3 Companies Likely to Succeed in China

Many American companies have failed in China, but these three stand to benefit from rising consumer spending in the country.

Jan 27, 2014 at 1:36PM

Consumer spending is on the rise in China. When you combine this with the fact that Chinese consumers have a desire for Western goods, it should mean success for American companies. Unfortunately, the Chinese retail landscape has been more difficult to navigate than many American retailers had anticipated. For example, look at what happened to Best Buy and Home Depot

Based on growing incomes and discretionary spending in the country, Best Buy figured that its electronic merchandise and gadgets would sell there. But Chinese consumers didn't take to the brand well, which might pertain to their penchant for bargain shopping. But it goes deeper than that.

The Chinese consumer wants to feel special. If a retailer doesn't treat a customer as though he or she is important, then that customer will look elsewhere. Chinese consumers also don't care for structure. These consumers want to go on the hunt for bargains in a store. It's more of an experience than what the American consumer wants -- get in, buy the flat-screen television, get out. Aside from Best Buy's Five Star stores, which have potential since they cater more to Chinese consumers in the form of bargains and customer service, Best Buy is out of China.

As far as Home Depot goes, Chinese consumers have no interest in do-it-yourself home projects. Home Depot opened seven stores in China in 2006. All seven have since closed.

The good news is that three other companies, two of which are quick-service restaurants and one of which is a retailer, do have potential in China. Here's why.

Yummy!
When you think about Yum! Brands (NYSE:YUM) and China, you likely think about too many antibiotics in KFC's chicken, a public backlash against the brand, and the avian flu. However, the avian flu is a temporary event, and KFC China has cut 1,000 of its chicken suppliers in China. And Yum! Brands is doing a lot correctly in China.

When is the last time you went to KFC and ordered Sesame Seed Cake? How about Fried Shrimp? If neither of these menu items would satisfy your palate, then perhaps Spicy Chicken Rice would do the trick.

Unless you have been to China recently, you couldn't have ordered these menu items at KFC. The key here is that Yum! Brands has figured out that the Chinese consumer wants American brands, but it also wants these brands to cater to their desires. By making its menu locally relevant, KFC should see long-term success in China. KFC also has a 2-to-1 lead over its nearest competitor in China. Additionally, Pizza Hut is the No. 1 Western casual-dining brand in China.

Yum! Brands isn't the only company likely to benefit from increased consumer spending in China, though.

Would you like some coffee with those profits?
Starbucks (NASDAQ:SBUX) is one of the best-run companies in the world. If you think its growth run is over, you might be mistaken. Starbucks has more than 1,000 locations in China, and it's taking the correct approach to targeting the Chinese consumer.

Instead of setting up the traditional Starbucks restaurants in China, Starbucks caters to the local consumer in various ways. For instance, one Starbucks location in a high-end area will offer couches as well as local art and artifacts. Another Starbucks location in an area where there is more nightlife will offer floor-to-ceiling windows, louder music, and a more modern atmosphere, all in an effort to cater to the younger Chinese consumer.  

The point here is that Starbucks "gets it" in China. Starbucks also understands that most Chinese consumers will visit Starbucks in the afternoon and at night, as opposed to in the morning like most American consumers. Therefore, Starbucks is setting up its locations to match this trend.

The biggest growth potential for Starbucks is if it can get a tea-drinking population to drink coffee. If Starbucks were to find a way to succeed in this area, the growth potential would be enormous. 

Don't be fooled by store closures
Wal-Mart Stores (NYSE:WMT) recently announced the closure of 25 underperforming stores in China. This might lead many people to believe that Wal-Mart has failed in China. However, the company still has 390 stores across 150 cities there, and it plans on opening 110 stores in smaller cities over the next three years.

Wal-Mart is really playing along with the Chinese government's intentions, which are to pour money into small cities for urbanization purposes. By situating itself in these cities, Wal-Mart is likely to benefit from increased consumer spending there. This is especially the case since Wal-Mart will be offering these consumers everything they need under one roof and for everyday low prices. Wal-Mart also plans on renovating 55 stores this year, and 65 stores next year.

The bottom line
If you're looking to invest in the rising middle class and increased consumer spending in China, then you might want to further investigate Yum! Brands, Starbucks, and Wal-Mart as potential investment options. All three of them cater to the Chinese consumer in different ways, but what's most important is that they're catering to the Chinese consumer, whereas several other American companies assumed they could just set up shop and ring up sales.

Bonus: 2 more companies poised to profit from China
U.S. automakers boomed after WWII, but the coming boom in the Chinese auto market will put that surge to shame! As Chinese consumers grow richer, savvy investors can take advantage of this once-in-a-lifetime opportunity with the help from this Motley Fool report that identifies two automakers to buy for a surging Chinese market. It's completely free -- just click here to gain access.

 

Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends Home Depot and Starbucks. The Motley Fool owns shares of Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers