Haagen-Dazs had done its homework well for China

Executive Summary: In the mid-1990s, the Chinese were highly price-sensitive consumers with little dairy in their diet. In walked Haagen-Dazs, pitching its full-fat ice cream at prices five times higher than in the US. To anyone unfamiliar with Chinese culture, this looked like a recipe for disaster. But Haagen-Dazs had done its homework - and done it well.
 
The name Haagen-Dazs was invented by Reuben and Rose Mattus in 1961, because they thought it looked Scandinavian, and because Denmark was known for dairy products. Fifty years on, Haagen-Dazs sells in over 80 countries. Its revenues were over $750 million in 2011. In the global ice cream market, Haagen-Dazs has only a two per cent market share, while Unilever has 18 per cent and Nestl 14 per cent. But in the premium category, Haagen-Dazs is ahead of Unilever's Ben & Jerry's brand and Nestl's Mvenpick.

Haagen-Dazs mooncakes are an example of how the brand has adapted culturally while retaining its global identity"

For Haagen-Dazs, the temptation to expand operations to China was great. Despite the traditional lack of dairy in the Chinese diet, demand was rising as the population gained exposure to Hong Kong since 1984, but venturing on to the mainland in 1996 introduced a completely different set of challenges.

One of the most appealing was to direct the brand at the local hunger for luxury goods that were markers of economic status. Luxury brands such as Louis Vuitton and Cartier lined the high-end shopping areas of Shanghai and Beijing. With increased buying power and a diminishing stigma on displays of wealth, upper-class Chinese appeared well situated to appreciate Haagen-Dazs's themes of indulgence and self-gratification.

Just as Starbucks was expected to fail in a nation of tea drinkers, Haagen-Dazs was expected to flop, as dessert in China was just fruit"

Before entering China, Haagen-Dazs did extensive research to plan distribution. Its products need a constant temperature of -26»C, so the company decided to handle distribution itself. It would import products from its US and European factories rather than manufacture locally, because the quality of Chinese dairy products was poor. Shipments from overseas would be brought to warehouses in Shanghai and Beijing, and then go out to retail outlets across the country in specially designed refrigerated trucks. This would ensure the quality that was crucial to the brand, though it would mean huge transport costs and import duties as high as 93 per cent.

The market research also yielded other vital information. First, Haagen-Dazs observed that many Chinese stores stopped carrying frozen desserts in winter, and their refrigeration did not meet its standards. Second, unlike Europeans, who eat ice cream at home, the Chinese preferred to eat it in the retail environment.

Chris O'Leary, Head of international operations at General Mills, explains: "It's not an ice cream cone they're buying; it's an occasion." So Haagen-Dazs decided to sell its ice cream in China in stand-alone shops instead of supermarkets. And, unlike the casual ice cream parlours in western countries, China's were designed as luxurious spaces.

Haagen-Dazs opened its first Chinese cafe in Shanghai in 1996, with plans to invest another $40 million over 10 years to open more shops across China, starting with major eastern cities and following the spread of prosperity into the hinterland.

The strategy was simple: high-end real estate and service reminiscent of a five-star hotel. Patrons were served on Wedgwood tableware by highly trained staff, in an ambience that suggested a European patisserie. The extensive all-dessert menu had the word "Indulgence" on the cover. These were intended as environments for couples and professionals. Shop managers were recruited locally, so they were familiar with the customers' culture and could ensure that their experience met expectations.

Traditionally, the Chinese have been price-conscious, but the perception of quality turned this on its head: a higher price and respected brand name mean quality. This is why companies with high-quality products often find themselves in reverse price wars in China, raising prices to attract people who will only buy expensive brands.

By constantly reinforcing the message of quality and luxury, Haagen-Dazs could command premiums far above those of the local competition. Prices on cafe menus were equivalent to as much as $35. Even a banana split cost $12. To put this premium in perspective: the average Chinese factory worker earns $150 a month.

Alongside the perception of quality was the notion of a luxury product as a status symbol. In a country where people felt increasingly free to display their wealth, guests at a Haagen-Dazs cafe enjoying expensive sundaes with friends or colleagues gained instant bragging rights. Lastly, the brand took advantage of the Chinese mindset of "saving face", because of which giving only premium brands as gifts allows the giver to appear generous and the recipient to feel important.

Food is a culturally sensitive business. Haagen-Dazs managed the challenge of tweaking its products to suit Chinese preferences while maintaining its global brand identity. It also spotted an opportunity in a Chinese gift-giving tradition. In 1997, it introduced mooncakes to its product range. This is a type of confection traditionally given to family, friends, and clients during the Mid-Autumn festival. Haagen-Dazs's version, which is essentially a mini ice cream cake, sells like the proverbial hot cakes - mooncake sales have grown around 25 per cent a year since they were introduced, and account for 28 per cent of Haagen-Dazs's revenues in China.

In China, Haagen-Dazs did not compete with other ice cream companies, but aligned itself with luxe brands"

So the management's efforts on four fronts - product, pricing, promotion, and distribution - reinforced one another to build Haagen-Dazs into a brand highly desired by affluent Chinese. It was further strengthened by celebrity endorsements. Adjusting products to suit local tastes helped the company create demand and space in the massive Chinese food market.

Imports ensured quality, which justified the high price, and this in turn made the product more desirable in the culture of "saving face". The retail ambience guaranteed delivery of the expected brand value. Locating shops in prime locations meant that customers were "dressed to impress", which further enhanced the premium brand image.

Haagen-Dazs has turned out to be one of the most successful global food and beverage brands in China. It is often mentioned alongside Starbucks in case studies of successful market entry in a challenging country. Like Starbucks, which many thought would fail in a tea-drinking country, Haagen-Dazs was expected to fail as people ate fruit for dessert and considered dairy products foreign. But by 2009, more than 50 per cent of Chinese had heard of Haagen-Dazs.

Today, the company has more than 160 shops in China, including stores in second-tier cities. Eager to introduce pints for consumption at home, Haagen-Dazs has also installed 5,000 freezers, costing $15,000 apiece, throughout China. The company does not disclose exact figures, but revenues were estimated at over $100 million in China in 2010, with an annualised growth rate of 21 per cent over the three previous years. About 80 per cent of revenue comes from ice cream parlours as opposed to supermarket sales.

The sailing hasn't all been smooth, however. In 2005, the company learned a lesson about the Chinese media's propensity to disproportionately scrutinise foreign multinationals, after a makeshift kitchen in Shenzhen producing ice cream cakes without a food hygiene licence sparked public outcry. The company publicly apologised, closed the kitchen and distributed refund vouchers, but the media continued to criticise it. However, Haagen-Dazs was able to rebound because of its strong brand.

Today, it is grappling with growing competition - both foreign and local - and saturated primary cities. Another challenge is to expand in China's secondary cities while continuing to open shops in primary ones. As luxury brands look to benefit from the vast Chinese market, many struggle to find the balance between preserving their aura of exclusivity while reaching as many customers as possible. Haagen-Dazs is no exception.