Best Buy in China

Best Buy’s failure in China is another example of a slow, arrogant major international player that didn’t understand China. Their own explanation of why they failed: “China’s demand for low prices without regard for service,” is clearly a lame excuse. By Fang Yu, China Entrepreneur magazine Best Buy shut down their nine stores in China on February 22nd, and within 48 hours fell into an unprecedented credibility crisis. Customers rushed to Best Buy stores on hearing the news and were locked outside security doors.

They finally broke through the doors and went into the shops, partly to seek refunds on the extended warranty policies they had purchased. Because of quarrels with staff over return policies, the Shanghai Municipal Government had to send police to maintain order. Best Buy, which has always boasted it was centered around consumers, never predicted it would withdraw from the Chinese market in such a disgraceful way. Best Buy China top executives said the business closed because their model did not adapt to the Chinese market.

Best Buy China president David Sisson said, “I have never worked in such a price-sensitive market. ” Best Buy shops within China were forced to close after a five year struggle Best Buy explains its failure with the excuse “Chinese consumers pursue low prices rather than services. ” This excuse shows that Best Buy still does not understand why it failed. This excuse does not take into account that China’s spending power is the fastest growing in the world.

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Home appliance expert and director of the Pal consulting firm Luo Qingqi argues luxury brands now entering into Chinese second- and third-tier cities, and the purchasing power for luxury cars in Chinese inland is no worse than in the first-tier cities. Ding Jie, a global partner at the Roland Berger consulting firm, notes that there are foreign retailers running excellently China. Why not Best Buy? Slow and arrogant Dennis, who has worked for ten years selling audio products, worked as an employee at Best Buy until it shut its doors.

After signing a compensation agreement, he began to seek a new job. He first came to a giant domestic chain giant to be interviewed, but he felt the treatment he received and business culture was too different from Best Buy, so he started looking for jobs at foreign retail enterprises. Dennis says the experience of working at Best Buy was profound and lasting. It’s difficult for him to adapt to the performance-oriented culture of domestic enterprises that stresses absolute obedience and brute execution.

Instead, he has become used to Best Buy’s “people-centered” culture: trying to win returning customers and promotion opportunities based on giving good service. He also became used to the sound of the English name that the store provided him with. The employee culture of Best Buy, which is not based on sales volume, enables the store to be peaceful, without a feeling of fierce competition between the sales staff. However, observers believe this unhurried attitude is exactly what drove Best Buy to become a loser in China’s fiercely competitive home appliance market, which is dominated by the retailers Suning Appliance and Gome.

When Best Buy entered China, Suning Appliance chairman Zhang Jindong said his company would ignore Best Buy for the next five years. Gome founder Huang Guangyu also said Best Buy could not compete with Gome in China because Best Buy did not have a sense of where to put its stores. People who participated in the press conference announcing the acquisition of Five Star Appliance by Best Buy in 2006 remember that Five Star founder Wang Jianguo was excited to announce the establishment of 300 stores annually with the financial backing of Best Buy.

However, this plan was quickly denied by Best Buy top executives. Wang and his team eventually left the company. In the United States, Best Buy defeated the second-largest retailer Circuit City, which used a consignment model, similar to Gome and Suning in China. Best Buy then entered the Chinese market with the arrogance of a missionary, ignoring the gap between its own model and the Chinese market. In Best Buy stores, the aisles are clearly wider than in Suning and Gome, the shelves aren’t as crowded, and fewer brands and models are on display.

Best Buy’ believes the space should be left for consumers rather than products. Suning Shanghai top executives pointed out North Americans prefer open and wide stores, and don’t require a wide range of product lines ranging from cheap and generic to expensive top quality brand names. Best Buy’s style is more suitable to North Americans emphasizing individual freedom, and China’s market is more similar to Japan’s. Insiders recalled Best Buy’s first China president Lu Weimin knew the local market very well.

The Chinese-born American, who graduated from a special class of gifted teenagers of the University of Science and Technology of China, better understood the rules of China’s home appliance industry than his colleagues. Lu Weimin helped to bring about the acquisition of Five Star. This helped Best Buy become a major retailer. However, Best Buy still did not want to give up the business model it developed and was proud of, and dreamed of restructuring more home appliance retailers such as Five Star into the Best Buy fold.

This resulted in a two-brand operation over the past five years, so that the Best Buy management team’s resources and focus were diluted. Five Star former top executives recalled Lu Weimin pushed Best Buy to expand. Lu chose several properties in Shanghai, but, following Best Buy’s management process, all matters related to store openings must be reported to Best Buy International. Best Buy’s competitors were opening a new store every four or five days. Faced with the slow process of opening new stores, Lu hoped he could use financial muscle to expand quickly.

For instance, Best Buy bid for Shandong Sanlian Commercial, which in the end was acquired by Gome. Many foreign executives who are not familiar with the Chinese market have a hard time understanding the importance and feasibility of quickly opening stores. An investor said he had heard a foreign executive of a consumer goods company laugh at his Chinese colleagues, saying, “What? How dare they plan to open 200 stores a year! ” In fact, these scoffers generally only ever come to Shanghai and Hong Kong and have no idea of the width of the Chinese market.

