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Best Buy Closures Show China Ain't For Everyone


Best Buy's failure in China proves the world's most coveted consumer market isn't welcoming to all foreign retailers.

China isn't for everyone.

That's the answer I offer to the numerous individuals who question my decision to live here. It's also the answer the Chinese gave to Best Buy (BBY).

The retailer announced it's closing down its 9 Best Buy branded locations across China. I am far from surprised.

All of the points that make Best Buy a success in the US make it an utter failure in China.

Where Sears (SHLD) is the only major brick-and-mortar domestic competitor, there is no shortage of players in China. Electronics is an enormously fragmented market. And while there are nation-wide players such as Gome and Suning, electronics markets, where bargaining is standard, and small mom-and-pop shops are the preferred method of purchasing electronic goods.

Best Buy has expanded into a household name in the US where high-quality customer service is its specialty. Not the same story in China.

The brand is virtually unknown and while customer experience is key in the Chinese luxury sector, it is less than desired when it comes to electronics and the middle-market in general. Even if customer service was valued, there was little to appreciate. Customer service at the two Best Buys I visited several times was sub-par, at best. The Chinese purchase electronics on price and price alone. Due to the bargaining at electronic markets and online, such as at Taobao, Best Buy couldn't win on price like it does in the US.

As for the infamous Geek Squad, Best Buy could hardly begin to compete in this space as electronics repair shops line the streets and will do the job for a small fraction of the cost of Best Buy's service. Replacement parts are sold near cost.

Best Buy's failure is a reminder that reaching out to the seemingly holy grail of consumers -- the Chinese -- is proving far more difficult than imagined for those outside of the coveted luxury space.

First mover brands in China positioned themselves as premium. In many cases, brands considered average in the US are priced and perceived as high-end in China. For China's luxury market, higher prices actually drive sales growth. And localization tactics aren't as imperative.

But Best Buy is part of the new wave of middle-market retailers entering China to try and capture the country's emerging middle-class. They're coming to the retail party as themselves. Meaning, US strategies are being replicated, replacing the "mark-up and act luxury" strategy.

The Gap (GPS) opened two Shanghai locations recently and prices appear equal to the US and store layout and overall store experience is identical to domestic operations. American Eagle (AEO) will open in this spring and price levels and store experience are expected to resemble the US as well.

Only time will tell whether China's middle-class will be attracted to American clothing with no brand-name value at average prices lacking any sort of localization factors. Neither Gap nor American Eagle holds brand recognition among average Chinese, who have likely never had overseas experience, their only chance for exposure to either brand.

From my personal standpoint, I'm quite skeptical because the Chinese are wary when it comes to buying less expensive foreign goods. Like Best Buy, neither offer differentiation. Prices are at a slight premium to comparable local Chinese clothes, but offer little to no incentive for consumers to pay this additional price due to weak brand association. And due to the price level and lack of brand power, Gap and American Eagle will not be able to command the premiums with customer service as it remains unappreciated in the mid-market.

Futhermore, middle-class Chinese tend to save to purchase luxury items and from my understanding, would rather buy one very high-end purse rather than a shopping bag full of meaningless branded clothing.

Home Depot (HD) announced earlier this month that it closed down its last Beijing location as it struggles to appeal to the Chinese. And French-based Carrefour announced it is scaling back its China operations. So Best Buy is in good company.

China's luxury market is a thriving hot spot for Western companies. But the middle-market is proving harder to capitalize on. Retailers can dream of their China potential, but if their business model isn't appropriate (such as the big box that has, for the most part flopped) and flexible enough to tailor it to the local market, it won't be realized.

For retailers who like to think the global consumer market is a one-size fits all situation, they'll quickly be proven wrong in China.
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