Why did Best Buy fail in China (1)?
A number of multi-national firms have failed in China. The Shanghai-based US consumer electronics retail giant Best Buy closed its 9 own-brand stores on February 22, 2011. Although completely withdraw Best Buy brand from the Chinese market, Best Buy will maintain wholly-owned subsidiary Five-star Electronics operation. Another US retail giant Home Depot closed its final store in Beijing on January 21, 2011, the 5th store closed for the past two years. Mattel closed its Barbie flagship store in Shanghai on March 7, 2011.
After acquisition of China’s Five-star Electronics, Best Buy brought its business model into China. In comparison with competitors to use its manufacturers’ sales force, carry fewer inventories, Best Buy buys products at wholesale price, build up inventory, use only in-house sales force, offers comfortable shopping environment with well-decorated shop interior. This business practice increases operating expenses, reduces inventory turnover, lower working capital management efficiency, thus inflates prices to cover higher expenses
Chinese consumers are not willing to pay extra for Best Buy’s products available at nearby competitors simply because of comfortable shopping environment and courteous customer service. The vast majority of Chinese consumers do not pay extra for extended warranties. In many cases Best Buy outlet serves as the showroom, where potential consumers come in to look and compare, ask questions, know more details, determine which product brand, which model to buy, then they go to best buy’s competitors to do bargain hunting.
If the same product of same manufacturer same model could be bought at nearby Gome or Suning, supermarkets, and many other small outlets, why should I go to Best buy? There is the reality that most Chinese consumers prefer to buy directly from factory at reduced price, or buy from its competitors Gome, Suning, or smaller retail outlets. Consumers come to hunt for the product in mind, not for the beautifully-decorated shop interior.
A proven business model in one particular market does not warrant being universal in all markets. Best Buy has been successful in the United States, but it is not suitable for China. Multinational firms must adapt to China’s giant group of consumers who are price-sensitive. Failure to observe the consumer behavior in target market, take existing business models for granted, will not fare well.
Who are Best Buy’s target consumers? They are average city residents whose income is not high, thus price sensitive. Price is the No.1 priority over other factors. To win the business of the general public, the product must be unique, not replaceable, can not be obtained from anywhere else. Best buy’s products are not unique, but standardized consumer electronics and software omnipresent everywhere else
Why are McDonald, KFC, GM, Coke Cola, Hollywood, Wal-Mart successful in China and the world over? Because their products are unique, irreplaceable. Their products are embodiment of culture, value system, way of business practice – these core competitive factors have laid the foundation for global success. Competitors have tried to imitate, but can not replace.
(To be continued. See the next post)
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