Managed by Best Buy, Five Star has expanded slowly (the number of stores has only grown to more than 160 from nearly 140 in 2006). Lu left Best Buy in April 2007, after he was made a figurehead. He had worked there for more than ten years. When the news of the closure of Best Buy stores was released, a departed top executive pointed out that if the failure was a result of a poor business model, why did the Xujiahui store in Shanghai become one of the world’s top 50 stores, with an operating revenue of RMB 500 million, becoming profitable in 2010? The Xujiahui store’s property costs were denominated in U. S. ollars, and were the highest in the Best Buy system. One of the reasons for the success of the store was that its site was chosen when Wang Jianguo served as Best Buy global vice president. The superior location of the Xujiahui store was envied by competitors. Following in Wang Jianguo’s shoes, Best Buy sent many executives to China, who were good at IT systems and background management processes, but did not have experience in selecting sites and opening stores in unfamiliar cities. “We can say they are outsiders! At the root, it was caused by the people factor. If they had different people, the results would have been different. Missing its chance After stumbling through the first three years, Best Buy made some changes. In 2008, Best Buy started to speed up its expansion in China, opening in Shanghai, Suzhou, Hangzhou and Beijing to lift the total number of stores to nine. This change was rooted in a shift in government policy. In September 2008, the Ministry of Commerce issued a document shifting the approval process for foreign retail stores from the national to the provincial level. Best Buy, which had a good relationship with the Shanghai government, quickly opened more stores in Shanghai to consolidate its base.

But compared with another retail giant, Wal-Mart, Best Buy again did not correctly understand the policy direction of the Chinese market. Wal-Mart quickly established wholly-owned companies (with taxes going to local authorities) in more than ten provinces in China, and quickly opened more than 30 stores in China in the first half of 2009, mainly in second- and third-tier cities. The new regulations of the Ministry of Commerce were intended to help foreign retailers make investments in China. The Shanghai market, where land is expensive, ended up putting a lot of pressure on Best Buy.

At that time, Suning only allocated 10% of its planned stores to central Shanghai and focused on opening stores in the suburbs, but Best Buy was making efforts to squeeze into the core business district, which was already full of the rival stores. The result was that the number of Best Buy stores grew, but diminishing returns did not cover the operating costs. David Sisson hinted at this when he explained that he shut down all of the stores in China because “the costs needed to keep one or two stores open are actually are almost the same as the cost needed to keep nine stores open. Best Buy missed its window for rapid development, and perhaps had no time to think about how to enter more deeply into the Chinese market because it was struggling with strong competition and high land prices in first-tier cities like Shanghai. Best Buy top executives were aware of the problems with the company’s expansion. Under pressure to make profits in 2010 (the 2010 third-quarter fiscal report shows Best Buy same-store sales fell 5%), Best Buy first adjusted the company’s global management structure.

Best Buy global vice president and Five Star CEO Wang Jian told China Entrepreneur, “In 2010, Best Buy adjusted the organizational structure and set up the America region, Asia region and Europe region. One major reason for the adjustment is that Best Buy wanted to give full authority to enable it to be more localized in operation and development. ” At that time, Best Buy’s attitude to Five Star changed. Best Buy encouraged Five Star to “open as many as stores as possible,” but Five Star also faced the problem of lagging development.

When Suning and Gome completed setting up in first- and second-tier cities and started planning to enter into third- and fourth-tier cities, Five Star was still only operating in limited areas and never opened stores in Shanghai. In Best Buy’s last days, the low-price commitment could be seen everywhere, and even the consumers could feel the change. Claire, a loyal Best Buy customer who works at a foreign company in Shanghai, said, “Compared with the beginning, the number of salespeople in the store grew obviously. In the past, when you looked around by yourself in the store, no one would bother you. But at the end,] if you stood in front of an item for a while, a salesperson would come up to you. ” Best Buy started taking the initiative to increase sales. Learning the wrong lesson After closing all of its China stores, Best Buy top executives said the lesson learned in the Chinese market is “price, price and price! ” In the opinion of Best Buy top executives, Chinese consumers’ sensitivity to the price is so overwhelming that Best Buy’s “customer-centric” values were meaningless. However, Best Buy’s customer-centric philosophy and various design details were adapted by Gome and Suning, making Best Buy’s conclusion questionable.

The Five Star top executive interviewed by this magazine said the Best Buy model uses its own staff, unlike stores using a consignment model. He gave an example. A 5,000-square meter store needs 260 staff, and in consignment stores, generally 200 come from the manufacturers. But Best Buy will not open a store until recruiting all 260 staff. Because of the emphasis on service, the training period for retail staff is longer, with a six-month to one-year training period for management. A shortage of talent was an important reason for Best Buy’s slow rate of opening stores.

Home appliance expert Luo Qingqi believes Best Buy’s problem is not that is acted like a traditional retailer (as opposed to selling on consignment like Gome and Suning) but the product line. Products sold at Best Buy stores were mainly foreign. Chinese brands such as Midea, which offers many popular product lines, did not appear on Best Buy’s shelves. Even the foreign brand Whirlpool cooperated more with Suning and Gome. “We are operating within the Chinese market and will notice which stores consumers like to visit, and use them as our main distribution channels,” said a Whirlpool employee.

Ding Jie, a global partner of the Roland Berger consulting firm, believes Best Buys’ high operating costs were not its main problem, but rather that Best Buy cut itself off from the supply chain by refusing to adapt the consignment model. Ding Jie said most staff members at China’s consignment-based home appliance stores are employees of the manufacturers. “In China, consumers do not have strong core brand awareness, and the difference among home appliances is not big. Manufacturers focus on distribution channels that allow them to collect market information and determine market trends.

Manufacturers and distributors cater to the needs of consumers with the collaboration of the entire industrial chain. ” The Best Buy model serves consumers by being independent. But because there is no personalization and differentiation of products, it is bound to fail. According to Ding Jie, the main advantage of foreign retailers is their management model. But if they want to succeed in China, foreign retailers should let their local staff operate more freely and give them the power to adjust the business model. Many foreign retailers that failed in China might have succeeded if they empowered local staff.

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