#101 Think a hundred times before you “Best Buy” in China

best_buy bai si maiYes, this is somewhat old news, but it’s also an ongoing story. In early 2011, several media outlets reported that US electronics retail giant Best Buy was failing in China. In a year when Chinese overall retail sales grew by a monthly average of 18 percent, Best Buy shut down all of its nine mega stores. It would be easy to blame the Chinese consumer for their price sensitivity, their tendency to haggle over discounts, their unwillingness to pay for quality service, and the rapidly rising competition from online retail, but that would be – well, too cheap. Foreign companies entering a new market carry what the international management scholars call the “liability of foreignness” – their task is not to educate consumers and reshape and entire culture, their task is to adapt to local conditions. Or, if their internal environment and business model doesn’t allow them to do so, to simply stay away. Also, local Chinese competitors such as Gome (Electrical Appliances Holding Ltd.) themselves started to introduce fixed prices and to take sales personnel off commission a while ago, thus getting closer to the Western retail model. In Best Buy’s case, the failure might have been a combination of many different things from costs that were too high to mistakes in product portfolio decisions to the building of monumental flagship stores. Maybe Best Buy even overextended itself on a global scale. Almost parallel announcements to withdraw from the UK and from Turkey point to a mismanaged overall global expansion strategy. Anywho, back in 2011, it seemed that another arm of Best Buy’s operations in China, the acquired local, Nanjing-based Five Star chain and its mobile business units would be the solution to the company’s trouble. In fact, Five Star was where Best Buy’s involvement in the Chinese market started altogether in 2006. Two years later, Five Star’s market share had been steadily declining and calls for Best Buy to completely pull out of China grew louder. In late 2013, however, the company’s new CEO, Hubert Joly, renewed Best Buy’s confidence in the Chinese market, citing steady progress the company had been making. In 2014, it remains to be seen if Best Buy’s future will be able to attract more Chinese consumers or if they’ll continue to do what one of the translations of Best Buy’s name in Chinese, 百思买 (Bai Si Mai), could mean: “Think a hundred times before you buy”!

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3 Responses to “#101 Think a hundred times before you “Best Buy” in China”

  1. Dubravko Dobra Says:

    Rally It is interesting to see how often western retail companies experience failure in China. How come? Media Markt or Best Buy are strong worldwide companies wizt much of experience in international business. I am positive they have had wisely change management and systematic approach to International market entry but again, they face failure. Long time ago Geert Hofstede determined how cultural differences influence behavior in business. Furthermore, it is widely known how cultural differences can be a source for miscommunication, wrong perceptions and stereotypes. Not to lose the essence, by Hofstede model, eastern civilization are one which are more collectivistic with commitment to long term orientation. Maybe there is catch. Western companies haven’t been used to wait for success. If they don’t have promising results in few years, they are giving up. Maybe, they just need to be more patient and integrate local touch in their brand so locals can identify with the products as a time pass by. In introducing new brand or products, it is essential to determine key factors which influence on individual adaption or usage in order to determine perfect Marketing Mix. People determine their behavior intention on three beliefs. Normative (what they are expected to believe), subjective beliefs (what they think about that) and also by behavior beliefs. Behavior beliefs refer to perceived usefulness, ease of use, compatibility, visibility, and Image. These beliefs make attitude which also influence behavior intention. While, behavior beliefs are pretty strong in western societies, in China, I would say, normative beliefs plays major role for behavior intention. To summarize, adopting to all mentioned along with examination of PEST factors; the macro-environment e.g. Political (and legal) forces, Economic forces, Sociocultural forces, and Technological forces are critical for integration in host market which at the end can result with success!

