Best Buy’s Failure in China
Lea Pernet and Paulina Nunez-Candiani
INTB4501/ Advanced Global Management
Alvaro Cuervo-Cazurra
April 25, 2012
Best Buy Co. is a “multinational retailer of consumer electronics, home office products, entertainment
products and related services” 1. The group is the largest U.S consumer electronics retailer by revenue.
In 2006, Best Buy made its first steps in China with the acquisition of a Jiangsu Five Star, a Chinese
retailer and opened its first Chinese store under its name in Shanghai, soon followed by eight others. With
a consumer focused strategy, Best Buy was hoping to capture part of the electronics retailing market, so
far dominated by the local retailers Gome and Suning. However, in 2008 the group’s net earnings had
decreased by 77 percent from the previous year. No later than February 2011, the multinational
announced it would close all nine of its branded stores.
This report analyses the reasons of Best Buy’s failure in China and tries to assess recommendations for
the company to approach the Chinese market.
1
SITUATION ANALYSIS
Best Buy in the USA
History of Best Buy
The company started in 1966 when Richard Schulze and James Wheeler opened a store called “Sound of
Music” in Saint Paul, Minnesota. At the beginning, the company focused on home and car stereos. In
early 80s Schulze realized that there was little potential selling audio components to a shrinking audience
with little resources and began focusing on appliances and VCRs2. The company’s name was given when
they had a special sale event they called “Best Buy”. After the success of this event, the board of directors
approved the name for the company.
The design of the stores was introduced in 1989 and had spacious 44,000ft warehouse-like layout. The
company overtook Circuit City as the leader in electronics retailer by revenue. In 1998 Best Buy entered
e-commerce by launching a site that sold CDs and DVDs. Shortly after, the offering expanded into
consumer electronics, computers, software and games. In 2002 Best Buy bought Geek Squad, a computer
maintenance and repair company, and began to incorporate it into existing store locations. In more recent
history Best Buy has been extremely successful in supplying demand for flat screen TVs and cell phones.3
Best Buy is recognized as a “big-box” store, which is defined as a physically large retail establishment
being usually part of a chain. Best Buy was one of the first stores to implement the ‘big box’ model
stocking mostly high technology/electronic items, and also home appliances sometimes.
It’s important to mention that in 2011 after the company reported a $1.7 billion loss and the closing of 50
big-box stores, “the opening of 100 smaller format mobile stores, and the culling of 400 employees”4 the
company started thinking if this model was the best for them of not.
A price competitive strategy threatened by online retailing
From its creation, Best Buy’s success relied on a price competitive strategy. However, the arrival of
online retailers who do not have to bear as much overhead costs as Best Buy has significantly threatened
America’s largest electronics retailer’s strategy.
At the beginning the company’s competitive advantage was primarily the price. The company has had its
share of ups and downs and endured many challenges that overwhelmed some of their competitors. In the
late 80’s numerous competitors crowded the electronic retail space that resulted in price rivalry on
popular consumer items. Many companies took hits on profit margins by slashing prices to sell hot items
such as VCRs. Best Buy’s sales had nearly doubled in 1988, but their net earnings fell 64%.5
Although battered, Best Buy survived the price wars when some of their major competitors including
Highland Superstores and Dixon’s Group’s Silo Holdings were forced to liquidate. Throughout the 1990s,
Best Buy entered yet another intense battle with its main rival, Circuit City. The rapid expansion and
intense competition caused the company’s stock to swing wildly in 1994. Best Buy surpassed Circuit City
in the late 1990s which eventually declared bankruptcy in 2008.
2
The company is now having problems competing with online retailers. Amazon’s example speaks for
itself since its brand increased by 32% in 2011 while Best Buy declined by 11%.6
Whilst Best Buy is now the largest electronics retailer in the US, Amazon has seen its revenues grow at a
much faster rate and is expected to take the number one position by 2012. Best Buy’s net income is down
30% to 154 million for 2011 fiscal year.7 The company's CEO, Brian Dunn, has recently resigned because
of inappropriate personal conduct allegations. Best Buy’s stock price continues to set new 52 week lows.
In order to improve its situation, the company plans to reduce store locations and sizes.8
Moreover, Best Buy is struggling with an excess of overhead costs because it is a brick and mortar retailer
and therefore it has large operational costs to run and maintain its locations. There are a lot of factors that
contribute to the overhead costs. In addition to paying rent for the leased locations, Best Buy also incurs
real estate taxes, insurance, and area maintenance fees, which the company has to incur to stock products
on its sleeves. These overhead costs have to be reflected in the price of the products offered, thus
preventing Best Buy to compete on price alone with online retailers.
Finally, another current and important disadvantage for Best Buy is tax regulations. Indeed, in most
American states, the customer must pay a sales tax when purchasing an item at a store, which can often be
avoided by purchasing from online retailers.
