Why China Could Steal the Magic of Disney

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One of the world's most recognized brands is set to open up shop in China later this year. Walt Disney (NYS: DIS) plans to launch 25 to 40 Disney Stores in China by 2015. Rising wealth and a huge population make China a crucial market for Disney as it looks for fresh sources of revenue outside the United States and Europe. However, this growth strategy could cause major problems for the specialty retailer, because China is known for counterfeit goods. 

American companies in China face a costly battle to protect their intellectual-property rights. It's estimated that Chinese knock-offs cost foreign businesses around $20 billion in profits each year. Deregulation in the country has helped it become one of the fastest-growing economies in the world. However, this explosive growth can costs companies like Disney in terms of missed sales and possible damage to their brand names.

If you don't make it, fake it
Companies such as Apple (NAS: AAPL) spend billions of dollars each year building their brand, only to see that value ripped away by counterfeits. Last year, a fake Apple store in Kunming, China, made headlines around the world for its striking resemblance to the real Apple store. The counterfeit location was so convincing, in fact, that actual employees working for the imitation retailer thought they were working for Apple. Also consider that Apple's iPhone and iPad are some of the most pirated devices in China and the potential brand destruction is huge.

Selling the experience
Similar to Apple, the Disney Store relates to customers in a way that fosters the Disney brand experience. In 2010, the company launched its new interactive store design, which created an engaging retail experience.

Part of buying Disney merchandise is visiting the store. Kids can create custom rides featuring their favorite characters from the movie Cars or step in front of a special princess-mirror that talks to them based on what merchandise is in their hand.

The magic of Disney will be available in 12 countries by the close of 2012. While the new Disney Store format is going to be difficult to mimic, it wouldn't be the first time we've seen Chinese counterfeiting replicate a seemingly irreplaceable brand experience.

Satisfying local demand
There's a lot at stake for Disney Stores as they enter the Asian market. On top of protecting their intellectual-property rights, businesses breaking into the Chinese marketplace face serious challenges involving cultural differences. Just look at what happened with American toymaker Mattel (NYS: MAT) .

Barbie closed her six-story flagship store in China last March, after lagging sales failed to gain speed. It's hard to imagine the world's biggest toymaker struggling to find customers in the heart of Shanghai. However, that's exactly what happened. Perhaps Disney learned something from Barbie's experience in the emerging market, as Disney's China stores plan to carry more localized products and fewer princess dolls.  

At least for Disney, most people in China understand the brand and the merchandise behind it. Chinese demand is so strong, in fact, that a fake Magic Kingdom was created. Known as the Beijing Shijingshan Amusement Park, the illegitimate theme park even featured Disney's familiar characters. To counter, Disney's planning to open its famous Disneyland theme park in Shanghai -- bringing the authentic magic of Disney to the heart of China.

There's no doubt that China's a critical market for Disney to be in. However, the company's profits could be hurt if it's unable to stay a beat ahead of imitation retailers in the region. Luckily for investors, Disney isn't the only U.S.-based company trying to tap into emerging markets. Find out which domestic businesses are set to dominate emerging markets in this special free report, which is titled: "3 American Companies Set to Dominate the World."

At the time this article was published Fool contributor Tamara Rutter owns shares of Disney and Apple. Follow her onTwitter, where she uses the handle@TamaraRutter, for more Foolish insights and updates on your favorite stocks. The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Walt Disney, Mattel, and Apple andcreating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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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