beyondbrics

Media Markt – the German electronics retailer - announced on Friday that it’s pushing ahead with its expansion into the Chinese market – adding another store to its huge flagship outlet in downtown Shanghai. Another 10 are coming in 2012.

Yet, just two days ago, Best Buy – a rival – beat a high profile retreat, shutting down its China HQ, and closing its 9 branded stores. Can Media Markt succeed where Best Buy has failed? And can any foreign retailers really hope to overcome entrenched local competition?

There are undoubtedly some sectors where foreign companies are indeed booming in China. Take food products, like baby milk, where high profile scandals at domestic producers have raised concerns among consumers. Foreign producers provide quality assurance, and a respected supply chain, which customers will pay more for (or buy cheaper elsewhere).

Then there’s clothing, where the feel of an Adidas sports shoe or a Levi’s pair of jeans has a certain cachet, not to mention quality about it. And with luxury goods, there’s no contest (though Chinese are more likely to buy overseas).

But when it comes to electrical appliance retailers, what is there that foreign companies can offer?

Not much, says Shaun Rein, managing director at China Market Research Group in Shanghai. While the sector itself is set to grow around 15 per cent this year, foreign companies have yet to come up with a reason for Chinese consumers to buy from them. He says that the foreign companies have made three big mistakes:

1 – same products. Almost all the products on sale at a Best Buy or a Media Markt outlet in Shanghai will be available at a nearby Suning or Gome. Why pay more for the same stuff?

2 – wrong products. A local Chinese computer retailer will probably offer to install pirated software on your new PC. Big multinationals, for good reason, won’t.

3 – costs. Foreign retailers have focused on ‘big box’ retail – large flagship stores that try to make a splash in the local market. That means high rents, and high costs for more staff as wages rise. Local brands have small shops, and they are spread around town, not just in one place.

There are other complications too. If Mr Wang wants to buy an air conditioner unit he could go to the big downtown foreign-backed store where he’ll pay more and won’t be able to park his car. Or he could go to his local dealer, park his car, and get it cheaper. Better still, why not just buy direct from the supplier – who, with no middle man to pay, may offer to sell even cheaper.

The retreat of B&Q, Home Depot, and most recently Best Buy shows how difficult it is for big brand retailers to compete without exclusive products. At the other end of the spectrum, Apple now makes more profits per square foot at its Shanghai store than anywhere else in the world. That’s because you can’t buy Apple products anywhere else (and be sure that it’s real).

It’s a stark lesson for all companies champing at the bit to get into the Chinese consumer market. If you don’t have anything unique to offer, stay at home.

Related reading:
Best Buy brand closes shop in China and Turkey, FT
China luxury: from Paris with love, beyondbrics
Untrained staff just the start of Media Markt’s China challenge, beyondbrics