Bye Bye Best Buy

I was sad, but not really surprised, to see Best Buy close the doors of it 9 branded stores in China last week.

I am not surprised because I think there are three fundamental errors that they made in their market entry:

Error # 1.
When Best Buy arrived just four years ago they promised a dramatically different and better consumer electronics retail experience for Chinese buyers:
- plush store environment
- impartial product advice

- live demo equipment
- geek squad support staff

This was all well and good, but critically failed to recognise that the Chinese do not place any value on service. So if an enhanced level of service is your only differentiator in China, you will only succeed if your pricing is the same. But Best Buy was more expensive.

Error # 2

Carrefour was an early entrant in China and so largely wrote the rule book that everyone in China modern trade food retailing now follows. But in electrical retailing, the Chinese market was already dominated by major players like Gome, Suning and Yolo. These local guys had written an alternative rule book that Best Buy chose to ignore. There were just two rules:

- Don't sell anything. Instead, focus on property development, establishing prime real estate sites and renting out a few square meters to each major brand so they can sell everything for you (including paying for all the staff!)
- Don't stock anything. Instead, get the brands to hold all your stock, whilst you take all the cash (and no doubt holding it for a few weeks to ensure positive cash flow before passing it on to the brand owner).

Best Buy chose to lease it's sites, employ it's own staff, and hold it's own stock, so adding three critical and expensive operating costs to its P&L that it's competitors did not have.

Error # 3

When Tesco came to China, despite being very late for the party, they still invested many more years waiting, and selling nothing. They simply opened an office in Shanghai and watched...and watched...and watched. Only when they felt they were really ready did they pounce and buy the local HiMal chain, converting them all to Tesco stores - "China style". Best Buy so nearly got this one right. Best Buy also bought a local Chinese retailer called Five Star. But instead of learning from them, they kept the 161 Five Star stores totally separate from the Best Buy business, and chose instead to open 100% American-style Best Buys with not even a hint of Chinese flavouring.

If Best Buy really wanted a presence in China, they should have simply converted the 161 Five Star outlets into 161 Best Buy outlets, and added just a twist of American to the successful China recipe. If they had, China might not now be saying 再見 "Zai Jian" (Good Bye) to Best Buy.

Pulling Feathers from Ducks (From Top to Bottom)

Last week it was reported that the chief of China's railway ministry had been suspended on suspicion of taking bribes. But he is just one of the hundreds of millions of Chinese who supplement (or vastly exceed?) their monthly salary in this way. But the government departments only showcase their high profile catches, as evidence to the populace that corruption is being tackled.

However, these public humiliations are meaningless when it is a way of life for almost everyone in China. All this does is bury the problem deeper and force people to be more clever/sneaky in the way they do it.

A colleague visiting Shanghai last week asked me how, if everyone really WAS on the take, was our company driver creaming off the top? Following a few days of close observation, it seems he can take in three different ways:

1. He falsifies the mileage on his written report each day (so allowing him additional private use of the car at our expense). I caught him today.

2. He falsifies the start and finish times each day, adding a few minutes where he can (so allowing him additional over-time payments.) I caught him yesterday.

3. Siphoning petrol out of the tank, so enabling him to resell some of the petrol paid for by us. I do not yet have proof of this last one, but our petrol consumption appears excessive versus the (true) mileage, and so going forward I will fill the car up myself and will note the mileage at each fill up

I really should not be surprised. I have lived here long enough to know that if there is a Chinese expression for something, then it really IS endemic:

雁过拔毛

If a duck flies past, you should pull out a feather

Retail Field of Dreams

This picture was taken on Sunday afternoon. Not any special Sunday - just a normal shopping day in Shanghai.















When this shopping centre was built about 10 years ago, it was almost empty with many of the upper floor units vacant. Now, it is a heaving mass of people, with queues stretching out of the door of the huge Starbucks on the second floor.

The Chinese consumer's insatiable appetite for shopping is incredible and growing every year. New shopping centres and malls that would be a major news event in the UK open almost weekly. At the same time the older shopping centres are constantly reinventing themselves, raising their rents in huge steps to rid themselves of "no longer desirable" tenants and replacing them with Japanese and Western luxury brand stores

How sustainable this Chinese locust mentality is, bearing in mind the stalled stock market, an intensified central government tax war on house prices and rampant inflation, is a question that will be answered in due course. But for now, if you build it, they will come.

Should China be worried about Egypt?

The last 18 days in Egypt will do doubt have been watched closely by the ruling elite of the People's Republic of China. But should they be worried about the power of these People?

Whilst many Chinese increasingly have the confidence to express their grievances on line, the fundamentals of the Chinese economy remain very strong. As a result, the typical Chinese is much closer to the top of Maslow's Hierarchy of Needs pyramid than the typical Egyptian. The complaints of the Chinese people therefore tend to be from a vocal minority rather than the majority.











Another key difference is that China now changes its leadership on a regular basis, so avoiding the risk of any single individual ever becoming as entrenched as Mubarak (or Mao) had become.

I believe that China is more sensibly compared to Singapore than Egypt. Singapore has demonstrated that you do not need true democracy to create a modern, dynamic, functional and successful economy. If China, over time, really is able to recreate on a larger scale what Singapore has created, with a firm but fair rule of law, racial tolerance and improved human rights, then China's leaders will no longer have to keep a nervous eye on their central square in Beijing.




Happy Chinese families enjoying the Spring Festival sun in Shanghai, February 2011