The failure of Best Buy in China

Imagine you are a major retail chain with tight operations and a successful business model in North America and you are planning to expand into foreign markets to compensate for stagnant growth at home.  China, the largest and fastest-growing market on the horizon, would probably become a most obvious choice.  Before moving forward, what strategic considerations would you really need to make in order to succeed in this market?

Consider this week’s news of Best Buy’s apparent brand pull-out from China.

Adam Minter of Shanghai Scrap made a great post on Tuesday complete with links to some of his earlier coverage on Best Buy, including an interview he held in 2007 with then CEO, Bob Willett.  I highly recommend.  With the benefit of a little hindsight Adam points out two odd little quotes from the interview that I wish to echo here.

First, when asked why Best Buy was entering the China market, Willett responded: “China’s going to be the biggest economy, or second, and it would be just unbelievable if we’re not there.”   Adam now emphasizes that Willett didn’t say there was a real market opportunity for Best Buy in China, only that it would be “unbelievable” if they didn’t go there.   More on this later.

The second thing points more to Best Buy’s stated positioning in the China market.  I will let Adam’s own words speak for him:

… [when asked]  about how Best Buy would differentiate itself in an already crowded, highly-competitive and extremely price sensitive Chinese retail electronics marketplace. Willett, like several other Best Buy executives involved in the company’s China venture, patiently, and a bit condescendingly, told me that some Chinese consumers were willing to overlook price in favor of service, and that – all things considered – Best Buy was going to distinguish itself on service:

“We’ve become a service company in North America, and that’s what we’re doing in China, too. Generally, though, you don’t have a lot of natural homegrown talent in China that knows how to do it. So we’ve had to create it ourselves.”

Now just pause for a moment to take that in and parse it: Best Buy didn’t enter China intending to hire talent that knew how to be successful in China. Rather, it entered China intending to create talent that knew how to be successful in North America. That might work very well in Canada, where the retail culture is decidedly service-oriented, but it was going to be a hard, hard road in China where – even Best Buy’s internal studies showed – price was still king for most consumers.

We can’t say for sure what exactly the execs at  Best Buy were thinking when they adopted a customer service  oriented approach for China.  I am sure Willett has a point, that some Chinese are willing to trade price for service, but generally speaking when consumers here buy everyday products such as home electronics the decision will most likely be about price.  Service and convenience just don’t stand up against savings here, evidenced to me by the enormous amount of time and effort I have seen people exert just to save a few kuai.  With their low margins and dependence on high volume, Best Buy should try to go with what the vast majority of Chinese public is already doing, not what just some consumers may be willing to try out.

I might add that a customer can pretty easily visit a Best Buy for product information and even try the product out in-store (one of the selling points of the Best Buy experience) but then just walk down the street to a Gome or Suning and buy the same exact product for what they feel is a better deal.

To make matters worse, anecdotes suggest that Best Buy never really did excel at providing superior service in China in the first place – fights among staff, intimidating-looking fellas hawking stolen iphones on the shop floor, the list goes on…. read Adam Minter’s post and comments.  It looks to me like Best Buy was suffering from a serious human resources problem which left them without much real differentiation at all, however great or small a difference superior service might have made.

So what then?  In short, the China market is not the North American market.  The consumer electronics space in China is extremely tight with a large number of competitors vying for a slice of margin.  At the same time consumers are quite savvy and very price sensitive.  In North America, Best Buy has enjoyed relatively little competition in their massive boxes out in the suburbs, and many consumers there are willing to pay for good service and the convenience of not having to drive to a city or wait for delivery of an internet purchase.  But that is North America.  China is a different place.

Add to that the extreme difficulty of finding great talent in Chinese cities who are willing to work retail and then training them up to deliver on your core promise, and you have a serious problem.

From the first Willett quote there does not appear to have been much strategic thought into the China market overall.  Perhaps they hadn’t seriously asked themselves WHY Best Buy was even going to China in the first place.  Perhaps they only saw China as a big party that they needed to get into in a hurry (however late, however unprepared) or else they would be missing out on something special. In the mad rush to China many companies fail to ask themselves simple questions about the consumers, competitors, core competencies that can be built upon, etc. It seems all too many are simply jumping in out of fear of being left out.

I think the main lesson here is to know exactly where to will fit before entering into a new market. If you can’t really figure out what advantage you can develop and exploit there, then you probably should just stay home.  Otherwise you may end up with a very ugly hangover from a party that wasn’t really much fun to begin with.  If company leadership really feels they have to be in China, they must do their homework and be prepared to adjust everything to fit the Chinese market, because the Chinese market will not be willing to adjust to fit the company’s needs.

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