A misreading of China’s retail market in 2008 led to a dramatic rethink of strategy
Executive Director of New World Development Adrian Cheng Chi-kong poses in his office at Central. Photo: South China Morning Post/Getty Images
By Nicolle Liu and Louise Lucas, read the full article on The Financial Times
Adrian Cheng, heir to a $17.2bn family fortune and general manager of New World Development, sidles into a banquette at the Murray Hotel, the former government office of colonial-era Hong Kong. He clutches a takeaway coffee, spurning the sumptuous buffet on offer, and is unaccompanied by his usual retinue of bodyguards and advisers. “I always bring my own coffee,” he laughs.
It is an odd choice for a man whose wealth comes from an empire spanning property, hotels and retail. Along with his father, Henry Cheng, he runs Hong-Kong based New World Development, a HK$130bn conglomerate founded in 1970 by his grandfather, the late Cheng Yu-tung, and Chow Tai Fook Jewellery Group.
That takeaway coffee illustrates one of the 39-year-old’s cardinal rules, born of a misreading of China’s retail market in 2008: look at what your customers are doing in real life, not what focus groups and trendy buzzwords tell you. Or, as he describes it, “feel the pulse of the customer”.
Mr Cheng, then in his late twenties, was eager to make his mark on his own merits. He set about revamping the group’s 30-odd department stores that year, armed with little more than a degree in east Asian Studies from Harvard and a few years of investment banking under his belt.
It was a boom time for China. The Beijing Olympics catapulted the country on to the international stage, the economy was in its seventh year of 9 to 10 per cent growth and the government was pushing domestic consumption. People were pouring out of the countryside and into the cities. It was, says Mr Cheng, “the golden time of the department store”.
His vision, informed by nascent talk of millennials and Chinese affluence and the looming threat of shopping malls, was for a totally different department store. Out went the dull supermarkets, in came “lifestyle goods” such as Dior and Burberry. Prices climbed but sales growth fell to almost a third of previous years’ levels.
The poor sales prompted him to reflect on his new strategies. “We didn’t have the [daily] necessities,” Mr Cheng says now, shaking his head. “We were just creating things because we thought the macro [change] and paradigm shift was coming.” But this was wrong. “We were too early, too vague, too ambitious. And we just based it on some research.”
Comparing the prevailing mood of China with the tale of decadence and decline in F Scott Fitzgerald’s novel The Great Gatsby, he adds, “Then of course came the financial crisis in 2008 and the dream just collapsed.”
“It was like la-la land, you know, it was like a dream. We took out all the needs of customers, but we put on something that we dreamt of, and we’re basing on research, basing on paradigm shifts, basing on buzzwords.”
Much of the latter came from consultancies and focus groups, key props of retail management at the time. Worse, youthful staff who had never seen a downturn were unable either to call out mistakes or — a failing of hierarchical structures — speak to the boss.
“Local teams did not have enough retail knowledge because they had not ridden the cycle before.”
The renovations did not even win over the wealthy consumer: growth in premium customers who spent thousands in the stores flatlined after growing at 40 to 50 per cent between 2008 and 2009.
Mr Cheng says his family remained supportive, “They were actually very tolerant with what I was doing and also gave me a lot of space.” There were never any fights, he insists. “I was very grateful that my father and my grandfather gave me this platform for me to incubate and learn.” The sales slide forced him to take stock, however. “From a management point of view, there are three things I always remember: one, forget the dream because it’s not real. Two, anything to do with the customer is about product, product, product — that the product fits that community, that consumer. Three, you cannot change consumer habits. That takes five to 10 years. Instead, fulfil customers’ needs.”
The first thing he did in 2009 was to introduce customer segmentation — redividing locations into two major categories: fashion that served office workers and living that focused on the needs of middle-class families.
He reintroduced and enlarged the supermarkets, increased the brands stocked and added more restaurants to persuade shoppers to hang around longer.
He also deployed tactics since harnessed by China’s e-commerce groups such as Alibaba, inaugurating a Singles Day style 36-hour promotion that attracted snaking queues so long that the police were called out.
Back office changes were introduced too. Human resources staff now give less weight to academic qualifications and more to practical experience.
“When I recruit anyone, I need them to get through the downside of things before getting hired,” Mr Cheng says. He favours candidates who have been through failures.
Mr Cheng has instigated whistleblowing and mechanisms to flag up problems, so that staff are able to speak up. “I need to know what the real voices are,” he says.
Regional hires are also key. “Hire local teams,” is his answer to understanding the Chinese market, “build trust with the local teams because they are going to tell you the truth.” Spending time with your local merchandising head helps you more than [time spent with] store managers, as they can spot customers’ needs, he stresses.
And he is wary of making the same mistakes again. Thus while Mr Cheng himself — a natty dresser who sports virgin-white Yeezy shoes and owns a sizeable art collection — may be in touch with the zeitgeist, he is aware most of his shoppers are not.
Take sustainable cosmetics, popular in much of the west. “China is not there yet, not at all,” he says. “They will say they support sustainability, but it doesn’t mean that they will buy sustainable goods.”
The lessons from his disastrous revamp were painful but they have taught him to look at consumers’ needs. His advice? “Don’t be in this stupid bubble of [a] dream. Always think of what is real.” Three questions for Adrian Cheng
Who is your leadership hero? My father, Henry Cheng, who champions open-mindedness within the organisation. One thing he’s taught me by example is that while a leader must push his/her team, a good leader must also trust the team and be ready for new visions. It’s not so easy for big family businesses and he could just keep the status quo, but he understands to continue to grow, businesses must innovate and pivot — sometimes the next big idea comes from the new generation who needs to be given a healthy dose of trust, like when I pushed for the concept of K11 [a high-end lifestyle brand operator of properties].
If you were not a leader, what would you be? I took singing quite seriously in high school, in fact I was trained professionally as a tenor then. I would love to be a wedding singer by night, entrepreneur by day.
What was the first leadership lesson you learnt? I live by the Chinese proverb “虛懷若谷” by the great Chinese philosopher Laozi《老子》that roughly translates “to have a mind as open as a valley”. A good leader must be humble, and take in all ideas, suggestions and criticisms with equal value. I always remind my management team that you must listen to the voice of the customer, as well as the millennials and Gen Z-ers within our organisation because their feedback is just as important as mine.
Copyright The Financial Times Limited 2019
© 2019 The Financial Times Ltd. All rights reserved.