Lawrence L. Allen's Chocolate Fortunes

Posted by Alice Xin Liu, December 4, 2009 12:50 PM

Lawrence L. Allen, who for seven years worked in turn as an executive with Hershey in China and then later Nestlé, is the author of Chocolate Fortunes, published by Amacom Books. The Preface of the book introduces chocolate in context:

The battle for China’s chocolate market holds lessons for anyone doing, or about to do, business in this most dynamic of markets. There is no single path to business success there, however; the country is too big, too complex, and evolving too quickly for simple, ‘‘one size fits all’’ business formulas. Nevertheless, the story of the chocolate war is highly instructional.

But the story of the opening of China’s chocolate market isn’t simply a business story; it’s a window into the world’s most populous country — one that is, almost by the day, acquiring greater and greater economic and political clout and positioning itself for a powerful, if not preeminent role, in shaping world events and the global future. Never before has China’s destiny been so closely intertwined with our own, or with the rest of the world’s. And for years, never had the future of chocolate been so intertwined with one nation’s perilous transformation from rags to riches.

An extract from the book, below, is published with the permission of the publisher:

Chocolate Fortunes' Chapter 2 extract; Ferrero's Struggle with Local Copycats

by Lawrence L. Allen

Until it reopened its doors in 1978, the concept of intellectual property rights in China was virtually nonexistent, and the reason for its conspicuous absence went well beyond the fact that private property was virtually eliminated after communism took hold in 1949. The concept of intellectual property and its ownership rights has deep roots in European history and tradition. Patents can be traced back to the Greeks, circa 500 BC, with the first modern patent originating in Venice, Italy, in the 1400s. Trademarks first appeared in Europe in the 1200s and copyrights after the arrival of the printing press in Europe in the 1600s. In the modern-day Western world these have become well-established legal traditions that are handed down to American schoolchildren when they are taught about Thomas Edison and Alexander Bell and their famous inventions and patents. Because China’s society developed independently from that of Europe’s, and did not follow this same path of intellectual property rights development, the concept of intellectual property rights is still quite new there. As a result, copying of foreign products in China has been a problem of epidemic proportions, and it is still very much an evolving feature of this market. And for the privilege of being the first of the Big Five chocolate companies in China, Ferrero would also be a pioneer in facing this cultural and historical gap head-on.

It is ironic that Ferrero’s motto is ‘‘Be unique! Never copy anyone else’’ since, perhaps more than any other foreign chocolate company in China, it has been plagued by one of the most long-lived and notorious cases of local copycatting. In 1982, Ferrero filed its import registration under both the foreign language name, Ferrero Rocher, and a Chinese name, Jinsha. But when it applied for trademark registration in 1986, it only registered its foreign language name with the Chinese Trademark Office. This procedural oversight set in motion a chain of events that nearly caused Ferrero to lose its unique product to a local copycat.

If imitation is the greatest form of flattery, then Zhangjiagang Dairy Factory One, seeing the success that Ferrero Rocher was having with China’s consumers, decidedly flattered Michele Ferrero by producing its own copy of it. As the saying goes, ‘‘Use it or lose it,’’ and Zhangjiagang Dairy applied for and received trademark approval for the Chinese name Jinsha in 1990 for its Ferrero Rocher knockoff. When the company attempted to register the combination of the Jinsha name with its Ferrero Rocher look-alike brand label, Ferrero objected, and that objection was upheld by the China Trademark Office. In spite of this, Zhangjiagang Dairy continued to use the Jinsha name along with the label.

Zhangjiagang Dairy was not the only company to copy Ferrero Rocher in China, though its Jinsha brand was by far the highest-quality and most successful copy on the market. Several low-grade versions of the product also appeared over the years. One memorable one was a poorly made Ferrero Rocher copy whose unappetizing foreign language name was ‘‘Fretate Relish.’’ The intent was to impress less discerning Chinese chocolate consumers by using any foreign language words that conveniently consisted of a seven-letter word that began with F followed by a six-letter word that began with R. Ferrero took action against low-grade copycats such as these through the State Administration on Industry and Commerce, Trademark Office, one of the primary intellectual property (IP) enforcement agencies in China that will act on behalf of brand owners to enforce IP rights and that had the authority to shut down copycat operations. However, most of these lowgrade copycat companies are fly-by-night operations that will have their doors locked by authorities one day only to pop up under a different company name and literally just down the street a few days later. In this respect, dealing with copycat companies in China was like the Whac-a-Mole gopher bash game: a copycat would pop up out of a hole, and as soon as you whacked him down, another one would pop up and after you whacked him down, another would pop up, and so on.

