Failure of Best Buy in China

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Best Buy’s Failure in China
Lea Pernet and Paulina Nunez-Candiani

INTB4501/ Advanced Global Management
Alvaro Cuervo-Cazurra
April 25, 2012

Best Buy Co. is a “multinational retailer of consumer electronics, home office products, entertainment products and related services” 1. The group is the largest U.S consumer electronics retailer by revenue. In 2006, Best Buy made its first steps in China with the acquisition of a Jiangsu Five Star, a Chinese retailer and opened its first Chinese store under its name in Shanghai, soon followed by eight others. With a consumer focused strategy, Best Buy was hoping to capture part of the electronics retailing market, so far dominated by the local retailers Gome and Suning. However, in 2008 the group’s net earnings had decreased by 77 percent from the previous year. No later than February 2011, the multinational announced it would close all nine of its branded stores.

This report analyses the reasons of Best Buy’s failure in China and tries to assess recommendations for the company to approach the Chinese market.

1
SITUATION ANALYSIS
Best Buy in the USA
History of Best Buy
The company started in 1966 when Richard Schulze and James Wheeler opened a store called “Sound of Music” in Saint Paul, Minnesota. At the beginning, the company focused on home and car stereos. In early 80s Schulze realized that there was little potential selling audio components to a shrinking audience with little resources and began focusing on appliances and VCRs2. The company’s name was given when they had a special sale event they called “Best Buy”. After the success of this event, the board of directors approved the name for the company.

The design of the stores was introduced in 1989 and had spacious 44,000ft warehouse -like layout. The company overtook Circuit City as the leader in electronics retailer by revenue. In 1998 Best Buy entered e-commerce by launching a site that sold CDs and DVDs. Shortly after, the offering expanded into consumer electronics, computers, software and games. In 2002 Best Buy bought Geek Squad, a computer maintenance and repair company, and began to incorporate it into existing store locations. In more recent history Best Buy has been extremely successful in supplying demand for flat screen TVs and cell phones.3 Best Buy is recognized as a “big-box” store, which is defined as a physically large retail establishment being usually part of a chain. Best Buy was one of the first stores to implement the ‘big box’ model stocking mostly high technology/electronic items, and also home appliances sometimes. It’s important to mention that in 2011 after the company reported a $1.7 billion loss and the closing of 50 big-box stores, “the opening of 100 smaller format mobile stores, and the culling of 400 employees”4 the company started thinking if this model was the best for them of not.

A price competitive strategy threatened by online retailing
From its creation, Best Buy’s success relied on a price competitive strategy. However, the arrival of online retailers who do not have to bear as much overhead costs as Best Buy has significantly threatened America’s largest electronics retailer’s strategy.

At the beginning the company’s competitive advantage was primarily the price. The company has had its share of ups and downs and endured many challenges that overwhelmed some of their competitors. In the late 80’s numerous competitors crowded the electronic retail space that resulted in price rivalry on popular consumer items. Many companies took hits on profit margins by slashing prices to sell hot items such as VCRs. Best Buy’s sales had nearly doubled in 1988, but their net earnings fell 64%.5 Although battered, Best Buy survived the price wars when some of their major competitors including Highland Superstores and Dixon’s Group’s Silo Holdings were forced to liquidate. Throughout the 1990s, Best Buy entered yet another intense battle with its main rival, Circuit City. The...
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