Now with the world’s second largest economy and a government bent on getting consumers to empty their pocketbooks, China might seem like fertile ground for foreign retail giants.
But as many of America’s best-known firms have learned from experience, potential doesn’t necessarily equate to success. Their missteps provide lessons for other firms, large and small, which seek to stay cautious while ensuring they don’t miss out on opportunities in markets where the door is slowly creaking open, such as India.
Best Buy in December closed its last remaining affiliate stores in China, exiting the market to focus on North America in a move reminiscent of Atlanta-based Home Depot Inc.’s complete retreat two years ago.
Just a year before selling off 184 stores, Best Buy claimed its China brand, Five Star, was a bright spot. That was after closing all nine of its own branded stores in 2011 facing massive competition from domestic competitors and realizing that its model didn’t fit just right.
Home Depot claimed a similar epiphany about upon shuttering its last seven stores in 2012 after six years of gradually sloughing off non-performing outlets.
China, the company had found, was a “do-it-for-me” market where the middle class prefers to hire cheap labor to outfit their homes, most of which are purchased new as simple shells awaiting custom finishes.
B&Q, a British chain that competed against Home Depot in China, seemed to have cracked that code by offering design and remodeling services, but its success also gradually eroded. In December, it sold a 70 percent stake of its dwindling Chinese operation to a local retailer for £140 million (about $212 million).
At the outset, Home Depot executives spun their post-closure plans in a positive light. They gushed about China’s prospects in e-commerce and heralded a new strategy where specialty stores would sell paint and flooring direct to consumers and designers. In a 2012 interview with Global Atlanta, then-Chief Executive Frank Blake called the market “too big to ignore.”
“We’re not deterred from going overseas. We just learned lessons,” he said at the time.
But by the next year, Mr. Blake had changed his tune, arguing that even the most significant of forays abroad wouldn’t justify shifting resources away from the bread-and-butter market of North America.
“Since our June 2012 conference we exited our big box stores in China and we have no intent to build stores in other areas of the world, and here is the main reason why: In the second quarter of 2013, the three months of May, June and July we grew comp sales in our U.S. business by approximately $2 billion in three months. A wildly successful venture into a foreign country might yield $2 billion in sales after a decade of effort. So opportunity and capital efficiencies strongly argue for intense focus here,” he said.
That squared with a seemingly nonchalant comment made earlier by then-Chief Financial Officer Carol Tome, who downplayed the $160 million financial hit incurred from closing Home Depot China, which she said amounted to a “rounding error” in the grand scheme of things.
That thought process actually makes a lot of sense for American multinationals that look at quarterly results, said Tamer Cavusgil, a marketing scholar and executive director of Georgia State University’s Center for International Business Education and Research. When considering foreign expansions, they have to consider the opportunity cost of their investments — how that cash might be used more productively at home.
While justifiable to shareholders, though, it doesn’t set a company up for success internationally, especially given the variety of hurdles faced by foreign retailers in emerging markets: regulation, competition, entrenched loyalty to domestic stores and the high costs of developing a local supply chain, Dr. Cavusgil said.
“You need to have the stomach to endure and withstand early resistance and establish yourself in the long run,” Dr. Cavusgil told Global Atlanta.
Home Depot has since left the country completely, shuttering even its small specialty stores and the e-commerce operations it touted as promising.
Understanding Local Conditions
Visiting the retailer’s former stronghold of Tianjin, a city where five of its 12 Chinese stores were based, it was easier to get a sense for how the deck is stacked against foreign firms, especially in the home improvement sector.
Shuttered Home Depots visited had rusted bars, fading letters and metal chains on glass doors. At one location, next to a crowded McDonald’s and across from a government building, a sign in the window still read, “This location has gone bankrupt.” That was appropriate: When Home Depot closed, it left completely and simply wrote down the loss. On at least one occasion, a sudden shutdown of operations led to a “hostage situation,” where managers were trapped in the store by angry employees.
After being denied an interview at the now-closed specialty stores in a large Macalline mall, a reporter headed to the postage-stamp-sized Sherwin Williams next door to gain some perspective. Gregarious salespeople said they had a tough go of selling high-priced, low-chemical paint, even to health-conscious consumers. The speculated that Home Depot didn’t have enough people to cover that learning curve.
That problem didn’t exist across town at the zhuangxiu shichang, a local remodeling warehouse – much larger than a Home Depot – laid out more like a farmer’s market for home goods. Festooned with flapping, colorful flags, the giant single-story market spread out in the shadow of gleaming high-rises advertising new office spaces. This was the big-box, Chinese style: an open market chopped up into tiny, privately owned compartments selling specialized items – bath fixtures in one, flooring and cabinets in another. Each was staffed by an enterprising salesperson ready to deal directly with customers.
Origin to Exit: What Went Wrong?
Home Depot’s standard line has been that it failed because it found out China is a “do-it-for-me” market, but that leaves a lot of unanswered questions, the answers to which might provide clues for retailers that come later.
According to the New York Times and other sources, Home Depot seems to have indirectly outsourced its initial push into the country. Du Sha, a former academic from Nanjing, had founded the Tianjin-based Home World hypermarket chain, giving him access to retail real estate, and was apparently keen to get into the home improvement game.