  2. Wilma Nutz Says:

    The American middle class was the world economy’s growth engine throughout the 20th century. Now, the center of growth has shifted to the Asian–Pacific region. As such it is not very surprising that American retail giants such as Best Buy try to stabilize total sales through a broader country portfolio, diversify risk and participate from the growth in these booming markets.
    Interbrand, the world’s largest brand consultancy, nominates the Best Retail Brands by country every year. Even though Best Buy was losing ground during the last years, the company is still in the top positions of the ranking for the United States for several years in a row now. According to Interbrand’s definition, brand strength is the ability of the brand to create loyalty and includes customer-centric factors like clarity of target audiences, customer drivers as well as the commitment to recognizing changes in their customer’s needs and wants. [1]
    Clearly this understanding was missing when Best Buy entered the Chinese market in the following aspects:
    Product: Best Buy was positioning itself as a high-quality service and good shopping experience offering company. However Chinese customers’ major purchasing determinant is price, not service. The competitive advantage Best Buy enjoyed in the U.S. was not a source in China. As such, company didn’t understand the customers’ preferences.
    Price: As stated already above, price is the main distinguishing factor in the Chinese market. Best Buy was perceived as being too expensive compared to local competitors e.g. Gome and Suning. Premium prices were only accepted by Chinese customers for products they couldn’t get elsewhere, like Apple products. Hence there was no need for customers to shop at Best Buy.
    Brand recognition: Whilst Best Buy is a well-known brand in the U.S. domestic market, it enjoyed very little brand recognition in China, compared to its competitors. Hence it had to invest significantly in marketing to build this brand recognition. As part of this strategy, the company decided to convert its name to its phonetic equivalent, which meant “think a hundred times before you buy”- another reason for Best Buy’s failure in China. Examples like Coca-Cola, meaning “Tasty and Happy” or Carrefour “Happy and Prosperous Family” show how names can attribute positive aspects which are in turn contributing to a successful market entry.
    Place: Best Buy was relying on large flagship stores, like in the U.S., rather than smaller, conveniently located retail outlets even though Chinese customers rather prefer to shop closer to their homes due to ongoing traffic congestions.
    In this connection I found an interesting example of how Coca Cola managed its market entry in India by identifying the local specialties particularly with regards to sales. As such, the company noticed the importance of small family stores in India, requiring the company to adapt their business practices compared to how they do business in developed markets. In the beginning, basic concerns, like cooling the drinks and socio-economic factors (E.g. small stores are often run by women, who face more difficulties in getting a credit) shaped the way of doing business and were more critically. As such, they learned to see the market as it is, not as they wished it to be, which perfectly summarizes their success formula. [2]

    [1] http://www.interbrand.com/de/BestRetailBrands/2013/Best-Retail-Brands-Brand-View.aspx
    [2]http://www.mckinsey.com/Insights/Asia-Pacific/Thinking_outside_the_bottle?cid=reimagining_india-eml-alt-mip-mck-oth-1312

  3. Christoph Stadler Says:

    Is there a direct relation between foreign market entry failures and companies with a proven successful domestic business model? Wal-Mart, Best Buy, Home Depot, Mattel, Coke and Media Markt, just to name a few, are (im)perfect examples on this subject. Of course, we must not forget media’s power of attention when retail giants such as Best Buy massively scale back or even pull the plug on its foreign country operation. Nevertheless, all those companies have at least one thing in common: Domestic success. As already mentioned in the initial blog, it looks like, successful corporations try to teach customers and reshape cultures, while overlooking the necessity to adapt their (domestic) business model to foreign countries and their external factors (political, economical, technological, etc.). What are the sociocultural distinctions between China and the U.S. that Best Buy might have failed to consider? According to Geert Hofstede’s cultural dimension model* there are major differences in individualism, pragmatism and indulgence between the American and Chinese culture, so that high prices and big flagship stores might have pushed shoppers away. Also, foreign advertising and brand image make a difference. Stated by Paul Chao (1989), many companies in developing countries sell their products through well-known U.S. retailers as a result of their lack of clearly identifiable brand image and consumer resistance. Similar situation happened to Best Buy in China. Five Star, the local chain that had 136 stores at the time of the acquisition in 2006, still shows steady improvement while Best Buy struggled from the beginning. Was it the right timing for Best Buy’s attempt to conquer the Chinese Market? Market entries should be timed to balance the risks of premature against raising problems due to missed opportunities (Lilien & Yoon, 1990). One of the major reasons why Best Buy had to close its stores in the U.K. was, because the market entry occurred during a time where margins in the electronics industry hit rock bottom. Needless to say that in order to increase the chances for a successful foreign market entry, companies like Best Buy will have to overhaul their business models and adapt their strategy to the evolving Chinese consumer preferences.

    *http://geert-hofstede.com/china.html

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