Bye-Bye, Best Buy (China): You had it coming. [UPDATED]

[23 Feb: Multiple updates to be found at the end of the post!]

Late last week the Chinese media started reporting rumors that Best Buy, North America’s dominant electronics retailer, was planning to shut down its branded stores in China. Rumors like that don’t start from nothing – the company’s stores have been empty for years, and rumors have circulated about all kinds of management problems. Still, that didn’t prevent the company from formally denying the closure rumors yesterday … and then shutting them down today, Tuesday. An image of Best Buy’s flagship store, shut down and locked up, around 4:00 this afternoon.

So what went wrong?

Late in 2007, just as Best Buy was getting ready to roll out its first branded store in China, I sat down with Bob Willett, then the CEO  of Best Buy International (he’s since retired), in a cubicle at the company’s HQ south of Minneapolis. It’s funny: four years ago seems like ancient history in China terms, but even then there was a strong sense – at least at Best Buy – that they were late to the China market, and had much catching up to do. When I asked Willett why Best Buy was entering the China market at that late date, his answer was concise: “China’s going to be the biggest economy, or second, and it would be just unbelievable if we’re not there (the article for which the interview was conducted can be found here).”  Note that Willett didn’t say that there’s a market opportunity in Shanghai, just that it would be “unbelievable” if they weren’t there. In the two years running-up to the launch of the brand in China, the company would hire a consultant (dunnhumby, whose website claims: “we put genius into making sure that our people and our clients get to know and treat their essential customers better than anyone else.”) to tell them what they wanted to hear: that there was consumer demand for Best Buy in China. But the decision to move in was much more seat-of-the-pants, and had little to do with any pent-up demand in the market.

The second thing that jumped out of the four-year-old transcript came in response to my question about how Best Buy would differentiate itself in an already crowded, highly-competitive and extremely price sensitive Chinese retail electronics marketplace. Willett, like several other Best Buy executives involved in the company’s China venture, patiently, and a bit condescendingly, told me that some Chinese consumers were willing to overlook price in favor of service, and that – all things considered – Best Buy was going to distinguish itself on service:

“We’ve become a service company in North America, and that’s what we’re doing in China, too. Generally, though, you don’t have a lot of natural homegrown talent in China that knows how to do it. So we’ve had to create it ourselves.”

Now just pause for a moment to take that in and parse it: Best Buy didn’t enter China intending to hire talent that knew how to be successful in China. Rather, it entered China intending to create talent that knew how to be successful in North America. That might work very well in Canada, where the retail culture is decidedly service-oriented, but it was going to be a hard, hard road in China where – even Best Buy’s internal studies showed – price was still king for most consumers.

They would self-inflict this lesson upon themselves by locating the flagship store within two blocks of a Gome and a Suning (China’s two biggest electronics retailers), both of whom – in image, if not reality  – were able to undercut Best Buy’s prices significantly. But here’s the insult that makes it even worse: before opening in Shanghai, Best Buy’s management told me, over and over, that “our market studies show Chinese consumers like to try out products,” and that Best Buy’s interactive displays would take advantage of that predilection, put the company over the top in Shanghai. Lo and behold, it was kind of true: Shanghai’s shoppers would go to Best Buy to try out products – and then promptly march across the street to one of the other Chinese retailers and buy them for less (in stores with much deeper production selection, no less). And here’s where the Best Buy model truly failed: in North America the company has no major competitors, and even if it did, customers would have to drive to find them – because the store outlets are typically located in suburbs, surrounded by giant parking lots . In China, however, the company located its stores in urban environments where customers could walk to the competition and did. In that environment, no amount of service is going to help a company compete: you’ve got to win on price.

