Disney now claims 4,200 such retail "corners" devoted to its merchandise in mainland retail stores. That's up from just 1,700 corners a year ago, an increase that reflects a locally tailored strategy emphasizing sales of brand-name goods like sweaters, stuffed animals and watches. Worldwide, Disney's television, film and theme park divisions account for about 94% of sales, with consumer products chipping in a modest 6%. But in China, Disney's consumer arm -- which includes licensed toys, clothes, books and games -- actually accounts for the bulk of company revenue.
The reason is simple: Consumer products aren't burdened by the heavy regulatory hand that weighs on media businesses in China. What's more, China's retail market has seen rapid growth in recent years, including expansion by global retailers that sell Disney goods such as Wal-Mart Stores Inc., France's Carrefour SA, Britain's Tesco plc and Germany's Metro AG (see box). Stanley Cheung, managing director for Disney's China operations, says all of Disney's business lines are important. But he acknowledges that the company is "pushing consumer products a lot mainly because the environment of consumer products is well defined according to the [World Trade Organization]. There are clear definitions of how to proceed."
It isn't that Disney's other offerings are altogether stymied in China. Many Chinese in their 20s grew up watching televised cartoons of Mickey and Donald Duck and watching videos (albeit often pirated ones) of Disney movies. Online gaming firm Shanda Corp. will debut games featuring Disney characters in the spring of 2007. In 2006, despite tight restrictions on imported movies, Disney managed to obtain theater showings of three of its films, including "The Chronicles of Narnia," "Eight Below" and "Cars." According to Disney, a theatrical version of "The Lion King" that played in Shanghai in the summer of 2006 set a national record, with 5,000 tickets sold in a single day. Some Chinese Disney fans have even made the pilgrimage to Hong Kong Disneyland, the theme park that opened in September 2005 and is expected to see growing mainland traffic. All this would seem to offer a promising foundation for future expansion.
Disney CEO Bob Iger, who has identified global growth as one of the company's top priorities, says China and India represent "great opportunities." But there are caveats. Iger also told investors in 2006 that in both countries "the near-term issues are great, and they are not for the faint of heart, whether it's because of site issues, local regulation or piracy, or in some cases the sheer lack of infrastructure."
And of all the local regulations, China's curbs on foreign broadcast media are likely the biggest hurdle. Disney can't buy media outlets outright in China, as it's allowed to do in some other emerging markets. For example, in India in 2006, Disney was able to acquire a 24-hour Hindi-language channel for kids, which it hailed as an important step toward building its brand and business there. But in China, where foreign TV programming is closely regulated, Disney cartoons air at the pleasure of government-run TV stations.
China typically allows only 20 films to be imported into the country each year for theater screenings. Disney's kid-oriented fare does comparatively well under the quota. But the tight limits also likely contribute to counterfeit sales of movie DVDs priced at $1 or less -- a painful source of lost revenue for Disney's film business.
The retail channels look wide open by comparison. Euromonitor International estimates the China retail market was worth $528 billion in 2006, up 8.9% from the prior year. Between 2006 and 2011, the retail industry is expected to post compound annual growth of 5.4% to be valued at $690 billion. "Within China, consumer products is definitely operating in a much less regulated environment, and therefore we're able to succeed here," says Ken Chaplin, Disney's Shanghai-based vice president and general manager, retail sales and marketing, for Asia-Pacific.
Though Disney declines to disclose its annual sales in China or say whether it's profitable, it now claims about 200 employees nationwide. Most are in the consumer products and TV business lines, though the company has also been adding staff in its Internet and mobile phone arms.
Disney's retail presence is concentrated in a handful of the wealthiest cities -- Shanghai, Beijing, Guangzhou and Shenzhen. But over the next few years, it plans to drive deeper into second-tier cities such as Wuhan, Chengdu, Chongqing and Nanjing, expanding from more than 4,000 retail "corners" currently to 6,000 by 2009. (Just as in the U.S., Disney doesn't directly operate any retail stores in China.)
This marks a decided step up in the company's ambitions, especially in light of Disney's relatively limited recent history in China. It wasn't until 2005 that it set up a wholly foreign-owned enterprise, or WFOE, on the mainland. Before that, it ran its mainland operations out of Hong Kong, with only a representative office in Shanghai. In deciding to become a WFOE, Chaplin says Disney was influenced both by the growing ranks of affluent Chinese consumers and a key rule change in December 2004 that allowed foreign retailers to operate without Chinese partners.
