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Third US retailer shuts shop in China this year

March 8, 2011

Meandering through the medley of Chinese regulations to successfully set up and operate a business in China isn’t childs play anymore. With Beijing more worried about its domestic players than attracting foreign capital or talent, western firms are feeling the heat.

The latest exit that of Mattel, owner of the iconic Barbie brand, shut its six storey pink store on Shanghai’s upmarket Huaihai Road owning to failure to adjust to the local market. Other US retailers to exit in the first two months of this year from the worlds fastest growing and second largest economy include Home Depot and Best Buy.

Its tough to enter the Chinese market and even tougher to survive. A blistering growth rate doesn’t ensure that a presence in the Mainland will guarantee bottom lines to rise. A thorough understanding of the people, their purchasing decisions, culture and rising aspirations is what is needed. However with each consumer, geographic, income and gender segment differing so drastically, operating in China isn’t a cake walk.

The failure of the US brands to prosper come despite efforts by the Chinese government to make boosting domestic consumption a top policy priority. Retail sales grew at more than 18 percent in 2010 from a year earlier.

All plainly failed to meet Peter Drucker’s requirement for “true marketing”, which starts “with the customer, his demographics, his realities, his needs, his values. It does not ask, What do we want to sell? It asks, What does the customer want to buy? It does not say, This is what our product or service does. It says, These are the satisfactions the customer looks for, values and needs”

“None of the three companies – Best Buy, Home Depot or Barbie – have catered to local consumer preferences and habits enough,” Shaun Rein, managing director of China Market Research Group, told the Financial Times.

“In Barbie’s case, they chose the wrong location [for the flagship store] and they offered sexy clothes designed by Patricia Fields of Sex and the City fame when young Chinese women tend to prefer cute designs like Hello Kitty.”

Similary, Best Buy’s business model in the US, where it markets itself as providing better service than competitors, did not go down well with Chinese consumers and in February it said it would close all nine Best Buy-branded stores in China.

Analysts said Barbie, Best Buy and Home Depot were all seen by consumers as expensive in a price-sensitive market where Chinese competitors operate on razor-thin margins.

Nonetheless, many western brands that have understood the subtle nuances of operating in China’s widely varied market, such as Nike, LVMH, Carrefour and Wal-Mart, have successfully localised in China and become hugely profitable there. Walt Disney, too recently announced an investment of US$3.7 billion to build a Disney theme park on the outskirts of Shanghai.

What lessons should those who follow in Best Buy’s footsteps learn? as reported in the Financial Times

Use local knowledge and relevant prior experience. Non-Chinese brewers failed to push the local consumer up to premium beers, while SABMiller, drawing on its knowledge of another emerging market – South Africa – read the local conditions better.

●Start small. Mr Patel says that if Best Buy were launching a Chinese strategy now, it would try out “fast, quick, cheap” ideas. The total bill for restructuring in China, the closure of two more branded stores in Turkey and a revamp of the US supply chain came to US$225m-US$245m. Even if only part of that bill was attributable to the China experiment, that is a costly laboratory.

●Work on several fronts. Best Buy – which now owns all of Five Star – will expand its locally branded stores in China. But it will also incubate ideas via the internet, work with local partners and explore other options, such as stores within stores.

●Be different. The success of Apple stores in China, which provide the only reliable outlet for its products, contrasts with Best Buy’s experience.

●Stay humble. Non-Chinese groups still seem prone to arrogance about the applicability of their business models that would have embarrassed 16th-century Portuguese traders.

If you are interested in knowing how to set-up and operate in China, contact us at contact@inchicnloser.com, our team of experts will help you navigate your way to prosperity.

 

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