These disadvantages that Best Buy has in comparison to its online competitors made the company to
reevaluate its competitive advantage in the US.
A consumer centric strategy
Such weaknesses amongst online retailers made Best Buy to reevaluate its competitive advantage in the
US by putting the emphasis on services which competitors like Amazon cannot provide.
Nowadays, Best Buy focuses its competitive advantage on a consumer-centric strategy by building a
superior service to differentiate itself from online retailers. By extending its offers to warranties, in-home
installation and configuration services, Best Buy hopes to position itself as a retailer who cares about its
customers and provides them with the utmost services9.
Best Buy’s 2006 annual report synthesizes their positioning strategy as the company that “excels based on
its fun, interactive store experience; broad product assortments; name brands; knowledgeable employees;
and ability to offer services.” Best Buy is an ideal location for many new electronic product launches
because customers can come into the stores and try out the product. The employees are typically
dedicated to a specific section of the store to familiarize them with a product category, so they can best
assist and educate customers.
In 2006 Best Buy decided that they had to “transform (their) company, and (their) transformation (had)
moved beyond the tipping point. (They) believe (d) that the best way to boost returns (was) to invest in
(their) customers and employees” (Best Buy’s 2006 Annual Report.) An obvious element of this
consumer-centric strategy is a focus on employees’ quality service. As Brian Dunn -Best Buy’s chief
executive, explains in his interview with Marc Gunther: “We are leveraging our people as a competitive
advantage. We stand on the shoulders of all the people who have worked on the floor for the past 40
years at Best Buy.” Indeed, the success of a consumer-centric strategy relies on the quality of the
company’s service. “Several years ago, for example, Best Buy executives decided to save money — about
$10 million a year — by cutting back on employee discounts. The reaction from workers was swift and
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negative, and the company pulled back.” 10. Such an example reveals the importance of the workers’
service to customers on the company’s profits and thus the appropriability of this competitive advantage
to the company.
However, Best Buy’s competitive advantage of customer service is serving Amazon to generate more
sales by being Amazon's “showroom”. Indeed, a trend has started where people visit Best Buy to try a
product and then purchase it online for a cheaper price. As an incentive to follow this trend, Amazon has
facilitated the price comparison process by releasing Price Check. This mobile app, “available on Android
and iOS, lets the user scan a barcode and instantly find the merchandise price on Amazon”11
Best Buy in China
Entering the Chinese market
With such threats on their domestic market, Best Buy decided to double its efforts in foreign markets.
With a two digit growth of its middle-class, China represented a promising potential market which the
company saw as an opportunity to boost its sales globally. Having operated in China in the past, Best Buy
decided to enter the Chinese market in 2006 through the acquisition of Five Star -China’s third largest
electronics retailers.
China represented a great opportunity for Best Buy to expand due to economic and social factors. China’s
population of 1.3 billion people and an annual GDP (Gross Domestic Product) growth of 10.7%, a strong
middle class emerging and which rose from 6.5 million to 80 million whose per capita income surged
from RMB 21,739 per household in 2006, representing a “robust 50% increase over 2001 in real terms”12.
By way of example, in 2004, Gome -the largest chain retailer of home electrical appliances in China,
reported a 189% increase in profits due to increased customer demand. Most certainly, Best Buy saw a
substantial market opportunity in China.
Moreover, the company already had operated in China for purchasing purposes. In 2006 Best Buy
operated three global sourcing offices in China in order to purchase products directly from Asian
manufacturers. These offices improved Best Buy’s product sourcing efficiency and provided them with
the capability to offer private-label products, which complemented their existing product assortment, in
order to achieve an increase on the total purchases and an improvement on the gross profit rate by
lowering their overall product cost13.
Having a first step in China most certainly made Best Buy confident they could start selling in the
country. Indeed, their 2006 annual report indicates that Best Buy had six priorities for fiscal year 2007,
the sixth being the pursuing of an international growth strategy for which they had plans to embark on a
controlled growth strategy in China opening their first store in Shanghai.
In 2006, Best Buy entered into an acquisition of 75% of China’s third-largest retailer of appliances and
consumer electronics, “Jiangsu Five Star Appliances”. This acquisition provided Best Buy with a strong
management team that was familiar with local customers and business models. Moreover, it was an
opportunity for the American retailer to increase its knowledge of Chinese customers. Best Buy obtained
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immediate retail presence in China and enhanced its expansion by opening its first Best Buy-branded
store in Shanghai in December 28, 2006 (See Exhibit 1).
By 2007 Best Buy and Five Star in China occupied 4.3 million retail square feet in China, the equivalent
of about 10% of the total retail square footage (See Exhibit 2), operating “135 Five Star stores in seven of
China’s 34 provinces and one China Best Buy store in Shanghai”14.
