Best Buy Failure In China 2j503b

Best Buy Failure in China

Introduction History of Best Buy http://www.fundinguniverse.com/company-histories/best-buy-co-inc-history/ http://pr.bby.com/phoenix.zhtml?c=244152&p=irol-factSheet Best Buy Co. Inc is a multinational electronic retailer selling entertainment and technology products, home and office appliances and related services. It is currently the largest consumer electronic retailer in the U.S and Canada, with an estimated 19% market share in the US consumer electronics market. Best Buy is estimated to be valued at USD20.5 billion with annual revenues reaching USD40 billion (Lowe 2008). It was formed in 1966 as a home and car stereo store named the Sound of Music. It gradually expanded and the company changed its name to Best Buy Co. Inc in 1983. Best Buy is one of the early pioneers of the “Big-Box” format store, which is described as a physical large retail store that is often part of a chain (International Directory of Company Histories, cited in Funding Universe 2004). Over the years it has acquired various subsidiaries including Geek Squad, Magnolia Audio Video, Speakeasy, Audiovisions, Pacific Sales and Future Shop. In 2006, it acquired a majority stake in Jiangsu Five Star Alliance, China’s fourth largest electronic retailer, giving it control over Five Star outlets and access to the China market. Currently, Best Buy has around 1300 stores in the US, Canada, China and Puerto Rico (Best Buy 2012.

Problems Encountered http://www.bloomberg.com/news/2011-02-22/best-buy-s-china-stores-shut-as-retailer-focuses-onmore-profitable-brand.html

Unprofitable Venture In December 2006, Best Buy China, the Chinese division in Best Buy, opened up their first Best Buy store in Shanghai (The New York Times 2006). The store was physically the biggest Best Buy retail store ever and would serve as the company’s flagship store in China. The giant flagship store in downtown Shanghai was several storeys high, with numerous product lines and was even staffed with Best Buy’s own handpicked sales team. Over the next five years, Best Buy opened another seven Best Buy stores, six in Shanghai and one in Suzhou, giving it a total of eight stores in China. The stores were designed to mirror the big-box store format Best Buy had in America. While China’s Best Buy stores were bigger than their U.S counterparts, the sales figures they produced were disappointing. Best Buy’s earnings fell annually as the China stores struggled to perform. Finally, in February

2011, Best Buy announced that it will be closing all of its Best Buy branded stores in China. All Best Buy China store employees were laid off with Best Buy estimating an investment loss of USD245 million from the failed venture (Bloomberg News 2011).

Causes of the problem encountered The business model that worked well for Best Buy in America clearly did not work as well in China. Management hubris, overconfidence and a lack of understanding of local consumer culture led to their downfall.

Different Buying Behaviour http://online.wsj.com/article/SB10001424052702303444204577460693377819420.html

http://shanghaiscrap.com/2011/02/bye-bye-best-buy-china-you-had-itcoming/http://en.iceo.com.cn/tts/?p=4 (bob willett) http://en.iceo.com.cn/tts/?p=4 China is a developing market with an enormous number of low-end consumers. According to Moody’s Analytics, despite the recent economic boom in China, median household income for Chinese cities in 2010 was around USD13400, around a quarter of the US median household income. Chinese consumers also had less disposable income. They saved more than 30% of their household income, greatly dwarfing most American family’s monthly saving. Credit cards were rarely used as they did not like spending on credit. Haggling over price was also common in China. In such a market, price would be the key concern for consumers. Any perceived price advantages would definitely outshine other advantages in services (Burkitt & Davis 2012).

Chinese electronic retailers, such as market leader GOME Electrical Appliances Holding Ltd and market number two Suning Appliance Co. Ltd understood this and sought to keep their product prices as low as possible. They adopted a business model where, other than purchasing goods from suppliers and manufacturers, these electronic retailers rented out sections of the store to different suppliers and manufacturing brands. When customers come into their store, they would see representatives of electronic brands such as Samsung or LG selling their products in the store. Through this business model, Chinese electronic retailers were able to on the cost of hiring store employees to manufacturers and suppliers and were even able to earn additional revenue through rental and commission from each brand’s profits. http://www.financeelements.com/business/best-buy-failed-in-china.tml