To be sure, Disney can trace its history in China back some 70 years, to when it released the film "Snow White" in 1938. A long hiatus followed the Communist takeover. Then, in 1986, the company was allowed to start showing Mickey Mouse cartoons on state-run China Central Television, or CCTV. Retail goods got going in a small way a dozen years ago, about the same time that Disney's "Dragon Club" cartoon show went on the air. Today "Dragon Club" is broadcast by 41 TV stations around the country.
The retail strategy involves working with several different kinds of partners. Global retailers such as Wal-Mart and Carrefour are generally allowed to choose their own suppliers to make Disney-licensed clothes and toys. Meanwhile, Disney's recent shift to WFOE status has allowed it to do deals with smaller licensees in Chinese renminbi, greatly increasing its base of potential partners. Before, as a representative office, Disney could work only with licensees that did business in dollars.
Licensees that make and sell Disney-branded toys, clothes and footwear in local stores run the gamut from multinationals such as Gillette Co. for toothbrushes and Japan's Unicharm Products Co. Ltd. for diapers all the way down to local outfits that deal in Disney-brand clothing and stationery. While Disney does a healthy business with key accounts such as Wal-Mart and Carrefour, it actually does the majority of its business in China through these licensees, according to Chaplin.
In the past, Disney was "probably a little more passive" in dealing with licensees, Chaplin says. "We would sign up a company and say, 'Go sell in China.' " But now, he says, "[w]e as Disney are taking the lead and saying we'll group together as a team and singular brand."
Case in point: In November 2006, for the first time, Disney sponsored its own trade show in the south central Chinese city of Wuhan, offering licensees a chance to show off their wares. Local wholesalers, retailers and reporters all showed up. "What we're trying to do is help existing licensees get distribution into second-tier cities, demonstrating the breadth and scale of the Disney-brand opportunity," Chaplin explains. "We come back in with a big marketing push once that happens. We get placements in retail, then run promotions to support it." The strategy will then be replicated in 10 or 11 other cities, he explains.
Amid that expansion, Disney has sought partners that boast a combination of national presence and strong distribution networks. "In the future, we're moving towards broader distributed products that can reach [throughout] the country versus individual cities," Chaplin says.
Distribution poses a challenge unique to China. "China has over 600 cities, and consistent execution across them is not easy," Cheung observes. Even if a retailer managed to achieve solid distribution across China's urban areas -- a major feat by any reckoning -- it would still be reaching only 40% to 45% of the population.
As Disney reaches into more second- and third-tier cities, it's also trying to figure out how to balance quality products with affordable prices that the less affluent customers there can afford. That means selling Disney-branded toothbrushes for only $1.50, compared to $3 to $4 in the U.S., or packaging milk in smaller containers. "The difference for us is that where bigger is better [in the U.S.], here it's sometimes seen as wasteful," Chaplin says.
Still, Disney prices are relatively high for China. At the Sogo department store in Beijing, a child's Minnie Mouse sweater costs 308 renminbi ($39) while a Peter Pan jigsaw puzzle goes for Rmb88.
The Sogo store caters to especially well-heeled Chinese in one of the nation's wealthiest cities, so its clientele may be more willing than most to pay extra for a foreign brand name. But Yang Fan, a Shanghai-based analyst for Euromonitor, says pricing could pose a problem for Disney, based on his informal surveys of Chinese consumers who've visited Disney specialty stores. "People believe the accessories and toys are a little overpriced. If they want to expand very fast or gain more share in China, they need to set their price at the right levels," he says.
That said, China doesn't yet have a leading brand of children's clothing, though a few companies (including soft drink manufacturer Wahaha Group Co. Ltd.) have entered the market over the past few years. "If Disney focused more on children's clothing, there's a much bigger market for that," Yang says. "I don't think there's as high demand from adults."
Besides pricing and demand issues, foreign brands such as Disney confront a risk more specific to China: widespread counterfeiting, including fake goods sold online and by street vendors. A few days before Christmas, for example, it was easy to find giant Disney stuffed animals being sold alongside generic teddy bears from wheeled carts in downtown Shanghai.
Chaplin says the company's main anti-piracy strategy is geographic expansion. "Counterfeiters tend to have a foothold in areas where we don't have supply yet," he says. "They're playing everywhere we don't have great distribution. If you're a local T-shirt manufacturer, you pretty much have the market to yourself until we come in with legitimate, better products."
