Retail Reality

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While there can be little doubt that the future of retail in China, and of the Chinese consumer market generally, is full of potential, it is not without its challenges – as seen by big international players like Best Buy and Kingfisher.

Access Asia report in their newsletter on the Best Buy situation under the title: “Bye Bye Best Buy?”:

    “Some degree of mystery surrounds the China operations of US electronics category killer Best Buy – one of the most hyped and eagerly awaited retail launches in China in the last couple of years. Following a flurry of various and often conflicting news stories and press releases, it’s a bit hard to piece together, but we’ve had a crack at it.”

Best Buy reportedly shut down its Beijing office in early March, and has pulled out of the capital’s retail market entirely. The company announced that its withdrawal from Beijing was due to an internal adjustment, and that it has no plans to open stores in Beijing for the time being. Best Buy had opened its Beijing office in 2006 ostensibly as an HQ from which to locate sites for new stores and sourcing home appliances and electronics products across the country. Best Buy first went into China in 2003 through the acquisition of Five Star Appliances, but has since run into difficulties in opening stores.

The opening of Best Buy’s second store in Shanghai (the first is in Xujiahui), scheduled to be opened at Zhongshan Park, has already remained suspended for some time despite some Best Buy signage being up and under wraps and some ads for their ‘Geek Squad’ (apparently spotty teenagers who come and fix your computer). This comes shortly after having released plans for between six and eight new Shanghai stores in February (announced on Sinocast and other sources). This all follows the high profile resignation in late January ’08 of Lu Weimin, who was the VP, chairman and general manager of Best Buy China.

Lu claimed, via the Wall Street Journal, to be leaving for personal reasons and not because Best Buy’s Chinese operations have failed to deliver targets, as speculated in the Chinese media and, eerrr, by us. The story then gets slightly more confusing – Best Buy was rumoured in the Chinese press to be swapping some shares with Chinese rival GOME – the market leader. But apparently this was all false and had to be denied by Best Buy CEO Robert Willett.

We’ll now have to wait and see what happens next? Curioser and curioser.

The caption with the story perhaps says it all:

    “Best Buy has found transferring its successful US business model to China a touch problematic”

Best Buy are just one of many foreign firms to have found out about this truth of China business – competitive advantage can not be cut and pasted into the market.

Another foreign retailer, Kingfisher (owner of B&Q, and an often-touted China success story) has also been reporting tough times in China. According to the Times:

    “The new chief executive of Kingfisher said yesterday that the group may close stores and reduce its workforce in China after seeing its B&Q business grind to a halt in the world’s fastest-growing big economy.

    Ian Cheshire, who was promoted to the top job from B&Q UK in January, said that talks had already begun with local Chinese government officials about a restructuring plan. The value of the business, the biggest player in the Chinese home improvement market, with 62 stores, is being written down by £33 million.

    …Kingfisher has suffered in China from government legislation to take the steam out of the property market. New apartment sales in the city of Shenzhen plunged by 80 per cent in three months last year.

    Mr Cheshire said that Kingfisher had been guilty of failing to lend enough management support to the operation after opening 42 stores in China in the past three years.”

This story also contains some gems that foreign investors in China should note: government policy and regulation can change quickly, with a big impact on business, and board level support from HQ is a must (even while giving local decision-making powers to local management).

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