In any case, only Best Buy has the research to show why its Chinese stores massively failed. But as someone who lived (past tense, Adam, past tense) near the flagship store, and who walked through it on occasion, I think the answer is two-fold: the prices were too high, and the service was not much better, and often significantly worse, than what you’d get at other retailers. To be sure, when the flagship opened, the service standard was outstanding, but in no small part due to the fact the company had been training some of the employees for more than a year. But as it expanded in Shanghai, that initial talent was diluted, resources for training could never match those expended on people hired at the flagship store, and – most important – the available talent pool in China’s big cities simply wasn’t going to make a career out of working at a Best Buy. So, in my case at least, that translated into witnessing Best Buy employees playing grab ass on the sales floor and, in another notable instance, being offered a stolen iPhone in the middle of Best Buy’s mobile phone display section. Could Best Buy have afforded to train longer, and hire better? I have no idea, but as a self-proclaimed service company, one would think that they would have asked that question before entering China. Alas, that’s not how Willett and the other geniuses  who cooked up this China entry plan were thinking. Rather, like most of the failed China strategies I’ve seen, the failure stemmed from one problem above all others: the foreigners were convinced they knew better than the local market. Turns out, they didn’t know anything.

[Addendum: A special note regarding Redmond Yeung, who served as COO of Best Buy China for years. He jumped ship last year, and is now running – and botching – Gap’s entry into the China market. Nice job of failing upward, sir. Below, a photo taken at the flagship store’s grand opening: left to right, Yeung, with former Minnesota Governor, and likely GOP presidential candidate Tim Pawlenty, and Lu Weimen, the Chinese national who ran the company before Yeung replaced him. I could be wrong, but I’m all but certain that he’s the only Chinese national to have had a senior leadership role in this debacle.

]

[Addendum II: In response to a couple of emails, let me note that I would have loved it if Best Buy had succeeded in China. In part, out of Minnesota pride (I’m a native, and still consider it home) but also because I liked being able to shop for electronics in China without having to bargain, worry about buying fakes, or not being able to return items. The laptop upon which I’m writing, right now, was purchased there, as was the printer to my right, the speakers in front of me, and the iPod in my gym bag. I’m as sorry, and as irritated, as anybody that this happened.]

[Addendum III: A few folks have pointed out to me that I’m only focusing on the negative in Best Buy’s closure of its branded outlets, and not the positive. Namely this positive: the company has closed the branded outlets in order “to focus on expanding the more profitable domestic chain it acquired five years ago.” It’s true: Best Buy owns 70% of Jiangsu Five Star, a low-end consumer electronics retailer based in Nanjing. But you would have to be particularly susceptible to corporate spin if you believed that the millions of dollars in charges that Best Buy is taking over the closure of the branded stores, in some of Shanghai’s most prominent retail locations, is anything but a massive strategic and financial failure. Jiangsu Five Star was acquired to help Best Buy learn the market, and provide it with a lower-end retailer that it could use to springboard wealthier consumers into higher-end Best Buy. Needless to say, Best Buy learned little to nothing from Jiangsu Five Star, and it has just conceded the high-end of the Chinese consumer electronics market to others. Perhaps they can turn this disaster into something positive, and make Five Star a solid competitor to market leaders Gome and Suning. But, considering how badly Best Buy just screwed up its branded stores, there’s little assurance that they can. Or, put differently, how do you think the old management of Five Star – the ones who still hold 30% equity – are going to react when the suits from the US show up and tell them, “We’re going to start focusing on customer service.” Don’t be fooled by the spin. [Correction: Calvin Chin comments, below, that Best Buy bought the remaining stake in Five Star in 2009. Apologies for the error!]]

[Addendum IV: This is too much. In the official company press release, Best Buy calls its shuttered Chinese stores: “Best Buy-branded test stores.” [italicization mine] This sort of ass-covering is typical of the PR profession, I know, especially when practiced in service of multinational companies that reimburse for business class. But it’s particularly shameless in a case such as this one, where the so-called test stores cost the company tens if not hundreds of millions of dollars, and priceless prestige in the China market. Apparently, accountability isn’t something that’s being stressed around the Best Buy offices these days.]

