Best Buy's retail magic apparently doesn't translate into Chinese.
Four years after one of the U.S.'s largest technology and entertainment retailers entered the world's most populous marketplace, Richfield-based Best Buy last week did a major about-face, closing nine of its nameplate stores in China and another one in Turkey, which it entered just two years ago.
Best Buy, which said its international retreat would cost up to $245 million, is just the most recent example of a U.S. retailer finding that stores don't export so well. Wal-Mart had four failed attempts in Asia and Germany from 1995 until 2006. Several years ago U.S. clothiers sampled the European market and failed because, by tradition and sometimes law, there was little or no Sunday shopping. Home Depot has been closing stores in China.
"You have to understand how those consumers think and you've got to fit what you're doing to reflect that," said Michael Houston, associate dean and international marketing professor at the University of Minnesota's Carlson School of Management. "For stores like Best Buy and Wal-Mart there are difficulties cracking into those markets."
As many retail experts describe the U.S. landscape as overstored, particularly in urban areas, more chains have eyed international expansion.
Take Target Corp. The Minneapolis-based retailer, which currently has no stores outside the United States, plans a major push into Canada in the next two years. In January, it bought the leases of up to 220 Zellers stores, a discount Canadian retail chain, and it plans to convert most to Target stores.
Even Best Buy, while it was stumbling in China, moved forward with its delayed expansion into the United Kingdom last year and has plans for Mexico and Canada.
Dave Brennan, co-director of the Institute for Retailing Excellence at the University of St. Thomas Opus College of Business, warned nearly three years ago that Best Buy may be overstepping its reach. He and a colleague, Lorman Lundsten, had studied the failed global expansion attempts of Wal-Mart. "They went too far too fast in too many areas," Brennan said at the time.
The professors concluded that Wal-Mart's strategy to get the lowest price from vendors couldn't always work in foreign countries.
But in some sectors, acceptance of U.S.-branded products can be wholehearted. "KFC is a huge success in Asia. So is McDonald's," Houston said, noting that Asian consumers are very brand-conscious. "Consumers attach different meanings to these stores. McDonald's might be a date place."
Although it closed its branded stores, Best Buy will concentrate on the Chinese marketplace with Five Star, a Chinese chain in which it acquired a controlling interest in 2006. At the time there were 136 Five Star stores, and Best Buy has added some the past five years, bringing the total to 159. Now it wants to accelerate that by adding 40 to 50 outlets in the next two years.
"Having the humility to accept that we do not have all competencies to succeed in China and other emerging markets is critical," said Kal Patel, president of Best Buy Asia, in an e-mail. "Our acquisition of Five Star has been key to being able to create a viable growth option in China."
Best Buy's branded stores in China were similar to its U.S. stores, where products made by different manufacturers sit side by side by category. Computers in one section, printers in another, for example.
But in China, shoppers are used to smaller stores crammed with technology products that are bunched together by manufacturers and sold by clerks licensed to that manufacturer. Thus there is less comparison shopping.
There is also an active black market that undercuts what retailers can charge, Brennan said.
Brennan said household products, such as appliances, are much smaller by U.S. standards because of cramped living quarters. He said Chinese consumers also value price over quality.
"They would rather trade down rather than trade up," Brennan said.
Nonetheless, Best Buy says its purchase of Five Star has been a success. In a December presentation to Wall Street analysts, CEO Brian Dunn said that year-over-year sales for the chain were up nearly 30 percent with "significantly" improved operating margins.
"I'm very pleased with the continued growth and profitability of that business," Dunn said.
Piper Jaffray analyst Mitch Kaiser said the decision to abandon the Best Buy brand for Five Star in China makes sense, noting that's the format that works there.
"Retailers get in trouble when they open a bunch of stores in a country without understanding the customer," Kaiser said. "You should put in a couple of stores, see how the market responds and then tweak the model."
Best Buy has taken a similar tack in Canada, where in 2001 it bought Canadian chain Future Shop, and in Europe, where it partnered with mobile phone giant Carphone Warehouse. It has branded stores in both markets, too.
The company said it researches local consumer knowledge when deciding how to brand a store.
Patel said the brand name overseas does not necessarily need to employ the same business model used by Best Buy in the United States.
"Going forward we will always be seeking innovative local partners in new markets," Patel said. "Good local partners help you challenge your business model orthodoxies [and] assumptions and teach you how to make money in the new market."
David Phelps • 612-673-7269