By Jennifer Wu
SHANGHAI, July 4 – Red-bean Frappucinos at Starbucks, porridge at KFC, mooncake-shaped ice cream at Häagen-Dazs—don’t be surprised to find these products or variations at any of their respective chain stores in China.
It may seem like an obvious route to take: catering to local preferences and culture as a surefire way into the Chinese market. Though this strategy may not guarantee success, increasingly it has become more and more obvious that any foreign company looking to penetrate the local economy must incorporate it, or suffer the consequences.
When B&Q opened its first store in China in 1999, it hoped to capitalize on the growing numbers of Chinese buying homes and on the burgeoning middle class in particular. As of this year, the British home improvement chain has more than 60 stores in China and has established itself as the leading home improvement retailer. Last year, it announced plans to open about a dozen stores each year in China, reaching over 100 by 2010.
So when Access Asia reported that B&Q is set to close five of its stores in China this year and to downsize another three, as well as cull main administration and restructure its management, speculation on the health of its China operations grew.
The home improvement chain is no stranger to challenge in the Chinese market. One of the starkest differences between its European consumer base and that of China’s is the condition in which Chinese homeowners buy their homes. Most homes upon purchase are empty shells of concrete in China. Their owners themselves have to address questions of insulation, plumbing, tile, paint, and other considerations.
As The Guardian reported, the local culture does not fit with the DIY (do-it-yourself) practices that B&Q shoppers are familiar with in Europe. On the contrary, a CIY (create-it-yourself) procedure applies in China. Labor is cheap, and it often makes much more sense to hire a worker to make the necessary installations.
Over the years, B&Q has worked hard to assimilate into the market through its localization approach. The chain recognizes, for instance, that a vast diversity of consumer needs across China exists, and has adapted as such. For example, B&Q has had to make some price adjustments to accommodate for sizable income disparities across the country. The Shanghainese consumer, who makes approximately twice as much as his or her counterpart in Qingdao does, no doubt has different shopping habits for home furnishings.
Indeed as B&Q China President, Mariusz Gliwinski asserted in Forbes magazine, a city in the north of China and one in the south could very well be in two different nations. The differences are reflected, too, in the stocks of the stores—ovens are available in Beijing but not in Kunming. Northern locations also sell more carpeting and wooden flooring, according to Gliwinski, while tile and marble, better-suited for homes in hotter climates, do better elsewhere in China.
Perhaps the biggest challenge thus far has been keeping up with the rapidly evolving tastes of customers. Gliwinski calls it staying at minimum “a half hour ahead of China’s constantly changing consumers.”
At least the Chinese appear to be progressively valuing the quality of products more and not just looking at the price tags. In the advent of greater environmental awareness and a desire for safe and reliable goods, multinational companies have profited from their ability to provide items of trustworthy provenance. Add to that, the delivery of top-tier customer service, and consequently, companies like B&Q begin to revolutionize the entire shopping experience and in turn, raise local standards of it.
One of B&Q’s most significant adaptations in penetrating the Chinese market has been its formation of a design service for new homeowners. Customers can come into a store and consult with an interior decorator while viewing their entire home shown in three-dimensional images on a computer. The decorator hires contractors for all desired installations, and the sole requirement is that at least 80 percent of purchased goods must go through B&Q.
As more fully equipped homes have hit the market lately, B&Q has accordingly offered mobile design centers which equip novice homeowners with the tools necessary to make construction decisions at the very site of their new apartment or house. And the options don’t just stop there. Centers even provide customers free rides to their nearest B&Q stores so they can see for themselves, completely built kitchen and bathroom models.
Since its debut in China, B&Q has embraced the concept of CIY in targeting its Chinese clientele but it has not given up on spreading its DIY tradition either. In a 2006 interview with Business Week, Wei expressed a desire to build a DIY culture in China beginning with DIY youth clubs in Beijing and Shanghai. Wei commented, “Lots of men don’t have DIY skills, so at a kids club on the weekend they can come and do some basic painting or build a small wardrobe or a chair. It’s a free service to attract parents to the stores.”
Why then, the need to close stores? B&Q has found itself in the midst of a highly competitive landscape, facing off against local hardware big box stores in every city where B&Q has an outlet. While rival warehouse retailers like China’s Orient Home and American brand Home Depot, which arrive in China in 2006, have limited impact on B&Q’s market share, competition from the local stores can be fierce.
Moreover, profits for B&Q have not been high at all since it entered into the market. Besides fierce competition – which also leads to very low prices, continually high distribution costs and low average household incomes have also constrained profit-making.
Former B&Q China President David Wei has claimed that the company has a reasonable return still in the environment of “high sales, low margins, low operational costs, [and] low investment costs” in China, though others have pointed out that the returns aren’t all that great. Paul French, a Shanghai economist and director of Access Asia, told The Washington Times that B&Q has “only begun to see a dribble of profits” in China since the beginning of 2006.
Facing a slowing economy in Europe, B&Q appears to be tightening the monetary purse strings, no longer content to subsidize underperforming stores worldwide. These latest closings are just a “natural pruning” of B&Q’s low-earning stores on the mainland, French says. He doesn’t see it as any sort of indication of a broader trend in the retail industry.