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Baskin-Robbins vs. Dairy Queen: A delicious cold war in China

By
Diana Bates
Diana Bates
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By
Diana Bates
Diana Bates
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April 4, 2013, 5:00 AM ET
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FORTUNE — “Get to the bottom of things,” urges a Baskin-Robbins menu at one of its central Beijing shops. The same flyer features a cartoon skater wearing a beanie, sliding down a ramp just beneath the words, “Time to re-treat.”

The message seems oddly prescient for the ice cream chain, which is gearing up for a major China reboot.

An off-duty store manager says the slogans are from the mid-2000s, back when the Canton, Mass.-based brand was under different management and known in Chinese as “31 American Flavors.”

Under parent company Dunkin’ Brands (DNKN), Baskin-Robbins has made China the centerpiece of its push into emerging markets. “We’re in the first stages of working out how to be really successful in China, and it’s at the forefront of our growth strategy,” says Nigel Travis, CEO of Dunkin’ Brands.

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Just 20 years ago, few American companies had made it into China. Going into the region, with its shifting political and economic risks, was a considered bold move. Back then, the goal was to build a presence in first-tier cities like Beijing and Shanghai. By contrast, today, Baskin-Robbins says it will focus on China’s second-tier cities like Zhengzhou, Chengdu, and Nanjing, where real estate is less expensive and opportunities are plentiful.

It’s been a tough road for Baskin-Robbins in China. “China had a very different business environment in the past than it does today, and Baskin-Robbins has operated under several different management structures since entering China in 1993,” admits Giorgio Minardi, president of Dunkin’ Brands International.

But not all ice cream operators have encountered freezer burn in China. Soft-serve chain Dairy Queen International has opened over 500 stores across China. The company, which entered the region just two years before Baskin-Robbins, says it plans to have 1,000 stores in China by 2016.

DQ isn’t wasting much time. In 2011 alone, it opened 271 stores in China, according to Kevin Lee, who was manager for China and Southeast Asia at Dairy Queen International from 2007 to 2012.

What has worked for Dairy Queen? Lee says the most important element to a franchise’s success in China is, firstly, finding the right master franchisees, the kind who want to grow their operations; and secondly, choosing the right store locations.

Then there’s the challenge of developing localized menus that make sense to customers. “You have to get to know your customer and offer flavors that cater to the local market. In northern China, people love strong flavors but enjoy fruit-based desserts and less chocolate,” Lee says. “In southern China, green tea-based flavors are more popular, and there’s more consumption of chocolate, but it can’t be the central flavor.”

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This leads back to Lee’s first rule: The master franchisee is crucial. Franchisees are a parent company’s richest source of information on what will succeed in stores. They are also critical to balancing the benefits of tailored menus against production costs.

It’s taken Baskin-Robbins 20 years to get to just over 90 stores with two master franchisees. Granted, half of these stores opened in 2009 or later. Last year, the company signed on five additional master franchisees in China. And it plans to sign with multiple franchisees that will focus on growing within individual provinces.

Baskin-Robbins says it has more than 1,000 flavors to draw from its playbook. Fresh flavors along with a store revamp that it is unironically calling “Happy 1.0” could get the brand’s pink plastic spoons moving again. The timing is ripe, as ice cream competition in China is starting to heat up.

China loves ice cream. The scene on a recent sooty Saturday afternoon in Beijing’s Wangfujing thoroughfare is irrefutable testament to the fact. Amid the first signs of spring, crowds gather outside the Wuyutai Tea Shop’s service window for a choice of two soft serve ice cream flavors, matcha or jasmine tea.

Wuyutai began to offer soft serve at three stores in Beijing last year, and it’s proven incredibly popular. Hard ice cream hasn’t done as well for dominant domestic ice cream manufacturer Baxi, which offers its desserts in specialty stores and supermarkets. And in southern China, there’s Iceason, a domestic ice cream store chain known for its fruit gelatos.

So does Baskin-Robbins stand a chance? Xie Lei, a former manager at Baskin-Robbins’s first store in Beijing, says the company will need to focus on its brand positioning if it is going to make inroads in China. “It’s a great quality product, but … customers were often confused over whether it was a high-end or lower-end brand,” says Xie.

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Häagen-Dazs sits on the luxurious end of the ice cream food chain. The brand offers desserts such as the “Cologne Light,” a German cathedral made out of cappuccino truffles, and the “Madagascar Carnival,” a dollop of ice cream etched in the shape of a cocoa bean with a side of grilled pineapple chunks.

To be sure, Baskin-Robbins can point to a few signs of life. The vibe at one of its locations in a southern Beijing outlet mall is hopping; it’s hard to find a seat, and no one is ordering a cup to share. Minardi says the company has refined its brand in China and the menu for the local market. It may not even need to get to the bottom of past belly flops to succeed this time around; the market may be just that ripe. “We are beginning to ramp up our growth strategy as demand for our product in China is really taking off.”

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