China Consumer

Born in the USA

Why some American firms fail in China

Born in the USA

Didn’t prove the best after all

When asked why Best Buy was entering China in 2007, Bob Willett, then chief executive of Best Buy International (he’s since retired) replied: “China’s going to be the biggest economy, or second, and it would be just unbelievable if we’re not there.”

Well, it’s time to suspend belief. Four years later the world’s largest electronics retailer by sales is closing all of its branded stores in China. And at a time in which sales in the mainland electronics market have been growing at an annual rate of 8%. Industry observers expect the revenues to reach $203 billion in 2013.

So what went wrong? For a start, Best Buy entered the China market quite late in the day and never caught up with rivals like Gome and Suning, which each have more than 1,000 branded stores around the country (Best Buy only had nine).

Moreover, Best Buy tried to compete on the basis of its business model in the US, where it markets itself as providing a better service than its competitors. That seems to have failed to strike a chord in China. “Best Buy believed it could grab market share by offering high-quality service and a good shopping experience,” Torsten Stocker, retail analyst at Monitor Group told the Financial Times. “But what determines Chinese consumers’ purchasing decisions is price, not service.”

To be fair, mainland shoppers did take advantage of Best Buy’s superior service. According to blog Shanghai Scrap, Chinese shoppers would go to Best Buy to try out different products – and then promptly march across the street to one of the Chinese retailers and buy them for less.

Nevertheless, Best Buy hasn’t completely given up on China. The company now says it is committed to expanding Five Star, a local electronics retailer it took over in 2006. Five Star has about 170 stores, according to its website, and Best Buy said it planned to open 40 to 50 more in the next two years.

And as it turns out, Best Buy is not the only US retailer to announce a retreat from the Chinese market. A month ago, Home Depot, the largest US home improvement retailer by sales closed its last store in Beijing too.

On the face of it Home Depot’s chances looked good, with rising rates of home ownership looking like a promising indicator for increased demand for the company’s do-it-yourself product range.

But again, there were problems in translating a US-based business model into the Chinese context. The problem Home Depot faced is that Chinese property owners haven’t taken to the do-it-yourself ethos with much gusto. It’s usually more convenient to pay others to do the work. “In China, even the more price-sensitive people hire labourers,” James Roy of China Market Research in Shanghai, told the FT.

Foreign companies need to immerse themselves in changes taking place in Chinese lifestyles, and forget just about everything they have learned in other countries, says Mike Bastin, a visiting professor of brand management at China Agriculture University.

Dunkin Donuts, another US chain, also learned the hard way. The company left China back in 2000, saying at the time that the locals simply didn’t like doughnuts. But competitors like Mister Donut, owned by Japan-based Duskin, have managed to build popular brands by doing things like reducing the sugar in their pastries to adapt to local tastes. Dunkin Donuts eventually returned to China in 2008, providing more localised offerings alongside its traditional menu. That means it is “much better prepared coming to the market” second time around, believes Anthony Pavese, the company’s chief operating officer for international operations. “We’ve learned to adapt to consumers, to listen to them and see what makes them tick.”

Looking for a role model? Perhaps try Coke. According to Reuters it engineered its Minute Maid Pulpy drink purely for the China market. Since the juice’s creation in 2005, it’s been a huge hit. So much so, that Pulpy has become the company’s first “billion-dollar brand” to be designed outside the US. It joins a line-up of 13 other brands that have achieved sales of at least $1 billion for Coke.

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