People don't like Xenoblade Chronicles' characters because of their look. In fact, I still remember how the character design was often described as bland / weak / ugly before the game came out. And after the release, many people got worked up (rightfully so) about some of the ridiculous and/or questionable armor designs as well.
Xenoblade Chronicles' characters are remembered fondly and in spite of how they look because of a combination of the following factors:
a) They at least your first four or so party members are quickly established as very straightforward and easily relatable "everyman" types. The game has a welcome lack of conceited JRPG protagonists of the Squall Leonhardt variety and that alone does wonders.
b) The voice acting is idiosyncratic, but in a good and very likeable way. Those Reyn Time memes don't just happen out of nowhere.
c) The storytelling. Really, it's mainly about that. The game gets the ball rolling very early. It sets out very clearly what is at stake and doesn't let up for the entirety of the first act. The concise intro and the Colony 9 attack in particular are very strong establishing moments for the major characters. If, by the time Dunban joins the party and you've had your first confrontation with the voiced version of Metal Face (another very effective scene), you have not taken them all to your heart, you are a cold and soulless person.
For whatever reason, Monolith decided to throw all of these elements overboard for XCX. This is why I'm very happy that they're returning to XC's approach with XC2. I don't really like the look of the new characters myself, but that's not what will count ultimately, if the original XC is any indicator. We'll only find out when the game is actually out.