Management Hubris Best Buy International, in charge of overseas expansion and branches, had set up a global procurement office in China in 2003. This made them confident that they would be able to influence Chinese consumer philosophy into accepting Best Buy’s service oriented business model which led to their success in America. Service would become the market’s prime competitive advantage and not price. This thinking was largely attributed to management hubris. Prior to their entry into the Chinese electronic retail market, market research conducted by

internal Best Buy studies had concluded that China market was extremely price sensitive. However, top executives at Best Buy International paid no heed to the report. Bob Willett, who was the CEO of Best Buy International at that time, said “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” (Minter 2008, para. 15). Best Buy International seemed to think they knew more about local Chinese market than the locals themselves. Therefore, they focused they strategy on service as the main differentiating factor. They continued to offer services such as installations, repairs and guarantees as they did for customers in U.S and filled its China stores with knowledgeable employees who did not push for product sales. Best Buy’s was totally committed to the idea that service was the way to go in China. They even selected people from China and sent them for training at the company’s headquarter in Minnesota to ensure that they would be able to deliver a higher standard of service not typically found in China. Best Buy believed that the answer to the Chinese market was “service with a smile” (Young 2011, p. 15). The customer centric strategy did result in Best Buy stores being a lot more customer friendly than other Chinese electronic retailers. There were easy to read product brochures available and customers had the freedom to fiddle and try out products. There was no fear of aggressive hard selling from sale staff as they were all noncommissioned. Competitors store products were mostly kept locked behind glass panes and brand representatives were pushy. However, the same strategy caused Best Buy product prices to be one third more expensive than the exact same product offered by local electronic retailers. For example, a SIM unlocked HTC Desire Smartphone was retailed at 2800RMB to 3000RMB at a GOME store while Best Buy price retailed at 4000 RMB, 30% more expensive than competitors (Millward 2011).

Best Buy did well in America because American consumers saw the value in the services provided. Americans felt the perceived price and convenience it provided was reasonable to them (D’Altorio 2011). However the buyer behaviour in China was very different. Chinese retailers seldom provided services such as warranty and installation as repair services were available for much lower prices at local convenience stores (Young 2011). Thus Chinese consumers saw no value in the extra services Best Buy customer representatives were trying to sell to them. The situation led to consumers coming into the Best Buy store, tryout the products they wish to buy, compare the price at Best Buy and then walk out of the store to purchase the exact same product at a neighbouring electronic retailer or at an online store. Competitors quickly caught on to this and allowed consumers to try out the products in stores as well (Macleod 2011). This erased the reason for customers to go into Best Buy stores, leading to dwindling sales.

Local Manufacturers and Suppliers Best Buy’s low number of stores, only 8 stores in total, meant it could only place small stock orders from local manufacturers and suppliers, compared to competitors who were placing large stock orders to supply their 400

stores. This resulted in Best Buy being unable to get the low supply prices its competitors were receiving. Furthermore, as Best Buy employed their own customer service representatives, Best Buy offered to pay a to local manufacturers and suppliers to restrict brand representatives from renting space in their store. This caused local manufacturers and suppliers to perceive Best Buy as a barrier between the customer and them (Ni 2011). Local manufacturers and suppliers, who were used to the domestic competitors business models, felt that the loss of valuable customer interaction did not justify the Best Buy was paying to keep their brand representatives out of the store.

Store Format and Layout http://en.iceo.com.cn/tts/?p=4

http://leapernet.files.wordpress.com/2012/06/leapernet-failureofbestbuyinchina.pdf The Best Buy store format in China mirrored their American counterpart. Shopping aisles were significantly wider than local Chinese competitors. This reflected Best Buy’s philosophy that ample store space should be left for consumers (Yu 2011). The shelves were not as packed and there were a smaller number of brands and models on display. Popular local brands such as Midea, with many product lines, were not stocked by Best Buy. Instead foreign brands, largely unknown to Chinese consumers, were commonly seen on Best Buy shelves. Products in stores were also allocated categories instead of brand. This worked well in America where their target audience were the middle class. America’s culture also promoted individualism and personal freedom, where consumers pursue functionality over branding. In contrast China’s culture promotes collectivism, where brand popularity plays a more important role during the buyer decision process (Hofstede 1991). Chinese consumer demographics also differ, with a large number of low-end consumers and small number of high-end consumer. A wide range of products ranging from cheap and generic to expensive top quality brand names would be needed to cater both ends of the buying spectrum.

