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.

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
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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.

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