By March 2008 the company operated 160 Five Star stores in China and one Best Buy store which
represented 5.9 million retail square feet. In 2009, Best Buy acquired the remaining 25% of Five Star and
converted the Chinese retailer into a “wholly-owned foreign enterprise”, 100% owned by Best Buy. In
2009 the company expanded their Best Buy stores, they operated 169 total stores in China, 164 Five Star
stores and 5 Best Buy China stores all located all in Shanghai (See Exhibit 3), and by the end of 2011 the
company had a total of 8 Best Buy stores (See Exhibit 4).
From Five Star to Best Buy
Management and operations of Best Buy in China were very similar to the ones in the U.S and Canada. In
its 2007 annual report, Best Buy explains that its first store in China “employ(ed) an operating model
similar to (their) U.S. Best Buy and Canada Best Buy stores. (Their) China Best Buy store (was) staffed
with a general manager; assistant managers for operations, merchandising, inventory and sales; and
approximately 340 sales associates, including full-time and part-time sales associates. Advertising,
merchandise purchasing and pricing, and inventory policies for (their) China Best Buy store (were)
centrally controlled by corporate management. Meetings involving store management and corporate
management (were) held on a regular basis to review operating results and establish future objectives.”
Therefore, in terms of organization, Best Buy in China was managed in a similar way that their American
or Canadian stores.
One of the biggest challenges for the company when opening a Best Buy-branded store, was their lack of
brand equity. On the one hand, Five Star was the third biggest electronics retailer in China. But on the
other hand, Best Buy had very little brand recognition in China while Gome and Suning -China’s number
one and number two electronics retailers, were widely known of Chinese consumers. “One of the biggest
contributing factors has been establishing brand identity amongst Chinese consumers. Whilst Best Buy is
a global retail brand and a particularly formidable force in its domestic US market, it was relatively
unheard of in China prior to its acquisition of Jiangsu Five Star. In contrast, both Gome and Suning are
household names in China.” 15Consequently, Best Buy had to invest significantly in marketing in order to
build brand recognition.
As part of its brand strategy, Best Buy decided not to change its name in China but to convert it to its
phonetic equivalent: Baisimai. However, the choice of name might have been a bad move as China
Briefing Magazine explains: “Many consumers even commented that the Chinese name of Best Buy –
Baisimai – as a bad one for marketing. Baisimai literally means ‘to buy after thinking 100 times16’.”
Best Buy’s business strategy in China
Boosted by their consumer-centric strategy in the US, Best Buy decided stay consistent and offer an
utmost services range to its Chinese consumers in order to differentiate itself from domestic competition.
The strategy mainly relied on qualified and objective salesperson, not biased by commission like most
Chinese retailers’ are.
5
Contrary to its strategy in North America where stores are located in the suburbs with the convenience of
parking lots, Best Buy opened its eight stores in urban environments of Shanghai, most of them in Pudong
which is the historical center of Shanghai. Perhaps they did so because this is where most Chinese
retailers settle too since the number of cars per household in China is relatively low.
However, most locations were not conveniently located. For instance, one of the Best Buy-branded store
was situated in between two metro stops which customers complained about a lot on forums. In fact Best
Buy decided to focus on building “large flagship stores, like in the U.S., rather than smaller, conveniently
located retail outlets. China may have one of the highest car adoption rates in the world, but its perennial
traffic congestions and lack of parking means consumers often prefer to shop closer to their homes.”17
Best Buy’s store in China offered merchandise in three product groups, consumer electronics, homeoffice and appliances. But the differentiation strategy of Best Buy did not rely on its product offer but on
its services. With the objective of transferring its competitive advantage in China, Best Buy developed a
consumer-centric strategy. “Best Buy chose to take an alternative approach to the China market: it
focused on a service-based business model. It sold the same installation, repair work and guarantees
offered to customers at U.S. Best Buy stores and staffed its outlets with knowledgeable employees who
did not push for sales. To prepare for its entrance into China, Best Buy handpicked customer service
representatives from China and trained them at company headquarters in Minnesota to provide a higher
level of service not typically found in China, much less in China’s bargain electronic retailers. Best Buy
would provide what they thought the China market needed: service with a smile.” 18
Salaries of salespersons in the Chinese stores did not include commissions on sales since Best Buy
wanted its sales force to work in total impartiality. “The U.S.-based appliance retailer is banking on a
strategy adopted by its North American operations, under which its salespeople will work on a noncommission basis to guarantee unbiased advice, the company's China chief said. ‘Based on our
understanding of Chinese consumers, we have an advantage of our model in China. It's such a growing
marketplace and retail chains only command a small part of the market,’ Best Buy China chairman
Weimin Lu said in an interview. ‘The biggest thing for us is to learn about the Chinese consumer and the
consumer electronics retail market in general.’ Sales staff in Chinese retail chains such as market leader
GOME Electrical Appliances Holding Ltd. and Number 2 Suning Appliance Co. Ltd., generally work on
commission for various brands.”19 .Unlike its Chinese competitors whose salespersons were encouraged
to sell particular brands in order to obtain their commissions, Best Buy would offer a more ethical
environment with reliable, objective and unbiased salespersons.
