2011 was marked by two notable American retailers who both chose to exit the Chinese retail market: Best Buy and Home Depot. Given previous comments by the executives from both companies about the relative importance of selling to the growing Chinese middle class, these exits were as surprising as they were unsettling. Surprising because access to China’s consumers has long been the holy grail that multinationals have been pursuing in China specifically, and in emerging markets more generally. Unsettling because the inability of two competent channel-leaders in their respective market segments to sell to middle income Chinese (Home Depot for the DIY consumer, and Best Buy for the electronics consumer) begs the question of what each company missed in terms of developing a successful strategy to accomplish their goals.
The reasons these companies exited China has been batted around by a number of journalists and market researchers. In the case of Home Depot, not taking into account that a DIY culture simply does not exist in China like it does in the United States was certainly one fatal flaw unique to their business model. Home Depot either overlooked, undervalued, or believed it could change the Chinese consumer’s preference for how the traditional empty apartment was finished and furnished in such a way as to create demand for a DIY culture. For Best Buy, issues with brand recognition in comparison to established Chinese retailers like Gome, as well as the problem of similar (note this does not mean equivalent) products being sold at cheaper prices by other Chinese retailers than what Best Buy could offer proved to be terminal issues. Best Buy’s higher quality was, surprisingly, not so much misunderstood by Chinese consumers as it was not valued enough to make up for the higher cost.
Regardless of whether pundits believe that better market research or a more highly tuned strategy might have allowed either company to be successful, the bottom line is it takes guts to try and transplant your business model into a foreign country and consumer culture, especially one as dynamic and evolving as China. What did these two companies do wrong? That is an important question to ask and answer, and one to which we will turn our attention to in a subsequent post here at the blog, but before we do, it is important to give them a shout out for having had the courage to fail in what is one of the most important business challenges of the 21st Century. What Home Depot and Best Buy tried and failed at is the same question almost every company in North America and Europe needs to ask and answer: how am I going to develop a strategy for selling to new middle class consumers in emerging economies?
In many ways, these two North American retailers understood three factors that shaped the world of the last twenty years were going to go away and that something new would need to be developed to replace their impact on the retailers’ financial performance. These three factors benefited everyone in the business world and in their absence, businesses of every size need to find new compelling ideas that will drive their companies forward absent the influence of three trends whose influence is waning. These three are first, the impact of the “China Price” on their P&L which drove significant gross margin improvements, second the over-expansion of the suburbs in North America related to a combination of government policy and mortgage rates, and lastly the broad availability of inexpensive credit for consumers to use at their discretion. The alignment of these three factors was a once-in-a-lifetime event. Politicians in Washington want to figure out how to re-create some (or all) of these factors (not likely), but businesses want to figure out how to re-create the impact these factors had on both their top and bottom lines. Right now the best opportunity does not appear to be selling more to tapped out North American and European consumers; no, it is figuring out how to develop products for, market to, and sell through emerging markets.
Retailers felt the pinch first when these factors were attacked post the 2008 financial crisis, and it was more than a little foresight in advance of that event which took both Best Buy and Home Depot into emerging markets to try and pre-emptively find the next great story that would push their business’ growth and profitability forward. Yes, they failed in their efforts. But failure is going to be a prerequisite for success and, perhaps what is most important to keep in mind for both B2B and B2C companies is that failure at building a strategy for selling into emerging economies really is not an option. Whether you are an industrial company selling controllers to the power distribution system, a healthcare provider, or a consumer goods company, figuring out how to navigate emerging markets is one of the most important strategic issues your business must navigate. Don’t let the setbacks of these two retailers convince you otherwise; in fact, view their failures as short-term, survivable and necessary to success.