Mind the gap: Reputation also matters

In the latest in the Thought Leader’s series FleishmanHillard’s Rachel Catanach examines the growing importance of corporate reputation

After decades of serving as “the world’s workshop,” Chinese companies want to move up the proverbial value chain. Many of them recognize that a stronger reputation will help them capture more of the value associated with the goods and services they produce.  A reputation for producing lower-end products also makes it harder to negotiate prices with buyers and suppliers.

Moreover, research published in the March 2013 issue of The International Journal of Production Economics shows that product recalls result in greater financial losses for Chinese companies than for their non-Chinese counterparts. The research indicates that some industry sectors in China are especially vulnerable: food companies, for example, take a bigger hit when they recall products than do automakers.

This finding is consistent with FleishmanHillard’s own recent research measuring the authenticity gap –the gap between what consumers expect and what they actually experience. We looked at various industries and countries, including China, where authenticity is lowest among makers of Packaged Foods, Family and Fast Casual Restaurants, Fast Food Restaurants, and Discount Retail. Three of the four lowest-scoring categories in China involve food, reflecting the many food-related scandals that have occurred or originated there over the past few years.

Food for thought

Western multi-national companies operating in China’s fast food sector are also not immune to the impact of reputational blows.   Yum! Brands, which owns KFC, recently reported that same-store sales in China plunged 29 percent in April due to customer concerns about the safety of its chicken and the spread of bird flu.  In December, it was revealed that KFC’s locally sourced chicken contained unacceptably high levels of antibiotics.

Yum! Brands has become less valuable to investors, as well. As of early May, The shares are trading at a 38 percent premium to the Standard & Poor’s 500 Index on a price-to-earnings basis. They traded as high as 62 percent last May.

As this example shows, authenticity is a vital factor in a company’s success, and as you might suspect, consumers are the final arbiters of whether a company has it or not.

But authenticity isn’t an all-or-nothing proposition. In fact, as we studied different regions of the world, we found that consumers have surprisingly diverse views about who’s authentic and who’s not. Often, those views were linked to geography.

In addition to China we asked respondents in the US and Germany to evaluate authenticity in 20 categories, then generated a score for each category based on whether respondents said it was gaining ground (“positive momentum”) or losing it (“negative momentum”).

Rising living standards – high expectations

China was the most optimistic region, followed by the US and Germany. Unlike elsewhere, all 20 categories in our China study recorded positive momentum. This may be because Chinese consumers have been conditioned by years of growing economic prosperity to expect a continually rising standard of living (severe air pollution in its major cities notwithstanding). This rising economic tide has colored the perceptions of Chinese and predisposed them to see things (including the behavior of many industries) more positively.

FleishmanHillard’s research suggests that Chinese companies expanding overseas may find a much less receptive consumer base when they make the transition into Europe and the US. Other studies (such as those by Nielsen) also show China to be one of the world’s most optimistic countries, so companies operating there may well enjoy a higher reputational rating.

When Chinese companies go to Europe or the US, however, they will face a different environment. In those new markets, their brands will be unfamiliar, their leaders unknown, and they may be viewed with suspicion simply because they come from China. Establishing a reputation – and a compelling brand aligned with it – will be crucial first steps on the road to success.   For the full report click here

Rachel Catanach is the managing director, senior vice president, senior partner of FleishmanHillard Hong Kong

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