Defying Tough Times, These Four Foreign Brands Are Successful in China

How Ikea, Starbucks Others Manage To Thrive During 'New Normal'

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Shoppers in the furniture department of Ikea's first store in Beijing.
Shoppers in the furniture department of Ikea's first store in Beijing. Credit: Doug Kanter/Bloomberg

China can be a rough market for foreign brands these days, and this month brought a few jarring reminders of that.

Hershey had been on a roll in China, logging strong sales, opening an innovation center in Shanghai and buying a local chocolate maker, but its revenue in China dropped by nearly half in the first quarter of 2015 and was disappointing in April and May. With those troubles in mind, the company just cut its general 2015 growth target and announced layoffs for 300 employees.

In a completely different sector, luxury, Prada recently reported that net profit in the most recent quarter tumbled 44%, with blame focused on lower spending in greater China and Asia.

Brands from Nestle to Rolls-Royce have struggled to adjust to what China's leaders call "the new normal," a slowdown after years of double-digit growth. The Chinese economy expanded 7% in the first quarter, the smallest gain in six years.

Luxury has been hit by a government anti-corruption drive, and by tastes shifting away from bling. For everyday purchases, many categories have already reached saturation in China's most developed cities. And Western brands have more competition now from local players, "which have made big investments in product quality and brand image," said Laurel Gu, senior lifestyle analyst at Mintel in Shanghai. A recent Mintel survey said 67% of people said Chinese brands were gaining appeal for them, Ms. Gu said.

Despite all the challenges, though, certain foreign brands are still doing great, either by tapping into consumer trends, succesfully localizing products or by simply being the right kind of brand for the moment in China. Here's a look at a few of them, and what their success reveals about Chinese consumers right now.

Ikea isn't just a place to shop; it's often compared to an amusement park, with sofas and beds instead of rides, and with inexpensive hotdogs and ice cream to boot. Customers get cozy on the furniture, sometimes dozing off, and Ikea doesn't mind. Ikea China is an experience, not just a place to shop, and that's something consumers are looking for. (Travel and leisure are also expanding categories.)

Ikea said in its 2014 annual summary that China was its fastest-growing market. (Several local reports cited sales up 25% including new stores in the year ending Aug. 31, but the company didn't immediately respond to a query on that.) It's brought prices down by localizing production, which has fueled its popularity.

So has China's drive to promote urbanization and consumption. In a country that traditionally favors saving instead of spending, the government hopes that people moving to big cities will have to spend to outfit their new apartments.

Starbucks has been opening roughly a store a day in China over the past few years; now it has over 1,600 locations. It offers classics and localized products, some with green tea or fruit to appeal to consumers who find coffee bitter. The company said sales were up 12% at comparable stores in Asia in the quarter ended in March, with growth driven by China.

The brand is also tapping into China's craving for experience and indulgence. It's not a place for grabbing a coffee on the run; people linger there with friends, sometimes posting selfies on social media. In China, where a grande latte costs nearly $5, Starbucks has successfully cast itself as an aspirational brand.

Coach: The luxury sector has cooled in China, and show-off luxury items are now often seen as tacky. In that context, "affordable luxury" brands are well-positioned, and Coach has benefited. Coach is hurting in North America, with same-store sales down 23% in the most recent quarter. In China, though, sales were up a solid 8%.

Apple: There are plenty of up-and-coming Chinese electronics brands, especially in the smartphone category. Xiaomi and OnePlus, which offer stylish, lauded phones at a much lower pricepoint than the iPhone. But there's just something about the iPhone – and the bigger screens on the iPhone 6 Plus help too. In the first quarter, during China's Lunar New Year, iPhones sales were bigger in China than in the U.S. for the first time. Apple has been showering its Chinese customers with lovingly crafted campaigns -- and CEO Tim Cook just acknowledged that gold phones and other designs were made with China in mind.

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