Yes, 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”!
Posts Tagged ‘China’
After only three years in China, German electronics retail giant Media Markt in 2013 joined the list of companies that have left China after years of trying, including US-based companies Best Buy and Home Depot. Not too long ago, the store, owned by Metro-group had lofty plans of 100 and more stores. In 2014 it’s a distant memory at best.
According to some analysts, the Metro-group owned chain simply didn’t understand the mechanics of the very competitive Chinese market. Some even say that they didn’t know why they were in China in the first place. What was it that went wrong. First, Media Markt didn’t understand how price-sensitive Chinese consumers are. While Media Markt focused on the consumer experience, Chinese consumers were using its stores as showrooms before buying the products they wanted online or at another retailer. In addition, other retailers, such as local competitors Gome or Suning kept their cost down by setting up shop in less fancy locations than Media Markt. Chinese competitors usually also sub-let space to brand manufacturers who bear the bulk of the risk. Media Markt’s flagship store, however, not only was fully self-operated, but also occupied too much space on one of the most expensive retail streets in China. That amounted to cost pressures and brought Media Markt’s (necessary) nationwide expansion to a screeching halt. While Suning had built 1,700 stores all over China, Media Markt had only 7. This resulted in a situation where Media Markt only made about 5 % of local Chinese competitor Suning’s revenues. As a result – according to the Financial Times – the group didn’t want to invest the several hundreds million Euros annually needed to establish a significant Chinese operation. Media Markt wanted to build a famous brand for its store, in a market where consumers are looking more towards products as brands.
In the past few months, U.S. federal prosecutors have cracked down on shipments of high end cars to China. Dozens of luxury vehicles at U.S. ports and millions of dollars in U.S. bank accounts have been seized. What had happened? Are U.S. car manufacturers no longer interested in the Chinese market? Not at all! The seized cars were mostly BMWs that were purchased by straw men and their “employers”in the U.S. for resale on the grey market in China. With a sticker price for a BMW X5 xDrive 35i of around $56,000 in the U.S. and around $153,000 in China - almost three times as much – there’s a huge potential for profitable wheeling and dealing between the two countries. Driven by their need for status and prestige, Chinese consumers are willing to pay the price for a foreign luxury car, and BMW and other manufacturers naturally want it all for themselves, and so they have taken legal action. All legal aspects aside, what’s interesting is that this is a perfect case of global price discrimination / differentiation – volume positioning in the U.S. and premium positioning in China. Based on the cultural conditions in the local environment, global companies are leveraging these price differentials to their advantage and – as has been shown in this case – are trying to protect this advantage as long as possible.
In the past, H&M may not always have met analyst’s expectations, it may have taken some heat over the use of Photoshop in some ads, it has been criticized over unfair labor practices, but from this blog’s angle, the Swedish multinational seems to be doing things right in international markets. Considering high profile retail failures such as The Gap’s in Germany, Fresh & Easy’s in the U.S. or WalMart’s in Korea, H&M has been navigating foreign waters without major blunders so far. One of the markets where H&M is very active and expanding is China – a market in which many foreign entrants fail. While H&M did have some run-ins with authorities in China over product quality – excessive PH levels, weak crack resistance, and lower fiber content than claimed, it has all been very contained and hasn’t hurt them. In September 2013, after a year of rapid growth and expansion, H&M opened it’s 3,000th store globally in China where it currently has 170 stores. While this puts H&M behind Inditex’s Zara’s 400 plus stores in China, H&M has ambitious plans for future expansion in the Middle Kingdom. Analysts say that H&M is filling a mid-range gap between sports apparel and high-end luxury clothes in China. By bringing affordable clothes to the market they are catering to the needs of younger Chinese consumers who want Western style shopping experiences and clothes that provide some degree of status that an established global brand conveys.
People who follow foreign companies in China are well aware of the challenges that Danone has had in that market over the last few years. We’ll never quite know why Danone’s joint venture relationship went sour (not good for a company dealing in dairy products…) but it may not be completely unfair to assume that it often takes two to make and two to break a relationship. The simplistic and official story is that Wahaha reneged on a deal to let Danone buy the majority stake in the joint venture, after which Danone filed for arbitration and then took legal action. It probably was right there when the real trouble started. In China, you don’t sue your partner before a court of law, you chit-chat it out. But there was definitely more to it, including the fact that the Chairman of Wahaha, Mr. Zong Qinghou didn’t exactly appreciate the tight shackles that Danone placed on him in all business decisions – not recognizing that China is a market that often calls for entrepreneurial approaches rather than the central control that French companies are known for.
But these are things past. More importantly, Danone seems to be in the middle of its next quagmire. Granted, it was unfounded allegations of contamination that caused their Dumex baby food division to recall baby formula on a large scale, but the allegations of price fixing in the same product market were very real and ended in a fine ordered by Chinese courts (a total of $ 110 mio including five other companies) and more negative press by the media which is just waiting for Danone to get more scrambled egg on its face.
Then, as the Wall Street Journal reported last week, Danone’s Nutrica unit, a division which specializes in medical nutrition, had to deal with allegations that it bribed more than 100 doctors at more than a dozen hospitals in Beijing. How much more does Danone want to work on the image of the ugly, imperialist company? If that’s their goal, they can stop, because they have succeeded! If not, they can stop, too, because it is time to embark on a focused campaign to restore their own image and that of Western companies in China in general. And if they don’t care about image (let alone about being a good corporate citizen), maybe Danone should simply look at their challenges in China from a bottom line perspective as sales are already declining.
