China: Enormous Opportunity, Enormously Difficult

We just finished up a week of meetings and store visits in China. The amount of information we now have on the market could fill a thimble—a few trips hardly qualifies one as an expert. Of course, that won’t stop us, so here goes.

The statistics, as we have discussed before, boggle the mind. A population of 1.3 billion people, a rising economy and over 250 cities with more than a million people presents opportunities at nearly every turn. What could possibly go wrong for companies who are positioning themselves to do business in what will easily be the world’s largest economy in the not too distant future? Plenty, as it turns out.

During the week of our visit, two unrelated news stories caught our attention. The first is Best Buy’s decision to close their nine branded stores in China. While they will still have an investment in a Chinese electronics retailer, Five Star, closing their eponymous brand feels like an early signal of defeat. Observationally, the Chinese market for appliances and electronics looks and feels very different than the U.S. Price dominates and the stores are loud and noisy, populated by brand supplied salespeople in an environment where negotiation is expected. Gome, the large Chinese retailer, currently dominates. Best Buy, with an elevated customer experience, was way out ahead of the curve.

The complementary story of the quiet closing of the six story House of Barbie flagship store in Shanghai was even more surprising. This much written about experiential store was the global equivalent of American Girl and had just opened in 2009. The costs to operate, and/or the costs to close both had to have been substantial. This is a store that was more a brand builder than a money maker, even at the outset. It must have been losing even more money than even planned to pull the plug this early. Since Barbie’s owner, Mattel, is not a retailer, we would suspect some significant miscalculations on their part in what it takes to operate a Flagship retail store.

Home Depot is also in retreat, closing the Beijing outlets acquired when they purchased local retailer Home Way. To be equal opportunity with International struggles, the French DIY chain Saint-Gobain is also pulling out of the China market. The DIY market in China is far less developed, as apartments tend to come fully equipped.

The China market is large (and growing at incredible rates) but is also intensely competitive. Local regulations further hamper foreign businesses and bodies in the store (of which there are lots) don’t always translate into high sales. Average transaction size and sales density are quite low (in most cases) for now. The market is “open” but you’re never very far from remembering that this is a Communist country tightly controlled by the government. We couldn’t access our Blog page in China—censored (apparently) by the government!

This is definitely a market where investing for the future is required—quick returns are likely not there. Exceptions include a booming luxury goods market and a preponderance of very successful (think KFC) fast feeders. As the large global retailers (Auchan, Tesco, Carrefour, Walmart) battle it out, China will be a fascinating retail landscape to watch over the next decade. It decidedly is not, however, for the faint of heart.