Why is Disney Failing in Hong Kong?

| About: The Walt (DIS)

I have always loved Disney (NYSE:DIS), ever since I was a little boy watching Donald Duck’s antics with my parents on TV or being mesmerized by the exotic delights of Epcot with my grandmother … I even went there on a family trip for my sister-in-law’s honeymoon – and 9 months later my first son was born.

Like generations of people around the world, Disney has had a special place in my heart and mind. Disney connected with people’s heartstring about love and family and dreams. Their marketing team was second to none.

But all is not well in the Disney empire. Disney has lost its ability to connect with customers. As I wrote last year, my most recent trip to Disneyworld was a disaster from a service standpoint. Disney employees chastised my in-laws when they did not understand what was said to them because English is not their 1st language and the rides and hotel rooms seemed to be falling apart.

Hong Kong Disney’s struggle too is no secret. Disney was caught with its pants down last year, not expecting the rush of Mainland Chinese tourists during the Chinese New Year. How that happened I am still not sure. Disney was better prepared this year, but attendance actually decreased from 5.2 million in its first year of operation (already falling short of the 5.6 million expected visitors) to just over 4 million last year, a 23% fall.

Hong Kong Disneyland’s poor performance is not a reflection of Chinese distaste for theme parks. Just down the street in Hong Kong, local theme park Ocean Park has been beating up on Disney with more visitors—a record 4.92 million in 2006/2007 fiscal year, leading to a record surplus of $141 million, a 9 percent year on year increase. Government officials expect attendance to increase to 5.8 million by 2012.

So what is wrong with Disney in Hong Kong?

Right now Disney in Hong Kong is kind of like that new restaurant that opens up in the same location where dozens have failed before. No one seems to want to go there. No one knows why no one eats there, they just do not.

In response to complaints that Hong Kong Disneyland does not cater well enough to the Chinese market, the park is trying to localize itself. Its current “Year of the Mouse Celebration” is a good example. Hong Kong Disneyland Managing Director Bill Ernest explained, “’To help Mickey celebrate this monumental year, Hong Kong Disneyland has combined the best Chinese New Year traditions with Disney's unique style of entertainment.’" Mickey and Minnie will be sporting new Chinese New Year customs created by designer Vivienne Tam, and as the website boasts, “of course, traditional Chinese New Year menus and food will overflow from every corner of the Park and the two Disney themed hotels. With over 80 new items and menus with lucky names, there are sure to be endless "lucky" palates during the "Year of the Mouse Celebration".

Alas, clearly, Disney does not understand why they are failing in Hong Kong and China. Localization is important, but other more serious problems plague the parks, and plague the company in other ways. While having Chinese food rather than burgers and hot dogs might fit the Chinese palate more, having Mickey dress up in Chinese garb is not going to get Chinese to rush to the gates of HK Disney.

My firm conducted interviews with Chinese, Korean, and Singapore tourists recently who had visited Disneyworld in Florida and in Hong Kong. As one Korean 45 year old man responded, “I was mesmerized with Disneyworld went I first went there 20 years ago. The rides were amazing. I was so excited when I took my family there last year. But I was shocked – it was the same rides as 20 years ago, and they were falling apart and outdated. I won’t take my family back to Florida, and I won’t even try Hong Kong.”

Such poor sentiments were echoed by people we interviewed who had visited Hong Kong Disney. As one 28 year old Chinese male said to us, “The park is too small and there are no rides. Why on earth would I want to go there? It is not fun.”

Hong Kong Disney needs more and bigger rides, not designs by Vivienne Tam – what wrong-headed thinking… Would Disney attract more people by getting Ralph Lauren or Tommy Hilfiger to design employee suits in Florida?

For some reason, Disney feels that Chinese consumers wanted to stroll and take photos rather than go on rides. This is a complete err in thinking. The park’s small size is its second huge problem.

Disney is taking steps to improve Hong Kong Disneyland with more rides, but much more is needed. The park announced the addition of four new attractions in 2008—Muppet Mobile Lab, High School Musical Celebration, Turtle Talk With Crush and The Art of Animation—as well as a version of its classic ride It's A Small World. In addition to parks, though, and perhaps even prior to focusing on their park fiascos, Disney has more fundamental problems to address in Asia.

Rumors are flying that Disney is thinking about expanding its Asia parks operations by opening a new park on the mainland, most likely in Shanghai. Such a move would further damage Hong Kong attendance and has Hong Kong government officials worried about the prospect of pouring more investment into the already struggling park.

In America, people will continue to visit Disneyland because of the same “magic” feelings towards the brand that I have, as an American raised with Disney since I was still in the crib. In China, though, consumers do not have those magic feelings.

This is Disney’s 3rd problem and perhaps biggest problem in China and Hong Kong – they just are not connecting with Chinese consumers on the emotional level that they did in the US.

That emotional attachment to Disney that exists elsewhere in the world can be created in China and this is what Disney needs to focus on. To create the attachment, needs to focus on their product lines in retail outlets. Disney theme parks are generally visited by those who already are quite familiar with the company. Disney needs to strengthen the products that will reach people earlier in their formation as consumers: Clothes, toys, and all the other paraphernalia that has potential to find its way into China’s increasing number of middle class homes.

Thus far, however, Disney has been licensing its brand too much and thus diluting its image. Disney has not been aggressive enough about quality control, with the result that Disney products stay expensive while quality gets worse and worse. This is hurting the brand in exactly the places Disney needs to build brand loyalty the most.

As one Shanghai housewife told us when looking at Disney clothes for her newborn, “These clothes are ugly. Why would I spend more for this shirt when the quality does not look good?” One man said, “That doll of Winnie the Pooh looks like junk.”

Poor quality consumer products are problematic for Disney not only because they hurt the brand image but because they could damage Disney’s ability to cash in on the Mainland’s increasing demand for international-standard consumer products. Disney has a lot of potential in the consumer products area as Chinese increasingly demand top quality products for themselves and their children as incomes rise, and people are increasingly willing to spend more for safety and comfort as I wrote in a column for Forbes recently entitled “Chinese Seek Quality from Multinationals.”

There are lots of opportunities in China and Hong Kong still for Disney. But it is important that Disney gets back on track by connecting with Chinese consumers, understanding what they want, and delivering entertainment and products of a high quality. They still have a long-way to go.

CMR Analyst Charlotte MacAusland contributed to this article.

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