As the English edition of the Chinese newspaper Renminbao (People’s Daily) reports, fourth quarter sales at Yum! Brands, the parent company of Kentucky Fried Chicken (KFC) and Pizza Hut have significantly declined. What has happened in the Middle Kingdom that not only has a huge love for chicken dishes, but also for foreign brands, a market that has been promising nothing but growth for the fast food giant? It all started out with a media report on China’s national TV station CCTV in December 2012. The broadcast alleged that some poultry farms, among them suppliers to KFC, ignored regulations by using hormones and antibiotics, and triggered unfavorable media attention and social media activity. An investigation by authorities in Shanghai only resulted in some vague recommendations concerning a strengthening of KFC’s supply chain, but no fine was assessed and no further action was taken. Unfortunately, as is often the case in such circumstances, the good news got much less media coverage than the original bad news. And so the Chicken scare started to nest in the minds of the Chinese consumers. As the Economist reports in its February 9th issue, KFC’s January sales in China fell by a dramatic 41 %. What makes this even worse is the fact that Yum! doesn’t operate under the usual franchise system in China, but owns most of its stores. With currently approximately 5000 restaurants in 800 Chinese cities, this is a costly development to digest – probably worse than eating a big bucket of deep fried poultry. KFC’s example just shows how tricky it can be to operate in far-away markets. Cultural, geographical and legal distance make it very difficult to first perceive and interpret the early warning signals correctly and then to react quickly and appropriately. Often in such cases, foreign companies quickly pick up the stigma of being an imperialist monster that has no respect for the local environment and whose only interest is exploitation of the local market. Or, in this case in the words of the Economist, to be the “Yucky Kentucky”!
Not too long before US-based DIY giant Home Depot announced it’s almost complete withdrawal from China, similar news emerged about Europe’s largest home improvement retailer, Kingfisher PLC. Kingfisher, founded in 1969, which owns the B&Q and Castorama brands, operates close to 1,000 stores in eight countries including Britain, Ireland, France, Poland, Spain, Turkey, Russia and China. Kingfisher has been struggling in most countries, but it’s China troubles seem to be of a different magnitude. Ever since it first entered China in 1999, it has been uphill for Kingfisher in the Middle Kingdom. When losses hit more than $ 80 million, B&Q decided to cut the number of stores by 22 in 2009. Realizing that the “big box concept” is not very appealing to the Chinese market, it also downsized operations for its remaining 40 stores. As has become apparent in the recent Home Depot case, B&Q may be struggling with exactly the same difficulties – the fact that for cultural and economic reasons, the entire DIY concept is too foreign to most Chinese consumers. And for those who like the idea of tiling their own bathrooms and flooring their own living rooms, there is a plethora of local alternatives in a highly fragmented market. After all, brand is not as important in the DIY segment as it is in more visible FMCG categories. All in all, another case of the difficulties associated with the internationalization of retail businesses.
Late last week, US-based home improvement giant Home Depot announced that it would take a $ 160 million after-tax charge and close seven of its big-box home improvement stores. Home Depot entered China with high hopes in 2006 when it acquired 12 stores across China. Over the years it had reduced the number of stores to the seven it is now closing. Home Depot, which of course also sources heavily from China, does have plans to keep two speciality stores in the city of Tianjin and also to be active in online retail, but for now the dreams of making it big in a market of more than a billion consumers are over. While it is true that many retailers in China are currently struggling as slow economic growth is curbing consumer spending, the roots of Home Depot’s failure may be somewhere else.
The first reason may be that China is not so much a Do-it-Yourself (DIY) culture, but more of a HIDBO (Have-it-done-by-others) culture. Cheap labor is abundant, but even more importantly for a culture that values status and prestige, tiling your own bathroom or painting your own window frames is not necessarily a desired activity for the masses. You may ask why it then is that IKEA is hugely successful in China – a company that also makes you assemble your own furniture. The answer leads us to the second reason behind Home Depot’s failure. Chinese are looking for guidance in acquiring Western lifestyles. IKEA provides this guidance by showing their customers how to decorate their homes in a Western fashion. The fact that you have to assemble your own furniture is a little more appealing when you know what the final product is supposed to look like. Besides, there’s always someone to assemble your IKEA furniture for you. Home Depot, however, leaves consumers largely alone and guessing about the final look and feel. Also, most Chinese live in small apartments and don’t have the room to keep tools or work on DIY projects. And ultimately, Home Depot is selling commodities – nails, screws and paints aren’t necessarily the same cultural icons like IKEA, McDonalds or KFC that so many Chinese middle class families are looking for. There may also be a third reason. Generally, as has also been featured in this blog, retail somehow doesn’t travel easily across international borders. But that’s for another time.
Who would have ever thought? Not only is Volvo in Chinese hands, now Saab is, too! Zhejiang Youngman Lotus Automobile Co. and Pang Da Automobile Trade Co. of China have announced that they will purchase insolvent Saab for approximately 100 million Euros. What remains to be seen are two things – first, if the Chinese will really be able to pull off the deal. Not too long ago, another Chinese carmaker’s plans to take acquire Hummer from General Motors have been barred by Chinese authorities. Second, if the deal comes through, will Swedish and Chinese cultures be compatible with each other?