An unprofitable expansion
Nevertheless, Best Buy’s strategy in China proved to be unprofitable. In 2008 Best Buy’s international
segment’s gross profit rate “decreased by 0.9% of revenue to 20.7% of revenue. Therefore, the company
lowered its costs and by 2008, its international segment’s Selling, General & Administrative Expense
(SG&A) rate “decreased by 1.3% of revenue to 18.3% of revenue. (Their) China operations, which
carr(ied) a significantly lower SG&A rate than (their) Canada operations, reduced (their) International
segment’s SG&A rate by approximately 0.5% of revenue in fiscal 2008” (Best Buy’s 2008 Annual
Report).
6
Although Best Buy cut significantly cut its expenses in China, results were still not satisfying. “(Their)
China operations, which operate(d) at a significantly lower gross profit rate than (their) Canada
operations, reduced (their) International segment’s gross profit rate by approximately 0.7% of revenue in
fiscal 2008. The remainder of the decrease in (their) International segment’s gross profit rate was due
primarily to the increased sales of lower-margin products in both (their) Canada and China operations,
which was partially offset by rate improvements in certain product categories as well as lower financing
costs in Canada”20
In 2010, the company’s international segment operating income “resulted primarily from higher operating
income in Europe and China”21. However, during 2010 the company faced a decrease of revenue of 0.3%
in China caused primarily by “cost-cutting measures to reduce overhead, payroll and marketing
expenses”22 Despite these results, the company continued to expand its brand in China, and by the end of
2011 the company had a total of 8 Best Buy stores (See Exhibit 4).
However, in the fourth quarter of fiscal year 2011, Best Buy announced plans to “restructure the Best Buy
branded stores in China during fiscal 2012. Restructuring activities in China include closing all eight Best
Buy branded stores. (They) also intend(ed) to explore other more profitable growth options for the Best
Buy brand in China, including the option to reopen two of the closed stores at a later date” 23. All of the
eight branded stores were closed by the end of 2011.
The Electronics Retail Market in China
The rise of a cost-effective business model
The Chinese appliances and electronics retail market has witnessed a determinant restructuring during the
late 1990s. By building a strong logistics strategy, retailers have significantly lowered their overhead
costs.
“From 1993 to 2000 (before the rise of chain-store retailers), the average sales cost ratio (sales
costs/revenue) of China's major household appliance manufacturers rose from 2.9% to 10.6%.”24. But by
restructuring their whole business model, Gome and Suning rapidly took over the appliance and
electronics retail market in China.
The Chinese electronics retailers’ strategy and organization significantly differs from the typical
American Big Box model. Indeed, Chinese retailer usually owns a large store and rent part of it to
different brands. For instance, Gome, one of China’s biggest electronics retailers, owns retailing stores in
which representatives of electronics brands such as Nokia or LG rent their selling area. Therefore, the
Chinese retailers’ revenue includes the rents from the brands as well as a commission on every brand’s
profits (Ni, V.) Therefore, Chinese retailers are extremely price competitive by passing costs directly to
manufacturers. “Gome’s 2008 Annual Report revealed that its income from suppliers consisted mostly of
such fees charged to suppliers for promotional activities, management services, and display space leasing.
The total was RMB 2.5 billion, which was nearly one billion more than the earnings before tax of the
entire company. Suning’s related income in 2008 was RMB 1.4 billion, which contributed 48% of its
earnings before tax.”25
7
As a consequence to this Chinese business model, the sales strategy for Chinese electronics retailers relies
highly on commissions “as a result sales personnel are keener to sell and meet their quotas in order to
increase their personal incomes. This has resulted in higher sales per employee for domestic retailers.” 26
As opposed to Chinese retailers, Best Buy’s non-commission strategy aimed at building impartiality as a
differentiating aspect. Such differences implied costs on Best Buy’s side which its Chinese competitors
did not have to bear and thus prevented the multinational from being price competitive.
An oligopolistic market
On the one hand, the Chinese household appliances and electronics market is largely dominated by two
retailers -Gome Electrical Appliance (Gome) and Suning who have been fighting for the first place.
In 2006, Gome was China’s largest retailer in the industry with approximate sales of $10 billion, it ran
420 stores and employed about 300,000 people and Suning was very close behind Gome. 27
As a response to the arrival of foreign competition, both retailers initiated aggressive expansion strategies
and started entering into acquisition with smaller retailers. As a result, in 2011, Suning ran 1,300 stores in
China and took away the first place of Chinese electronics and appliances retailer, leaving Gome with the
second position with 700 outlets in China.
