City Spotlight

A Place of Contradictions, Shanghai is the Gateway to China's Billion-Plus Consumers

A Look at the Agency and Media Landscape in One of the Country's Wealthiest Cities

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For many global marketers and agencies, Shanghai is the gateway to China and its 1.3 billion consumers. Sprawled across both banks of the Huangpu River, it has much in common with New York: It is international and energetic, with a strong business bent. And like New Yorkers, Shanghainese are proud denizens of China's most cosmopolitan city" or a little stuck-up, depending on whom you ask.

It's a place of contradictions, like many others that embody China's economic growth and the social disparities that have developed in its wake. Lamborghinis and Ferraris are a common sight on the boutique-lined streets of the former French Concession, cruising past elderly residents hanging up laundry that they still wash by hand.

Still, this city of nearly 24 million is among China's wealthiest, and consumerism is vigorous and unabashed here. Dynamic Shanghai is the home base for many industry execs tasked with reaching consumers in communities much less prosperous, spread out over a country about the size of the U.S.

In our previous city spotlight, we traveled to Minneapolis. This time, we're taking a close look at the Shanghai ad market.

AGENCIES
Nearly all the major international agencies have a presence in Shanghai. Ogilvy remains the leader in size and profile, though WPP sibling agency JWT earned kudos last year, winning China's first Cannes Grand Prix with an ad for Samsonite luggage. Hot shops include fast-growing BBDO and AKQA. Still, in an immature consumer market like China, it's not just creativity that matters, as many purchase decisions are made in-store. Field marketing agencies employ huge teams that deploy to supermarkets and electronics malls. One such agency is called Always, which has more than 15,000 people on staff. Meanwhile, holding companies are constantly on the lookout for acquisition targets as a way to expand their footprint or skills offerings. WPP and Publicis have been the most aggressive, though Seoul-based Cheil joined the fray this month with its purchase of boutique agency Bravo Asia. And international agencies make up just a slice of Shanghai's ad industry. According to government figures, there are 202 international agencies operating in the city, far outnumbered by the 28,000 local agencies mostly serving local clients.

MARKETERS
Shanghai is a major hub for global marketers working in China. It's home to fast feeders such as McDonald's, which plans to open 500 new stores by the end of next year, and KFC, one of the most successful Western brands in the country. There is also a multitude of Western luxury brands whose fortunes are increasingly tied to the spending habits of Chinese consumers, whose purchasing power continues to grow. China is the No. 1 market in the world for automakers, where Volkswagen is by far the biggest player. VW sells double the amount of vehicles as its closest competitor, GM. Growing in influence are local Shanghainese companies such as Bright Food Group, which earlier this year bought British breakfast-cereal brand Weetabix, its first European acquisition, and Shanghai Jahwa, a maker of cosmetics and personal-care products that is challenging the market share of multinational powerhouses Unilever and P&G.

MEDIA
Newcomers are often surprised to find that media costs in China, especially for TV and increasingly for digital, can be comparable to those of major Western cities. Such is the challenge of working in a market where media inflation has averaged 15% to 20% each year over the past several years. With purchasing power continuing to grow among Chinese consumers, demand remains robust. "Be prepared for the long haul," advises Doug Pearce, China CEO of Omnicom Media Group. "You can't just run one TV campaign and think that that 's it. [Brands] should be prepared for some considerable investment." State broadcaster China Central Television is the country's only national TV network. The results of its annual daylong auction for ad time in the coming year -- China's version of the upfront market -- are seen not only as a benchmark for the ad industry, but China's economy as a whole. Meanwhile, feisty provincial satellite stations provide consumer-friendly fare such as historical dramas and dating shows. They must be nimble to respond to heavy-handed government restrictions on programming, such as last year's missives cracking down on "overly entertaining" shows and banning commercial breaks during dramas.

TECH
China has the world's largest online population -- 500 million people -- and the country's controlled internet ecosystem is thriving. Facebook, YouTube and Twitter are blocked by the "Great Firewall," instead replaced by a variety of homegrown sites. But that 's not an issue for the vast majority of Chinese internet users, who go online not to search for politically sensitive information, but to shop, message with friends, play games and watch videos. Digital marketing is still immature, though Chinese sites are extremely attuned to their users' unique needs. Due to a lack of trusted information, quality entertainment and social opportunities in China, the internet plays an integral role in users' lives. Many go to Twitter-like Weibo platforms for news, spurning reports from state-run media. With WeChat, similar to WhatsApp, a shake of the phone reveals profiles of other users shaking their handsets at that moment, allowing strangers to connect. Many photos on Pinterest clones link directly to online shopping site Taobao, generating hundreds of millions of dollars at both ends. As for Western internet companies, at this stage it doesn't look like there's a place for them in China. "They're going to have to censor content ... it seems to go against the ethos of those companies and they would get a lot of flak," said Sam Flemming, founder of Shanghai-based social-media intelligence company CIC. "If they were to come in and have a censored version, what's the value they bring to an already very fragmented, very dynamic, active social-media landscape?"

TALENT
This is the biggest headache for every agency and marketing exec. The ad industry here is relatively young (the country only adopted capitalist reforms 30 years ago) so there are few local Chinese with a deep understanding of marketing. Western expats are at a disadvantage, lacking an innate understanding of local consumers and culture. Overseas Chinese from Hong Kong, Taiwan and Singapore frequently fill management positions. Visit any ad agency in Shanghai and one immediately notices that there's hardly anyone older than 30 there. The most qualified jump from job to job, and agency turnover rates of up to 50% are common. Meanwhile, companies are desperate for talent as business steams ahead at double-digit rates, some outgrowing their office spaces almost as soon as renovations are complete. Media agencies are at a unique disadvantage: with little understanding of their role in the marketing process, recruiters are just happy to have people come in for interviews, even when many prospective hires confess they have no idea what the agency does.

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CHALLENGES
China isn't one market, it's many markets, with cities such as Shanghai and Beijing a world apart from remote communities where villagers are just starting to buy Coca-Cola and cellphones. But the economy is growing at an increasing rate, and the marketing industry must keep up. "We use the analogy of dog years. What takes seven months elsewhere takes place in one month in China," said Greg Paull, principal at independent marketing consultancy R3 in Beijing. And though it seems Chinese are online all the time, data transparency with digital is a big problem, with numbers from media owners often unreliable and "zombie" followers easily purchased. "The system can always be gamed in China ... there's lot of trickiness going on," said Sam Flemming of CIC. The sheer size of China and its highly fragmented supply chain also pose a major problem for marketers. "There are no national brands, there are no national retailers," said John Quelch, dean of the China Europe International Business School and a member of WPP's board.

OPPORTUNITIES
Growth. With an emerging middle class and increasing spending power, the Chinese consumer market strikes a sharp contrast to soft economies around the world. Marketers with a presence in Beijing and Shanghai are now seeking to expand into lower-tier markets such as Chengdu (population 14 million), Wuhan (10 million) and Shenyang (8 million). China has a billion mobile-phone users, many of whom use their handsets to go online. It's also a place for brands to reinvent themselves. KFC isn't a popular fast-food option in its home U.S. market, but it's a behemoth in China. For KFC's parent company Yum Brands, China operations make up nearly 40% of overall operating profits. The next phase for marketers, said Mr. Paull, is building moving beyond awareness and interest to build loyalty. "When times get tough, how do I build relationships with my customers?" he said. "That's going to be the next area."

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