However, Zhangjiagang Dairy was a special case because it was a legitimate company with established operations in other lines of business, such as milk and milk by-products. Whereas most local copycats were content to make a quick buck while keeping a low profile, focusing on less conspicuous retail outlets in major cities and driving their distribution into third- and fourth-tier cities, Zhangjiagang Dairy boldly targeted the same first-tier cities and high-end retail stores as Ferrero, even selling in China’s international airport duty-free shops. Jinsha eventually developed a wide consumer following, with sales that compared with those of Ferrero Rocher. Side by side on the retail shelf, at first glance it was difficult to tell Ferrero’s Ferrero Rocher apart from Zhangjiagang Dairy’s Jinsha. Both companies could demonstrate that they operated legitimate businesses, and this meant that each could sue the other under China’s Unfair Competition Law. This law protects a company’s IP rights if the product is well known and makes it unlawful for another company to sell a similar product that would cause confusion in the market. But who was the ‘‘owner’’ and who was the ‘‘infringer’’? If Ferrero pursued the case, it would be a foreign company’s attempting to shut down a hometown favorite, in which case Ferrero would face a real possibility of being ordered to refrain from selling Ferrero Rocher in China because it interfered with Jinsha!

During the decade-long battle between Ferrero and Zhangjiagang Dairy, Ferrero struggled with direct side-by-side competition with its local rival, with Jinsha selling at a substantially lower price. While the legal process played itself out, Ferrero had to take action with consumers, with the real battleground being in retail stores, not the courthouse.

Ferrero encouraged its in-store merchandisers and retailers to separate the two products on the retail shelf as much as possible to minimize consumers’ making side-by-side comparisons. Also, Ferrero took great pains to talk to retail buyers to educate them about the pitfalls of selling ‘‘fake’’ product in their stores. This argument was strengthened after 2000, with the emergence of a number of high-profile consumer-poisoning cases, one tragically involving fake locally made baby formula that had too little nutritional value, which led to the malnourishment of hundreds of babies and to the deaths of over fifty babies in 2004. Retailers knew that Zhangjiagang Dairy’s Jinsha was not a fake, but a legal brand and a product in its own right. Ferrero’s most compelling argument to retailers was that they should not sell Zhangjiagang Dairy’s Jinsha since, owing to Ferrero’s higher price, retailers made more money, gift box for gift box, with Ferrero Rocher. While this may have been true, it was in fact the least persuasive argument, since most retailers decided to continue to sell both Ferrero Rocher and Zhangjiagang Dairy’s Jinsha—and for a very good reason: consumers demanded both.

Over the first two decades of China’s transformational era, consumers had become accustomed to copycat products of all kinds, not just food. Having come of age as consumers throughout the topsy-turvy experimental phase of China’s transformational era, and through the rapidly accelerating consumerism throughout the 1990s in particular, many Chinese consumers have taken the copycat phenomenon in stride. Not knowing any different, they accepted it as just a natural feature of the free market; it became a part of daily life.

There is no question that Jinsha had an impact on Ferrero Rocher sales in China; however, to what degree is debatable and nearly impossible to quantify. This is because, although Ferrero Rocher and its Jinsha rival may have looked alike, their vastly different price meant that they competed for different segments of the market. In other words, a large percentage of Jinsha buyers would not step up and pay the high price of Ferrero Rocher if Jinsha were unavailable in the store.

Ferrero was, of course, not alone in its battle with China’s copycats. Nestle´ China, for example, has hundreds of products, ranging from infant formula to coffee, and maintains
a well-staffed legal department at its Greater China Region Headquarters in Beijing that, among other legal work such as product registration and licensing, is continually pursuing and challenging copiers of its products. The cost of defending IP in China is substantial, but the cost of doing nothing, in terms of both lost sales and long-term degradation of its brands, would certainly be much higher.

In 2005, Ferrero took the risk and pursued its case against Zhangjiagang Dairy on the basis of its similarity to Ferrero Rocher causing consumer confusion. Though it was eventually ruled that Ferrero Rocher was, in fact, copied by Zhangjiagang Dairy without its authorization, as of the writing of this book both can still be found side by side in retail stores. Ultimately, both Ferrero and Jinsha found a home with Chinese consumers.