On the other hand, independent convenience stores are still very present in the electronics retail market in
China. They have significant advantages over bigger retailers like Suning and Gome in terms of customer
relationship “Independent local players, which account for more than 50 percent of the rural market, have
advantages including being able to use their familiarity with local spending behavior to adjust their
offerings and provide customized product advice to their customers.”28
However, through their recent numerous acquisitions with small retailers, Suning and Gome have
countered this disadvantage and widen their local, convenient presence and thus built a strong advantage
on multinationals. Indeed Chinese top retailers’ strong and fast supply chain management enables them to
keep a large selection adapted to local needs throughout its fleet of stores. “Consider televisions. Rural
consumers tend to prefer big screen TVs, which confer greater status in their villages while urban
shoppers are more focused on quality and brand, according to Zhu. While national operators like Suning
and GOME will struggle to compete with local chains, their wide selection of fast-selling electronics
products may give them an edge over foreign players such as Wal-Mart and Carrefour. When asked
recently about flat-screen televisions, a salesman in the small electronics department of a newly opened
Carrefour in the second-tier factory town of Dongguan suggested the reporter look elsewhere. ‘You can
probably get a wider choice of products in the Suning just down the street,’ he said.”29
The perceived value of Best Buy’s offer in China
Many of Best Buy’s products were considered too expensive compared to the local market. Paradoxically,
Best Buy’s prices were similar to its main competitors’ - Gome and Suning. However, Chinese consumers
positioned Best Buy at a higher perceived price range.30
8
Part of this misinterpretation might be due to the fact that the Best Buy was recognized as a multinational,
considered to charge at a higher price. But the main reason why Best Buy’s prices were considered higher
relies on the business model itself.
Indeed, Best Buy’s non-commission strategy was accompanied by a fixed-price policy. Therefore,
salespersons had no possibility to bargain products whereas Chinese retailers have a more adjustable and
aggressive bargaining strategy by which they “lower prices within pre-defined limits if it ensures a sale.
This flexible approach allows retailers to price discriminate and maximize revenue from different income
groups. Whilst consumer attitudes towards flexible pricing may be negative in North America or Western
Europe, it is firmly embedded in the shopping experience in many Asia Pacific markets, especially
China.”31
Finally, the surplus in Best Buys’ perceived price was not accompanied by a higher value in their services
and product range offer. Although American consumers might be willing to pay for a supplement in price
for the services Best Buy offers, Chinese consumers’ buying behavior differs. Chinese electronics
retailers rarely provide warranty and installation services, mainly because repair services are available at a
cheaper price at local convenience store.
Typically, Chinese consumers would spend a lot of time comparing price and wait for the best deal on
products, but services are rarely part of their buying decision process. “Best Buy’s service-oriented model
seemed like a reasonable strategy given that China’s maturing consumer class is increasingly looking for
product value. Though a better shopping experience would appear to be in line with those expectations,
the price factor cannot be underestimated. Chinese consumers are looking to upgrade their purchases, but
the electronics market in China is known for being extremely price sensitive.”32
Therefore, although Chinese consumers value and need the services, the price they are willing to pay for
they were below Best Buy’s perceived price. Moreover, Best Buy’s higher perceived price was not
followed by a different product range offer than what was already available on the Chinese market.
“Customers could easily get the same product literally down the street.” 33
Consequently, there was little incentive for Chinese consumers to purchase at Best Buy since the product
offer was similar: “Why buy a Sony DVD player or Nokia phone at Best Buy when you can pay less for
the exact same product at a local store? Consumers will only be willing to pay more, like at the Apple
stores, if they are buying something they cannot get elsewhere.”34
While Best Buy did not differ from domestic competitors in its product catalogue, its differentiation
strategy relied on its elevated services which Chinese consumers could find at a cheaper price at
convenience stores. Therefore Best Buy was left with only one differentiation point: the possibility for
consumer to test products in the store but this advantage was quickly copied by competitors as Liu
Buchen, an independent electronics retail analyst explains: “The company's service style, whereby
customers can test products, was quickly copied by others, and left them with no unique competitive
strength”35
To conclude, the competitive advantage Best Buy was enjoying in the USA was not a source of advantage
in China, its consumer-centric strategy offered services that were available elsewhere at a cheaper price.
