Best Buy CEO indicates company will stay in China

Best Buy Co. Inc. CEO Hubert Joly suggested Friday that the company will stay put in China despite speculation on Wall Street that it will eventually sell off its operations in the world's most populous country.

In an internal memo that announced international President Shari Ballard also will lead human resources, Joly said the company remained committed to its foreign businesses, which includes China, Mexico and Canada.

"Our international businesses are a significant part of our company, and leadership of those businesses remains critical," Joly wrote.

In some ways, Joly's memo is his strongest endorsement of China yet. Since joining Best Buy last fall, Joly has conveyed skepticism toward the company's struggling international operations. The chief executive has devoted most of the company's resources toward stabilizing its core U.S. retail business, which generates most of its $50 billion in annual revenue.

Last April, Best Buy agreed to sell its 50 percent stake in Best Buy Europe to joint venture partner Carphone Warehouse for $775 million in cash and stock. Analysts suspected Best Buy also would divest its Five Star business, a local electronics chain that Best Buy acquired in China a few years ago. The business has struggled of late, due to a slowing economy and the end of China's stimulus program.

At the same time, however, China still holds considerable opportunity. The country has overtaken the United States as the world's largest smartphone market. Of the top five smartphone vendors in the world, two — Huawei and ZTE — are Chinese firms selling smartphones mostly in their home country.

With Five Star, Best Buy seems uniquely positioned to benefit from this growth. Although the company has shut down its big-box stores in China, Best Buy has continued to open Five Star stores and is testing a Best Buy Mobile store-within-a-store concept in some Five Star locations.

In May, Best Buy named Meng "Max" Zhou, a longtime retail executive in Asia, as its new China CEO. Still, Wall Street continues to doubt Best Buy's future in that country with some analysts speculating that the company hired Zhou as a type of caretaker to prepare Five Star for a sale.

Of China and Canada, it makes more sense for Best Buy to stay in the latter, said David Strasser, a retail analyst with Janney Capital Management. Canada's stores are profitable, and many of Joly's strategies toward fixing U.S. retail can also apply north of the border, he said.

"Canada was always going to be a part of Best Buy," Strasser said. "It's a legitimate and good part of the business."

China, however, is a different animal, Strasser said. The country has not yet generated the necessary returns to justify Best Buy's continued presence there, he said.

"I still believe China is a question mark," Strasser said. "Over time, China will either work itself out or it won't."

"He is personally engaged in our international business," Furman said.

In the memo, Joly revealed that Carol Surface, the current HR chief, is leaving Best Buy to join an undisclosed Minnesota company. Joly also sought to refute the idea that appointing Ballard to run human resources would somehow detract from her duties as international chief.

"To be clear, Shari also remains responsible for our international business," Joly said. "The addition of HR to Shari's responsibilities does not, in any way, diminish what is expected of her as President, International."

That might seem a lot of work for one executive but it fits Joly's preference for a lean, efficient management structure. For example, Chief Financial Officer Sharon McCollam also is chief administrative officer charged with revamping Best Buy's supply chain operations and real estate portfolio.

In addition, the sale of Best Buy Europe and the appointment of Zhou will help ease the burden on Ballard, a company veteran who formerly led human resources and served as co-head of North American retail.

Thomas Lee • 612-673-4113