Best Buy’s Withdrawal: American Morals Fail to Transcend Chinese Consumer Market

Posted by Reading Time: 5 minutes

By Vivian Ni

Mar. 2 – The famous United States-based consumer electronics retailer Best Buy announced on February 22, 2011 that it had decided to stop running its nine stores in China. The surprise announcement effectively signaled the end of Best Buy’s eight-year China story in which it spent three years preparing for its market entry and five years expanding itself to nine stores located in Shanghai, Beijing, Suzhou and Hangzhou.

Best Buy disclosed its decision to close three of its stores in Shanghai at an upper management meeting on the afternoon of February 21. Just one day later it officially announced its plan to shut down all of its nine stores in China. Although the withdrawal seems a little too speedy, there were already signs earlier that Best Buy’s business was not running very well in China. According to related reports, in Shanghai alone last year, there were already three contracted Best Buy projects that failed to finally settle themselves. The first-to-third quarter financial report Best Buy released last November also showed a meager 4 percent sales increase in the Chinese market, among its total US$38.5 billion global sales during the same period, an over 100 percent increase from a year earlier. The other part of Best Buy’s business, the Chinese electronics brand Five Star acquired in 2006, also only opened around 30 new stores between 2006 and 2010, a very small number compared to other Chinese electronics retailers that are seeing rapid expansion.

Unsuccessful business model?
Opinions on reasons for Best Buy’s failure in the Chinese market do not differ much. Many people believe it expanded way too slow to survive in the face of severe competition from other Chinese electronics giants such as Gome and Suning, both of whom currently boast over 1,000 stores nationwide.

Experts say that Best Buy’s decision to stick to its American business model brought about its failure in the Chinese market, although the model has been working very successfully in Western markets. Different from its major Chinese competitors, who lease separate parts of a store to retailers of distinct brands and earn profits from the so-called “entrance-fee” and take a portion of every retailer’s sales profit, Best Buy purchases all of its products directly from suppliers and prices them independently. Also, while the majority of sales people in most Chinese stores come from the supplier side, Best Buy hires a whole staff as its own sales team. The American company also utilizes a non-commission policy for its sales staff in order to avoid biased promotions that will disturb customer decisions.

Although the Best Buy model aims to please both suppliers and consumers by reducing the price competition between suppliers, creating a friendlier shopping environment, and providing better services such as the opportunity to try products before purchase, it does not seem to suit the immature Chinese market very well.

Chen Can, senior consultant at Analysis International, says the Best Buy model requiring self-purchased property and commodities as well as a bigger team of sales staff will lead to a significant cost rise which will result in price disadvantage.

One employee of a local electronics supplier described the Best Buy model as a “wall” instead of a “bridge” between suppliers and customers.

Both Chen and home appliance expert Chen Qingqi pointed out that Best Buy failed to please its suppliers because they do not really receive very many orders from the company due to its small market presence. In addition, the frequent requests for customized products from Best Buy also increased supplier costs.

Chen added that most importantly, Best Buy did not please its customers. In an immature market like China with a massive portion of low-end consumers, the price advantage seriously outshines any advantages in management.

Many consumers even commented that the Chinese name of Best Buy – Baisimai – as a bad one for marketing. Baisimai literally means “to buy after thinking 100 times.”

Ironically, its business model, just as its Chinese name, tries too hard to educate consumers about high-end service value when lower price is typically the only value that motivates them to make quick decisions. The electronic giant’s overconfidence in transforming the Chinese consumer philosophy finally hurt its overall performance in the Chinese market.

“Good companies” do not survive?
When Best Buy first entered the Chinese market, many people hoped it would successfully replace the prevailing, yet widely-criticized Chinese business model that focuses on price-centered competition, squeezing suppliers’ profit margins, and conducting promotions on questionable legal footing. However, the more moral and advanced “good company” did not survive long, leaving the ones with the traditional Chinese business model still prospering in the market.

A recent commentary piece by Xin Haiguang on the Financial Times refers to the current Chinese market as a “swamp” with low-end consumer awareness, a relaxed legal environment, and a low bottom line of business ethnics. Xin pointed out that “good companies” like Best Buy, who still insist on playing by the rules of mature commercial markets, easily fail because they have given up a significant amount of available business resources compared to their Chinese competitors. Xin sees Best Buy’s withdrawal as a failure in its business value, rather than its profit model.

Best Buy’s future in China
At its press conference on February 22, Best Buy said it will alter its operation strategy and integrate all of its Chinese business under the Five Star brand it acquired five years ago. Admitting China might not be the best marketplace to run the Best Buy business model, the company is still very optimistic regarding the expansion of its Five Star electronics stores, which mostly copy the operation model of its Chinese competitors.

According to Best Buy China’s new CEO Wang Jian, Five Star plans to open around 50 new stores by 2012, adding to the current 160. Wang also emphasized that Best Buy will not exclude the possibility of opening new Best Buy stores when the timing is right.

Unfortunately, many experts do not seem to be very optimistic about Best Buy’s future in China since it has missed the best timing for expansion in the country. Some commentators speculated that even if Five Star can expand at its proposed rate and does not make any strategic mistakes in the next 10 years, the total number of stores will still not be big enough for it to achieve a solid nationwide impact.

Analysts even speculate that Best Buy’s high-profile announcement of its new management team and strategies may indicate that it is looking for acquisition since both Gome and Suning are supposed be very interested in the growing Five Star.

It is not totally clear for us to see if Best Buy will yield its American business values to the Chinese consumer culture, totally give up on the Chinese market, or come back in the future when a better time comes for transformation. While Best Buy’s present circumstances have become a reflection of the current state of Chinese electronic retailers’ profit model, its future will depend on where the market goes.