Chinese retailers had competitive advantages among Best Buy: their convenient locations, low price and
knowledge of the local market. Best Buy could not be competitive in terms of prices specifically because
of its business model which was much less profitable than the Chinese rental system.“Ironically, its
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business model, just as its Chinese name, tries too hard to educate consumers about high-end service
value when lower price is typically the only value that motivates them to make quick decisions.”36Best
Buy in China quickly became a convenient window to more price competitive Chinese retailers. Chinese
consumers “had little incentive to buy immediately and were more inclined to wait for the right – and
ostensibly cheaper – deal. The perceived price hike was a severe impediment to Best Buy’s success, and
the additional service was not an attractive enough incentive to entice customers to buy exclusively at
Best Buy. “Best Buy represented the shopping, not purchasing, stage of consumption,” sums up consumer
researcher Mary Bergstrom.”37
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RECOMMENDATIONS
The aforementioned situation analysis reveals a lack of understanding of the Chinese consumers for Best
Buy in its attempt to mimic the American model in China. The elements previously discussed raise two
questions; was China a good location for Best Buy to offshore in the first place? And if so, what
alternative strategy could have prevented the company from its obvious failure?
While considering the possibility to offshore its activity to another country, it is important for companies
to follow a thorough and systematic decision process. Indeed the expected profits assimilated with an
offshoring strategy need to be weighed against significant costs and risks for the company. Farrell (2005)
drew a helpful framework for companies to decide where to offshore. We slightly reviewed this
framework and added additional steps in order to optimize the decision process (See Exhibit 5).
In this section, we assume a “back-to-the-future” scenario and use the aforementioned reviewed
framework in order draw two possible recommendations for the company’s internationalization strategy.
Option 1: Stay Out
As clearly mentioned in its 2006 annual report, Best Buy’s objective in offshoring was to pursue an
international growth strategy. Struggling in its domestic market, Best Buy’s main goal of offshoring was
without a doubt trying to generate profit in foreign markets.
As a consequence, following the reviewed Farrell framework, we decided to establish decision criteria for
Best Buy to consider while weighing different countries to offshore in. Firstly, the presence of a growing
market with interest in electronics is crucial for Best Buy to generate substantial profit. The second
criterion would be the presence of a weak competition or at least a competition on which Best Buy has a
clear advantage on. Indeed, the decrease in profits Best Buy was experimenting in its domestic market did
not allow it much breathing space for risks.
Considering these two criteria, China would have rank high as an offshoring location for the electronics
retail market. Firstly, with 60.5 million in 2006, China was a potentially profitable location for Best Buy.
Moreover, the market was so far dominated by Gome and Suning, which did not provide such services as
Best Buy offers, thus opening a clear differentiation strategy for Best Buy.
Best Buy seems to have considered this promising data as a sufficient green light to expand its operations
in China. However, China did present some significant risks for the electronics retail market. While the
sales revenue of foreign-retailers in China has been generally positive, it has not been so for the
electronics and appliances retailers who have not seen any significant increase since 2005 (See Exhibit 6).
In view of this threat, China was perhaps not the best location for Best Buy to offshore. Indeed, although
the company had developed a differentiation strategy based on consumer service and reliable advice from
its sales force, the risks perhaps outweighed the possible profits. Indeed, as discussed earlier, Chinese
consumers are known to be extremely price sensitive and might not have been ready to pay more for such
services.
Moreover, according to the global brand study of Douglas B. Holt, John A. Quelch and Earl L. Taylor,
China has an interesting mix of global citizens and antiglobals. On the one hand, global citizens buy
global brands mainly because of it quality signal, that is to say, the assumption that global brands have
better quality than local brands due to more funds. In this logic, if local brands had better quality, they
would expand.
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This type of customer would be ideal for a global brand. However Best Buy is a retailer and not a
manufacturer, the quality of its products does not depend on the company but on its suppliers, most of
which are already present in China. Therefore, China’s global citizens do not have any particular
advantage in going to Best Buy. On the other hand, antiglobals are more skeptical on this quality signal
and are not sensible to the global myth by which consumers buy global brands to feel part of a global
community. On the contrary, antiglobal do not buy global brands because they “dislike brands that preach
American values”. Such customers were a significant threat to Best Buy’s implementation in China.
Along with this idea of ant globalism, Best Buy had significant disadvantages of foreignness because of a
strong consumer ethnocentrism.
In addition, the retailing industry is difficult for multinationals to entry since its is long and requires and as Dawar, N. and Frost, T.’s positioning for emerging market companies framework suggests, local
companies took a defender approach and continued to provide low price and corner store position which
the local market preferred. “Best Buy also made the mistake of focusing on building large flagship stores,
like in the U.S., rather than smaller, conveniently located retail outlets. China may have one of the highest
car adoption rates in the world, but its perennial traffic congestions and lack of parking mean consumers
often prefer to shop closer to their homes.” 38 Best Buy could probably have acknowledged this strength
of local competition before launching their over-sized stores in China.
In view of these risks, our first possible recommendation for Best Buy in 2006 would be to stay out of
China. The company could have pursued the acquisition of Five Star and increase its presence in China.