34 thoughts on “Bye-Bye, Best Buy (China): You had it coming. [UPDATED]

  1. So Gap is lost. What do you think: is Mediamarkt making the same mistakes as BB? And Apple seems to be doing pretty well now, but going for the upscale model.

  2. No Adam, it’s not Best Buy that’s wrong. It’s the Chinese who are wrong for not recognizing that service is important. How dare they go around buying cheaper products when they can leave a Best Buy store, having being served by someone with all the insight and skills provided by North American service culture.

    Foolish Chinese. You will regret losing Best Buy service culture!

  3. WOW. … really comes as a shock.

    I was just there on Sunday, and I am not sure many people were in on the plans. Certainly, given the fact the place was FULLY stocked, this was not some planned out drawback (as you would have found in most US Borders stores 12 months ago).

    Anyway, I would agree that there were problems, but given the amount of investment that BB had put into Shanghai, I was hopeful that they would turn the corner. Yes, it is cheaper to go around the corner (sometimes), but you can buy a fake LV in front of the LV store as well.

    Wonder who will move into replace the real estate.

    R

  4. Fons – I think what differentiates an Apple, or even a Gap, from Best Buy is the fact that they sell their own products. Best Buy – and Mediamarkt – have to compete with the local retailers to sell the same stuff. I haven’t been to Mediamart and I don’t know much about them, so I really can’t say if they’re making the same mistake or not. But I have to think it’s a huge challenge to compete on those thin margins in a foreign country that gives you no advantages.

    Rob – This post is pretty negative, and I should probably clarify and say that I would shop there, and I was glad to shop there, and I hoped it would stay open. But my reasons for shopping there – I wanted to know that I was getting new, authentic products – are not the reasons that most of their customers were there.

    That’s some serious real estate – who’s going to pony up for it? Apple?

  5. Ouch, but frankly well deserved. As your fellow MN native, I hope that this is ends up being a useful case study for future market entrants.

    I cant help but wonder who is buying up all that excess inventory(especially considering how quick it closed).

  6. You are only telling half of the story here. The other half is that the company is opening another 40 – 50 Jiangsu Five Star outlets over the next year or so. Compared to shutting down less than ten Best Buy units that sounds pretty good to me.

  7. TC Belle – You must be joking, or a PR flack. The idea that Best Buy is shutting down its branded stores “to focus on” Five Star is the sort of thing that PR professionals pride themselves on cooking up. But don’t be fooled by this kind of BS: the closure of the branded stores is a massive failure, requiring Best Buy take huge charges, and accept a major face loss for the company in China – particularly with its partners in Five Star (who still own equity), and its suppliers. Put it this way: how do you think the mainland Five Star management is going to feel next time Best Buy calls and suggests that it needs help with its customer service platform? In any case, the company always intended that Five Star be a part of a two-pronged approach to China, with Five Star focused on the lower end of the market, and Best Buy on the top end. Well, Best Buy just conceded the high-end market – one prong – and now it’s doubling down on the remaining one. Don’t be fooled by the impressively crafted, but preposterous, spin.

  8. Depends on how “local” Five Star is. I went to Best Buy for peace of mind. Bad experiences dealing with Gome while shopping made me decide to shop at Best Buy in the first place. If Five Star is just as “local” I won’t be going, that’s for sure.

  9. Calling the Shanghai stores “test stores” isn’t spin. It’s a lie. An outright, bald-faced lie. To shareholders.

  10. I heard on the radio this morning that the Five Star stores in Hangzhou are shut indefinitely too. So maybe they are pulling out of China altogether?

  11. Nice post on the issues with BestBuy but don’t see how you can link Gap to this? Every time I’ve been passed or into their Huai Hai Lu store it is absolutely rammed with people, seems like they are doing pretty well!

