consumers depends on which segment of the Chinese market one is talking about. tends to be driven by work and utility, usage in China is centered more around entertainment and gaming. However, unlike a knock off Louis Vuitton purse, which could serve the same basic functions as an authentic LV bag, the combination ofthe iPhone vast selection of apps from the App Store, music selections from iTunes, sophisticated software capabilities and seamlessly integrated hardware and software user experiences cannot be easily replicated by knock off products.
In addition, better informed consumers and greater exposure to real luxury products, via media channels such as the Internet, increase the likelihood of being caught with a fake Apple product, thus deterring many Chinese shoppers from considering a knock off product as a way to establish status. According to the 2011 McKinsey Insights China report, the percentage of consumers who said they were willing to buy fake jewelry dropped significantly, from 31% in 2008 to 12% in 2011. This general consumer trend toward authentic products as a way of enhancing social status and gaining access to superior functionality and design elements will continue to benefit Apple going forward.
Chinese consumers today are looking for more than just luxury goods; they want the luxury experience as well. According to BCG 2012 report, Redux: Raising the Bar of the Selling of Luxuries, sales for personal luxury goods increased 22% annually, while experiential luxury grew by 28%. In a market where consumers love to touch and feel before they buy, Apple has turned the retail shopping experience into entertainment. However, true to its Different company DNA, A