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This column originally appeared in Forbes

Last March, Mattel (NASDAQ:MAT) opened a $30 million, six-story flagship Barbie store in Shanghai with great fanfare. Facing dwindling sales in the U.S. and increasing competition from MGA Entertainment's Bratz dolls, Mattel wanted to revamp Barbie's image and create a lifestyle brand. The store targeted twenty-somethings by offering a line of clothing by Patricia Fields, the Sex and the City designer, and it sold Barbie brand cosmetics and even had a Barbie Bar with alcoholic beverages.

It was a bold strategic move for which Mattel should be given credit. Winning brands innovate and look for new growth markets, especially in downturns, when competitors are weakened. Kraft's (KFT) acquisition of Cadbury is likewise an example of a bold and potentially lucrative move by a cash-rich company.

With its retail sales growing by 15% in China in 2009 Mattel was right to look there for revenue growth for its Barbie brand. It targeted the right age and socioeconomic group. Middle-class Chinese women between the ages of 24 and 32 are especially optimistic. Their incomes kept rising to where they now account for about half of all household income, up from 20% in the 1950s. (See: "China's New Purchasing Powerhouse: Women.")

Unfortunately Mattel failed to execute the strategy well. Like Apple (NASDAQ:AAPL) when it launched the iPhone in China, Barbie made the mistake of paying too little attention to local consumer tastes. Chinese women tend to like cutesy, girlish pink clothes (think Hello Kitty), not the sexy and skimpy kind Fields designed. Odd as it sounds, Snoopy-branded clothes, cartoon logos and all, are hot sellers for women entering the white-collar workforce.

So far sales at the Barbie store have been disappointing. The product positioning and style just aren't what Chinese women want. The pricing hasn't fit the market either: My firm, the China Market Research Group, conducted interviews with shoppers leaving the store and most said they thought the store's tops, which they viewed as simply T-shirts, were overpriced. Chinese women have kept shopping during the financial crisis, but they've sought value. They want to make the most of their spending by buying bags and coats they can use every day rather than skimpy, eye-catching outfits they'd only wear every few months. That drive toward perceived value is why brands like Zara, Uniqlo and even the ultra-expensive Gucci are doing well.

Barbie's other big mistake was setting up a standalone flagship store. Mattel was right to try to build a large store with a lot of products. Too many brands, like the jewelry companies Tiffany (NYSE:TIF) and Mikimoto, have set up stores that are too small and have limited product selection, as I wrote in "Three Dumb Things Foreign Companies Do In China." They want to start small and see if their products sell well. That sounds reasonable since it keeps costs down so you don't overspend before the market is proven, but a tiny store makes consumers feel put off and disrespected. In most cases it is important to invest in a top-of-the-line store with the newest season's products. An increasing number of Chinese know what's offered in other markets from traveling abroad and surfing the Web.

However, setting up standalone stores rarely works in China, as both Mattel and the British retailer Marks & Spencer (OTCQX:MAKSY) have found out. It's usually better to build a large store within a mall or department store, where the foot traffic is. Because of snarling traffic and dizzying pollution, most Chinese prefer to go to one indoor destination rather than walk down the streets. They expect to shop, eat and hit beauty salons in a single place with nice air conditioning and a clean environment. They don't like to go out of their way to a single store unless that store is really special. And most foreign brands, having entered China only in the last decade or so, need to go where the customers are to catch people who have no experience with them.

Mattel should have set up a store in a large, busy mall. Companies like Louis Vuitton and Gucci, which already have extremely loyal customer followings, set up flagship stores in malls. Their stores are enormous, and they build up brand exposure. Most important, they get the foot traffic you need to make your brand known and attract new customers.

Mattel should be given credit for having taken a risk to try to increase sales by extending its brand in terms of both new positioning and regional expansion. That was smart. Unfortunately it didn't execute properly in the design of the products or the location of the store.

All is not lost for Barbie in China, however. Young girls still clamor for those dolls and other products. Barbie has a fine future in China, but if she wants to make the most of it, she will need to rethink what Chinese girls and young women want, as well as how they shop.

Disclosure: no positions

Source: Retail Risks: Where Barbie Went Wrong in China