As early as 1996, he and a team reportedly received training at Home Depot stores in California, and Home Depot’s American executives even suggested he paint his stores orange. He took their advice: The Home Way, which some news services went so far as to call a “clone” of the Atlanta-based chain, used the very same orange and white color scheme. Imitation must have been a form of flattery: Home Depot executives praised Mr. Sha as an ideal partner when they bought out his 12 stores.
It’s unclear whether The Home Way started with the end goal of being bought by Home Depot, and Mr. Sha could not be reached at his new company, Pacific Links International, a Canadian firm that designs golf courses. But the question remains: If The Home Way was floundering, why did Home Depot buy it? And if it wasn’t, what changed?
Annette Verschuren, who headed up Home Depot’s successful Canada operations and was picked to tackle the China expansion, knew very early on that DIY wouldn’t work in China.
During a 2007 interview with Canadian Business magazine, she said she had already learned that 70 percent of Chinese homeowners’ spending focused on finishing out apartment homes in high rises and that people have little space for tool storage. “When you look at how people renovate homes, they get a cement box and finish it completely themselves,” she was quoted as saying. Home Depot would have to offer more tile, flooring and finishes, and less lumber, plants and outdoor fixtures. She also said China has a strong bargaining culture, which might require more aggressive sales instead of an everyday low price model. Ms. Verschuren, now founding CEO at Canada-based NRStor Inc., did not respond to emails seeking comment about Home Depot’s China strategy.
Foreign retailers are often driven to China by ambitious boards of directors who read the headlines and worry about missing out on growth there, says Aram Rubinson, an analyst at Wolfe Research.
But this top-down approach has left big-box retailers, almost to a man, battered and bruised. Individual brands, especially at the luxury end, have fared better because they’ve built on other retailers’ foundations.
“It’s not worth the effort when you’re laying in the infrastructure; if you’re a brand and you’re selling in, whether you’re Burberry or Prada or something else, that becomes a little easier, Mr. Rubinson told Global Atlanta. “To be the four-walled box has not been a lot of fun.”
[pullquote]”To be the four-walled box has not been a lot of fun.”[/pullquote]
Many academics who have speculated about the causes of Home Depot’s failure were cultural. One rumor goes that Home Depot’s servant leadership model, where executives wear orange aprons, flopped in China’s top-down business culture, where bosses command utmost authority. A former employee also hinted that the bureaucracy in China was more than anyone bargained for, causing problems in getting products through customs.
In a thesis while studying under Dr. Cavusgil at Georgia State University, Betty Feng looked at the closures of Home Depot and Best Buy specifically. She concluded that both tried to apply their U.S. business models to an environment with different buying cultures and aggressive local competitors.
May Gao, a researcher at Kennesaw State University, spent five years on the case, interviewing 37 people including Home Depot employees, executives, store managers, customers and competitors’ customers. She concluded that Home Depot should have opened smaller “urban boutique stores” targeted toward affluent clientele, particularly women newly empowered to make design decisions.
“You cannot ignore women in the home improvement business. It is especially important that Home Depot consider Chinese women as key purchasing agents,” Dr. Gao wrote.
Home Depot also should have taken advantage of its position as a trusted foreign provider of high-end products. Its brand had little recognition in China, and customers didn’t feel its American cachet, according to Dr. Gao.
“Products are too cheap and simple at Home Depot. Poor people are the only group in China who would bother taking on a DIY project, because they cannot afford to hire others,” she quoted one shopper as saying.
For that reason, she also said Home Depot also should have positioned itself better with contractors who would actually be doing the work for young couples who buy homes as a prerequisite to marriage but don’t have the desire or skills to do labor themselves.
Cutthroat Competition
At a B&Q store in the southwestern city of Chengdu, China, consumers expressed some of the same basic sentiments to Global Atlanta.
Dou Wenjuan, a 24-year-old real-estate marketer who gave the English name “Sun Rain,” had come to pick out bathroom fixtures for the house she and her new husband recently purchased. She was raised with the impression that only poor people do manual labor, and her parents urged her do well in school so she could get an air-conditioned office job, she said.
“We are too, too lazy,” she said of herself and her husband, smiling. “At my house, if we had broken bulb, my husband won’t change it.”
Ge Weimin, a middle-aged customer, lamented that the younger generation was completely inept at home improvement work, and he didn’t see that changing soon. He was buying a small part to fix some furniture, hoping to instill some ingenuity in his kids.
Across Chengdu at IKEA, the Swedish furniture and home goods giant, was different story. The store was bustling on a Thursday evening.
One customer, a young professional in her 20s, said IKEA offered her a place to hang out while picking up design ideas for her new home. It’s a more creative space than B&Q, and the restaurant provided an added incentive to come in, she said, noting that her boyfriend would arrive later to eat dinner. Apparently, IKEA’s role as a meeting place has caught on: IKEA has reportedly become a crossroads for senior romances.
Wei Yongshi, a retiree, had already found love. He and his wife often travel together and have visited every province in China except two. They had joined their son and grandchildren on an evening excursion to IKEA to buy furniture, which he said was made without the same noxious chemicals used in local production. “You can tell by the smell,” or lack thereof, he said.
But there was another reason he picked a foreign retailer: aspiration for a better life, achieved through spending. After a 2008 earthquake decimated parts of Sichuan province and killed more than 50,000 people, the former teacher just didn’t see the point in storing up more wealth.
“Saving money just isn’t a safe bet. It makes no sense.”
