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 Li-Ning is a Beijing sportswear brand that has become fashionable in China. Here a woman shops in a Li-Ning stand in Beijing.









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BEIJING—Political controversy isn’t the only problem American companies face in China. They are also up against adversaries like Three Squirrels.
In just seven years the maker of nuts, seeds and fruits has become one of the country’s most popular snack sellers. Its cartoon squirrel characters have become so popular that there’s now a Three Squirrels theme park under construction and an online show with hundreds of millions of viewers. Its sudden popularity is making it difficult for iconic American snack brands like the Oreo to gain more favor. Even with special flavors like seaweed-flavored Oreos, Oreo Wasabi and Oreo Spicy Chicken Wing.
For years, American companies looked to China as a land of new opportunity. Now a new reality is settling in: The Chinese consumer isn’t about to save the day for Western brands.
“Now the quality is similar, so why not buy China?” said Gao Yang, 39, who works in home decoration, as he browsed in a Beijing mall. Once an avid buyer of Nike and Adidas products, Mr. Gao said he has switched exclusively to Li-Ning, a Beijing-based sportswear brand that has become fashionable in China. In a Hill+Knowlton Strategies survey in 1998, virtually no Chinese respondents said they thought Chinese brands were cool.
 











Home Advantage

China’s domestic companies, particularly smartphone makers, have been snatching up market share in the country.













*Based on a McKinsey analysis of 30 categories of consumer goods †Includes domestic and foreign brands
Sources: McKinsey Global Institute (categories); Cinno Research (smartphone sales)
American brands now face two major challenges in a country that is increasingly a foe of the U.S. on matters of trade and geopolitics. One is that local Chinese brands are getting stronger. The other is that Chinese consumers are increasingly turning away from foreign brands because they have run afoul of Chinese politics. The result is that some American brands that used to be cool are falling out of fashion.
The recent NBA flap in China was a reminder of just how quickly Chinese attitudes can turn on Western brands. Within hours of a tweet—later deleted—by the Houston Rockets’ general manager expressing support for Hong Kong antigovernment protesters, stores removed Rockets gear and sponsors pulled deals with the NBA. All game broadcasts were canceled. Searches for Rockets merchandise on e-commerce sites yielded friendly error messages encouraging shoppers to consider something else— perhaps a toy rocket.
 Li-Ning mimicked American competitor Nike with a stylized “L” resembling Nike’s swoosh on its sneakers. The logo is still the same but the company is succeeding on its own merits. Its profits were up 35% year over year in the six months ending June 30.

Other foreign brands, including Asics, have had to apologize to China in recent years after upsetting local consumers on sensitive topics. This week Apple Inc. removed a crowdsourced map service that allowed Hong Kong demonstrators to track police activity. The decision came a day after the Chinese Communist Party-run People’s Daily newspaper called the app “toxic software.”
The shift signals a possible end of an era. For years, it was customary for Western executives to tout their plans for dominating China—a market they felt they had to win as markets elsewhere matured. But foreign consumer brands now hold a smaller market share in the categories tracked by McKinsey & Co. than at any time since the global financial crisis, according to a Wall Street Journal analysis of research from the U.S. consulting firm, incorporating data from Euromonitor and IHS Markit. Market share losses were particularly evident in categories such as pet food, passenger cars, videogames, smartphones and appliances.


In 2011, 70% of smartphone sales in China were from three foreign brands: Nokia Corp. , Samsung Electronics Co. and Apple. In the first half of 2019, the top three—Huawei, Oppo, and Vivo—were all Chinese, with 71% of the market between them.
Ebbing market share might still be OK for some Western companies, given that China’s market is also getting bigger. But China’s retail sales aren’t growing as fast as they used to. Many consumers are now burdened with mortgages and other debts. Retail sales have slowed to an annual growth rate of about 7% to 8% a year, compared with 15% or more a few years ago.

 Note: Chinese data not available for all months. Dotted line connects months where data is missing
 Sources: Wind (sales); FactSet (monthly exchange rate)


Some Western companies, including Carrefour SA, Amazon Inc. and Uber Technologies Inc., have decided China is too complex or costly to win for some of their major businesses, and have closed or sold them off after facing powerful local rivals who were able to largely control the market. Ford Motor Co. , Apple Inc. and others remain committed, but are struggling to meet expectations. Amazon said it continues to serve Chinese consumers through its cross-border e-commerce business and remains committed to China. Uber didn’t respond to requests to comment. Ford didn’t comment. Carrefour provided no further comment beyond its press release detailing the transaction.
The willingness of Chinese consumers to keep buying foreign products matters more to the global economy than ever. China now contributes roughly a third of global growth, and is the world’s second biggest source of household wealth, according to Credit Suisse. China is expected to surpass the U.S. as the world’s biggest consumer market in 2021, according to New York-based research firm eMarketer, with analysts predicting China will have more than $5.8 trillion in retail sales.






