France's Groupe Danone finally lost its foothold in China this fall after a two-year legal battle with local beverage maker Wahaha. Apple's iPhone logged a disappointing debut there in November. Figuring out the Chinese retail market -- which posted 5.9 trillion yuan ($867.6 billion) in total sales in the first half of this year -- is far from a piece of cake for some big international corporations.

But not for Kraft. The president of Kraft International, Sanjay Khosla, told Forbes how the world's second largest food company overhauled its recipe for success to align with the particular appetites of China's 1.3 billion people. It now boasts the biggest market share in China in two major categories: cookies and powdered beverages.

Kraft Foods seized 22.4% of China's $1.6-billion cookie market for the year ending in September 2009, AC Nielsen research shows. Kraft's major competitor, Taiwan's Tingyi, ranked No. 2 with 8.3% of the market, while local leader Dali grabbed a 5.7% share. Switzerland's Nestle squeezed into the top five with a 2.6% share.

The Oreo cookie alone reached 7.3% market share by value over the same period, up 1.9% from one year ago. It's also quite an uptick from a few years ago -- the brand lost ground between 2003 and 2005, and after that improvement was stymied because of insufficient understanding of local consumer preferences.

"Kraft Foods entered China more than 20 years back, but for many years [it] was not doing well," says Khosla, who is responsible for its business in developing markets.

Kraft's business in China turned around after the company kicked off its "Winning Through Focus" strategy in 2007. The new gameplan overthrew Kraft's original belief that what was good for one market would also be good for every market. "The company could can no longer simply 'export' U.S. brands all over the world and expect them automatically to do well," Khosla adds.

To stay focused, Kraft has prioritized China as the most important country in its developing markets division. It has invested disproportionately high resources in people, distribution, research and development, principally marketing Oreos and orange drink Tang, its top-selling items out of its dozens of brands.

"We view China as a market that has taught us how to focus, how to differentiate and how to innovate," Khosla says.

To win over Chinese customers, Kraft realized that even a global corporation must transform itself, letting local managers make decisions based on their understanding of the market.

"Chinese consumers found the U.S. Oreo too sweet, so we made it less sweet," Khosla says. "They also thought the original price at 5 yuan [73 cents] for 14 cookies was too expensive, and the package was too big, so we repacked it in a smaller size at 2 yuan [29 cents] for seven cookies."

Catering to local tastes, Kraft also made a radical move by launching new Oreo products like Oreo Wafer Sticks, Oreo Wafer Rolls, Oreo Soft Cakes and Oreo Strawberry Creme.

Thanks to these reforms, China is now the world's largest Oreo market outside the United States, with 41.9% growth in measured consumption over the last year, according to AC Nielsen. In other words, Chinese consumers ate about 42% more Oreo cookies during the survey period than in the previous year.

Tang's tipping point also came after Kraft gained a clearer understanding of Chinese consumers' needs. Says Khosla: "The local business team found that children in China think water is boring, while at the same time, mothers were concerned about getting their children to drink enough water. There was clearly an opportunity here."

Kraft thus began an extensive advertising and marketing campaign to promote Tang -- a non-carbonated soft drink named after the tangerine that comes in liquid and powder-mix form -- as an alternative beverage that "makes water more exciting." In addition, Kraft also sells Tang differently depending on the city.

"We found that many in China drink Tanghot, rather than cold. So we have developed in-store promotions around this," Khosla explains. The new marketing strategy boosted Tang's revenue in China, which saw high double-digit annual growth through the third quarter of this year.

Kraft's profit margin in China was further elevated by its $7.2 billion acquisition of Danone's global cookie unit back in July 2007. The deal added Petit Ecolier chocolate-coated cookies and TUC crackers to Kraft's own Oreo and Ritzbrands, and it let Kraft expand its distribution base and cut costs.

"In 2007, after the Danone biscuits acquisition, we had two businesses in China about the same size. But combined they were essentially a break-even business," Khosla says. "We quickly integrated them and consolidated offices in Shanghai, where Danone had been, and turned the business around. We improved the cost base, expanded distribution from 80,000 outlets to over 133,000 in six months, optimized marketing investments behind priority brands and ramped up innovations."

In September French beverage giant Groupe Danone ( DA - news - people ) agreed to sell its 51% interest in its joint ventures to its former partner, Chinese beverage tycoon Zong Qinghou's Hangzhou Wahaha, which finally ended all legal proceedings related to trademark and business disputes between the two parties.

Through Groupe Danone's painful experience, Kraft learned that building up a local management team to maintain solid connections with the Chinese distributors is a major part of doing retail business in China. Khosla said it is part of Kraft's strategy to localize decision-making, allowing its Chinese workforce to market and sell products that are made in China for a diverse array of Chinese consumers.

"For example, our Ritz brand is popular in Beijing, but this is in contrast with Guangzhou," Khosla says. "There are also nuances in consumer preferences regarding flavor, texture and pack sizes, and we actively address these. In Shanghai, for example, consumers like bulk size packages, whereas in Beijing there is a distinct preference for smaller size formats."

Kraft's food business in developing countries posted an 8.1% increase in organic revenue in the third quarter of this year, beating the 0.8% decline of the food business in Europe and a 1.8% contraction in North America. Especially in light of Kraft's potential takeover of Cadbury ( CBY - news - people ), which could be costly, boosting revenue in developing markets like China is critical for the company's growth.

Kraft recently opened a new facility in Suzhou Industrial Park, near Shanghai. The new facility is its largest center for cookie research and development in Asia, and its output will allow Kraft to create new product platforms tailored to suit local tastes. Fittingly, there's still room to grow: The plant was built with the capacity for future expansion.