Lack of expansion and high cost of investment Five years after Best Buy entered the market, Best Buy’s two main competitors GOME and Suning expanded their store numbers to 1000 while Best Buy only increased to 8. There were a few reasons for Best Buy’s slow expansion. First, unlike GOME and Suning, Best Buy mainly opened stores by buying over the real estate instead of renting and leasing. This gave Best Buy a greater sense of control but led to a very slow rate of expansion. Furthermore, a large amount of cash flow was needed as all 8 Best Buy stores were located in the central district areas. Secondly, due to the size of Best Buy stores, they usually need 260 to 280 staff per store. Considering their emphasis on service, they would ensure all staffs were properly trained before the opening of each store. Because they do not use brand representatives, who were already trained in product knowledge, Best Buy needed a longer period of time than their competitors before they are ready to open a store. This caused Best Buy to miss the opportunity it has in any new location as competitors would have already opened new stores in the same area to address any threat Best Buy would pose (Fang 2009).

Decision maker made up of foreigners who did not understand local demands Best buy’s China General Manager Lu Weimin was educated in China and understood the culture of the local home appliance industry. He sought to expand Best Buy number of stores in order capture more market share as

competitors were opening a store every week. He had already sought out key locations to set up stores. However, due to Best Buy management policies, he had to wait for approval from Best Buy International in US before any plans for store openings or bids could be made. This cumbersome process allowed competitors to snap up the attractive locations, causing Best Buy to lose location advantage. Another factor impeding the expansion plans were foreign executives at “Best Buy International”, who were mostly unfamiliar with the Chinese market as they rarely visited China at all. This made it very hard for them to understand the significance and feasibility of rapid expansion in China (Yu 2011).

Language Insensitivity Best Buy’s brand marketing was also ineffective and lacked credibility. Many Chinese consumers have commented on Best Buy’s local Chinese name “百思买”, which is a direct translation based on phonetics. “百思买” literally means “hundred times of rethinking before purchase” (Ni 2011). It is ironic as it the exact opposite of the English meaning of Best Buy, which conveys “no brainer, the goods here sold are definitely the best buy”. It goes to show the insensitivity and lack of understanding Best Buy shows towards the Chinese language and culture.

Solutions to the problems encountered

Market Research Best Buy should have conducted a more comprehensive market analysis before entering the country. Qualitative methods such as ethnography would yield data such as consumer buying habits, product preferences, store location attractiveness and other information that can be observed from Chinese consumers in a store. This would help Best Buy decide whether their traditional business model would fit in China. Further quantitative research on data such as revenue and profit per square feet of retail space would reveal the unprofitability of the “Big Box” store format. They should also learn from their Chinese subsidiary to have a better understanding of the market.

Employee Empowerment The management policies over foreign expansions should be changed. Using Hofsteade (1991) cultural theory, the power distance between Best Buy’s China and America management team should be reduced to allow more fluent communication of ideas and problem solving. Due to rapid changes in China’s market, the China management team should be given more authority and autonomy to modify the local business model. This would give Best Buy greater market adaptability.

Location and expansion Best Buy should build smaller, more conveniently located stores. Despite China’s booming car market, constant traffic congestions and lack of parking spaces lead many consumers to shop near

their homes. Smaller stores equal lower expansion cost, making it feasible to increase the number of stores to cover more areas.

Cut cost and improve branding Adopting the rental system used by the Chinese retailers allows Best Buy to be more cost effective and promotes a better brand image. In America, a manufacturer store inside a retailer’s store would likely imply the manufacturer’s dominance over the retailer for autonomy is given to the manufacturer within the rental space. On the contrary, the same situation in China implies a strong relationship between the retailer and the manufacturer, seen by consumers as a sign of the retailer’s strength instead of weakness (Wharton 2009). This follows the Chinese cultural emphasis on relationship, where it often determines the strength of business ties between companies. Best Buy should also change their Chinese brand name. It should pick a name in Mandarin that conveys similar meaning as its English brand name. This would help build the brand’s credibility in China.

Conclusion http://www.cnbc.com/id/46009614/?goback=%2Egde_1794126_member_89621859 http://www.ibtimes.com/articles/357058/20120627/best-buy-china.html Best Buy has eaten the humble pie and learnt that cultural differences between American and Chinese buyers are not easy to change. China’s huge consumer market still makes it very attractive for investment, but Best Buy and many foreign companies will continue to fail if they don’t localize their business strategy and management enough to compete with domestic competitors (Rein 2011). Besides China, Best Buy is also losing domestic market share in America to competitors such as online retailer Amazon. It has resorted to downsizing jobs and closing down stores in America in an effort to cut costs and increase revenue due to their failed overseas investments. For the time being, Best Buy is focusing efforts to develop Jiangsu Five Star Alliance, Best Buy’s Chinese subsidiary. While Best Buy plans to re-enter the China market in 2012 with 14 Best Buy stores, it remains to be seen if they have learnt their lessons (Young 2012).