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

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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.

6 thoughts on “Best Buy’s Withdrawal: American Morals Fail to Transcend Chinese Consumer Market

    JoeJoe says:

    There are several articles mentioning this “business model” used by BB and how it does not fit to Chinese market.

    From articles discussing BB’s closure it seems if the customers only cared about price and that the local retails offer bad service. Is that really the case? Fact is, service at local retailers is just fine. You can get personal and helpful service. It’s also possible to return items and get good repair warranty. It is not as if it seems that BB had this fantastic service with higher prices and local retails have lousy service for cheap items. Reality is that local retailers have good enough service, AND cheaper items. So what did BB offer exactly other than blue walls?

    1. From my own personal experience I did not encounter that glorious service and care for customers at BB. If they did not achieve that, what reason do they have for their excessive pricing? Another question might be, when I go to buy heater do I really care if the service person goes our of his way to tell me that it comes also in pink?
    2. Their prices at times were MUCH higher than the market. Such businesses fail and will continue to fail in the USA as well.
    3. They might have giant stores, but the selection for specific items was often limited compared to dedicated stores. In accessories, it was obvious they intentionally selected expensive items.

    My own personal conclusions: FAIL. No need even to go to the china differences or whatever, just plain old fail from a clueless management.

    Thanks for the article!

    Chris Devonshire-Ellis says:

    Sometimes though its about losing a battle but winning the war. It’ll be interesting to see if later, when Best Buy have absorbed their China lessons, whether they’ll re-enter the market, or concentrate on emerging markets more suited to their ethnic culture. Time will tell. I often think its a brave decision to pull out. Re-grouping then back again may make a lot of sense – Chris

    Jim G says:

    I was very impressed on my last visit to BB in Shanghai. As doors opened employees stood in a line clapping to welcome the shoppers coming in. They were well trained and customer focused; stores were clean and products were well displayed. Unfortunately, Chinese consumers judge stores based on different criteria than Western companies focus on. Add BB to the list of foreign companies that have a concept that just does not transfer to the booming Chinese market. Jim

    Chouteau says:

    To add some comment to the over-simplistic view of Joejoe. I would suggest to look at BB from another point of view. In China, situations, businesses, etc. are never black or white, sometimes they are grey. I mean, it is not because people saw BB having more expensive prices that they were doomed to fail.

    Here are several other factors, SURPRISINGLY, not mentioned by BB’s management:
    1) Local authorities have been slow to allow them access to a website (contrary to local players like suning or gome). Talking previously with an executive of BB, they were countless obstacles they had to face, before they could start to run their business smoothly.

    In other words, unfair advantages to local competition from local authorities. It demonstrates one thing: the chinese people never played by the rules.

    2) The accountancy of BB must have been checked very precisely, during their operating time. Can you say the same for Gome or Suning ? Some stories of bribes or stock cheating appeared last year about Gome… If BB did not follow the rules and had cheated like its competitors, maybe it would not have closed so early.

    3) I do agree that the prices for products were different from shops e.g. in XuJiaHui. But BB had a bigger choice for brands regarding washing-machine, and other products… And we are a lot to know that a lot of products found cheaper in XuJiaHui, are products that failed the quality control tests of big brand like hard-drive or accessories. Therefore you can get them cheaper. That is why when you compare for the same product BB’s price, and XuJiaHui, you compare on the paper the same thing but it in real, 2 different qualities, then 2 differnet prices !!!!!

    The chinese people are very keen about paying cheaper products even that means the product could harm their health. Between health and money, money always appear more important. The mistake of BB was to sell the same products the XuJiaHui were selling. Then, everyone went to BB to test, touch, see the product, get some explanations about it, and then go to the competition to buy it for a better price.

    They should have 1) not listen to consulting companies, which described the Chinese market as an easy market to win 2) sell products other people were not selling to differentiate their offer 3) set up membership cards and make specific marketing events to make the customer feel unique 4) contact the different groups of foreigners, chamber of commerce, etc. How many people knew about BB until they passed in front of the shop ?

    I wish Media Markt a better future, but I also think they will fail, for the same reasons, BB has failed.

    NanjingConsumer says:

    One missing piece of the puzzle is the tendency of companies like Suning to offer GE appliances that are not really made by GE. You can find Haier air conditioners that have internal parts installed that are not standard from the manufacturer…and sales people on the floor who are happy to “steer” the customer to that weeks “blue light special”.

    The sales tactics and questionable source of the lower pricing (substituting substandard or cheaper components vs. working from a purely volume driven discount) are just as foreign to many China “newcomers” as the language and some of the culinary delights.

    Adding these “inches” to the already challenging hurdles of a foreign start-up is liable to trip up even the best of athletes. If you want to get dirty, jump right in…but don’t expect to succeed without getting a little mud on your face. If you can’t compromise perhaps it’s best to wait until the “swamp” dries up and you can build on more solid ground.

    Morals aside…know your market, and your competition. Better have a plan and be able to adapt for both.

    Pd says:

    I agree with alot of what Chouteau said. I am an American who has sold my business in America to move to China for travel and to entertain new business ventures. I have lived here 2 years and have visited hundreds of factories and have had my fill of tea.
    The Chinese “Business Ethics” to put it politely are not made from the same values as America (not that America is perfect)-
    Best Buy is a great company- we can speculate that the 2 or 3 years of preparing was done through mostly consultants. They should have moved a team of Best Buy higher-up employees to live in third tier cities for a year (not Shanghai-not Beijing) Fuzhou and cities of that nature. Having them learn the language (or atleast enrolled in a language school)- this experiment would have cost a small some of money-but it would have saved them a lot money- the employees would have learned what so many “dreamers” who want to sell in China come to learn and they would have reported back to the “dreamer” that he needs to wake up and not go to China. They would have learned the “Chinese thinking” and the “Chinese way” of doing business does not add up to Best Buy coming to China…

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