If more Chinese consumers buy locally, or don’t spend as much as hoped, that will force Western companies—and economies—to rely more heavily on domestic buyers in their home markets to keep growth ticking. While consumption has been largely strong this year for the U.S., it is nowhere near the growth happening in China and recent data warned it may not last.
As the Chinese economy shifts inward, McKinsey predicts between $22 trillion and $37 trillion of economic value—or between 15% and 26% of global gross domestic product—could disappear as supply chains shrink and other changes ripple through the global economy.
Many Western companies are still thriving in China. Nike itself recently reported a 22% jump in quarterly sales in China, to nearly $1.7 billion, and has seen double-digit growth in China every quarter for the last five years. Beauty and personal care brands have gained market share.
Some Western brands have thrived by tweaking their products to make them feel more Chinese. After initially losing market share to an upstart Chinese coffee chain called Luckin Coffee that emphasized delivery counters and smartphone transactions, Starbucks Corp. has prioritized more local flavor, including opening a store in Tianjin in a historic building designed by a Chinese architect. The company worked with preservationists to retain everything from a giant glass dome to the original counters once belonging to the Zhejiang Xinye Bank. It also added a tea bar with marble countertops that it says demonstrates “deep respect for thousands of years of tea tradition.”
Its results have improved in part because of initiatives that are similar to those of its local competitor—a large number of new locations, delivery service and stores for people “on-the-go.”




Above, Chen Xiangpeng, 26, poses for a portrait in Beijing after shopping at a Chinese clothing brand. Zhang Qi, 33, poses for a portrait in front of Gap, an American clothing brand. She just shopped for her two children, who are 3 and 5 years old.
 















 KFC and Pizza Hut, now part of Yum China, have adopted many locally-influenced products in China that would be unrecognizable to American consumers. KFC sells various versions of the traditional Chinese porridge breakfast. Photo: Qilai Shen/Bloomberg News
Some other U.S.-originated brands, like KFC and Pizza Hut (now part of Yum China ), are now owned by Chinese companies and have adopted many locally-influenced products that would be unrecognizable to American consumers. For instance, Pizza Hut in China has pizza topped with durian, what some call the stinkiest fruit on the planet. And KFC sells various versions of the traditional Chinese porridge breakfast.
But even successful brands are having to watch their backs more than before. Li-Ning—the sportswear company whose full name is Beijing Li-Ning Sports Goods Co.—mimicked its American competitor with a stylized “L” resembling Nike’s swoosh on its sneakers.
Today it is succeeding on its own merits even though the logo is the same. “I think it shows my patriotism,” said Xiong Junming, 40, covered in gear from Beijing-based sportswear brand Li-Ning at a Beijing pedestrian mall. Mr. Xiong said he had just purchased four pairs of the brand’s shoes, along with some sportswear. He said he used to wear Nike but now Chinese quality has caught up.

Li-Ning’s net profit/lossSource: the companyNote: 1 billion yuan=$141 million.billion yuan

Li-Ning recently began making a badminton line in cooperation with its national team, with rackets and footwear endorsed by Chinese stars in badminton, a wildly popular sport in China. Another clothing line, called “Deconstruction,” is aimed at “Chinese culture, street fashion and basketball attitude,” a nod to emerging street basketball culture in China. In the six months ended June 30, the company’s profits rose 35% year-over-year, though total revenue is still much lower than Nike’s.
Nike didn’t respond to requests for comment. Li-Ning declined to comment.
Many American companies miscalculated how difficult it would be to gain a permanent foothold in a country that has turned toward patriotism. In a Brunswick Group survey conducted in June, 56% of Chinese consumers said they’ve avoided purchasing an American product to show support for China’s position in a continuing trade war with the U.S. A Credit Suisse survey last year found that more than 90% of Chinese consumers between ages 18 and 29 would prefer to buy domestic appliances.
Other companies are finding it harder to sell to Chinese shoppers who now have some of the same debt worries that weighed on Americans. For every dollar of GDP generated in China last year, its households owed 54 cents, according to the International Monetary Fund. Households will owe 68 cents per dollar of GDP by 2024. U.S. consumer debt is 60 cents per dollar.