  12. Scooter – Fair point re Gap. Last time I was over there, in January, they were packed, and there was a line for the register. Of course, Best Buy was packed, too, during its first months, so I think we really have to wait and see. However, my wider point in re to Gap was two-fold: a) they hired the person who managed and nurtured Best Buy’s China strategy through most of its short, sorry life; and b) the Gap launch has been less than impressive, marked by an opening press conference held in Tokyo, and product selection not being tailored to the Chinese market, but rather explicitly copied from the Japanese stores (aren’t all Asian markets alike?). We’ll see how this holds up – I know many brand and marketing folks in China are EXTREMELY skeptical.

  13. Yeah, I also saw a lot of grabass at BB. The staff tried not to help me a few times, despite my Mandarin lang ability. I like MediaMarkt, and I hope they can make it work. Living in the HuaiHaiLu area I would rather make a trip there than deal with Pacific Mall (slooowwww) and/or the CyberMart (yeccchh) at Xizang Lu. Also, I purchased a product that didn’t work when I got it home and when I returned it, MM replaced it painlessly.

  14. Pingback: Trying to Make Sense of Best Buy China Closures | China Hearsay

  15. I’m disappointed at this news. I’ve purchased a number of items at Best Buy over the past few years. One of the reasons I paid more for products at Best Buy was for their (extra cost) product protection. I brought back a broken vacuum recently, and sure enough, it was repaired free of charge. I’ve also used their Geek Squad on occasion. It was nice to have a retailer for electronics with the kind of guarantees and service backings of a large corporation like Best Buy. I’ve been to Suning ang Gome, and did not enjoy the shopping experience. I guess I’ll be a MediaMarkt customer from now on… until that gets pulled as well 🙁

  16. I’m surprised by the store closings and appalled that the company is claiming that they were “test stores.” Says a whole lot about management that they’d outright lie to shareholders like that. Scumbags.

  17. Actually, BBY owns all of Five Star. http://www.chinadaily.com.cn/bizchina/2009-02/16/content_7480360.htm

    I think it’s possible to take the “test stores” spin with a grain of salt and square the circle with what I agree is a substantial failure. Depending on how big the write down for this failure is, and in the context of overall sales and profitability, I think it can be seen as a _failed_ test. If they had opened only one store and then closed it, maybe we would all agree that it was a failed test. But what could one learn from that failed single store? If I were a shareholder, I wouldn’t have a problem with either the fact that they tested multiple stores and spent several years trying to get the model to work (although I agree with your points that maybe they weren’t trying smart enough or hard enough), and after seeing that it wasn’t working, they pulled the plug. Better than pouring more money into a sink hole. Time to go back to the drawing board and see if other strategies wouldn’t have more success.

  18. Calling these “test stores” reminded me of what happened when NTT docomo pushed out their cellphone payment terminals to certain restaurants and shops in Shanghai. Practically no one used them because they didn’t even bother trying making it relevant to the locals (how many of you have heard of “iD-credit”? Thought so). When they withdrew the terminals, they called the whole thing a “test run” when it was most definitely not marketed as such “at home”.

    And about Gap- The annoying thing with them is that I went to them assuming that they’d keep at least a few US items in stock for people like me who can’t quite fit into the Japan-sized stuff. But noooo…

  19. Calvin – First off, thanks much for the correction. I’ve noted in the post, above, and credited you.

    The “test store” issue still troubles me. We don’t know the full cost of the write-down, in part because it’s packaged into the shut-down of the Turkish stores (also labeled test stores), some Five Star and US Best buy openings, and supply chain improvements totaling between $225 – $245 million over the next two years. How much of that is China? Beats me. $100 million? I guess my objection to the “test store” claim is in the wider context of Best Buy announcing all of this in a press release titled “Best Buy Announces Actions to Generate Improved Returns for Shareholders.” This sort of PR happy talk drives me nuts, and is expressly designed to force reporters into telling the good side of this story (if there is one – I’m not sure that they would’ve bought Five Star if they knew that the branded stores would eventually fail) rather than the dark one. Anyway, thanks for the great comment!

  20. Curious to know for those in Shanghai – what were the margins between BB and places like Gome? Did BB have access to the same suppliers, or did they have to add ‘export taxes’ for certain items?