Disney has also taken the more unusual step of getting consumers involved in fighting piracy. It labels its products with holograms, then gives retail customers an incentive to buy only authentic Disney goods. Earlier this year, it ran a promotion on its TV shows inviting customers who bought Disney products to find the hologram, peel it off, then affix it to a card and mail it in for a chance to win prizes including a trip to Hong Kong Disneyland. The campaign got a huge response.
"We were expecting tens of thousands of entries in the first week. But we ended up getting over a quarter million entries out of the gate," says Chaplin. The company expects to run a similar promotion again around China's Children's Day holiday in June.
Disney also teams up with retailers on marketing. Last year in Wuhan, it ran a promotion in which customers who spent at least Rmb88 got a free video compact disc of Disney cartoons. "It's a good way to get content into the hands of consumers and let retailers increase their average ring," Chaplin explains.
Also looming large on the marketing front: Hong Kong Disneyland, which drew more than 5 million visitors in its first year of existence. Cheung says the theme park has been "very successful in introducing our branded characters to a new audience."
CEO Iger told investors last year that in China, "[k]ids are starting to hear more and more about Hong Kong Disneyland. They are seeing it on TV. They're hearing about other people who are going," he said, adding that some 70% of visitors during the Chinese New Year holiday hailed from the mainland. "These people are going back and telling other people about it, and that will have a profound impact." Iger added that he expects to see a Disneyland in mainland China "not necessarily during my tenure as CEO but hopefully in my lifetime."
By the time that happens, China may also have eased up on its broadcasting regulations. But for the near future, Disney will have to rely on its name-brand goods to drive sales in China. With lots more ribbon cuttings for new outlets ahead, expect those Mickey and Minnie costumes to get a workout.
Ramping up in Retail
Walt Disney Co.'s retail expansion in China comes in the context of a nationwide retail land grab, with acquisitions driving much of the activity. U.S.- and European-based global chains are racing to build out their networks in the Middle Kingdom, even as local players seek to build scale through tie-ups.
A quick recap of the action involving foreign players:
• In December 2006, Home Depot Inc. spent a reported $100 million to acquire the Home Way, a 12-store home improvement retail chain.
• The same month, Britain's Tesco plc paid $353 million to boost its stake in Hymall, a 44-store hypermarket chain, to 90% from 50%.
• In October, Wal-Mart Stores Inc. reportedly acquired leading hypermarket chain Trust-Mart, which has about 100 stores, for an estimated $1 billion.
• Office Depot Inc. in September took a majority stake in AsiaEC, a 500-person office products retailer that operates in Beijing, Shanghai, Guangzhou and Shenzhen, for an undisclosed sum.
• Last May, Best Buy Co. paid $180 million for a majority stake in Jiangsu Five Star Appliance Co. Ltd., the fourth-biggest Chinese appliance and electronics retailer, with 136 stores.
Why the influx of investment? One reason is that the foreign firms see an opportunity to capitalize on the supplier relationships they've built, at a time when retailing is coming of age inside China. They already do a volume business with Chinese manufacturers for goods sold in the U.S. or Europe. By further boosting orders to serve the China market, they can cut deals that will let them offer ultracompetitive prices. And that's key for satisfying budget-conscious Chinese, many of whom make a sport of comparison shopping.
"A lot of Chinese consumers shop based on price. They have a certain budget, and they will shop around until they get the most they can for that price. They're still mostly time-rich and cash-poor," says Shanghai-based Josef Mueller, Greater China retail executive partner for Accenture.
Acquisition-minded foreign outfits are also eager to secure prime real estate in China -- not just in the first-tier cities but in second-, third- and even fourth-tier cities, according to Mueller.
Besides acquiring store locations, he says, foreign retailers "want to acquire knowledge about Chinese consumers, and to acquire management talent and also store talent. And hopefully, they'll get a company that has relationships with the Chinese government -- national, provincial and local -- and get a sense of how to deal with those officials."
Yet another factor behind the acquisition wave is regulatory change, namely, the 2004 shift that allowed foreign retailers to begin operating without local partners. For example, Carrefour SA, one of the oldest foreign retailers in China, has been buying out some of the JVs it was required to enter into early in its history.
For now, China's retail industry remains highly fragmented, with mom-and-pop stores dominating. The top 100 retailers account for only 10% of the industry, according to Ernst & Young.
That means early movers have a better chance of carving out a niche. - K.C. Swanson
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