Are Fake Stores a Compliment to Western Retailers in China?

PT Black Explores the Gap Between Marketers' Plans and the Consumer Demand That Fuels Imitations

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The "fake" Apple stores in Kunming have set us all laughing -- at the clueless employees, the creepily accurate imitations and at the culture that could produce such brazen piracy. It gets surreal when we see it happening with other brands -- fake Ikeas, Dairy Queens and more. Another day, another incredible story of Chinese copycats.

But the joke is on these Western brands. While they've been carefully building their flagships in a handful of select coastal cities, the rest of China has been booming. Brands have let a gap grow, between high demand for their products faced with limited distribution and supply, especially in remote provinces. Local entrepreneurs have jumped in and flourished, often bending trademark law along the way.

Conflicts over retail experience are not new to China. The topic has been thoroughly covered by a Supreme Court interpretation ("trade dress"). Wise brands know to trademark as much and as early as they can. The system is "first come, first serve," so established international brands who haven't filed in China are at risk of being scooped by a local.

The topic of IP in China is a big one (get a good lawyer).

But I am more interested in knowing why brands have let this gap grow? If a businessman in Kunming is willing to invest his own money to build multiple Apple flagships, why isn't Apple?

First, a recap. A few days ago the internet ignited with images of "fake" Apple stores in Kunming, the largest city in southwestern China. The stores are detailed copies of the familiar Apple retail concept, all done without Apple's knowledge or approval.

It's been a media firestorm: Intellectual property theft! Lawless China! Abused Western companies!

This would all be fair if it weren't for two facts: the products sold have apparently been (to date) real Apple products, and the "fake" stores are filling a vacuum defined by Apple.

If the stores sell real products, Apple is getting its money, and consumers are getting what they pay for. In fact, Apple benefits. By investing so much personally in the construction of those stores, the Kunming retailers have unquestionably boosted Apple's sales.

But what about the intangibles? Isn't Apple's brand at risk?

Potentially, yes. If the store were poorly executed it could damage the brand, and hurt future performance in the region and beyond.

But in this case these imperfect "fake" stores are pretty good. Especially in light of their approved alternative -- the national network of 900 or so "authorized sales agents," most of whom operate as anemic, impersonal counters at tech malls, lost in a sea of PC vendors.

If we imagine an opportunity cost Apple was paying by not opening a flagship in this huge region of China, it seems like an even bigger win.

Well, shouldn't the retailers have paid for the use of the design? Of all the arguments, this is the most convincing. After all, great design doesn't come free! A fair point, but since Apple didn't provide a way to pay for design use, it's hard to fault the retailers. Especially since they erred on the side of brand-building and consistency.

So there's no money lost, no fake product, and no discernible brand damage. So why is global media so fascinated by this case?

One word: control.

Many companies operate under the mistaken impression that they control their brands. They think their strategy sessions, McKinsey studies, and retail roll-out plans give them the last say. They claim not only the right to use their ideas, but also the right not to use them. McDonald's decides which neighborhoods get Big Macs -- but they also decide which ones don't.

Fake apple store
Fake apple store Credit: A. Rose

They forget about consumers.

Brands exist in the minds of consumers, not in the plans of managers.

It's a universal truth, but in China it becomes a daily lesson. Growth is happening so fast, and the country is so big and opaque that real control becomes impossible. A good manager here knows when to plan, and when to let go. Control freaks don't do so well.

Apple's experience in Kunming is a vivid example of what happens when consumer needs and brand planners get out of sync.

On the consumer side, the demand is clear. China wants Apple products -- the company announced $3.8 billion of revenue in China in the last quarter. This doesn't count the untold numbers of iPads and iPhones quietly brought in from overseas by both friends and professional gray marketeers. This shouldn't be a surprise -- China is the world's largest market for both personal computers and mobile phones.

But Apple has been less than enthusiastic. For years the company has seemed undecided about China. New products go to priority countries like the U.S. and France, leaving Chinese with frequent shortages and delayed launches.

The gap between supply and demand is most obvious at retail. The company currently has four official Apple stores -- soon five -- for all of China. Two in Shanghai, two in Beijing.

In other words, each official Apple store serves a population roughly the size of the United States.

With that kind of bottleneck, it's no surprise that Apple's China stores are its most profitable in the world. The company has announced plans to add 25 more official stores to capture this market.

Now think like a Chinese businessman. Great product,limited distribution. Imagine what Apple could do if they had the 10,000 retail outlets Lenovo has, or the staggering 100,000 purchase points of Nokia? Imagine if Apple had spent the last three years seeding and promoting Mac OS in megacities like Chongqing and Hangzhou? Why hasn't it? Louis Vuitton certainly has, with flagships in Kunming and even farther afield, like sand-choked Urumqi.

But Apple hasn't.

So now the logic changes -- if you create demand you can't, or won't, fulfill then expect someone else to fulfill it for you.

That is indeed what we are seeing across China in the service arena. Ikea stores are thriving -- but with only nine stores nationwide there is a huge unmet need. In comes Kunming clone 11 Furniture. In this case, Ikea sees minimal benefits, because the products sold aren't even from Ikea. Assuming the clone has lower quality,that will damage Ikea's potential in Kunming.

If Ikea is worried about this, there's a simple solution. Set up in Kunming, and put your clone out of business by providing better service to customers. But I doubt they'll do it. Kunming is just not important to Ikea at this stage. Ikea instead wants to remove a strong consumer option without offering a replacement. Control 1, consumers 0.

The key point is that in China's vastness, consumer demand needs to be factored into business strategy. Strategic arguments need to be re-scrutinized -- if Louis Vuitton can build a flagship in Kunming, why can't Apple? Retail plays a defensive role in claiming a territory, as well an offensive role generating revenue. Finally, detailed protection and knowledge of the applicable laws is critical.

But overall I view the "fake" Apple stores in Kunming as a victory for consumers and a wake-up call to lead-footed managers. There is one other person who wins -- the Apple shareholder.

PT Black is senior creative director, China for Thoughtful Media Group in Shanghai
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