However, implementing Best Buy branded-stores might have been too risky an investment.
Option 2: Stay in China and Define a New Positioning Strategy
Despite the threats the Chinese market presents, we would like to consider an alternative strategy for Best
Buy to implement its stores in China.
Copy the Chinese business model
First of all, Best Buy’s American business model is a weakness in China. The rental system Gome and
Suning have developed is much more cost effective and enabled them to be more price competitive than
Best Buy. We strongly believe Best Buy should have copied the Chinese business model in order to stay
price competitive.
On the one hand, this business model is unheard of in the US in the electronics and appliances industry.
“The presence of a manufacturer’s store within a retailer’s store could suggest the weakness of the retailer
or the dominance of the manufacturer, as the manufacturer has autonomy in the space owned by the
retailer.”39
On the other hand, in China studies show an opposite interpretation, where “the presence of stores-withina-store often indicates the strength of retailers, rather than manufacturers”, according to a detailed study
titled “Store-Within-a-Store”, written by Kinshuk Jerath of the Tepper School of Business at Carnegie
Mellon University, and Wharton marketing professor Z. John Zhang. Their analysis shows that “the storewithin-a-store arrangement can; in fact, be a sign of the retailer’s strength … one would expect to see the
store-within-a-store arrangement only in the stores of power retailers, as is commonly the case.”40
Therefore, copying the Chinese business model would not only be a way for Best Buy to stay price
competitive in a highly price sensitive market, but also to build credibility in the Chinese retail industry.
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Reassess the competitive advantage in China
Secondly, the company needed some point of differentiation from Gome and Suning. The main reason
why electronics retailers have and keep failing in China might as simple as the fact that they do not bring
anything new or more valuable to the consumers. Gome and Suning have a thorough knowledge of the
Chinese market and already offer a wide variety of products. While Best Buy could not differentiate with
its product range, it decided to use its consumer-centric strategy in China.
In the US, the services provided by Best Buy constitute a competitive advantage for the company, it is:
- Valuable to the customer, such service is of great significance for electronic appliances which tend to
become obsolete fast and which are often difficult to set up.
- Rare, as Marc Gunther put it: “Just try getting help from Amazon or Wal-Mart if you can’t figure out
why your TV or computer isn’t doing what you want it to.”
- Not difficult to Imitate, competitors could easily decide to provide extended services to their customers,
though it might take some time to implement.
- Difficult to Substitute, installation service can hardly be done in another way than by employees.
However competitors could find a way to outsource the services.
- Appropriable to Best Buy, “According to one analyst, such services, which can be highly profitable,
could bring in 5 percent of the company's $47 billion in sales in the fiscal year ending February 2010.”
(NewYork Times)
But was this even a competitive advantage in China? While the warranties and installation services are
valuable to Chinese consumers, it is far from being rare nor difficult to substitute. Indeed, as discussed in
the situation analysis, Chinese consumers can easily find these services in their local convenience stores
where they can get their electronics items repaired at a cheaper price.
Therefore Best Buy needed to modify its competitive advantage in China, the company was neither price
competitive, nor had a product or service offer that the Chinese consumers were ready to pay extra money
for.
Find a gap in the Chinese electronics retail market
While both Gome and Suning are extremely price-focused and offer an extremely wide selection of
products, there is still place for Best Buy to effectively differentiate. Indeed, there is not any competitor in
China which has positioned itself as a high-end retailer which has narrowed down the product offers to
only what is best on the electronics market (See Exhibit 7). This is specifically where we would
recommend Best Buy to position itself in China because it would provide them the consistent and logical
differentiation strategy.
Best Buy cannot possibly offer a wider range of products than its Chinese competitors Gome and Suning.
However, it can narrow down the options for the consumer and become the electronics retailer for the
upper-middle class Chinese consumers who do not trust the biased salespersons in traditional retailers and
who are tired of being lost amongst too many different products, making it hard for them to choose the
best products on the market.
Best Buy would provide a higher environment, with a product selection narrowed down to the best
options in the market. By copying the Chinese electronics retail business model, Best Buy would stay
price competitive but simply serve a segment of the market that had not been by a particular retailer
served so far.
13
In addition, it is important to note that this target is actually the fastest growing segment in Chinese
middle-class. Indeed, “when looking under the bonnet at China’s economic engine, it’s clear that a
growing middle class with rising disposable income and consumption is missing. Instead, there’s an
economy that is still dominated by state owned firms and state-led investment, as well as by rapidly rising
inequality. Instead of an enlarging urban middle class, China is increasingly splitting into a small upper
class that spends freely on luxury goods, and a remaining population whose earnings and savings are
eroded by inflation and state confiscation.”41
Moreover, the spending power of this Chinese upper-middle class is expected to grow at a extremely fast
rate in the future going from 9.4% of the overall Chinese population in 2005 to 59.4% in 2025 (See
Exhibit 8).