  21. Media Markt should do better being part of the Metro group who have been in China since 2003 in numerous cities. Although Metro stores are often big box stores selling based on price and bulk. Interesting to see how they go.

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  23. The same thing is happening with BB here in the UK/Europe. They are getting their arses handed to them by the local competition — and all the senior executives have bailed out since last summer….

  24. It’s a shame. I really liked Best Buy in Shanghai – it was the only place I would shop for electronics. The other stores just aren’t trustworthy. I was happy to pay more for a better experience. Why don’t you look into and write about BB’s biggest problem – their trouble in getting good retail space reportedly because of some underhanded dealings by their competitors and their friends in local governments. If true, that would be an interesting story. I really don’t see the claimed arrogance angle – BB was just trying to bring a new service model to the market – a badly needed one. To some extent, I think consumers get the retailers they deserve.

  25. Jay – Those real estate problems are, reportedly, more than reportedly. Tried to get a handle on that four years ago, actually, but couldn’t get people to talk (enough) on record. Still, even with the overhead too high, the model simply wasn’t working, and wasn’t thought through. Anyway, I tend to think that there were people who wanted the BB service model, but not nearly enough (like I said, I loved shopping there). Price, I think, is still king.

  26. Pingback: The failure of Best Buy in China | Matthew Scott Leonard

  27. Add me to those curious about what will take over the space. Yes it’s next to Xujiahui but still hard to get to from there – requires navigating that pedestrian overpass from hell.

    Will miss the place. I will be at a total loss next time a computer breaks, now. And I have two years left on an extended warrenty on an Ipod from there, which I doubt the wankers at Apple will honor. Can I mail in to Best Buy in the US when my Ipod invariably dies after a year?

  28. Out of curiosity I wandered over to Media Market to check it out – it is a great store, clean and extremely comprehensive. I bet about twice as much floor-space as XJH BB. But it was almost totally empty. I mean, BB was hella crowded at all hours; at MM I was the only person wandering some floors. Admittedly this is at 5 PM on a weekday, but it does not bode well, unless they got a really sweet deal on the lease. The location is also really inconvenient, exactly half-way between Shanxi and Huangpi metro stops.

  29. Pingback: On Best Buy’s Departure | Sinosplice

  30. “And here’s where the Best Buy model truly failed: in North America the company has no major competitors” Um. Isn’t that because BB put them all out of business?

    Seriously, go to BB if you don’t want fake stuff. Now I have to shop with the ever present (am I getting ripped off because I’m white) cloud of anxiety hanging over me. Damnit.

    As for positioning directly beside your biggest competition, all businesses do that. You’ve never seen 2 gas stations beside each other? Ever thought it was redundant? It’s not, it’s basic Economics.

  31. Hi Adam, Good article and heart-felt. Been there done that, to beat the old cliche to death.

    I worked in corporate America(sometimes for corporate 5 companies, and yes I mean corporate 5 not 500, as in I worked for some of the best). Before the apocalypse(Y2K, dot com bust, 9-11, and outsourcing, etc, ad infinitum)companies would throw millions away. I worked on a 50 million dollar project that got shelved after 18 months. The reason: “It just became unworkable.” It happens every day in corporate America and then it’s cya. The people who are affected in the worst way are the customer and the average Joe employee.
    Once again, very good article!

  32. @Lisa and all other curious people- Media Markt has just put out an advertisement saying they’ll honor those.

  33. Sad. But the real sadness comes from the closing of the Barbie Store…..(but who really gives a sh@t?)

  34. I know how Chinese people think: they entered Best Buy and thought “Wow, (1) this store is REALLY nice, comfortable but obviously must have been expensive, (2) this is a U.S. store so they are probably trying to push U.S. prices, (3) I can just get the good service for free, figure out which products I want, and then go try to buy them for cheaper at other places in XuJiaHui, etc. It’s that simple and it’s not irrational. I did this myself in Shanghai for many electronics (although I did buy my laptop from BB).

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