Just 6 years after coming to China, US home improvement giant Home Depot (NYSE: HD) is shuttering most of its China shops, becoming the latest major foreign retailer to discover that China’s 1.3 billion consumers aren’t quite the same as their peers in the West. Home Depot’s departure follows the equally high-profile closure of US electronics retailing giant Best Buy (NYSE: BBY) stores last year (previous post), and I suspect that the reasons for both companies’ failures are similar. Put simply, both Best Buy and now Home Depot discovered that price is by far the most important factor for Chinese consumers, who are always looking for the best bargains. Brand loyalty and customer service — 2 important elements that attract consumers to Best Buy and Home Depot stores in the West — are far less important to the Chinese.
Let’s look at the latest news, which has Home Depot announcing it will close all 7 of its “big box” China stores, laying off 850 workers. (English article) The company will retain 2 recently opened specialty stores in the northern city of Tianjin, and will also keep a team of about 170 China-based employees working in its sourcing operations. Meantime, a company executive said Home Depot was exploring online opportunities in China, joining a growing number of US retailers like Walmart (NYSE: WMT) and online retail giant Amazon (Nasdaq: AMZN) in exploring that segment of the market. (English article)
Home Depot rival B&Q, owned by Britain’s Kingfisher (London: KGF), has also found the road difficult in China despite its earlier entry to the market in 1999. The company announced it would close a third of its China outlets in 2009, although its store count has remained relatively stable at about 40 since then.
The foreign chains have been hurt not only by their failure to offer the lowest prices, but also by several other factors unique to the China market. Because of their “big box” format that limits the number of outlets they can build and where they can build them, companies like Home Depot often depend on customers traveling longer distances to their stores, often by car. Big general merchandise giants like Walmart have solved this problem by providing free shuttles to their stores; but such an approach doesn’t work as well for home improvement chains, since people often buy much larger items that aren’t easily carried on a bus.
What’s more, many Chinese can find similar or the same goods at their traditional local hardware stores, called wujin in Chinese, which are much more convenient and will often help with transport and installation of bigger, bulkier items.
As Chinese car ownership increases over the next decade and people become less price sensitive and more focused on product quality, it’s possible that many of the factors that hindered Home Depot, B&Q and Best Buy will disappear and perhaps these big names will have a better chance of success in China. But in the meantime, look for many of the so-called “big box” retailers to avoid a market that offers not only a huge number of consumers but also an equally large number of challenges.
Bottom line: Home Depot’s withdrawal from China reflects widely different market conditions that will keep most Western “big-box” retailers out of the market for at least the next decade.
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