Some American brands that used to be cool are falling out of fashion in China, where nationalism is on the rise. Above, people walk past a Beijing storefront for HLA, a Chinese clothing brand. Below, customers walk past an entrance of a Walmart Inc. store in Xiamen, China, last August. Walmart recently announced it would invest $1.2 billion in distribution centers across China over the next two decades. Photo: Qilai Shen/Bloomberg News 


The shift in favor of domestic brands in China began taking off about three years ago, before the recent upsurge in patriotic feelings. Chinese brands were trading up in quality and innovation. Chinese consumers were also becoming more sophisticated, and less easily impressed with foreign names. Surveys show many now want products that express something about their identities—which increasingly involve pride in being Chinese.
Hollywood studios are among those affected. Last year for the first time, China’s top five grossing films were all Chinese. Recent blockbusters have included Operation Red Sea, based on a 2015 mission to rescue Chinese citizens in Yemen, and Wolf Warrior 2, a 2017 action film that features China as a benevolent force inside Africa.
American studios have responded by attempting to do more projects jointly with Chinese backers, though that risks eroding Hollywood’s role in dominating global popular culture. IMAX’s chief executive, Rich Gelfond, summed up what he thinks it takes to succeed in China nowadays: “Be as Chinese as you can be. Try to make it a win-win situation. Play for the long-term.”
Another area that has gotten tougher for western brands is food. Yonghui Superstores, a grocer based in Fujian province, is on track to surpass the market share of Walmart Inc. after its revenue grew 20% last year amid a rapid expansion of its fresh supermarkets and the benefit of an early start in China’s hotly competitive fresh grocery delivery market.
Walmart is now pivoting to invest in stores that are hybrid pickup and delivery centers. The company recently announced that it would invest $1.2 billion in distribution centers over the next two decades. It has built 40 depots just for delivery. “In China we have to constantly move fast,” said Daniel Shih, Chief Corporate Affairs Officer for Walmart in China.
Mondelez, the Deerfield, Ill. maker of the Oreo, meanwhile, is still searching for a way to increase its market share 23 years after introducing the country to the iconic American sandwich cookie. Mondelez International Chief Executive Dirk Van de Put acknowledged at a conference in September that the company spent too much energy focusing on legacy brands that had worked well elsewhere. Mondelez International generates only about 1.8% of its sales in China, according to FactSet.











China is expected to pass the U.S. as the world’s biggest consumer market in 2021.What makes Mondelez’s challenge more difficult is the rise of snack upstarts like Three Squirrels, which managed $1.5 billion in sales in 2018 selling nuts, seeds and dried fruits. That made it China’s largest snack retailer on China’s major online retail sites, according to Equal Ocean, a Beijing investment research firm. It expects to have 10,000 franchise stores in the next five years, according to the company’s prospectus, or about five new stores a day.“We want to be the biggest and the best snacking company in the world, and as part of that, you need to win big in China,” Mr. Van de Put said. “One of the issues in the past why our growth was smaller or lower was because we were only focused on those power brands.” It has recently switched strategy by focusing on boosting the local brands it has acquired in China. This year, one of those local firms launched a new rice wafer snack with purple yam and black rice flavors. Mondelez, according to Euromonitor, was able to claw back lost market share for the first time since this data was collected in 2012. Mondelez doesn’t break out its China business separately.“The company doesn’t play in the same categories with Three Squirrels,” Mondelez said in a statement. 

A recent flap over a tweet from the Houston Rockets’ general manager expressing support for Hong Kong antigovernment protesters was a reminder of how quickly Chinese attitudes can turn on Western brands. Here people walk past an NBA store in Beijing.
Even China’s luxury goods market—dominated for years by Western names—is changing. After Chinese president Xi Jinping’s wife wore a trench coat from Guangzhou-based luxury brand Exception de Mixmind in 2013 during a state visit to Moscow, consumer sentiment about local alternatives has started to improve.
Many foreign luxury brands still post strong results in China. But McKinsey warns that among younger consumers, barely half of luxury buyers now care about brand names, with a growing number purchasing Chinese products. Among their parents, virtually none would have considered anything Chinese luxurious.
Western luxury brands faced consumer boycotts in August for labeling Hong Kong as a separate entity from China. Versace, Coach and Givenchy were among the foreign brands that posted apologies on Chinese social media.
Bingyan Wang and Fanfan Wang contributed to this article.
Write to Julie Wernau at Julie.Wernau@wsj.com





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