Stores’ locations
One of Best Buy’s most questionable strategies in China was the location of its stores which was not
considered convenient enough for middle class consumers who do not always own a car. However,
targeting the upper-middle class opens wider location possibilities for Best Buy. Since the majority of
upper-middle class households in China own a car, Best Buy could settle its high-end stores close to
neighborhoods with upper-middle class standard of living. In Shanghai, Pudong New Area and
Changning District downtown gather most of the upper-middle class.
Another advantage for targeting this segment class is that foreign expatriates tend to live in areas where
upper-middle class is settled. Opening its stores in the area they leave will enable Best Buy to reach its
target market while attracting expatriates who are already familiar with the chain.
The product and service mix
The presence of antiglobal consumers in China might have been underestimated by Best Buy in China.
“With regard to product mix, Chinese consumers are increasingly turning to Chinese brands. This is in
part due to a resurgence of national identity, the increasing quality of Chinese products and the fact that
Chinese brands are often priced considerably lower than foreign brands. This is particularly true of
consumer appliances and Best Buy China has been accused of not stocking enough Chinese SKUs.”42
Therefore, and along with the aforementioned differentiation strategy, we strongly believe that Best Buy
should narrow down its product range to the most up-to-date products with all brands, but highlight the
Chinese brands in its stores.
In terms of services, Best Buy should keep its extended warranties as optional services but it is not what
the company should rely on to differentiate itself. Instead, Best Buy should provide an enhanced and more
pleasant shopping experience for the upper-middle class. Delivery services, easy parking spots, luxurious
retail space, restaurant options... Everything at Best Buy should facilitate the consumers’ visit in a way
that is consistent with Best Buy’s consumer-centric vision, but in a high-end positioning.
14
China’s fast growing middle class is without a doubt a tremendous opportunity for Best buy to generate
profits abroad, especially in times where it struggles in its domestic market. However, China has proven
to be a very hostile environment for foreign electronics retailers in the past, and Best Buy was no
exception, the closure of its eight branded-stores in China in 2011 is a striking symbol of the failure of the
American electronics retailer’s strategy in this particularly complex country.
While Best Buy defined an effective competitive advantage in the US, its American business model was
not a source of profitable advantage in China. Perhaps the company should have stuck to its acquisition of
Five Star and simply expanded its stores. However, if Best buy did decide to play a significant role in
China, we strongly believe it should have copied the Chinese rental system in order to stay price
competitive.
Moreover, by observing the demographic trends in China, it appears that the upper-middle class is the
most promising segment of Chinese population. Therefore, Best Buy could have opted for a very different
positioning strategy and approach this upper-middle class with a higher-end retail experience. Thanks to
this strategy, Best Buy would have stayed consistent with its consumer-centric vision while effectively
differentiating itself from the two giant retailers in China -Gome and Suning.
Best Buy operations nowadays in China are based on “stand-alone” stores, described as “small stores
located in strip and similar retail locations”, because as mentioned above in China “the presence of storeswithin-a-store often indicates the strength of retailers, rather than manufacturers”43. This indicate that
Best Buy is following the Chinese model instead of focusing on their competitive advantage before
implemented wasn’t the best idea to enter China.
15
APPENDIX
Exhibit 1: Best Buy - Financial Hilights – 2007
Source: Best Buy’s 2007 Annual Report.
16
Exhibit 2: 2007 Best Buy China Total retail square footage
Source: Best Buy’s 2007 Annual Report.
17
Exhibit 3: Total stores 2009 International segment
Source: Best Buy’s 2009 Annual Report.
Exhibit 4: Total stores at the end of fiscal 2011
Source: Best Buy’s 2011 Annual Report.
18
Exhibit 5: Updated Farrell Framework/ Where to Offshore?
–1. Define the goal of offshoring (in comparison to existing locations)
–2. Establish the decision criteria and the weights that matter most to your company
–3. Draw up a long list of possible locations
–4. Collect data for each potential location, and forecast labor and other factors
–5. Rank locations in order of their attractiveness to your company
–6. Gather qualitative data (from experts, consultants, bankers, visits) on a short list and revisit the
quantitative analysis (add factors, change weights)
–7. Select the location (city and where in the city)
Source: Farrell, 2005
Exhibit 6: Sales revenue generated by foreign-owned retailers
Source: Euromonitor International, Retailing. 2010.
19
Exhibit 7: Determinant gap map of the Chinese electronics and appliances retail market
20
Exhibit 8: China’s Spending Power Forecast
Source: The McKinsey Quarterly
21
Exhibit 9: Map of Urban Districts in Shanghai
Source: Housing Choice in Affluent Shanghai
22
END NOTES / SOURCES
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