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Think Differently— An SME Strategy in China

Think Differently— An SME Strategy in China

In 2012, China’s State Council publicized the guidelines to promote the movie industry in China. At that time, movie theatres in small cities were still neglected by their investors. My brother and I grew up in a small coastal city named Penglai. The only cinema in the city was shut down in early 1990s when people all shifted to owning TVs. That was a big disappointment to my family with movie-going traditions.

 

We instinctively felt that this would be a good investment opportunity for us, however, as individual investors with limited funds, we did not have extra resources to conduct a classical due diligence to verify our idea.

 

We then started observing the market and tried to find sensible indicators in lieu of a direct due diligence. What we found was the following:

  1. Targeted consumers of movie cinemas in today’s China are in the 18-35 ages of the younger generation. This generation was brought up under the huge influences of western culture: KFC food and Hollywood movies. Targeted consumers of these two businesses are highly overlapping.
  2. Before approving a franchisee in one place, large brands will mostly make thorough due diligence to audit the market. As a result, franchises like KFC, McDonald will be a perfect indicator to determine whether a small city may be able to support a cinema.

 

Penglai already had one KFC in 2012, and luckily, we found a great location for a cinema near the KFC store. This proved to be the most successful investment we did in my life so far, which has been growing over 60% YoY for the past 3 years.

This is an interesting example showing how SMEs may conduct their businesses differently than those of their MNC counterparts and achieve satisfactory results.

This story also offers an inspiration on how a US/European small brand may enter into the China market. China has over 2000 cities in the same ranking as Penglai, some are relatively poor and some are wealthier, but they all have huge growth potentials (read my prior LinkedIn post on China’s 5-year plan). Xi Jinping has recently pledged China will end poverty by 2020, and most of these people are currently living in the small cities or counties. Driven by this plan, we can expect more and more cities will join the wealthier club in the next 5-10 years. One trend in consumer market is that the new wealthier population will start seeking foreign brands which could be a showpiece of their wealth.
Instead of taking the same “Top-Down” entry pattern as the large foreign brands (starting from large cities like Beijing and Shanghai) which have a well-designed business model, small brands might find less resistance and easier entry in the wealthy small cities. These smaller foreign brands can fill the price gap between the large foreign brands and small local brands. This strategy will also help to avoid bloodshed head-on-head fight with the established large brands in larger cities.

Gary Qu
COO
Trungale, Egan + Associates

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