Scenic Materials Previously, in "The Reality of Chinese Manufacturing Setting Up Factories Overseas," I shared insights on moving factories. This time, let's talk about building a brand. Most manufacturing bosses dream of creating their own brands, especially after this financial tsunami blocked exports, everyone has turned their eyes to the domestic market. To do well in the domestic market means building a strong brand. At a brand-building seminar, I asked the boss: if you were given 5 million yuan to build a brand, how would you spend it? The answers from the attendees varied, but they were all essentially "spending plans," just differing in timing and order. I share with you the story of Tom, a shoe industry boss who spent 60 million yuan without achieving significant results.
Everything was ready except for the brand. For many years, Tom had been doing OEM work for several globally renowned brands, making about 5 dollars per pair of shoes while the brand owners earned between 25 to 50 dollars each. After years of running a shoe factory, Tom had ample talent, experience, and financial strength. As part of his business transformation and upgrade, Tom felt he had everything ready except for the brand.
Unexpectedly, after three years of trying to build a brand, not only did Tom fail to earn the rich profits that come with branding, but he also burned through 60 million yuan without any significant results. Where did all the money go? Several years ago, Tom spent 20 million yuan to acquire a long-standing Italian famous brand, then poured another 40 million yuan into channel development, which took up three whole years without seeing any effect. Disappointed, he had no choice but to let the Italian brand rest indefinitely. So where exactly did those 40 million yuan go? First, Tom hired a high-level regional manager from a famous brand at a high salary, asking him to build a team. The cost of salaries for such a small brand company was equivalent to the wages of hundreds of workers. The second expense was paid to a professional market research company. The third chunk of money went to a domestically renowned advertising company responsible for image design and store layout. The fourth sum was paid to a brand management company to create a brand operation manual, product catalogues, etc... The fifth expense was the establishment of the first flagship store in a top-tier city, with monthly rent alone costing over ten thousand yuan. In the first half-year, the total revenue didn't even cover the rent (note: this is the revenue!). When the senior management of the factory raised objections about the flagship store, the brand manager cited numerous examples of stores that only became profitable after reaching a certain stage, pointing out that the primary role of a flagship store isn't profitability but advertising.
The sixth expense was advertising and recruitment in fashion magazines and specialized shoe magazines. On this point, there was no disagreement; despite the expensive ad space in fashion magazines. The seventh expense was offering preferential conditions for recruitment: employees of the brand company traveled around the country to "persuade" dealers, covering round-trip airfare, food, and lodging, inviting dealers to join recruitment meetings. Recruitment terms were very attractive: free renovation costs, shelves, promotional items, return policies, rebates, ...
First Channel Failure: Dealers Can't Make Money A few successful recruitment conferences allowed Tom's company to sign up more than 30 general agents, and stores sprang up everywhere. The company's morale was extremely high, and Tom was very happy. But before long, complaints from the dealers started coming in. First, they demanded the company to run advertisements because although it was an Italian brand, Chinese consumers didn't recognize it. They hoped the company would spend money on advertisements to increase brand awareness. Second, as a new brand, the company provided too little support. Third, the discount was too high, resulting in dealers not making any money. Fourth, some shoes had quality issues, some styles didn't suit the Chinese market, leading to unsold inventory, and requests for returns. ... Within a year, the gross profit brought by the general agents was far from enough to cover the operating costs of the brand. Meanwhile, most of the general agents were also losing money. Thus, some agents quit, some refused to pay the remaining balance, and others used the renovation funds and shelves but sold other brands' shoes instead.
Tom held the brand manager accountable, and the brand manager tossed back a truth similar to "a mother is a woman": "If dealers can't make money, they won't listen to us." Following this, the brand manager angrily resigned with a few subordinates. Channel Reconstruction: Mall Counters After the "talent" left, Tom hired another experienced channel professional through a headhunting company. This manager strongly advocated entering malls to set up shoe counters. Tom had indeed suffered enough from the pain of running specialty stores that were merely working for landlords, so he decided to change his channel strategy, abandoning specialty stores and going for mall counters instead. Entering malls doesn't require paying rent, but rather involves a commission linked to sales (the meaning of commission is: the brand owner does not have to pay rent but extracts a percentage from the sales as rent for the mall, typically ranging from 25% to 35%. However, apart from the commission, one must also pay the mall for shelf fees, advertising fees, public relations fees, participate in various mall promotions, and settle payment every three months. Of course, if the sales are below a certain amount, one must compensate the mall with rent and also risks being kicked out. Initially, when there were fewer mall counters, having three months of delayed payments and goods wasn't a big deal. But once the number of counters reached a certain scale, Tom realized that even if one mall pressed 200,000 yuan worth of goods and products, with 300 mall counters, that would mean tying up 60 million yuan in capital, which seemed like an unprofitable business.
Deadly Impact from Belle The biggest blow to Tom's brand dream came from the famous listed shoe company Belle Group. It was said that once, in a newly opened shopping plaza in a secondary city, Tom's subordinate and the vice-manager of the shopping plaza were close friends, thinking entry into the plaza was a sure thing. However, Belle Group arrived, and under their rule, all eight shoe brands under Belle either entered the plaza together or none at all. In order to attract Belle, the shopping plaza not only waived the entry fee but also covered the renovation costs, allowing Belle to pick the prime spots first. Only after Belle picked did smaller brands like Tom get a chance. Because of familiarity with the vice-manager of the plaza, Tom learned that the commission rate given to Belle was reduced by 15%, and settlement of accounts was done every two months... Tom felt he couldn't compete with Belle. Currently, Belle only had seven or eight brands, but in the future, there might be dozens of them. If the shoe section only had 30 spots, all could potentially be taken by Belle. Belle's dominance would certainly lead the mall to offer Belle the best deals, resulting in the strong getting stronger and the weak getting weaker... Disappointed, Tom made another major decision: refusing to enter that shopping plaza and deciding not to enter mall counters anymore, focusing solely on specialty stores instead. Channel Vicious Cycle When Tom's channel strategy returned to specialty stores, he found that even if he was willing to work for the landlord, it didn't guarantee success everywhere. Opening a specialty store requires selecting prime locations, but in many places, even if you're willing to pay, there simply aren't available spots. Just like that, from site selection, renovation, hiring, training, entry, selling, promotion, clearance sales, massive discounts, and finally closing down, Tom struggled for three years, burning through 60 million yuan, without turning the Italian famous brand into a Chinese famous one. Epilogue Later, Tom came to me and said, "Not doing a brand is waiting to die, but doing it burns money until death. How should we solve this?"
My opinion is to start by building low-cost brand talent internally, then expand gradually! Details of another case will follow later...