Blunders of the Past (BLOP), Deadly Sins, International Business , , ,

#150 Note quite a BestBuy in China

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Once again, this is not the most recent case, but it still is a good one. It serves as a perfect illustration for the fact that phenomenal success in one country doesn’t necessarily guarantee success in another. Quite to the contrary, success can be blinding and make companies ignorant of subtle – and sometimes even not so subtle – differences in the market environment. So, what happened to Best Buy? The company, originally founded in 1966 under the “Sound of Music” brand (yes, fellow Austrians, the movie very few of us have ever seen…) in Minnesota (a US state that most of the readers will never visit), for a long time was a beacon in consumer electronics retail in the United States. A few years after the turn of the millennium, BestBuy had more than 100,000 employees (almost 200,000 in 2016), approximately 1,000 stores (1,500 in 2016), and about $2 billion in revenue (almost $40 billion in 2016) worldwide. In 2006, BestBuy took the plunge and followed the example of many global retailers that had their eyes set on the vast Chinese market. Most likely as they were aware that entering the Middle Kingdom by themselves was not an option, they acquired a majority stake in a company called Jiangsu Five Star Appliances, located in – yes – Jiangsu province. Soon thereafter, nine BestBuy branded stores were opened that closely mimicked their US sister stores. It is well documented that it was BestBuy’s intention to change the landscape of consumer electronics retailing in China. Unfortunately, the vastness of China and the distinct differences in consumer preferences didn’t play along with these plans. In hindsight, the first major mistake was to start in Jiangsu province and limit its presence to that region. Chinese consumers believe in “big” brands which usually originate in London, Paris, New York or maybe in Beijing or Shanghai, but rarely in Jiangsu province. Also, big is beautiful in China, and the lack of a nationwide presence did not create enough visibility or inspire confidence among consumers. In China, one doesn’t start small in one corner of the country and then conquer the rest. Most of the time (exceptions are always possible), one starts big, and then grows even bigger! Consumer behavior was another important factor. Chinese consumers love a good deal. This implies the ability to bargain, which BestBuy’s policy did not allow. And, especially in not so central locations (such as Jiangsu province) consumers are very price conscious, which often results in the purchase of cheaper counterfeit products in lieu of more expensive, high-quality, branded products. Furthermore, an important element in BestBuy’s retail concept are impulse buys, which may work in Western markets where consumers have higher available spending power, but in China most consumers know what they’re shopping for before they enter a store, and they often stick to it. And ultimately, BestBuy also got their employee policy wrong – just like many other foreign companies. As a differentiator, BestBuy paid higher than average salaries. When their cost structure didn’t support their business model, they couldn’t lower salaries, but instead let employees go, which led to low employee morale. Make no mistake, for a while China actually looked like success to BestBuy as they grew to almost 200 stores. In the end, however, their approach to the Chinese market rested on flawed assumptions from the beginning and corrections were too little, too late. Ultimately BestBuy decided to leave China and sell all their stores (to focus on challenges in their home market, the United States).

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